Shutdown Showdown

Today marks a critical day in the battle over the 2011 budget…the fiscal year we’re already halfway through. Though the federal government has been kept alive via a series of Continuing Resolutions, this Friday will be the end of the easy stuff. At the end of the day on Friday, the federal government will hit the debt ceiling of $14.294 trillion (about $46,000 for each resident of the US). Without an increase in that debt ceiling, the federal government will be forced to choose between two options:

  1. Default on the debt
  2. Shut down major portions of the government

I’ll discuss both of these shortly, but first…why is today the deadline when we are still solvent until Friday? Because the House voted in new rules this year to have bills available for public viewing 72 hours prior to the vote. So if we don’t have a deal today, the options are violating that rule or choosing between the two above options at the end of the day on Friday. It’s possible to stretch this out until Thursday, since a “shutdown” over the weekend will have minimal impact, but that’s the absolute end of the line without violating the House rule.

So let’s look at the two options.

Defaulting on the debt would have a disastrous effect on the US economy. Assuming the US would be able to issue any additional debt in the future, the interest rates for those bonds would be substantially higher than they have been historically. For the past century, there was no safer place to park money than in United States debt. This certainty translates into lower interest rates, because the reduced perceived risk leads lenders to feel no need for a risk premium (in essence, a higher rate includes a virtual insurance policy). If a default occurs, it will be at least several generations before that risk premium will disappear.

That higher perceived risk will also translate into a much weaker dollar, since the dollar will stop being used as the default (sorry) global currency. Just as the US debt has historically been considered the safest place to park money, so, too, have dollars themselves. The European Union, who has taken great pains to avoid any defaults of their own debt, will most likely become the economy of choice for safe parking, which would result in a dramatically stronger euro.

Rand Paul

Rep. Rand Paul (R-KY) (Image via Wikipedia)

Sadly, Rand Paul has been saber-rattling about default, even though it’s unclear how serious he is about it. While such posturing may be good politics, it’s terrible economics. It’s akin to going to the loan officer and loudly announcing “Yeah, I might not bother paying you back,” before even asking for the loan. While I wholeheartedly agree that the debt is a substantial problem and needs to be addressed without delay, it needs to be done with care and maturity. Paul is showing neither.

Shutting down the government is barely a better option than default. Presuming that such a shutdown lasts only a few weeks, the medium-term costs are likely to be significantly higher than simply maintaining the status quo. This arises because of the costs of breaching the multitude of contracts in which the government has already engaged. A shutdown of several months might recoup those costs, but the repercussions through the economy would be catastrophic. Government activity represents approximately 20% of the GDP. For comparison, the frothy real estate market and its ancillary industries (e.g., construction), represented just under 5% of GDP in 2007 and 2008. In other words, the impact can be expected to be about four times as great as the impact of the housing bubble popping.

Of course, it’s not like the entire government needs to shut down in order to maintain solvency, so the amount of GDP impact will almost certainly be less than 20%. For the entire 2011 fiscal year, interest on the national debt represents only $250 billion, compared to the revenues of $2.23 trillion. That’s only about 11% of revenues devoted to servicing the debt. The remaining 89% of revenues can still be spent, which would mean reducing spending by “only” 43%. So it’s not 20% of GDP; it’s 9%, which is still 1.8 times the amount that housing represented in the economy.

In other words, the impact is huge.

So, given the three choices of raising the debt ceiling, defaulting on the debt, and cutting the federal government expenditures by 43%, the first option has the lowest impact on the economy, by far.

Republicans are caught in a tough spot right now. Many were elected on the promise of cutting government spending by $100 billion from the 2010 budget (which would be $3.4 trillion). This was first walked back to a $100 billion reduction from Obama’s 2011 budget request (which would be $3.7 trillion, or a net increase from 2010 of $200 billion). But even that far easier number seems unachievable, in light of a Senate and White House still controlled by Democrats. What seems agreeable to many on both sides of the aisle is a cut of a little over $30* billion from Obama’s original budget proposal, which ultimately nets about $270 billion over 2010.

But can the House Republican leaders convince the Tea Party that a net increase of $270 billion over 2010 is acceptable? It’s hard to imagine that it is, given the chants of “cut it or shut it” at the rallys. I fear that the overall impact of a shutdown is under-appreciated by those with a more ideological bent.

