THE REAL CRISIS BEHIND AMERICA’S ‘SHUTDOWN’

America is going through an identity crisis, unsure whether to embrace high taxes and a bigger state, and reluctant to play the role of world policeman

On 30th September, the federal government of the United States of America closed for business. Congressional Republicans refused to fund its activities so long as they include the provision of ‘Obamacare’, the President’s signature health reform. The White House insists that a gaggle of Tea Party radicals is holding the nation hostage and polls suggest a majority of voters share that sentiment. Until the two sides can agree a budget resolution, all but essential federal workers will go unpaid. A shutdown does not necessarily have to be disastrous, but it will have an impact on America’s economy. Some estimates suggest a prolonged stand-off could knock as much as 1 per cent from the country’s GDP.

However, the true significance of the crisis is that it is symptomatic of how America has become, in many senses, ungovernable. Heavily gerrymandered Congressional districts, and a wider, decades-long process of social polarisation, have produced an electoral system that packs Congress with partisans who have no incentive to reach accommodation with the other side. Moreover, even if the current impasse can be resolved, there is a much darker cloud on the horizon: America has hit the ceiling on its debt limits.

This could provoke an economic as well as a constitutional crisis: in a worst-case scenario, the nation would be forced to default on its borrowing, plunging the global financial system into a chaos to eclipse that seen in 2008. It seems inconceivable that the politicians on Capitol Hill would allow such a disaster to unfold, but nothing can be ruled out, given the obduracy on display.

Even if the Republican leadership is still in thrall to its Tea Party caucus, the hardliners actually have a point. At heart, this standoff stems from the fact that America ‘like so many other nations’ has made promises to its people that it cannot afford. The argument in favour of lifting the debt limit is that Congress has already written the cheques, and should have to honour them. The problem is that the state wants to spend more without raising taxes.

So, this is more than just administrative paralysis: it reflects a wider malaise. America is going through an identity crisis, unsure whether to embrace a European social model of high taxes and a bigger state, and reluctant any longer to play the role of world policeman. It is to be hoped that the current shutdown prompts a serious attempt to reach a grand bargain between the parties that puts America’s finances on a more sustainable footing. But given the dysfunction and lack of direction in Washington, it is probably wise to prepare for the worst.

The American government has begun shutting its non-essential services. Why? And what will it mean?

Q. What causes a shutdown?
Ans. Under the Constitution, Congress must pass laws to spend money. If Congress can’t agree on a spending bill ‘or if, in the case of the Clinton-era shutdowns, the president vetoes it’ the government does not have the legal authority to spend money.
Q. What’s a continuing resolution?
Ans. Congress used to spend money by passing a budget first, then 12 separate appropriations bills. That process has broken down, and Congress uses a stopgap continuing resolution, or CR, that maintains spending at current levels for all or part of the year.
Q. Why is this happening now?
Ans. The government runs on a fiscal year from Oct. 1 to Sept. 30. Shutdowns can happen at other times of the year when Congress passes a partial-year spending bill.
Q. When did this last happen?
Ans. It’s the first shutdown since 1995-1996, when Bill Clinton and the House of Representatives (and its speaker, Newt Gingrich) also failed to agree on a budget to fund federal services. That row ran for 28 days (over two stages).
But it was a more regular event in the 1980s, usually for a few days at a time. In total, the US government has partially shut down on 17 occasions before today.
Q. Could government agencies ignore the shutdown?
Ans. Under a federal law known as the Anti-Deficiency Act, it can be a felony to spend taxpayer’s money without an appropriation from Congress.
Q. When a shutdown begins?
Ans. It begins when a fiscal year ends. Most federal workers would report to work Tuesday, but unless they’re deemed “essential,” they would work no more than four hours on shutdown-related activities before being furloughed.
Q. When would the shutdown end?
Ans. Immediately after the president signs a spending bill. As a practical matter, it could be noon the following day before most government offices that were shut down would reopen their doors.
Q. Why this shutdown has happened?
Ans. The Federal government had no choice. The US financial year ended on 30 September, and politicians on Capitol Hill have failed to agree a new budget for the 2013-2014 financial year. Even a ‘stopgap’ funding deal proved beyond them. Without a budget deal approved by both parts of Congress, the House of Representative and the Senate, there’s no legal agreement to pay non-essential staff.
Q. Why couldn’t they agree a deal?
Ans. Under the US constitution, the President cannot unilaterally bring in legislation. And despite weeks of talks, Republicans continue to include cuts and delays to Barack Obama’s Affordable Care Act in the budget legislation they sent up to the Senate.
The House of Representatives is controlled by the Republican Party, whose Tea Party movement remains deeply opposed to Obamacare. They tried to use the budget as leverage to crowbar changes to the Act. The Senate, which is under the control of Obama’s Democrats, has stood firm.
Q. Will the shutdown mean the entire US government grinds to a halt?
Ans. No, it’s not an anarchist’s dream. Essential services, such as social security and medicare payments, will continue.
The US military service will keep operating, and Obama signed emergency legislation on Monday night to keep paying staff. But hundreds of thousands of workers at non-essential services, from Pentagon employees to rangers in national parks, will be told to take an unpaid holiday.
Q. How much damage will it cause?
Ans. If people aren’t getting paid, they won’t spend as much in the shops. They may be unable to meet essential financial commitments, such as mortgages and credit card payments.
Analysts at IHS Global Insight have calculated that it will knock $300m a day off US economic output (total US nominal GDP, or output, was around $16 trillion last year).
The key issue is how long it lasts. Moody’s Analytics reckons that a two-week shutdown would cut 0.3% off US GDP, while a month-long outage would knock a whole 1.4% off growth.
Q. Why doesn’t it happen in other countries?
Ans. The shutdown situation is a product of the US democratic system. The President is both head of state and head of the federal government, without a guaranteed majority in either of the legislative bodies where new laws are debated and voted upon (because Presidents, Congressmen and women and senators are elected separately). The President can’t simply ram laws through Capitol Hill.
In Britain, for example, tax and spending policies are outlined in the budget, presented to parliament by the chancellor of the exchequer. These changes are brought into law in a finance bill in the House of Commons. That’s in effect a confidence vote in the government, and even the most fractious backbench MP would balk at rebelling on it.
Finance bills are also one area where the elected House of Commons has the upper hand over the unelected House of Lords. The Lords have no power to reject a money bill; they can only delay it for a month.
Q. How does the US shutdown row tie in with the debt ceiling battle?
Ans. They are separate issues, but the shutdown is raising fears over the debt ceiling.
America has a legal limit on its borrowing of $16.7tn dollars, and it’s likely to hit that point in mid-October.
If a deal isn’t reached, then America would run out of borrowing room, meaning the world’s biggest economy would default on its debts. Both problems need solving ‘and a shutdown is now eating into valuable time to fix the debt ceiling.
Q. Why can’t they just raise the debt ceiling?
Ans. Again, legislation is needed. Republicans are again trying to link the plan to Obamacare’ arguing that the healthcare reforms are unaffordable.
Q. How are the markets reacting?
Ans. So far, there’s no panic. Investors are calculating that the shutdown will be short. But prepare for nervousness as that debt ceiling deadline gets closer.
The dollar, though, is being hit ‘dropping half a cent against major currencies.