{"id":2284,"date":"2013-10-01T17:57:21","date_gmt":"2013-10-01T12:27:21","guid":{"rendered":"http:\/\/teekhapan.wordpress.com\/?p=2284"},"modified":"2013-10-01T17:57:21","modified_gmt":"2013-10-01T12:27:21","slug":"us-shutdown-no-big-deal-expect-bigger-crisis-on-17-october","status":"publish","type":"post","link":"https:\/\/vivekkaul.com\/2013\/10\/01\/us-shutdown-no-big-deal-expect-bigger-crisis-on-17-october\/","title":{"rendered":"US shutdown no big deal, expect bigger crisis on 17 October"},"content":{"rendered":"

\"platinum_coin\"<\/a>Vivek Kaul<\/span><\/span><\/span>
\n\u00a0<\/span>Starting today nearly 800,000 of the 2.1 million people that work directly for the government of the United States of America, have been asked to go on an unpaid leave, leading to non essential services from national parks to museums to libraries being shut down temporarily. The call centres of the Internal Revenue Service(IRS or the equivalent of the income tax department in India) won’t work and nearly 90% of the workers of the Environmental Protection Agency, won’t be at work either. NASA or the National Aeronautics and Space Administration has also more or less been shut down, except its mission control centre at Houston, Texas. Services like rubbish collection and street cleaning stand suspended as well.
\nNearly a million workers have been asked to work without pay. This will ensure the continuation of essential services like military, postal service and police. Airport security and air traffic control will also carry on their work as usual.
\nSo what is happening here? The US budget year ends on September 30 every year. A ‘shutdown’ comes into the picture when the American Congress (the equivalent of what we call the Parliament in India) does not pass appropriation bills to fund the ‘discretionary’ spending programmes. The discretionary spending programmes need to be funded every year.
\nAs Matthew Yglesias writes on www.slate.com<\/a>\u00a0\u201cDiscretionary spending…is money that Congress appropriates on what\u2019s traditionally been an annual cycle. A law is passed saying that such-and-such agency has X amount of money to spend over such-and-such amount of time on this or that.\u201d What is not categorised as discretionary spending is ‘mandatory’ spending. This includes social security, medicare (a form of medical insurance) and some farm subsidies. This spending continues as usual.
\nThe two houses of the American Congress are currently in a logjam. The House of Representatives is dominated by the Republican Party and the Senate is dominated by the Democratic Party. The Republicans want the Affordable Care Act (better known as Obamacare, and an Act which aims to improve the quality of health insurance, at the same time making it more affordable ) to be pushed forward by a period of one year. They have made this a condition for passing a temporary budget to fund the ‘discretionary’ spending of government.
\nThe Democrats on the other hand are in no mood to relent given that the Affordable Care Act is something that President Barack Obama has been closely associated with. Hence, the two political parties have been at loggerheads. As Yglesias writes \u201cWhen the parties in Congress can\u2019t come together on appropriations bills, they often pass what\u2019s known as a continuing resolution that essentially instructs the government to extend the last appropriations bill forward in time…House Republicans keep writing new continuing resolutions that fund the government while simultaneously delaying or repealing key elements of the Affordable Care Act. Senate Democrats keep taking those provisions out and sending the \u201cclean\u201d continuing resolution back to the House. Absent a continuing resolution, the discretionary portions of the federal government lack funding to continue their work and the government goes into \u201cshutdown.\u201d\u201d
\nWith no money coming in the non-essential services are being shutdown. As The New York Times reports \u201cThe Office of Management and Budget issued orders that \u201cagencies should now execute plans for an orderly shutdown due to the absence of appropriations\u201d because Congress had failed to act to keep the federal government financed.\u201d
\nThe shutdown will impact the American economy depending on how long it continues.\u00a0Estimates made Goldman Sachs suggest\u00a0<\/a>that a two day shutdown could slowdown the economic growth rate during the period October-December 2013 by 0.1%. A longer shutdown of a week could shave of 0.3% from the economic growth.
\nNevertheless, the American government partially shutting down should not be seen as a big worry. The bigger worry is set to come on October 17, later this month. On that day the American government is expected to hit its debt ceiling. The American government spends more than what it earns. In order to make up for the difference it sells bonds and takes on debt. There is a maximum amount of debt that it is allowed to take on, and which currently stands at $16.69 trillion. This limit is likely to be exhausted by October 17, 2013.
\nIf the debt ceiling is not raised the American government will have to stop borrowing and start cutting its expenditure. AsEric Posner\u00a0writes on Slate.com<\/a>\u00a0\u201cIf the debt ceiling is not raised, and the executive branch stops borrowing, the government will need to cut spending by about\u00a015 to 20\u00a0percent\u2014or almost 40 percent of spending on everything (yes, Medicare and defense) other than the interest on the debt.\u201d
\nThe impact of the cut in expenditure will be immediate.\u00a0As Henry J Aaron writes in The New York Times<\/a>\u00a0\u201cA decision to cut spending enough to avoid borrowing would instantaneously slash outlays by approximately $600 billion a year. Cutting payments to veterans, Social Security benefits and interest on the national debt by half would just about do the job. But such cuts would not only illegally betray promises to veterans, the elderly and disabled and bondholders.\u201d
\nAlso, the American government has reached a stage where it pays the interest on past debt by selling new bonds and taking on more debt. Any decision to stop paying interest on bonds will lead to a global financial crisis. As Posner writes \u201c\u00a0If he(i.e Obama) stops interest payments, the United States will default. This will not only raise interest payments\u2014costing taxpayers hundreds of billions of dollars\u2014but could spark a financial panic like the meltdown of 2008.\u201d
\nIf this situation arises, there is not much that President Obama will be able to do. He will basically have three options. \u201cOne is President Obama could decide that the government\u2019s legal obligation to spend (and certain elements of the 14thAmendment)\u00a0trump the statutory debt ceiling, and just order the Treasury to sell more bonds. The second option is Obama could instruct the Treasury to pay\u00a0some\u00a0of the government\u2019s bills and just not pay the rest. The third option is to pay nobody. All three of these options face the same basic problem of seeming to be illegal. (The second one also faces the problem that Treasury says it\u00a0lacks the logistical capacity to do it),\u201d writes Yglesias.
\nAlso, there are no legal provisions to decide which expenditure should be cut first. \u201cThere is no clear legal basis for deciding what programs to cut. Defense contractors, or Medicare payments to doctors? Education grants, or the F.B.I.? Endless litigation would follow. No matter how the cuts might be distributed, they would, if sustained for more than a very brief period, kill the economic recovery and cause unemployment to return quickly to double digits,\u201d Aaron points out.
\nGiven this, the Republicans and the Democrats need to start talking pretty soon, or we will have another crisis on our hands pretty soon.
\nThe article originally appeared on www.firstpost.com<\/a> on October 1, 2013<\/span><\/span><\/span>
\n\u00a0<\/span>(Vivek Kaul is a writer. He tweets @kaul_vivek)<\/b><\/i><\/span><\/span><\/span>
\n\u00a0<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"

Vivek Kaul \u00a0Starting today nearly 800,000 of the 2.1 million people that work directly for the government of the United States of America, have been asked to go on an unpaid leave, leading to non essential services from national parks to museums to libraries being shut down temporarily. The call centres of the Internal Revenue … <\/p>\n

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