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Train Wreck Coming

September 18, 2013

House Republican leaders agreed today to bring the wing-nut budget to a vote this Friday. In lieu of a serious budget bill for the federal fiscal year that begins on October 1, the House is going to vote on a bill that would continue funding federal government programs into December – except for the Affordable Care Act, which would be zeroed out. According to the New York Times, agreement to vote on the wing-nut budget has “unified” House Republicans, indicating that the wing-nut budget will pass the House on Friday.

With dispassionate understatement, the Times observed that the House leadership cave-in raises the odds of a government shut-down on October 1, the first day of federal fiscal year 2014. It’s an accurate statement as far as it goes, but what it leaves out is that the House leadership move raises the odds of a shut-down pretty close to 100 percent.

The Senate won’t seriously consider, let alone pass, the House budget. The Senate will  pass a different budget bill, and it will only pass any bill at all because Senate rules prohibit filibusters on budget bills. Neither house will agree to the other’s bill, because the houses hold fundamentally inconsistent objectives for the budget: defund Obamacare entirely (House of Representatives) versus retain Obamacare intact (Senate).

I don’t see how compromise happens before October 1 – if for no other reason, because the House isn’t even scheduled to be in session the week of September 23. The House leadership can convene extra session days, but the Republican members will want to get to their districts to explain to voters why they decided to wreck the train.

The administration has a fair amount of discretion to determine what are “essential services” that will continue despite a shut-down. So the military, prisons, air traffic control, and the National Weather Service will keep operating. Some costs are mandatory, and not subject to annual authorization, so they will also continue – Social Security benefits, for example.

But new applications for Social Security and Medicare will not be processed. Passport and visa application processing will stop. Veterans’ health benefits will be curtailed. National parks and museums will close. Huge numbers of federal employees will be furloughed without pay. Federally funded municipal services in Washington, D.C. will be curtailed. The Centers for Disease Control will suspend disease monitoring. Clean-up of toxic waste sites will stop.

The six-day Newt Gingrich shut-down in late 1995 cost the federal government about $800 million. The cost to the economy probably ran into the billions in lost tourist revenue, lost spending from federal employee salaries, and other costs. The costs to people’s health and well-being were considerable, even if those costs are not easily calculated.

On top of that, the federal government will hit the debt ceiling in mid-October. The effects of a debt limit are different from the effects of a government shut-down. The debt ceiling applies to borrowing, not spending. Hitting the debt ceiling doesn’t prevent the government from spending cash on hand, and it doesn’t prevent the government from spending tax money and other revenue as it comes in.

Hitting the debt ceiling prevents new government borrowing. The problem is that the government is running a substantial deficit, so costs exceed revenue. So hitting the debt ceiling means that choices must be made, because revenue will cover only some costs.

The United States has never been at its debt ceiling for more than a few hours, so the full effects remain to be seen. The government would have to choose which debts to pay, and the choices would be excruciating. Failure to pay entitlements like social security, to pay federal employees, to pay military obligations, to pay government contractors’ bills, to pay farm subsidies, or to make any number of other payments, would be devastating to people and businesses, and to the economy and therefore to all of us. Failure to pay interest due on the federal debt would certainly wreck the American credit rating, needlessly increasing our borrowing costs for years, maybe decades, to come, and the effects on equity and debt markets would likely be severe as well.

The immediate costs of the 2011 debt ceiling crisis included $1.3 billion to the federal government, and 2,000 points on the Dow. The long-term costs included an unprecedented downgrade in the federal credit rating, which will increase our borrowing costs for the indefinite future. The Bipartisan Policy Group estimates the increase in borrowing costs for the first ten years after the crisis at $18.9 billion.

We’ve had government shut-downs before, and we’ve had a debt ceiling crisis – but so far we haven’t had both at once. Each separately is enormously damaging to our people, to our economy, to our debt, to our national confidence, and to our international reputation. The scope of the combined effects of both occurring together cannot yet be calculated. 

Polling tells us consistently and convincingly that Americans do not share Republicans’ obsession with ending Obamacare. Polling therefore not surprisingly tells us that Americans are prepared to blame Republicans much more than Democrats for a government shut-down that Republicans have tied to ending Obamacare. The grown-ups in the Republican room know this; they remember that Newt Gingrich took the lion’s share of blame for the 1995 – 96 shutdowns, and Bill Clinton was re-elected by an 8.5 percent popular margin and a 220-vote electoral margin. The rest of the Republicans in the room are on what the Wall Street Journal yesterday called a “kamikaze mission.”

Discontent will start to rise when federal services that people want are reduced or cut off, when interest rates soar and stock prices plummet and people’s 401(k)s take big hits. Then, compromise will become possible. Until then, I just don’t see it.

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From → All Posts, Obama 2.0

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