Yesterday, Congress avoided a government shutdown. But the fix is temporary. And all the uncertainty caused the stock market to plunge nearly 5% for the month of September. Since Republicans are adamant not to raise the debt limit; there are more problems to come.
What would a government shutdown mean for ordinary Americans?
Since essential services and Social Security and Medicare payments are not discretionary, spending in the first round of the shutdown would only affect discretionary programs.
And, because of the consistently low wages for American workers, they depend on discretionary programs. Being first in low-paying jobs is a dubious distinction for Americans. We lead rich countries in the proportion of workers in low-wage jobs. Almost a quarter of all workers in the United States earn wages below two-thirds of the median wage compared to Canada at 21%; the UK, Germany and Canada clustered around 19%; France and Italy below 10%. In America, for example, many workers depend on food stamps and other means-tested programs. During the 2013 shutdown, states were forced to pay for subsidy programs such as temporary assistance to needy families, “cash grants” and food stamps. During the 2018-19 shutdown, food stamps may have been threatened.
Good news, Social Security and Medicare payments are sent during a shutdown, but new beneficiaries have to wait. The verification of benefits and the issuance of cards would cease. During the 1995-1996 shutdown, over 10,000 Medicare applicants were temporarily turned away on each day of the shutdown.
The debt limit makes little economic sense
It may be surprising that the debt limit debate is purely political and almost completely devoid of economic content.
The debt limit is only interesting because in the real world of real savings it is not the level of public debt that matters, but what the government spends money on and how the government generates income that matters.
The debt limit has no economic value because the debt targets are not adjusted for inflation and they do not measure trillions in assets owned by the federal government. The federal government could sell to pay the bills. Over the past 25 years, nominal federal debt Pink from $ 5,000 billion to $ 22.7 trillion, debt service payments (required interest payments on debt) shrinks from 3.0% of GDP to 1.8%.
The US Treasury draws on Federal Reserve bank accounts to fund federal activities using tax revenue and borrowing. But, because the United States has a legal debt limit, once that limit is reached, the Treasury can no longer borrow and can only pay the bills with current tax revenues. When the economy weakens, the government spends even less, making the economy worse.
As Josh Bivens of the Economic Policy Institute writes, debt would be a problem if government borrowing competed with corporate borrowing and demand drives up interest payments. But interest rates are not rising and there is no pressure on the federal government capacity pay even if the political will to pay is mired in a political dispute. If Republicans can make Nancy Pelosi look bad, they will jeopardize market stability.
The biggest problem we face is economic weakness, as the American Cares Act money allotted last year ran out and closed – like the 35-day one we had under the Trump administration. could trigger a recession.
The shutdown could cause a recession
The United States imposed a statutory limit on federal debt, but it was militarized in 2011 in political battles to cut spending (not raise taxes). The Congressional Research Service’s excellent Primer on Debt Limits reveals that since Congress introduced the budget process we now use in 1976, there have been 20 “funding shortfalls when funds have not been allocated.” for at least a day. Before 1980, the government never closed its doors.
If a shutdown results in missing federal payments and millions of workers go unpaid, raising the debt ceiling could start a vicious cycle where cutting to a limit causes a recession, leading to lower incomes and a loss. increase in debt as the government pays more unemployment benefits, etc. . and gets less tax revenue.
There are other ways to regulate debt payments
If Congress doesn’t act to pay for the programs it has authorized – it’s like using my credit card and refusing to pay the bill when it arrives – the Biden administration could act by ignoring the ban on borrowing against the debt limit and fulfill the obligation to pay the bills. The Biden administration could issue debt by minting a trillion dollar platinum coin and returning it to the Treasury.
Further, as Bivens writes, “The United States should join the vast majority of rich countries around the world that have no debt ceilings. There is talk of Democrats in Congress abolishing the limit in its own right or in the reconciliation bill raising the debt ceiling to huge numbers – say $ 500 trillion – which would effectively abolish the debt limit. .
Stay tuned: A drastic spending cut could take place around October 18.