Analysis/Comment Dr. Peter Morici: Train Wreck: Calibrating the consequences of a government shutdown
By Professor Peter Morici
Apr 6, 2011 - 7:08 AM
President Barack Obama and Vice President Joe Biden meet with Office of Management and Budget Director Jack Lew and Rob Nabors, Director of Legislative Affairs, in the Oval Office, April 5, 2011. The President and Vice President later met with House Republican and Senate Democratic leaders to discuss ongoing budget negotiations.
Dr. Peter Morici: The economic
consequences of a government shutdown can’t be calibrated on a spreadsheet with
an economic model. It all depends on who wins public opinion—Congressional
Republicans or the President and Democrats.
Federal spending is out of control. From 2007, the last full year before the
financial crisis, to 2011, the second full year of economic recovery, spending
has jumped $1.1trn—40% when a $200 billion increase would have satisfied
For any other country, a deficit exceeding 10% of GDP would force austerity by
sending interest rates on government bonds through the roof. Alas, the United
States prints the world’s currency—the dollar—so it can inflate its way to
solvency, and the bond market is starting to take that bet.
Enter the Tea Party—that troublesome bunch of youngsters pushing elder
Republicans to stand up for fiscal solvency, end the madness or halt funding for
Closing federal offices for a few days will have not a great, lasting impact. On
reopening the checks will go out. What counts, though, is whether the newly
elected conservative majority in the House of Representatives keeps its mandate
as measured by the polls.
Through 2012, the projected cumulative deficit is $11trn, and House Republicans
are crafting a plan to cut that figure by $4 or $6trn—reports vary on the
amount. The means are hardly attractive—vouchers for poor folks to purchase
health care and block grants to the states to replace and reduce much of federal
Medicare spending. That would morph President Obama’s vision of universal
coverage into a victimization plan for the poor and even bigger budget crises
for the states.
Americans pay too much for health care, spending 18% of GDP for less effective
service than the Germans and Dutch receive spending only 12%. Instead of taking
on higher U.S. drug prices, bloated health insurance and hospital administrative
costs, and malpractice abuse, Republicans will tell the poor and the states to
bargain with the big guys directly—good luck with those ideas.
As for Social Security—hush, Republicans have a secret plan! The GOP will save
money but so far has not revealed how. Private investment accounts, the favorite
among free marketeers, would leave brokers smiling but the old poorer, judging
by how most IRAs have faired since 2000.
If the President comes out of the government shutdown politically stronger, then
its business as usual, but can it be?
Thanks to huge deficits, inflation expectations are rising, and bond investors
are becoming wary that the secular trend on 20 and 30 U.S. Treasury rates is up
and up. Not just a cyclical adjustment this summer, as unemployment falls and
the Federal Reserve ends quantitative easing, but up and up over the next
several years because the size of deficits President Obama’s budgets project are
on the low side. He assumes too much cost savings and additional revenue from
health care reforms and a 4% growth rate for the next 4 years few economists
As the long rate on Treasuries rises, interest payments will absorb more and
more federal revenue, and austerity will be hoisted on the U.S. government in
the manner of Greece or Portugal. At the point, slashing as opposed to reason
will prevail. Thoughtful reforms in health care and for Social security become
even more difficult.
It’s tough to forecast the consequences of a fiscal train wreck; but if the
Democrats win the day in a government shutdown, it only postpones the inevitable
reckoning to an ultimate day of calamity.
The choices are clear. Responsible reforms to health care that harness drug,
administrative and tort costs now, and ensure solvency for Social Security by
raising the retirement age to 70, or the bond vigilantes will ultimately end the
party. Changes more draconian will be forced on the American people who simply
refuse to live within their means.
Professor, Robert H. Smith School of Business, University of Maryland,