Thursday, April 7, 2011

Government Shutdown Looms Over Budget Showdown

For the first time since 1996 the federal government appears headed for a shutdown after talks between President Obama and Republican Congressional leaders intent on wringing more money out of federal deficit spending broke off this week, (see here and here).  This comes amidst effort by Republicans to pass a "balanced budget amendment," (see here), and follows accusations by Republicans, (see here), as well as some moderate Democrats, (see herehere and here), that the President has failed to take the lead in addressing the serious and systemic national fiscal crisis identified by the President's own Fiscal and Deficit commission in its report last December, (for pdf of report click here). Indeed, the failure of President Obama and Democrat leadership to address the Commission's suggestions-- most notably the need to deal with the coming insolvency of government entitlements such as Medicare and social security and ballooning deficits, see here-- or to present any budget at all for the last fiscal year, opting instead to fund government by six temporary“continuing resolutions” since Sept 2010, has solidified opposition in the Republican-led House from their Tea party backers to business as usual in Washington, (who have wanted to cut 60 billion from the current years spending or more, see here).

In spite of meetings on Tuesday between Obama and Congressional leaders, passage of two previous short term “continuing resolutions” that have kept the government running till now and a third offered by Republicans with even steeper cuts short-term cuts and other "riders" rejected by the President, (including full funding for the military the rest of this year), the two sides remain at considerable odds.  Indeed, the latest negotiations between the parties still leaves them apart by about 7 billion dollars from what House majority leader John Boehner has told the President he can get the votes to pass, (see story here and blog entry here). This makes a shutdown tomorrow all but inevitable. But does it really matter?

In reality much of this is political theatre. From the pro-spending-cut point of view, as Senator Chuck Schumer of New York pointed out in “strategy sessions” last week caught on tape discussing how best to insure Republicans get the blame for any shutdown, Republicans are indeed somewhat “in a box,” (see story here). Pressed by the even more stringent budgetary wishes of their Tea Party friends-- including Senators like Mike Pence (R-IN) and Rand Paul (R-KY) who wants even steeper cuts to bring the Federal budget in balance within 5 years by eliminating the Federal departments of Energy, Commerce, Education and Housing and Urban Development, (see here), they risk alienating independent voters whom they need to defeat President Obama's bit for re-election-- launched this week, see here and here-- if they are seen as unduly partisan, (even if such moves would have the added advantage of avoiding, at least for now, the divisive debates about how to reform programs like Medicare and Social Security). 

And this is true even if, at least for now,  Republicans seem to enjoy substantial Tea Party and Independent support, (as it is still a long time between now and the 2012 elections, and depending on the longer-term effects of the budget showdown and political events between now and then nothing can be taken for granted, leastwise what the sentiments of Independents and the nation as a whole will be come election time twenty months from now).

On the other side, the Democrats are being pressed by their own partisans on the left who largely run the U.S. Senate, or are at least strongly influenced by the likes of socialist-leaning "Independent" Vermont Senator Bernie Sanders and Senate majority leader Democrat Harry Reid of Nevada-- who fought back a challenge by Tea Party candidate Sharon Angle to retain his seat in the historic mid-term elections-- and in the House by Representatives like Sheila Jackson Lee (D-TX) and Anthony Weiner, (D-New York), who argue that there is no real deficit or budgetary “crisis” and that any cuts would hurt the economic recovery and the most vulnerable in society who need such programs to survive.

We think the truth, as is usually the case, is somewhere in the middle, but can't deny the long-term impact to our nation's security and economic well-being that the unsustainably high levels of debt and deficit spending will (and are!) having on our country.

Indeed, just one look at the nations debt 'clock,' (see, underscores the stark truth that our national deficit has now reached an incredible 14 TRILLION plus dollars and is growing at an unsustainable rate, (going up at least five billion a day, see here, and over 190 billion in the month of March alone! see here). Such debt levels sap private enterprise and investors' ability to create jobs by causing them to compete for capital with the public expenditures of the federal government-- which on a dollar to dollar basis is much less efficient-- and drives up interest rates which in turn further reduces private economic activity which we so desperately need to maintain our nascent economic recovery, (for more detailed discussion of economic impacts see here).

And that's besides the fact that at this rate the American government, after paying the interest on the nation's debt in 2020, will have used up all the money needed to run the entire federal bureacracy of entitlement programs and have nothing left for defense, education, or day-to-day operations necessary for the functioning of a modern society such as the judicial system and Internal Revenue Service. (Indeed, the current showdown has all but forced the President to instruct such federal departments and agencies to form 'contingency plans' on how to deal with the all-but-inevitable shutdown, see here).

And while some may, with tax deadlines right around the corner, actually breathe a sigh of relief at knowing the IRS may very well not be able to audit them or engage in other “enforcement” activities during any shutdown, that comes at a high price to many Americans whose refunds will be delayed or who need other essential government services like passports, student loans, and a myriad of other services. (NOTE TO OUR ELDERLY READERS ON A FIXED INCOME: The much ballyhooed medicare and social security programs will NOT be effected by a short term shutdown, click here).

However, an extended shutdown could damage America's stature in the world as a “safe” haven for investment in a time of instability, and even cause a spike in interest rates that will, in turn, result in even higher deficits in coming months and years as the government will be forced to pay higher returns to “lure” foreign investors like China, England and Japan into buying the U.S. government securities by which our deficit-binge-spending is financed.

On the other hand, perhaps a little pain is necessary now to spur our leaders on to action and avoid even more catastrophic consequences in the long term. Only time will tell if this high stakes game of political chicken will indeed yield any such benefits, or just cause the electorate to become even more frustrated with government in general. (Or, more saliently, result in any long-term political fallout, e.g., will a shutdown have any practical political results that would end the partisan bickering in the U.S. Senate by resulting in election of more Republicans, (or Democrats), in 2012? (and/or a new President?). Such prognostications are beyond the scope of this post and, at present, beyond our ability to forecast, so we will just have to wait and see.

Suffice to say that, in the meantime, if there's any business you have to finish with the federal government in the next 24 hours, we suggest you do so. It could be a bumpy next couple of weeks. jp

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