U.S. House Continues Dangerous Game of Political Chicken with the Economy

Photo By Kristina D.C. Hoeppner via StockPholio.com
Photo By Kristina D.C. Hoeppner via StockPholio.com

Fearing a vote not to raise the debt ceiling might have disastrous economic consequences, the US House of Representatives appears to have shifted tactics. It has temporarily moved the fight to defund Obamacare from the arena of the debt ceiling to the arena of the continuing resolution, i.e. funding government operations. Either way, it is playing a dangerous game of political chicken with the economy.

Congress must pass a continuing resolution by Tuesday, September 30, 2013 to avoid a government shutdown of all but the most essential operations. Similarly, by October 17 the debt ceiling must be raised so that the government can repay interest to individuals and institutions from which it has borrowed (i.e. not default on its debt).

The US House of Representatives is willing to fund government operations and raise the debt ceiling if the Senate and President go along with their planned to defund Obamacare. On this issue, neither side has shown a willingness to budge. Therefore, a shutdown of government operations seems imminent. Furthermore, a default on the national debt appears to be more of a possibility than ever before.

By shutting down the government, potentially hundreds of thousands of nonessential workers will be laid off, all but emergency funding to government agencies and organizations will be put on hold, and transfer payments to millions of households could be jeopardized. Shutting down the government would cause significant damage to consumer and investor confidence.

Over the last three months, the economy has stalled. It has not created sufficient jobs and major economic indicators have been flat or negative. If a freeze in government spending lasts long enough, it could send the economy into a downward spiral from its current lateral movement.

In comparison, failing to raise the debt ceiling will lead to a further downgrade of US credit rating, increase interest rates and cut in consumer spending and business investment. This scenario is a recipe for a new recession.

As the game of political chicken continues, we face two precarious economic deadlines:

  1. Tuesday October 1, 2013: Unless Congress passes a continuing resolution to fund government operations, the Treasury Department will not have budgetary authorization to spend money; except on essential government tasks. While the precise number of government workers will be laid off is not known exactly, estimates are that 60% of federal workers are nonessential.
  2. October 17, 2013: This is the date by which the national debt will have reached its authorized ceiling of $16.7 trillion. Since the government is running a large deficit, it must borrow money to cover things like Medicare, national defense, education etc. When it borrows money, it must of pay lenders interest on the debt. Unless the debt ceiling is raised, the US government will not have sufficient funds to pay this interest, which will likely lead to a further downgrade of US credit and an increase in the interest rate.

In recent times, a government shutdown occurred only once, under the Clinton Administration. Likewise, in past presidencies, voting to raise the debt ceiling occurred automatically.

The U.S. House voted early Sunday on a bill that would fund the government but delay for one year funding for the Affordable Care Act (Obamacare). The measure now goes to the U.S. Senate which has indicated it will call a vote today (Monday) to “table” the House measure. In other words, the Senate will not take the House measure up because of the Affordable Care Act contingency language.

This means the House will have one day to come up with a new bill that the Senate and President will not find objectionable. However, both branches have indicated they will not agree to a funding deal that undermines Obamacare.

Even if the U.S. House passes a bill with provisions acceptable to the Senate, it would have to be voted on and signed by the President before Tuesday. The House seems unlikely to do this, and the time remaining is too short to get it done. Therefore, while we hope for the best we should expect the worst from this continuing game of political chic