The Economist: The heart of the shutdown issue
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The partial shutdown of the US government has begun. While various proposals are still surfacing and meetings are still being arranged, it looks like it could go on for a while (as we go to press). Even if it has already ended by the time you’re reading this, however, it has once again highlighted a very serious problem in our federal government: an inability to agree on a budget (or much of anything else, for that matter).
Here is how the process is supposed to work. In early February each year, the President is required to present a federal budget which is the starting point for negotiations. (Congress often extends this deadline, and this year President Obama submitted his budget to Congress in April.) Once the draft budget is in place, House and Senate Committees on Appropriations (via 12 subcommittees) review detailed information provided by the agencies under their jurisdiction.
An agreement is hammered out as to the best way to allocate resources, and a new budget is passed. Appropriations acts then fund the federal government for another fiscal year (which ends on September 30).
Or not. The last time the Senate actually passed a budget was in 2009. If the two sides can’t reach a compromise, the focus shifts to a “continuing resolution.” A continuing resolution is a joint resolution enacted by Congress as the fiscal year winds down without regular appropriations acts in place. It provides budget authority for Federal agencies and programs to continue in operation until the regular appropriations acts are enacted. This time, even the effort to reach a joint resolution has failed.
The shutdown is devastating to some people who are directly affected, and that human cost is very real. However, if the situation resolves within a few days, it will be more of an inconvenience (if that) for the vast majority of Americans. Apart from the workers furloughed or persons directly in need of services affected by the shutdown, the fallout for individuals will probably be minimal. The employees who are furloughed will likely end up compensated for their time when things shake out; even if they aren’t, the consumer spending effects of 800,000 people for a few days in an economy of 144 million workers are relatively small.
Still, the partial shutdown is not something that should be brushed off as a simple annoyance. Because of all of the inefficiencies of starting and stopping, a shutdown typically ends up being more expensive than just business as usual.
The current shutdown is setting the stage for a far more critical issue: whether the debt ceiling is dealt with in a timely manner. Current estimates by US Treasury Secretary Jacob Lew indicate that the Treasury will run out of funds on October 17. This doesn’t necessarily mean the US government goes into default; there will be enough money coming in to cover interest and other key payments such as Social Security for a while, and the shutdown may delay certain outlays a few days despite being ultimately more expensive. Nonetheless, it obviously causes some major problems and far greater disruptions than the partial shutdown.
If it lingers, however, we will not be able to meet our bond obligations, putting the entire global financial system at risk. Surely, there is enough wisdom left in Washington not to let this happen, but evidence of that is slim these days.
The debt ceiling really deals with money that is already spent, with payments for funds already committed. It should be raised without damaging brinksmanship, with attention turning to fixing the underlying problem. What is essential over the long term is finding a path toward fiscal responsibility. Deficits are running in the range of $1 trillion per year, and until budgets are crafted which narrow the gap between expenditures and revenues, long-term risks will continue to grow.
Recently enacted programs (including the Affordable Care Act which has become the flashpoint this time) are pointing to larger deficits in the future, and faster economic growth is unlikely to be enough. The solution is going to require concessions from both sides of the Congressional aisle, and the current brouhaha makes that seem like a farfetched dream.
The snippets of interviews and pieces of information that are out there often tend to make the shutdown feel like a reckless and juvenile act which is much ado about nothing. In some ways, it is. After all, there is plenty of posturing and finger pointing, but essential functions are still going on and few people are directly affected by the shutdown. At the same time, however, the issue is larger than simply closing doors on some museums and monuments and falling a few more days behind on paperwork. While you might disagree with the tactics or targets, the fact remains that at some point in time, a real and meaningful budget must be passed (not just a stop-gap action to keep the doors open a few more months). Until the United States government begins to move toward a fiscally responsible and sustainable path through the budgeting process, our future prosperity is compromised to some extent. If the decision is made not to honor our debts (highly doubtful even in this environment), then the ride will be much rougher.
Dr. M. Ray Perryman is President and Chief Executive Officer of The Perryman Group (www.perrymangroup.com). He also serves as Institute Distinguished Professor of Economic Theory and Method at the International Institute for Advanced Studies.