Shutdown Squeak-By or Debt Default Armageddon – How Can America Avoid Missing Out on Moment for Growth?

~ ”Don’t it always seem to go
That you don’t know what you’ve got
Till it’s gone
They paved paradise
And put up a parking lot.” ~ Joni Mitchell, 1970

~ “The only reason people want to be masters of the future is to change the past.”
~ Milan Kundera, 1980

~ “A person often meets his destiny on the road he took to avoid it.” ~ Jean de La Fontaine, 1668
~ “Every human benefit, every virtue and every prudent act, is founded on compromise.” ~ Edmund Burke, 1775

~ “It is not in the best interest of the employers, employees or the American people to risk a government shutdown that will be economically disruptive and create even more uncertainties for the U.S. economy,” ~ U.S. Chamber of Commerce, September 2013

~ “Congress needs to keep our government open. It needs to pay our bills on time and never, ever threaten the full faith and credit of the United States of America.”
~ Pres. Obama, September 2013.

The past weeks in Washington D.C. I watched hundreds of thousands of furloughed Federal workers trying to stay busy – a scientist friend is writing folk songs! And I read about the mayhem caused by the Federal Government shutdown. I was struck by the irony of seeing our elected national politicians shooting our country – and potentially the whole world – in the foot. Just as America is poised to enjoy a period of greater prosperity, after five years of recovery from the Great Recession.
In the lead-up later this week to the World Bank-IMF Annual Meetings here, the IMF’s just published World Economic Outlook (WEO) shows the US economy poised to grow faster than any other advanced nation’s in 2014-16. At their October 10 global economy seminar Oxford Economics projected the USA could enjoy faster expansion than the entire world economy – potentially growing by 3.5-4% annually. The main clouds on that sunny horizon are totally self-generated : Even if it lasts only a few weeks, the Shutdown will reduce growth in 2013. Infinitely more disastrous, if the Federal Government defaults on its debt because the debt ceiling is not raised, the resulting savage cutbacks in budget would almost certainly propel the USA and the world back into major recession. Little wonder then that popular estimation of the US Congress has reached new all-time lows!
Key Questions : Where does the US economy stand now, what are its prospects? How would continuing Shutdown and Debt Default affect these? How does healthcare impact America’s economic future? What are the long-term challenges facing the U.S. economy? Can Shutdown and Debt Default address them, or, what are more effective solutions?
Where America’s Economy Stands Now : Since 2011, the US economy has out-performed all other advanced nations’ : ~ Economic growth has recovered well to average 2% annually, unemployment has dipped to just over 7%. ~ Importantly, household debt has greatly reduced, expanding consumer purchasing power. ~ Meanwhile, house prices have fallen back to pre-bubble levels and are rising again. ~ U.S. Government fiscal revenues are rising. With spending cutbacks in 2011-13, the Federal deficit has been slashed already – from over 7% of our economy (GDP) in 2012 to 4% in 2013. And the Congressional Budget Office (CBO) forecasts deficits at or below 3% in 2014-19 – a low level by international standards. ~ For the first time in many years, the US trade deficit is contracting sharply – thanks to growing exports and increased domestic energy production. ~ Worker and private firm productivity have grown strongly – making the USA competitive enough that major US firms are relocating plants back here from abroad.
Enter the Sequester, then the Shutdown, now Looming Debt Default : Any other advanced economy would relish the above prospects. Especially the Euro zone, the UK and Japan – all still mired in recession or slow recovery. But enter the Sequester applied from start of 2013. Now the Shutdown, and imminent Debt Default – absent last minute agreement. The Sequester – like earlier fiscal cuts in 2011 – already reduced US economic growth potential by a quarter. The Shutdown is expected to do the same again this year, causing unemployment to rise slightly. If it ends before Thanksgiving, the Shutdown would have only mild longer term impact and the US economy overall could recover from it. Back-payments could make up losses to workers and contractors.