Paul Ryan isn’t exactly helping by talking big (four trillion dollars in cuts), while avoiding the small-print reality (it’s over ten years, almost entirely back loaded, and his proposal makes a ton of barely credible assumptions).

That’s not to say that we shouldn’t be addressing the national debt; we should. But the responsible way to do it is by drawing it down when the economy is healthy, and to do so in a way that is relatively gentle and predictable. Ideological ranting and chanting does nothing to help us achieve that goal.

*In an earlier version of this article, the number was erroneously listed as $300 billion, not $30 billion.

About Michael Weiss

Michael is now located at http://www.logarchism.com, along with Monotreme, filistro, and dcpetterson. Please make note of the new location.
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54 Responses to Shutdown Showdown

  1. mclever says:

    Excellent article, as always, Michael.

  2. filistro says:

    Mike Pence was just on Morning Joe and stated baldly that defunding Planned Parenthood is a deal-breaker for him in this budget battle. When pressed by Joe Scarborough, he said it again.

    Scarborough: “Let me get this clear. Are you saying you’ll shut down the entire government over this issue? You will shut down the government if you can’t defund Planned Parenthood?”

    Pence: “Yes, I will. Nothing is more important to the American people than protecting life.”

    GROG asked yesterday why there is so much animosity toward Republicans from many in here. This is why. They WILL NOT let go of these social issues, even in the midst of a budget crisis. It’s hard to take them seriously because they’re not serious about fiscal issues or good government or pulling their country out of recession. They’re just fanatical about using the power of legislation to impose their personal morality on everybody else through legislation.

  3. mclever says:

    Right, filistro.

    And we’ll all just ignore that he’s flat wrong about the vast majority of what Planned Parenthood actually does, and that government funds are already restricted from subsidizing abortions, so his big stand on “life” is really just about denying health services and counseling to poor women.

  4. mclever says:

    I’m hopeful that there will be a few statesmen amongst the Republican House members. Just a few is all we need to set aside the demagoguery and work out a compromise with Democrats to avoid either of Michael’s dire predictions about defaults and shutdowns.

  5. Brian says:

    Have I mentioned I love Michael’s articles? I swear I learn more from articles like this and the ensuing conversations than I do in a day of work.

  6. filistro says:

    @Brian Have I mentioned I love Michael’s articles?

    Michael is an absolute marvel. Spending time with him is like taking a degree in economics with a poli sci minor… and computer tech classes for extra credit :-)

  7. clmbusboy1 says:

    I want to echo the earlier comments about the value of Michael Weiss. I check in occassionally mostly to read his articles. IMO, by far the MVP on this site, going away. Few do as strong a job breaking down complex issue to their very essence.

    filistro wrote:

    They [Reps/Pence] WILL NOT let go of these social issues, even in the midst of a budget crisis.

    Could it be you’re misunderstanding his intent. I saw the interview as well, and I only recall his advocating defunding (budget issue) Planned Parenthood, not abolishing (social issue) them.

    My inability to afford a Ferrari has nothing to do with a like or dislike of Italian made sports cars. It’s just I don’t have enough money to pay for it.

    Perhaps he is disguising his agenda in the econmic mess though. Either way, I’m glad we are starting to get serious about budget issues. It’s been a long time coming – from both sides!

  8. mclever says:

    @clmbusboy1

    While you are correct in the nuance of what he said, I think your analogy to buying a Ferrari is misplaced.

    With government-funded programs (or programs that rely heavily on government funding even if they aren’t technically government programs), defunding them is tantamount to abolishing them. It just sounds nicer.

  9. filistro says:

    @clumbusboy… (your handle always makes me smile. At first glance I invariably read it as “clumsy busboy”… which I find endearing. :-))

    As to your question: Could it be you’re misunderstanding his intent.

    I guess it could. It’s hard to strip our own strong views and biases from our perception of events and statements. Still, of all things to cut.. and of all things to declare as “absolute deal-breakers”…. why a small, relatively inexpensive program that provides essential health services to poor women?

    I think (and said quite a while ago) that the Republicans have left themselves extremely vulnerable in this budget war by their recent high-profile, no-holds-barred fight to protect tax cuts for the wealthiest Americans. I knew that was going to be not only a Pyrrhic victory, but a huge stumbling block for them in upcoming battles.

    Now it leaves them open to a constant drumbeat of “You’d really rather” kind of attacks.

    You’d really rather:

    *shut down the government with all the mess that entails
    *deny health services to poor women
    *kill Big Bird
    *phase out Medicare

    (etc etc etc)

    … than stop giving tax breaks to multi-millionaires.

