After months of unproductive negotiation over the Affordable Care Act, the US federal government is experiencing its first government shutdown in almost two decades. That’s bad, but hardly unprecedented. The government has shut down, for one reason or another, 17 times before. Yes, a shutdown demeans our international credibility, but our cachet has been relatively weakening for awhile now. Yes, a shutdown will directly weaken growth and employment, but the effects are marginal. Yes, a shutdown will mean that many government services (like national parks, small business loans, health and environmental protection) will be compromised, but the essential services (uniformed military, border patrol) will soldier on.
A government shutdown is, at best, a nuisance and, if history is any indicator, temporary: the longer government shutdowns usually last a few weeks. Historically speaking, the world economy should continue to function, more or less, in a similar fashion despite the irritation.
On the other hand, Congress will revisit Debt Ceiling limit in a few short weeks. Herein lies the genuine threat to our economy and global markets. To review, we wrote whitepapers about the last Debt Ceiling limit threat during Summer of 2011:
The Debt Ceiling (Prior to the Deadline)
The US Downgrade (After the Deadline)
It appears that little has changed in the past two years. These potential disasters are now expectable. Instead of arguing about overall deficit direction, the target has now shifted to a specific law (the A.C.A.), but the stakes and consequences of the 2011 debacle and the current crisis are similar. We ended our thoughts over the 2011 S&P downgrade hopefully discussing improvement in US deficit levels and credit restoration as the way to reinstall confidence. The US still faces an entitlement spending crisis, but current CBO debt and deficit levels have sharply improved. The deficit is not a part of the current debate, as both sides acknowledge, but rather a specific grievance. Recall, S&P’s rating downgrade in 2011 was primarily a function of our dysfunctional political climate rather than US fiscal weakness, but there are fewer ways to progress on that front. Taxes and spending are relatively simple math and they can be adjusted as necessary. Political dysfunction in Washington is substantially more difficult to fix, and it may require another election cycle, another mandate from the electorate, before resolution.