Impact of a government shut down

This is an excellent post by the Washington Post explaining the impact of a government shut down. Well over 800,000 people will be furloughed over the course of the next two weeks.  As the Post explains, a government shutdown would likely be expensive, costing at least $2 billion a month.

The government shutdown debate is distracting from the astonishing point.  Remember how the sequester was considered stupid and unthinkable less than a year ago? The continuing resolution being debated, essentially makes the sequester permanent.

Unfortunately, the continuation of the sequester likely cuts investment in science, research, technology and infrastructure in a way that might ultimately degrade the US superiority.  Also, Obama's decision to opt for furloughs rather than layoffs is going to mean that there will be a brain drain from government, essentially eroding the public sector's effectiveness for decades to come.  It might make sense for Obama to stop pretending the sequester is temporary and that sense will dawn, and instead actually cut services and lay-off people.  Obama's current approach punishes loyal employees and minimizes the impact on voters, thereby vindicating the GOP. 

Should Obama negotiate?

The latest news is that the GOP is proposing to hold the budget hostage to their demand that Obamacare be delayed by one year.  Wonkblog is celebrating as this makes it less likely that they will go the brink on the debt limit, which would be far worse.

On the other hand, a government shutdown is now nearly inevitable.  It isn't clear that there is enough time before Monday evening for the Senate to act.

If one were to consider this game of political chess, let's consider the positions of the various groups.

For the House GOP, this was likely their best option.  By proposing a one year delay of Obamacare they start looking reasonable.  They can argue that the issues with the implementation of Obamacare justifies such a delay - it's all to ensure smooth transition.  They are quite rightly banking on the assumption that most people will ignore the fact that these delays have been exacerbated by the fact that many states waited until the Supreme Court decision to act and that the House GOP has consistently been unwilling to provide the necessary funding to accelerate implementation.  So, while the GOP probably should share the blame in the current mess, they likely won't. In fact, Kathleen Parker's view is probably representative of how moderate GOP members will likely give the GOP a pass.

The question is, what's in it for the Democrats.  Well, not much.

1. It is not likely that a year's delay will make the law any more palatable and while some issues may be addressed, issues will likely remain so that the situation will be that we will go into the 2014 elections with Obamacare hobbled by a huge number of issues, while none of the benefits of the law will be apparent.  By contrast, if the law is not delayed, it is likely that most of the kinks will be worked out by early 2014, ensuring that Democrats will enter the 2014 elections with the best chance of touting the law's benefits - which are actually quite extensive.
2. What happens after one year?  The GOP failed to win the Senate, lost ground in the House and lost the Presidency in 2012.  In fact, the GOP received fewer votes than the Dems in the House in 2012. Yet, they are holding the country hostage to force a year's delay in Obama's signature achievement. How likely is it, then, that they will agree to implementation next year, especially when they will have an impending election and likely a stronger electoral position.
3. Implementing it now is likely the best chance the law has of surviving.  Once implemented, it'll be hard to unwind the law.  By the time the 2016 elections take place and the new President enters, the law would have been in operation for three years and the entire industry would be so intertwined with the law that wholesale changes would hurt rather than help.  Should the law be delayed though and if the GOP were to gain a majority in the Senate, it is possible that they could put enough obstacles in the way of the law to give them a fighting chance of repealing the law post 2016.
4. In terms of precedents, if Obama negotiates, it'll set a horrendous precedent.  It'll mean that the GOP could lose successive elections and yet, through a gerrymandered control of the House, blackmail the country to do its bidding.  A future liberal wing could potentially hold the country hostage to get its own way too.  It completely undermines the structure and meaning of the democratic process and the system of checks and balances.
5. Finally, the question for the Democrats is who will get the blame if government shuts down.  It's likely that the GOP supporters will blame Obama and the Democrats, but every polling firm is showing that Ted Cruz's crusade has effectively made this the GOP's baby.  So, the inevitable debacle from Obama's unwillingness to negotiate will likely hurt the GOP and help the Democrats. The Democrats therefore have nothing to lose and everything to gain by standing firm.

The question then is how quickly will the GOP capitulate.  Let's see.  The markets are betting soon. However, we are in nearly unprecedented territory here.  By framing the debate as an Obama vs the GOP issue rather than a focus on issues, the GOP has boxed itself into a position where any sort of climb down that appears to leave Obama unscathed will likely be unpalatable to its Tea Party wing.  As I explained in an earlier post, the fiscal policy objectives of the GOP have been largely met.  So, this really isn't about spending or debt.

We may be in for a game of chicken akin to Arthur Scargill's stand-off against Margaret Thatcher.  So, does Obama have the steel Maggie Thatcher did?

Strangely comforting shutdown

We are now two days from a total shutdown of the US government.  I exaggerate.  Turns out, Obamacare will be going strong.  As will Medicare, Medicaid and Social security.  A lot of defense and "essential services" will continue unabated.  As will departments that have their own sources of revenue such as the postal service and possibly the patent office.  However, most of the rest of the Federal government will effectively shut down next Tuesday, that is unless the GOP relents and negotiates seriously with Obama - something that seems increasingly unlikely.

