Why you should care
Because the total price of a government shutdown is much higher than you’d think.
Simonomics: A regular look at the global economy from a former staff columnist at The Wall Street Journal.
Two years ago, inside Washington’s Beltway, bars extended happy hours, drinks flowed plentifully and furloughed government workers cheerfully toasted one another. The scene was a result of an impasse in Congress over spending, and when it was all over, everyone went back to work — while, according to ratings agency Standard & Poor’s, costs totaled some $24 billion in lost output across the economy. Even worse: The government saved zilch because workers were given back pay for the time they were at home (or in the bar).
Legislators in Washington appeared to be headed for a similar showdown this week, until the White House and congressional leaders reached a tentative deal to raise the $18.1 trillion federal debt limit. But the Senate still needs to approve it, and the plan would be good only through March 2017. In some ways, the battle over whether to increase the debt limit every couple of years is a game of chicken: In a scenario where Congress doesn’t agree, the U.S. Department of Treasury wouldn’t be allowed to borrow any more money, and the results could be far costlier than the shutdown in 2013.
That’s because, in the event of an impasse, the Treasury might default on its obligations and not be able to make interest and principal payments on time. Default, which isn’t technically allowed, would slam the reputation of U.S. treasuries as the most secure financial instruments available. “I do think that if we default it would have a significant impact in the marketplace, with wealth lost in the markets,” says Steve Ellis, vice president of the nonpartisan Taxpayers for Common Sense. He’s right, of course, because the value of treasuries would drop, triggering a ripple effect through the global financial system that would lower the value of corporate debt and stocks. All told, losses would likely top those from 2013 and the crash of 1987, which wiped $500 billion off the value of the Dow Jones Industrial Average in a single day.
Which raises the question: Why do we have a debt limit, since not every country does? Having one is a good idea, Ellis argues, because it “serves to concentrate the public mind on the very real public debt that keeps growing.” True, the battle will play out among pundits on TV talk shows until the problem’s (hopefully) resolved. That’s partly why government officials tends to leave things so close to the last minute; in 2011, congressional leaders came to a debt-ceiling compromise with just hours to spare. “Nothing gets done until it has to get done,” says Jeffrey Kleintop, chief global investment strategist at Charles Schwab.
In other words, you get no political kudos for saving the damsel who is strapped to the train tracks unless, that is, you leave the act of rescuing her until the last minute. Sure, that “strategy” in Congress also has a price — last time it was lost economic output and days where families could have spent plenty of money in our national parks, something that can never be recovered. But in this week’s situation, even if the damsel does get rescued in time, no one in Congress truly comes out looking like a hero. Worse than that, sooner or later, the would-be rescuer may show up a little too late, only to find hopes crushed.