Roosevelt Institute | Cornell University

The Economic Horror of Our Current Predicament

By Marc GetzoffPublished October 13, 2013

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Economic uncertainty, a looming debt crisis and a divided government that is currently not working (literally!). Those words have often characterized regimes and nations that have fallen into economic calamity. One example is Russia in 1998 as it defaulted on its debt amidst inflation and government division. Today, we find ourselves describing the United States of America with those very words.
By Marc Getzoff

Economic uncertainty, a looming debt crisis and a divided government that is currently not working (literally!). Those words have often characterized regimes and nations that have fallen into economic calamity. One example is Russia in 1998 as it defaulted on its debt amidst inflation and government division. Today, we find ourselves describing the United States of America with those very words.

            It happened; the government shut down early Tuesday morning. This is not the first time the government has shut down in recent history as the argument between Bill Clinton and the Democrats against Republicans over Medicare and other benefits took a nasty turn as the government shutdown in late 1995 and early 1996. Government employees went on furlough and the national parks closed. This time around, it will be even worse.

The government shutdown is creating extreme burdens on the economic recovery. While a government shutdown does not affect any kind of guaranteed benefits such as Social Security or Medicare1, it does mean that many federal employees are on furlough. Only the "essential" employees, which include many components of the military, FBI, air traffic controllers, and most other agencies would still be working2. An occurring tragedy is the closing of museums and national parks along with the delay of passports and visas which lost millions for the tourism business last time. Across all sectors, the expected losses for three weeks of shutdown are roughly 55 billion dollars3. Patents and other certification are postponed until the government works again as well. Roughly 800,000 government employees are now on furlough4 and ordinary government transactions with the public such as student loans and housing loans will be delayed if they arrive at all. But the most dangerous part of the government shutdown now is that it may hinder a deal on the U.S debt ceiling.

            If Congress does not raise the debt ceiling then economic trouble will almost certainly ensue. The first debate over raising the debt ceiling occurred in 2011 as Republicans and Democrats battled over the budget and the delay in passing it resulted in the downgrading of the U.S credit rating. Whenever the decision to raise or not raise the debt ceiling has come up, the issue has been postponed. Three times the Treasury has adopted "extraordinary measures"5 which include suspending investments into retirement funds for federal workers. If the U.S defaults on its debt then the Treasury would have to freeze a value worth 7% of the nation's GDP5. Government contracts would be delayed or cancelled and benefits such as Social Security would be delayed. While this alone presents a possibility of a recession the even scarier scenario is that investors will become weary at loaning the U.S money. This would lead to a shortage of cash needed to make payments and thus the payments for Social Security, Medicare, Medicaid, and other benefits may never arrive7. Interest rates will rise, prompting an even more dire situation in the future.

            The default on the debt ceiling, while maybe not lowering the official credit rating of the United States, would destroy the notion that investing in the U.S government is a safe investment. Spending would have to be prioritized and the cash could dwindle which could usher in a new economic recession or worse. The only solution to the current predicament is for Congress to raise the debt ceiling and raise it fast, before other countries start seeing us like a bad investment. They are already looking at our government shutdown as a poor display of stability and are worried. Defaulting on the debt ceiling won't just add fuel to the fire, it will tie an explosive to it.

End notes

1. Schmidt, Michael S., Thom Shanker, and Andrew Siddons. "Federal Agencies Lay Out             Contingency Plans for Possible Shutdown." Nytimes.com. NYTimes, 28 Sept. 2013. Web.   1 Oct. 2013. <http://www.nytimes.com/2013/09/29/us/politics/federal-agencies-lay-out-     contingency-plans-for-possible-shutdown.html?_r=0>.

2. Schmidt, Michael S., Thom Shanker, and Andrew Siddons. "Federal Agencies Lay Out             Contingency Plans for Possible Shutdown." Nytimes.com. NYTimes, 28 Sept. 2013. Web.   1 Oct. 2013. <http://www.nytimes.com/2013/09/29/us/politics/federal-agencies-lay-out-     contingency-plans-for-possible-shutdown.html?_r=0>.

3. Isidore, Chris (October 1, 2013). "Shutdown: A multi-billion dollar hit to economy". CNN    Money. Retrieved October 1, 2013.

4. Schmidt, Michael S., Thom Shanker, and Andrew Siddons. "Federal Agencies Lay Out             Contingency Plans for Possible Shutdown." Nytimes.com. NYTimes, 28 Sept. 2013. Web.   1 Oct. 2013. <http://www.nytimes.com/2013/09/29/us/politics/federal-agencies-lay-out-     contingency-plans-for-possible-shutdown.html?_r=0>.

5. Yglesias, Matthew (16 January 2013). "What if Congress Doesn't Raise the Debt Ceiling?".        Slate.

6. Lew, Jacob L. "Debt Letter Limit to Congress." Letter to John A. Boehner. 26 Aug. 2013.             www.Treasury.gov. U.S Treasury, n.d. Web. 1 Oct. 2013.             <http://www.Treasury.gov/initiatives/Documents/082613%20Debt%20Limit%20Letter%       20to%20Congress.pdf>.

7. Yglesias, Matthew (16 January 2013). "What if Congress Doesn't Raise the Debt Ceiling?". Slate.