JNN 3 Oct 2013 WASHINGTON — The ongoing partial federal government shutdown and fiscal uncertainties are dampening American economic recovery, and a default on U.S. debt payments would have “immediate and substantial” negative effects on the country’s economy that would be difficult to quickly reverse, said David Stockton, a senior fellow at the Peterson Institute for International Economics (PIIE).
“A brief shutdown is disruptive, but not likely a systemic macro event,” Stockton said Tuesday at an event on the first day of the partial shutdown of the U.S. federal government agencies.
U.S. lawmakers failed to agree to a spending bill for keeping the federal government running beyond midnight of Sept. 30, which finally forced the U.S. federal government to a partial shutdown starting Tuesday for the first time in 17 years. Tuesday also coincided with the first day of the U.S. 2014 fiscal year.
The federal government shutdown each week will cost the United States about 0.15 percent of the growth in the fourth-quarter gross domestic product (GDP), predicted Stockton, also former chief economist at the U.S. Federal Reserve.
However, if U.S. Congress fails to meet a mid-October deadline to raise the country’s debt ceiling, it will be “a major macro systemic event” and will lead to financial volatility and depressed household and business confidence, he stressed.
A partial government shutdown for several weeks or a month would not have a significant impact on weakening the U.S. dollar or delaying the Fed’s decision of tapering off its third round of quantitative easing (QE3), compared with the potential impact of a debt default crisis, he said in answering questions posed by Xinhua.
U.S. economic growth rate is projected to be only 1.9 percent this year from a year earlier, and gradually accelerating to 2.9 percent next year, and 3.2 percent in 2015, Stockton predicted.
U.S. economic growth outlook has been revised downward from 2.3 percent, 3.1 percent, and 3.3 percent for the three consecutive years from earlier estimates given in April, respectively, as the talk of the Federal Reserve’s monetary stimulus taper has driven interest rates up, and the government spending cuts and fiscal uncertainties are also holding back economic activity, he added.
U.S. Treasury Secretary Jacob Lew has warned that a debt limit agreement needs to be reached no later than Oct. 17. Lawmakers will therefore have to come together to agree to raise the nation’ s debt limit of 16.7 trillion dollars or risk defaulting on its payment obligations for the first time in history.
It’s the greatest superpower the world has ever seen. It’s economy is the envy of every other. Unfortunately, America also does dysfunctional politics on a grand scale.
Many will draw parallels with the epic shutdown of 1995 but there is a key difference: For all his many flaws, at least Bill Clinton was leading the USA. Nowadays Barack Obama may occupy the White House but he looks increasingly like a lame duck caretaker awaiting a professional President who will actually take charge.
Post shutdown ‘blamestorming’ is in full swing and Mr Obama is quick to attribute culpability to all around him. However, given that he ultimately decides what gets spent, is there not an element of hypocrisy in his attempts to avoid responsibility? Barak Obama has overseen a lavish spendthrift shift to the left under his Presidency yet feels it is beneath him to actually negotiate a bigger bar tab.
Congress have dug in their heels over health care changes which are highly questionable. Then again Obamacare needs a serious rethink. That’s not my view: it’s the opinion of the US trades unions who form Obama’s base support. They have realised that heaping costs on employers will result in fewer full-time jobs. That hurts the average citizen but Obama’s aloof plutocrats don’t care. Equally Congressional Republicans are understandably furious that the President seeks to ignore their democratic mandates while being keen to schmooze with an Iranian President elected via a dubious democratic process. Obama behaves with the demeanour of one who has a massive mandate, yet strip away the hype and he was a relatively narrow victor against two frankly mediocre opponents.
On the broader economic front, a crunch looms around October 20th. Then it will be time to return to Congress cap in hand and request not just the cash for another round of drinks but actually a full extension to Mr Obama’s burgeoning bar tab. The debt ceiling will soon be breached once again. The President fails to grasp the fundamental tenet of his expansionist government tendency: Nobody can keep spending citizens’ money indiscriminately and not expect to pay for it along the way.
The last shutdown showdown resulted in America losing its coveted AAA credit rating. The current rounds of high stakes bickering appear unlikely to improve the US’s debt standing. Moreover a prolonged stand-off of several weeks may yet produce more economic damage than the hurricane Katrina disaster. The daily cost is apparently circa 300 million dollars per day. Then again the stakes are raised as actually the current impediment to daily life is more frustrating than fundamental. The great outdoors is a bit smaller given the shutdown of national parks but really the “crisis” so far has largely demonstrated that the US remains a private powerhouse where government is an interruption to the success of the economy. Nancy Pelosi and her leftist elite may recoil in horror but actually they don’t benefit society – well apart from enriching the bond traders they claim to loathe.
In some ways a government shutdown is rather useful. It ought to restrain the frequently irresponsible behaviour of the government mortgage agencies whose bankruptcy was a result of their huge input fueling the last property bubble.
Fundamentally, the USA needs a rethink to make its governance system match its economic and military capacity. President Obama’s focus on creating the European socialist mess is a fascinating example of stubbornness from somebody who has barely experienced commerce. True, the Europeans would love to “merely” have Mr Obama’s mess but then again Mr Obama’s mess can easily resemble the EU’s given a few more decades to develop.
Against this cloudy backdrop, the US economy is gradually gaining growth once again, despite, rather than on account of, the vast government sums wasted on bank bailouts and other centrally planned programmes which only benefited the wealthy. In a certain sense, it’s morning in America once again. Quite why Mr Obama refuses to open the curtains at the White House to see the great potential of American enterprise beyond the Washington bubble remains a mystery. For all the pedantry of Congress, they have a point.
The President doesn’t deserve an extension to his bar tab. America needs to live within its means but it will need an outbreak of genuinely skilled government to achieve such leadership. Mr Obama demonstrates the impotence of what Ronald Reagan defined as the six most frightening words in the English language: “I’m from the government and I’m here to help.”