    It’s a real killer. And (ideologues to the bitter end) Republicans walked right into it.

  10. clmbusboy1 says:

    @mclever

    Fair point. I just hope every single cut proposed isn’t met with a similar reply. (The politicians don’t care about women, old people, art, the constitution, etc.) We’ll never get the debt lowered. With that said, if Planned Parenthood is the sole vehicle by which some women are able to get life-saving services such as mammograms, well it’s impossible to argue in favor of their abolishment. Hopefully the new health care law had the foresight to address these issues, but I’m going on a tangent now.

    My point is that I hope there is a real desire on each side to fix the debt/deficit problem. (Assuming it’s an actual problem.)

  11. Thanks Brian and Mac. It’s good to be appreciated. :)

  12. Brian says:

    @clmbusboy1

    The government spent $3,552,000,000,000 in 2010, Planned Parenthood cost $270,000,000.

    3,552,000,000,000,000
    0,000,000,270,000,000

    That’s worth shutting down the government?

  13. clmbusboy1 says:

    @ Brian,

    No!

    I don’t believe that was my point at all. Reread my post. If it still looks like that’s what I was advocating, then I worded my post extremely poorly. My apologies.

  14. TakingAmes says:

    Brian, you just amde one of my points for me, so thank you. :-)

    Additionally, this quote is troubling me: Pence: “Yes, I will. Nothing is more important to the American people than protecting life.” Last time I checked, most American people are way more concerned about their own jobs than whether the poor woman down the street can obtain below-market-priced birth control.

  15. TakingAmes says:

    And I note they’re not really talking about jobs anymore.

  16. Brian says:

    @clmbusboy1,

    Sorry if I misinterpreted what you were saying.

  17. clmbusboy1 says:

    @Brian

    I accept your apology. I was simply saying how this *could* be considered a economic issue and not a social one. Read McLever’s post after mine why it could be considered the other way.

    I never attempted to defend the “non-starter/deal-breaker” portion of Pence’s remarks. Read TakingAmes post on why any attempt would be laughable.

  18. Mr. Universe says:

    Mike Pence is like a baby in a high chair in a burning house. He keeps pounding his spoon on the table demanding, “I WANT ICE CREAM! I WANT ICE CREAM!” while the house burns to the ground.

  19. Brian says:

    Btw, I just noticed Paul Ryan’s plan also includes tax cuts for the rich. Because that’s definitely how we fix the budget, cutting taxes.

  20. WA7th says:

    Gotta add my $0.02 to the Weiss appreciation pool.
    Bravo, Michael!

  21. mclever says:

    Boehner says, “We believe cutting spending will help us create jobs in America.”

    http://news.yahoo.com/s/ap/us_spending_showdown

    That sort of thinking reminds me of the underpants gnomes from South Park:

    Phase 1: Cut spending
    Phase 2: ?
    Phase 3: Jobs!

  22. Mr. Universe says:

    That sort of thinking reminds me of the underpants gnomes from South Park:

    You are so full of awesome.

  23. dcpetterson says:

    @mclever
    Boehner says, “We believe cutting spending will help us create jobs in America.”

    He forgets that most of that spending goes to government contracts, or to directly employing public workers (all of which IS JOBS) or directly into the pockets of Americans (ex: Social Security payments) which people spend (which means JOBS).

    This idea that government should cut spending during a recession is simply insane. It’s a sure way to create more unemployment.

  24. shortchain says:

    mclever,

    But, but, but … Ryan requested the Heritage Foundation to perform an analysis, and, according to them, the plan, if implemented, will have unemployment down to 4 percent by 2015 and 2.8 percent by 2021.

    (They don’t say whether that’s because all those who are incapable of working 120 hours a week without sleep or food will die as a result of the Medicare “reform”.)

  25. Anyone who ever suggests unemployment down below 3% should be seriously suspect. Per BLS data, in the past sixty years, there has been a grand total of one year of sub-3% unemployment in this country. And that’s seasonally adjusted. The year was 1952, when there was only one functioning industrialized nation on the planet. Short of something that kicks the rest of the world out of the industrial space, I don’t see anything that would drop our unemployment level below 4% in the next couple of decades.

    That said, something revolutionary and US-dominated could change that…something on the order of the Internet. But even the hottest dotcom days barely dipped unemployment below 4%, and by that point the boom was about to end.