To explain why this is comforting, one has to understand what John Boehner's alternative proposal was.  At the moment, the GOP is essentially planning to shut down government, but not default on debt.  John Boehner was trying to get his extreme right wing to relent on government in exchange for holding the world hostage on the debt.  If the GOP actually went the debt route, we would be entering uncharted territories.  Never before has any major country, let alone the reserve currency for most of the world, defaulted on debt.  The consequences ... well we have no idea what would happen.  However, no sane economist believes it would be anything other than a catastrophe.

Faced with a choice between a global catastrophe and a US only crisis, a crisis seems almost a relief.  This article in the New Republic summarizes it well.  Here's how they put it:

"First, the lunatics in the House were so determined to stage a confrontation with Obama that they were willing to shut down the government and court a massive backlash in public and elite opinion. Then, in an attempt to save them from this fate, their heroic and noble leadership tried to persuade them to defer these impulses and refocus them on a confrontation (the debt limit) that would have far more destructive consequences, and (in the case of default) earn them still greater amounts of scorn from the public and the media. When the lunatics didn’t go for that, Boehner then tried to bribe them with a laundry list of fantasy items, akin to bribing a 15-year-old male with endless supplies of pizza, video games, and Internet porn. But the lunatics still didn’t go for it because they really wanted to throw their tantrum now, not later, and anyway they weren’t sure Boehner was serious about the pizza and porn. And so, in the internal GOP conflict between pre-modern zealotry and cartoonish levels of cynicism, the zealotry appears to be winning out, to the serendipitous benefit of the rest of us."

What are they fighting for?

As the country heads, yet again, to a budget an impasse over the budget risking a possible government shut down and possibly, worse, a debt default, it is worth considering what this is all about.  As Ezra Klein explains, here is what has happened to deficits as a percentage of GDP:

Basically, post the sequester and the massive cuts Obama has agreed to, combined with an improving economy, slower than anticipated growth in medical costs and an end to the stimulus, deficits have shrunk back to pre-recession levels.  

It is important to bear this in mind as we look at the fight today.  There may be a longer term structural deficit problem, however: (a) that is not what the GOP is seeking to address, and (b) the most compelling issues today are not the deficit or debt.  In fact, by creating uncertainty around debt, the GOP may in fact create a problem where there is none today.

The GOP's latest laundry list of demands includes: "a one-year delay of the president’s health care law, fast-track authority to overhaul the tax code, construction of the Keystone XL oil pipeline, offshore oil and gas production, more permitting of energy exploration on federal lands, a rollback of regulations on coal ash, blocking new Environmental Protection Agency regulations on greenhouse gas production, eliminating a $23 billion fund to ensure the orderly dissolution of failed major banks, eliminating mandatory contributions to the new Consumer Financial Protection Bureau, limits on medical malpractice lawsuits and an increase in means testing for Medicare, among other provisions."  While many of these may be core to the GOPs policies, which of these, if any, are important enough to warrant risking the US credit rating or shutting down government?

Defunding Obamacare

The latest news is that the GOP is threatening to shut down government and default on the debt unless Obamacare is shut down or delayed.  Here are some interesting things to note:

• As Wonkblog explains, while there is a lot of hyperbole about the defunding of Obamacare, most of Obamacare funding actually has been separately appropriated as part of the Patient Protection and Affordable Care Act.  The Department of Health and Human Services has already been denied any funding to help implement Obamacare.  So, it is unclear whether the current budget debate will have any effect.  If the GOP takes this to the brink while "discretionary" government services would be shut down, Obamacare implementation will continue unimpeded. 

• A second interesting factoid is that the GOP budget actually assumes much of the benefits of Obamacare.  It appears that the House GOP budget leaves intact the tax increases assumed in Obamacare and the Medicare savings.  In fact, it also leaves the patient protection part untouched - i.e. it does not impact the coverage of preexisting conditions etc.  The tax and Medicare provisions though are particularly astonishing as the GOP budget would not balance, ever, without them.

• Is this sort of dysfunction and polarization the norm?  This article argues with some excellent data that the dysfunction is actually quite unusual for the recent past, although may have been more common pre 1930s.

• What would happen if the threatened shut down occurs.  Well, it depends.  The sequester has been managed in a particularly interesting manner by Obama where he has reduced long term discretionary investments and instituted furloughs instead of lay-offs and allowing the detrimental effects to flow to operations.  This has meant that the effects have been significantly more muted than predicted, although many economists fear, the long term damage as a result is far more serious.  It isn't clear whether Obama would exhibit the same sort of ingenuity on the shut down.  What is clear though is that the anticipated effects a debt default are far worse.  

• There is a case to be made that the debt ceiling is unconstitutional.  Congress authorized the spending.  Congress authorized the revenues.  The difference is paid with debt.  The 14th amendment states: "The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned."  It isn't clear that Congress is empowered to question the validity of debt it authorized by law.