The US government shutdown - any end in sight?

The US government shutdown - any end in sight?

What a joke.

Really, there isn’t anything else that can be said about the latest fiscal crisis in the United States. With the federal government shutting down most operations on the 1st of October, as the House of Representatives (controlled by the Republicans) and the Senate (controlled by the Democrats) couldn’t agree on a Continuing Resolution for the 2014 fiscal year.

In the absence of a formal annual budget (as we see in Australia announced and subsequently passed in May each year), these Continuing Resolutions (with their short-term nature) have been the legislation-of-choice for Congress for some years now; and, increasingly have been used as a vehicle for further gridlock and crisis. In recent years it’s brought us to the precipice many times, but only now has Congress taken it over the edge. I wrote for ESSA recently about this style of policymaking and its untenable nature in the long-term. Now we get to see the economic consequences of such legislative irresponsibility.

As the ABC Fact Check team cogently summarised, with the shutdown, a wide range of “non-essential” US federal government services have already shut down, with their workers “furloughed” – meaning they now have to stay home and may not ever be paid for the duration of the closure. Despite the shutdown, some services regarded as essential will continue – social security (pension) payments, the US postal service, active military, NASA Mission Control and air traffic controllers, to name a few. For these agencies, their employees may be required to work but not receive pay until the shutdown ends.

Despite the protestations of those on the fringes of the Republican Party who suggest that the shutdown is something to embrace for them politically, such as Representative Michele Bachmann, the non-functioning of the federal government is and will continue to have significant economic consequences. This is especially the case for parts of the country that heavily rely on government funding for their economic activity. As Wonkblog highlighted during the week, the shutdown will have its biggest bite in the Washington D.C. area as well as in cities where there are significant federal workforces, namely Colorado Springs (Colorado), Virginia Beach (North Carolina) and Honolulu (Hawaii).

All told, the shutdown (and the federal furloughs in particular) will reduce national income by a total of $1.3 billion per week, according to J.P Morgan analysts. As a result, the shutdown could shave 0.12% off fourth quarter GDP growth for each week it goes on. However, this forecast doesn’t consider the potential flow-on effects that may occur in the private sector or the already staggering plunge in economic confidence amongst consumers; according to Gallup it’s fallen 14% in the space of a week.

Everyone agrees– the shutdown is bad economics. And yet it goes on without any end in sight. Whilst the causes may seem foolish, conservative House Republicans haven’t wavered much in their desire to repeal, defund, or at least delay President Obama’s healthcare legislation, termed by all sides as Obamacare.

To understand why there is a shutdown without any clear pathway to bipartisan resolution, we need to consider the incentives driving each of the crisis’ main players.

Congressional Tea Party Members

Put simply, their incentive is to repeal Obamacare from existence. They tried to block the legislation when it first passed in 2010, they ardently campaigned via the courts to have it ruled unconstitutional in 2011-12 and they forced Mitt Romney to promise its repeal in his losing presidential campaign of 2012. Now that President Obama has a second term and the Affordable Care Act has been ruled constitutional, Tea Party members of Congress have resorted to holding the funding and by extension, functioning of the government hostage until the President walks away from his signature reforms.

Their incentive structure is dictated less by the concerns and desires of their legislative leaders, Speaker John Boehner in the House and Minority Leader Mitch McConnell in the Senate, and rather by the concerns of their highly partisan electorates. At numerous points through this crisis, some have suggested high-profile Tea Party members, such as Texas Senator Ted Cruz, exert more control over Republican strategy than the Speaker. As Waleed Aly pointed out this week in Fairfax publications, Congressional Republicans are no longer concerned about general elections against Democrats, and thus compelled to move to the centre of the political spectrum. Rather, their districts are now heavily polarised, in some states aided by the gerrymandering process brought about by the Republican nationwide-landslide of 2010, thus making the real contests at the primary stage of the campaign. In these primary campaigns, amongst a highly polarised voting constituency, Tea Party members are acting rationally when they campaign for Obamacare’s repeal and the use of methods such as a government shutdown to achieve it. For if they didn’t, they would imperil their re-election as more conservative and more radical candidates would emerge from their right in primary elections.

Even now as the crisis is increasingly blamed on them, they aren’t backing down from the fight. This was perfectly summarised by conservative Republican representative Marlin Stutzman who said during the week, “We’re not going to be disrespected … We have to get something out of this. And I don’t know what that even is.”

Ultimately, it’s this rigid belief that is prolonging the crisis.

Speaker John Boehner

Put simply, the Speaker is in the hardest position of anyone in this crisis. Firstly, he is bound by the pressure placed on him by external stakeholders, such as those in the corporate world and on Wall Street, Republican Senators and Governors and every Democrat in sight, to end the shutdown by simply opening up the House to a free vote on a clean Continuing Resolution devoid of any legislative text related to Obamacare. Yet Boehner continues to reject such proposals, rather calling on all sides to come together and negotiate a solution to the shutdown, angrily denouncing Democrats who have anonymously suggested they are “winning” the debate currently and the President who’s said repeatedly he won’t negotiate over the shutdown or the more consequential debt ceiling.

Despite the pressure, Boehner’s willingness to follow the strategising of the most right-wing members of his caucus stems from a desire to simply keep his job as Speaker. As Jonathan Alter explained in the New Yorker, Boehner fears avote to oust him as Speaker by his most radical members would likely accompany any clean Continuing Resolution coming to the floor of the House (something he has the power over) to end the crisis.

It’s this further fundamental tenet that prolongs the shutdown; a Speaker unable to cut a deal with his counterparts and desperate to avoid a humiliating rejection by his key followers.

President Obama

Throughout this shutdown crisis the President has held firm in his insistence to not negotiate policy matters (namely Obamacare) via legislation concerning the funding of the government or the looming debt ceiling.

Whilst he risks being the President who oversees the United States lapsing back into recession or being the first to administer a default on the nation’s debt, Obama faces the threat knowing that if he capitulates at all from his current position, he imperils his future in the office. As Jonathan Chait explains, moving from his now well established position of not negotiating at the beset of a radicalised Congress, particularly on the debt ceiling, “would fundamentally change the country’s governing norms, permanently placing new and destructive power in the hands of Congress.

Obama can’t appease the ransom demands of the Republicans or else his Presidency is over and the role of the President is placed at the whim of a Congress’ desire to push the country to the edge.

As can be seen from the above analysis, rational behaviour in response to incentives and threats has gotten us this far and could prolong the crisis for some time to come. It’s highly doubtful that resolution will be achieved in the short-term even if it’s increasingly apparent that it’s Congressional Republicans who are being predominantly blamed for the fiasco before the United States.

The saddest element in all of this is that no substantive policies to address the budget’s long-term sustainability are being discussed in any practical way. Whilst there are proposals to have another commission/conference/committee to discuss reforms to the tax code and the entitlement system, they are likely to go nowhere and are mere platitudes to seek the higher ground in the public’s eye.

With the countdown to the debt ceiling rapidly approaching on the 17th of October, it’s clear that this crisis will go on for some time to come, with further damaging consequences to the American economy and the quality and vitality of their political institutions. Sadly though, for all the hoopla, hot air and back-and-forth, there will be no real winners, only losers; the latter being the American people and the fate of the fragile and slow-paced economic recovery from 2008’s deep recession.

You can follow me on Twitter @CRJWeinberg.