  26. shortchain says:

    Michael,

    And, lest we forget, if unemployment dropped to that level, inflation would become a real problem — unless there were some countervailing force that would force wages down to compensate.

    How about this? Eliminate the NLRB and labor laws and allow employers to require hourly workers to work 40 hours a week even if they are only paid for 32.

  27. mclever says:

    @shortchain

    Or we could go the way of some European countries that mandate a MAX of 35 hours per week for workers. If an employer needs more than 35 hours worth of work per employee, then they have to hire more employees. Of course, that would also necessitate making the minimum wage a living wage, so that someone could afford rent on a single 35/hr income…

  28. shortchain says:

    mclever,

    Wait, are you suggesting that we raise the cost to the employer for 40 hours of work a week? I can hear the thin, piercing screams of the small business owners already.

  29. parksie555 says:

    MWeiss – with all due respect, of course the first of your three choices is the easy choice – kick the can down the road again. It’s always easier to leave problems for the next shift.

    But that being said I have my doubts about the real economic impact of a government shutdown. I don’t have your economic chops but I don’t remember the shutdown during the Clinton years having any great effect on the economy.

    I think the probable result is moderates on both sides will bring in cuts of around 40 billion and avoid the shutdown. Too much at risk for both sides at this point with a shutdown, too much uncertainty how it will manifest at the ballot box.

    Mostly posturing at this point prior to the real negotiations.

    The story we should be talking about is someone having the guts to take on the true root of the problem – entitlement spending – and promptly being left dangling in the wind by both parties.

    Hopefully a few politicians with some guts that are worried more about our nation’s future than reelection will give Ryan’s plan some momentum.

  30. dcpetterson says:

    @parksie
    The story we should be talking about is someone having the guts to take on the true root of the problem – entitlement spending

    I disagree with your premise. The roots of the problem are two: 1) the poor economy, which has greatly depressed tax revenues; and 2) the opposition to having a top marginal tax rate high enough to cover America’s responsibilities, as we had throughout the 50’s, 60’s, 70’s, and into the 90’s — which were boom times for America.

    We don’t need to un-do Medicare. We need to pay for it.

  31. shortchain says:

    parksie,

    Don’t forget that the Ryan plan cuts taxes on the wealthy. Real courage, for a Republican, eh?

  32. Parksie,
    I grant that it sounds like I’m in favor of kicking the can down the road. But I really mean for the can to be kicked responsibly. That is, the ceiling has to be raised, but the budget still needs to be addressed as well. But it needs to be done responsibly and with finesse. Waiting for the economic crises to hit and then applying drastic remedies is a cure worse than the disease. And that’s saying a lot, considering how bad the disease is.

    Incidentally, the economic impact of the 1994 shutdown was less significant for a few reasons. One big one is the time of year. Government economic activity in the last two months of the year is naturally reduced anyway, and the main economic forces at that time are holiday related. Very different in the spring.

  33. GROG says:

    @Parksie,

    You’re right. A government shutdown isn’t really a government shutdown. Maybe 1 in 4 workers would be affected.

    @MW: When you say Rand Paul “has been saber-rattling about default”, did you mean his father Ron?

    Let me get this straight. Obama has increased the federal debt by $4 trillion in 2 years. Ryan is proposing to cut spending by $6 trillion over 10 years and reduce the budget to 2008 levels. And the left is going crazy? Am I missing something?

    Thank God we have someone in Ryan who is serious about reversing the road to fiscal disaster that we have been heading towards for years. At some point in time Paris Hilton’s parents have to cancel her credit cards when they can no longer afford them.

  34. dcpetterson says:

    Let me get this straight. Obama has increased the federal debt by $4 trillion in 2 years.

    “Get this straight?” Right there you’re wrong.

    2009 was Bush’s budget, not Obama’s. As for 2010, did you really want the government to eliminate all spending except entitlements and the national debt? Do you really believe that the depressed tax revenues for 2010, and the economic conditions created by Bush 2, were Obama’s doing?

  35. GROG,

    When you say Rand Paul “has been saber-rattling about default”, did you mean his father Ron?

    Check the link…it’s Rand.

    As for Ryan, it’s not the number so much as how he proposes to get there.

  36. GROG says:

    “Rand Paul’s father – and new roommate – Rep. Ron Paul disagreed with the chairman of the Council of Economic Advisors, Austan Goolsbee, who said on “This Week” that “defaulting on our obligations” would be “catastrophic.””

