By Adam Lockyer
Photo: Government closures are damaging to the economy. It is estimated that this one will cost the United States $300 million per day. (AFP: Emmanuel Dunand)
The US government shutdown might sound catastrophic, however the debt ceiling, two weeks away yet, poses the real risk, writes Adam Lockyer.
On October 1, 2013 the United States government shutdown. As catastrophic as this might sound, government closure is something that has happened before and will again.
Between 1976 and 1996, Congress failed to fund the government 17 times, leading to it shutting its doors.
Government closures are damaging to the economy. It is estimated that this one will cost the United States $300 million per day. Federal employees' personal finances and morale will take a serious hit and Americans who rely on government services will be seriously affected.
The real risk, however, is still two weeks away. This is the debt ceiling.
It costs more to run the US federal government than it collects in revenue; total expenditure in 2013 will be roughly $3.803 trillion, while revenue will come in at around $2.902 trillion.
This year's budget deficit is $901 billion.
To make up the difference, the government borrows money. Congress periodically raises the debt ceiling to allow Treasury to pay the loans and interest on loans already incurred. It does not, as many believe, prevent the federal government from taking on more debt or running future deficits.
The stakes involved with failing to raise the debt ceiling completely dwarf those associated with the government shutdown.
The United States has never defaulted on its loans. The shock wave of doing so would lead to a financial crisis and likely plunge the country back into recession.
Further, the ripple effect would smash into the wounded European and weakening Asian markets, inflicting massive damage. This will also hurt Australia.
Two years ago, Congress only needed to flirt with not raising the debt ceiling to strip the United States of its AAA borrowing rating and cause the Dow Jones to have one of its worst days in history.
On August 8, 2011, the Dow lost 635 points. In all, it fell over 2,000 points during the crisis.
So, the real question is what the current government shutdown means for the looming debt ceiling debate.
For decades, Congress has approached raising the debt ceiling as a dull, apolitical, and largely administrative piece of legislation. This changed when the Republicans won control of the House of Representatives in 2010.
Speaker of the House John Boehner (R-OH) and Senate Minority Leader Mitch McConnell (R-KY) rallied their fellow Congressmen to make Obama a "one-term president".
Their strategy was to wreck the place.
Boehner said of Obama's legislative agenda: "We're going to do everything - and I mean everything we can do - to kill it, stop it, slow it down, whatever we can".
This was when the Republican leadership remoulded the debt ceiling into a political weapon. They began threatening not to raise it unless Obama and the Democrats reduce government spending. The Democrats did - to an extent.
The true significance of the current government shutdown is that it was against the wishes of the Republican leadership. Neither Boehner nor McConnell had wanted it.
Senior Republicans in Congress were car-jacked by members of their own party. Many of the insurgents are either directly or loosely associated with the Tea Party wing of the party.
These members are in open revolt against the more traditional conservatives in the party.
Yesterday, Tea Party Express sent out a fundraising appeal with the rhetorical question, With Republicans Like These, Who Needs Democrats?
What does the government shutdown mean for the debt ceiling?
An optimist might say that it makes a fight over the debt ceiling less likely. They may suggest that younger Congress-people have used the government shutdown debates to grandstand and so will not need to do it again in two weeks.
For instance, Senator Ted Cruz (R-TX) used a 21 hour-long speech to raise his profile and position himself for a 2016 presidential run.
A pessimist would point to three different issues.
First, Congress appears to still be a long way from passing a continuing resolution to reopen government. If nothing is passed within a week, then both the funding resolution and debt ceiling will be wrapped up in the same conversation.
Second, if the Republicans completely capitulate on the resolution to fund the government, then they might not be able to swallow a second defeat in as many weeks and push the debt ceiling to breaking point.
Finally, Congress might pass a short-term funding resolution to reopen the government. This will allow government to remain open while they debate a longer-term solution.
The danger is that, like the first point, a short-term bill might roll funding and borrowing into the one discussion.
With the debt ceiling, the Republican leadership may have invented a potentially devastating weapon that if it ever fell into the wrong hands could cause an economic catastrophe. The worry is that those wrong hands might be members of their own party.
Adam Lockyer is a lecturer in US politics and foreign policy at the United States Studies Centre, the University of Sydney. View his full profile here.
Has America let its fiscal genie out of the bottle? - The Drum (Australian Broadcasting Corporation)