Infinitely more serious would be the specter of U.S. Government debt default. Not raising the debt ceiling in time – combined with spending rigidities – would cause the U.S. to default on its debt. A swinging shortage of funds for current operations would lead to massive cuts in Federal spending – as much as $850 billion or 25% of the total. All Federal programs, including mandatory Social Security, Medicare, and Income Support, would be seriously affected by late- and non-payments. Inability to service its debt would cause panic in the Treasury debt markets, raising interest rates here and worldwide. Economists estimate this could slash the US economy by 4% in 2014 and cause unemployment to rise to over 12%. As in the 2008-09 Great Recession, the impact would be transmitted quickly across the world economy, as US markets slumped. For all are closely inter-connected through trade and financial links.
In short, US Debt Default risks propelling the US and world economy into another Great Recession, perhaps larger than that of 2008-09.
Why Healthcare Matters – But It’s Not Obamacare : The ostensible reason for a motley crew of Conservative and Republican groups forcing US Government Shutdown was to stop implementation of the Affordable Care Act (ACA) – Obamacare – healthcare reforms, before they could take hold in the economy. To be sure, America will face serious budgetary challenges long-term – in ten to twenty years – due to rising healthcare costs. Yet, these are not due to Obamacare, but rather to the massive long-term rise in healthcare costs for the elderly – principally under Medicare and also Medicaid. In fact, some private competition (in insurance) and cost containment (through greater prevention) under the ACA may help in part mitigate these.
The CBO estimates that, unless moderated, rapidly rising elderly healthcare costs will by 2023 force all other discretionary Federal spending – both military and non-military – to be cut by a quarter as a share of the US economy. Underlying causes are principally the growing numbers of elderly in the population, and importantly continuing rapid cost increases in the private US health care market. Expanded coverage provisions foreseen under Obamacare are not such a major factor. They will also help improve productivity and human capital through reduced disease. As Rep. Paul Ryan noted last week, major reforms of healthcare have to be part of any grand design for long term US fiscal reform. But they need to go way beyond simple budget cutting – through block grants of Medicaid or Medicare to the states which of themselves could merely cause greater human hardship. They must include far-reaching reforms in distorted, inefficient private US healthcare markets.
Long-Term Economic Challenges : Clearly, in the next quarter century, the US ability to control rising health care costs and their impact upon the Federal – and States – budgets will determine whether adequate funding can be allocated for other critical important public investments for our future prosperity. These include greatly increased funding for education – to provide Americans with the higher skills needed for more affluent jobs; for infrastructure – to repair our now dilapidated bridges, roads, ports and mass transit systems; and for basic research – to keep the USA at the cutting edge of global innovation. The latest CBO long-term budget estimates imply rising healthcare costs will force necessary cutbacks in these areas. On the other hand, the CBO assumes tax revenues well below recent peak level of 21% of the economy (GDP) in the fast-growth late 1990s. Long-term tax reform will thus also be crucial but must be designed both to meet public investment needs yet maintain incentives to private sector growth.
Conclusions : The legacy of legislative standoffs, acrimony, hyper partisanship and brinksmanship over the past four years have proven resoundingly that theatrical short-term fixes have failed to address America’s long-term economic challenges. But they have undermined realization of the US’ immediate and medium term economic potential, which is now considerable. There is no doubt that economic growth – and employment – have been lower because of premature fiscal cuts since 2011. Also, excessive and continuing monetary easing – to compensate for tight fiscal policy – risks return of the housing market bubble that caused the Great Recession in the first place. What is needed now – and very urgently indeed – is an end to the current debt ceiling stand-off, that serves no constructive purpose in addressing either America’s immediate prosperity or its long-term challenges. US legislators need to shift fundamentally to a more consensual, considered, but bold deliberative process – that squarely addresses the challenges based upon economic and social facts, not fictions or ideological prejudices. I, for one, hope they will have the good sense to pull back from the brink right now, and do so! Keep Your Fingers Crossed, America! You Need To!

Erratum : In last issue’s column, the reference to the ACA mandate should have read – as it did in the online edition : “ The individual mandate requiring all of us to buy health insurance will start in 2014. “

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