It sounds like the kind of lofty thought experiment that academics would ponder: What happens if the U.S. government shuts down?
The event is full of paradoxes. On the one hand, it appears the government hasn’t actually shut down; since the initial announcement, the majority of the nation’s citizens seem unfazed and unaffected. On the other hand, it is undeniable that the government has temporarily lost its authority to pay for non-essential services. A second paradox is that this shutdown is apparently not that big of a deal to the markets. This in itself is a big deal insofar as it allows America to do some chest beating in the face of the critics that claim that it is in decline.
However, these paradoxes arise from widespread misunderstandings. To call what is happening a government shutdown is an exaggeration, and makes the issue appear grandiose and overly complex. Instead, the headline should simply be “spending freeze.” The focus should shift towards the “communication shutdown” between the Republicans and the Democrats. Most analysts have been quick to point out that this is the key of the shutdown, as well as the most obvious difference between this and past shutdowns during the Clinton and Reagan administrations. Never before has there been such a robust unwillingness to negotiate, especially in such a problematic financial environment.
This is the crux of the issue. The biggest political risk lies in both parties refusing to talk. These early days of the spending freeze are a prelude to the upcoming negotiations about raising the debt ceiling. Failure to negotiate would, among many other things, affect credit markets, potentially cause a recession, and have ripple effects on an international scale. This drama is amplified by the inherent uncertainty of such an event. As Goldman Sachs CEO Lloyd Blankfein declared, “there’s no precedent for a [US] default.”
The second political risk has its roots in the growing divide between the rowdiest arm of the Republican Party and the Democratic Party. Assuming the debt ceiling is raised before October 17th, the Republicans will be seen as having obfuscated simple government proceedings and undermining services that are perceived as symbols of the nation’s unity. The Republican Party already suffered the effects of the extremism of their Tea Party wing in the last elections, and this could effectively undermine them in states where these symbols are hailed with pride. Elaine Kamarck has pointed out that this will ultimately benefit the president because he can formulate one coherent message, whereas the Tea Party and GOP will struggle to find a cogent rhetoric. ABC polls from the days of the Clinton government shutdown also show that Republicans received more blame than did Clinton at the time.
But how can the Tea Party’s position affect the economy? The answer lies in the more than one million workers being temporarily unemployed. By undermining some of the nation’s public services the Tea Party has gone from being a protest group to actually achieving something that Americans can see and feel. There is a distinction to be made between the bureaucratic stuffy rooms in Washington and America on the ground, where some of these services, or at least the perception of them, matter. Thus, the Tea Party has shown a lack of responsibility and political amateurism. In the long term, if they remain as vocal a minority in the Republican Party they will further undermine the party’s credibility between the fringes of American political opinion. If they falter, the Republicans will need time to put their message through the airbrush. This will allow the Democrats to appear as the voice of reason in the eyes of the voters, legitimate the Affordable Care Act more widely, and build on these reforms during another Democratic presidency in the post-Obama era. While this could usher in further entitlement and education reform, there remains the risk of greater public spending. The particular economic effects of this can not be predicted, but it’s clear that the Democrats would be able to shape the attitude towards the economy for the foreseeable future.
