Did the Shutdown Go Far Enough?

It was a close call. On Wednesday, Oct. 16, the American Congress raised the U.S. debt ceiling. Republicans and Democrats finally arrived at a compromise after weeks of strong-arm tactics leading to the partial closing of the federal government, which sent 800,000 civil servants into technical unemployment. A bill passed by the Senate and the House was presented to Barack Obama for approval.

Washington has thus avoided entering the financial danger zone. Due to insufficient funds, the government in effect would have been forced to expand the “shutdown” to military personnel and disability benefits before the end of the month, then to default on part of the United States’ debt, plunging the entire world into recession.

Even though he obtained this agreement without rolling back health care reform, Barack Obama is not doing a victory dance. The American president remembers that elected officials must now win back the trust of Americans. “We’ve got to get out of the habit of governing by crisis,” he says. They also need to win back the trust of the economic world. That will prove to be difficult.

$17.5 Billion Flies out the Window

This shutdown will cost dearly. Even if the civil servants who returned to work Thursday receive back pay, the United States has already lost 0.6 points of growth in the last quarter, according to Standard and Poor’s. More than $24 billion in wealth was not produced during these 16 days, precisely because of halting businesses that depend on public administration, from the basic consumption of civil servants to perishable goods that were held up too long in ports and the dollars that were not spent by tourists who were kept out of national parks.

The shutdown will cost even more than that; it is not the first, but rather the 18th since 1976. Under the Obama administration alone, which has never governed with a global budget, this is the third time that Congress has threatened to put the United States in default of payment. In the summer of 2011, Republican blockage cost the United States an AAA rating with Standard and Poor’s and led to a bill calling for automatic budget cuts, notably in sectors dear to Republicans, like the Army, making new budget discussions inevitable.

Thus, even if investors have truly taken account of the U.S. credit rating downgrade, accepting continuing lower interest rates for borrowing money in complete security from the Treasury, they have not exactly been reassured by Washington’s inability to pass a global and lasting budget agreement. According to a study by the Peter G. Peterson Foundation cited in The New York Times, since Barack Obama came into office, the resulting fiscal uncertainty has driven up the cost of business borrowing by 0.38 points, cost 0.3 points of growth in the United States each year and 900,000 jobs in 2013, and reduced national production by $150 billion — and it’s not over.

Wall Street’s Indifference

It’s about to start again. According to the terms of the compromise signed Wednesday, the federal government is only financed through Jan. 15, 2014 and the Treasury is only authorized to borrow until Feb. 7. A bipartisan commission bringing together congressmen and senators is charged with coming to a broad strokes outline of a budget before Dec. 13. Opposite Senator Patty Murray is the Republican Paul Ryan, who voted “no” on Wednesday’s bill and who may make himself a spokesperson for his colleagues, who haven’t digested the absence of concession from the White House on “Obamacare” — except for a reinforcement of pre-existing controls on pension revenue. In three months, the government could, therefore, realistically be forced into another shutdown. In four months, the United States will reach a new debt ceiling.

Does this necessarily mean a panic in the markets? Not really. As of Wednesday, global financial markets have remained unfazed. Only the one-month treasury bond rate passed from about 0 percent to 0.3 percent these last few weeks; the three-month rate has gained a bit these last three days. No one on Wall Street has taken Barack Obama’s warnings seriously, even if they imagine a possible slowdown.

A little before the announcement of the compromise, certain economists even forcefully put into perspective the impact of the political crises extending beyond Oct. 17. First of all, there would, in fact, have remained a little time before the government went totally broke. Secondly, that would have given more of a chance for constitutional reform, the only permanent solution for stabilizing once and for all the American budget debate. In a situation almost completely unique in the world, the president must at the same time obtain from Congress a passing vote on the budget, spending credit and the debt ceiling — a configuration which confers immeasurable blocking power to populists, who care little about driving the country into the wall over ideology.