Shutdown: be afraid, but not very afraid

The decision on a shutdown will be made by 2pm today. Surely Republicans aren’t radical enough to torpedo the American and world economy over ideology... or are they?

The prospect of a US government shutdown is a direct result of the 2010 midterm elections in the United States, which were, in effect, a referendum on President Obama’s sweeping healthcare reforms. He lost.

Obamacare had been signed into law in March 2010, seven months before the midterms, having been approved by the Democrat-controlled House. The Democratic Party then suffered massive defeats in national and state elections in November, but President Obama pressed on with healthcare reform. A collision was inevitable.

Radical Republicans are now successfully preventing a vote on the budget in the House of Representatives in an attempt to re-litigate Obamacare. If there were a vote, it would probably succeed because there are enough moderate Republicans, but House Speaker John Boehner is blocking it.

It’s not so much the partial shutdown of government over the blockage of supply that matters (although a further reduction in government spending is the last thing the US economy needs right now), but the need to raise the debt ceiling over the next few weeks.

If that fails there would be a huge and immediate spending cut, followed by the US defaulting on its debt. Some are saying this would create a worse financial crisis than 2008 because it would destroy confidence in US Treasury bonds – the bedrock of the financial system.

Moody’s estimates that a partial shutdown would trim US GDP by about 0.2 percentage points; a default would send it into recession.

Markets clearly don’t know whether to be afraid, very afraid or petrified, and have so far settled for afraid, in the understandable belief that surely the Republicans won’t send the economy into recession and cause millions to lose their jobs because they don’t like publicly-funded healthcare.

But that’s just it: some of them apparently would. The New York Times calls them “default deniers” because they simply dismiss the warnings about the US failing to honour its debts. As Paul Krugman points out, many of them also reject the theory of evolution, so why would you expect them to believe expert warnings about the dangers of default?

It looks like those who own the government debt that would collapse in value in the event of a default – Wall Street banks – will have to pull the radical Republicans into line, if they can. So far they haven’t succeeded, but they will. Their assets depend on it.

A couple of other points worth making:

1. Australia congratulates itself on having a political system in which something like this could never happen because the prime minister has almost unbridled power. Except the same thing did happen – in 1975. Also, the Coalition government does not control the Senate. In fact, it’s arguably worse than US Congress: it’s in the hands of both the radical left (the Greens) and the radical right (Clive Palmer).

2. The mess in America’s domestic politics has masked a genuine and positive revolution in foreign policy. Syria’s agreement, following pressure from Russia, to give up its chemical weapons, and the thawing of relations with Iran, are the best news out of the Middle East in decades. Of course, it’s possible that both of these developments will fall apart – but so far, so very good.

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