Government shutdown over - now what?

Government shutdown over – now what?

3Qs with Mitchell Orenstein, Chair of the Department of Political Science
October 18th, 2013

On Wednesday, Con­gress agreed on a budget deal that ended a 16-​​day-​​long par­tial gov­ern­ment shut­down and raised the country’s debt ceiling, averting a sit­u­a­tion in which the U.S. would default on its loans for the first time in its his­tory. The bill, signed by Pres­i­dent Barack Obama early Thursday morning, means the country can now finance gov­ern­ment oper­a­tions through Jan. 15, 2014. We asked Mitchell Oren­stein, chair of the Depart­ment of Polit­ical Sci­ence, to dis­cuss the budget deal and the United States’ place in the global economy.

 

What are your thoughts on the budget deal, and why and how it finally came together?

This was a total victory for President Barack Obama and the Democrats in Congress. I think many Americans were surprised by how far the Republicans would go toward damaging the U.S. government’s credit rating in a futile attempt to stop Obamacare. The consequence of not coming to an agreement was potentially catastrophic and partly unknown. It would have been the first time ever the government defaulted on its loans. I think at the end of the day no one was really willing to risk it.

What is the debt ceiling, and what were the implications had this deal not been reached?

The debt ceiling is the total amount of money the U.S. government is allowed to borrow by law. It was exceeded on May 19 but the government has been using “extraordinary measures” to finance its payments since then, meaning it borrows from other government funds such as pension funds. However, the government had been running out of these “extraordinary measures” to finance its daily expenditures, the big ones being Social Security payments and debt service payments.

The last battle over the debt ceiling cost the U.S. government its AAA credit rating.  Every time Congress raises questions about whether the U.S. will default on its debts, it damages the U.S. government’s standing among its creditors at home and abroad. If the government had been forced to default on any of its obligations, it would’ve had three effects: increasing the interest rate and interest payments on U.S. bonds, a likely downgrade of U.S. Treasury bond ratings, and ensuing chaos on Wall Street as various markets factor in reduced confidence in the U.S. government. The end result would’ve been lower growth and possibly tipping back into recession. On a global level, with the U.S. being the hegemonic leader of the global economy, a default on its debts for a long period of time would’ve been catastrophic and self-destructive.

This budget and debt ceiling standoff certainly had broader implications for America beyond its own borders. What is the United States’ place in the current global economy? Is America still a powerhouse or is it losing influence over concerns from abroad of U.S. instability?

What is so peculiar about the U.S. decline is that it is largely self-manufactured. Other countries are looking for the U.S. to exert leadership in the international economy. Even China, our likely future rival, wishes the U.S. to exert leadership because it is not yet willing or able to. The U.S. is the agenda-setter in all the major bodies of global economic policy making that matter. Its voice is decisive in the International Monetary Fund, which bails out countries when they get into trouble; in the World Bank, which finances development projects; in the World Trade Organization, which negotiates and enforces trade deals; and in the Financial Stability Board, which regulates global banking. I think that other countries would’ve read a default as a statement that, over the long term, the U.S. has become ungovernable and can no longer be depended on to regulate the global economy. They wouldn’t have been wrong in thinking this. This is why most analysts expected Congress to step back from the brink—and stay a good distance back.

 


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