    That makes it sound like it is Ron who disagrees with Goolsbee.

  37. GROG,
    Perhaps the apple doesn’t fall far from the tree on that issue.

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  39. filistro says:

    @GROG… That makes it sound like it is Ron who disagrees with Goolsbee.

    GROG is right. The subject of the sentence is “Rand Paul’s father” and the predicate is “disagreed with (appositive phrase) Austin Goolsbee.”

    I don’t see anything in the link where Rand Paul actually speaks about a shutdown.

  40. Monotreme says:

    I thought this was a pretty fair and reasonable statement of the likely effects of a government shutdown.

    Of course, our Tea Party friends want a Gubbmint shutdown. They might be surprised at what a government shutdown entails.

    What Would a Government Shutdown Mean?

  41. filistro and GROG,
    Not about a shutdown, but about default. Rand makes it sound like a real default would be little different from what we’re doing with adding to the debt.

  42. filistro says:

    Sorry… I did meant “default.” As I read the article, it seems Rand only expresses support for using the leverage to press for deeper cuts, while Ron (as GROG points out) is the one who actually sounds cavalier about default.

    Of course Rand is the one with more to lose, and he’s obviously learning to be more careful about what he says (sort of.)

  43. Monotreme,
    I don’t think the Tea Party wants a shutdown. What they want is to have the upper hand on spending cuts. I doubt the electorate has a good handle on the difference between the $100 billion campaign promise and the $100 billion cuts that are being talked about now. They sound the same, and it doesn’t help Democrats any to call attention to that difference. Republicans in office are happy to pretend that they’re the same, because they want to be reelected and it’s easier to get the “fake” $100 billion cuts through than the “real” $100 billion.

    But, absent those cuts, the members of Congress who got elected by promising the $100 billion in cuts will have a lot of awkward explaining to do to an electorate that doesn’t understand the subtle nuances of how our government really works.

  44. mostlyilurk says:

    “…an electorate that doesn’t understand the subtle nuances of how our government really works.”

    You are so very diplomatic, MW :)

  45. dcpetterson says:

    Michael, I think you’re right. The Republicans want to be inflexible, and assume the Democrats will be the adults and cave in to the insane childish demand that these cuts be made or else we have to a) shut down the government, or b) default on the debt.

    I also think you’re right that the public doesn’t distinguish between the $100 billion promised and the $100 billion actually being talked about. Nor does it really realize that the budget simply can’t be balanced by spending cuts alone, nor that even $100 billion is pretty meaningless compared to the size of the deficit as a whole — nor that cutting spending during a recession is the exact wrong thing to do.

    It’s also significant that every time the Democrats give in to onw of the Republican demands, the Republicans back up and say, “Now you have to come here!” For instance, the Dems have agreed to the original numbers the R’s put forth; but now, that’s not enough. Of course, this is how the Republicans normally operate. They are congenitally incapable of negotiating in good faith.

  46. DC,
    You’re mixing the Republicans (elected officials in Congress) with the Republicans (voters). They have somewhat different beliefs and goals in this case. I don’t think the former group wants the shutdown, but the latter group doesn’t see it (or probably defaulting) as a big deal.

  47. Monotreme says:

    MW,

    Sorry, that’s what I get from being pithy.

    What I mean to say is that the Tea Party doesn’t want to shut the government down. What they want to shut down is some mythical Gubbmint, the one that tramples on citizens’ rights and individual freedoms. The ones that Colonel Ludlow denounced in “Legends of the Fall”.

    I think they’ll be surprised to find the government and the Gubbmint are one in the same.

  48. dcpetterson says:

    Michael, sorry I wasn’t clearer. in my comment of April 6, 2011 at 10:57, my first and third paragraphs related to elected Republicans. My middle paragraph related to Republican voters.

  49. Monotreme says:

    Oh, and MW? I don’t trust CNN’s version of “what the Tea Party believes” but this is another datapoint arguing against your analysis.

    http://www.cnn.com/2011/POLITICS/04/06/tea.party.shut.down/index.html?hpt=T2

  50. Monotreme says:

    Tweet from the National Coordinator of the Tea Party Patriots:

    @jennybethm Jenny Beth Martin
    Thanks for letting us know there is still no deal @SpeakerBoehner. Stand firm. Don’t blink. #Teaparty #tcot #tpp

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