Held to ransom: the US shutdown

At 23:50 on 30 September, the White House began ordering shutdowns of Government offices as the Senate and the House of Representatives were unable to agree a budget before the end of the fiscal year. Approximately 700,000 ‘non-essential’ federal staff have been told to stay home without pay as Republicans contest the introduction of the Patient Protection and Affordable Care Act (known to many as Obamacare) that went into effect 1st October. The problems caused by this shutdown will not only have ramifications for the unpaid staff and American population, but potentially worldwide if left unsolved through October when the decision regarding the American debt ceiling is to be agreed.

Since Obama’s election, the Senate and House of Representatives – held by Democrats and Republicans respectively – have been unable to agree on a long-term budget and have only managed to produce shorter-term budgets. Many believe the Republicans have used this as leverage to block policies, which they believe not to be in the interest of the American population, such as Obamacare.

As the Federal Government shuts down, many institutions will reduce numbers or even close down entirely until a new budget is agreed. Among them, all passport offices in the US will close down, with visa applications going unprocessed overseas. All Smithsonian institutions in Washington will close down (including 19 museums and galleries as well as national parks such as the Statue of Liberty). Despite sectors such as the Department of Education and Defence seeing large cuts to their workforce, governmental employees such as teachers, fire fighters and doctors will still be able to work as these services are paid for by the state and not the federal government.

Due to large closures throughout the US, the (write this out in full) (IHS) estimates that the US will incur a $300m loss every day this shutdown remains in place. Despite this seeming trivial in an economy with an annual output of 52,000 times this number, it may cost even more when taking into account consumer confidence and spending in the market, with large tourist attractions closing and citizens spending less whilst some people are not being paid. This has led Goldman Sachs, the American Investment Bank, to estimate a 0.9% GDP decline in this quarter if this shutdown were to last for three weeks.

So far however, the markets have seemed relatively unaffected by the shut down with reported rises upon being re-opened 1st October. This seems to point to the idea that this stand off is not seen as a weakness of the US economy but rather a temporary glitch that will be solved in the short term.

Whilst these immediate problems are all of large concern to both the American and world economies, more damaging problems will be felt worldwide if this shutdown carries forward into mid-October when an agreement has to be made as to whether the Federal Government’s borrowing ability should be raised. This is known as raising the debt ceiling, which is vital to ensure that the American Government doesn’t default on its debt, something that it has never done in its history. Although hard to say exactly what the consequences of such a default would be, it is clear to see that this will bring extreme volatility to an already fragile market.

The ransom laid out by the Republicans to stop this shutdown was simple, delay the Patient Protection and Affordable Care Act and the budget will be passed. Despite Republican arguments such as the high costs and complexity of introducing this Act, as well as increasing taxes, the aim of increasing access to health insurance for millions of Americans who have been unable to have access to such security before seems entirely achievable.

By trying to block and deny this healthcare access for fear it would destroy the country, it appears the Republicans are destroying the very thing they set out to save. With Obamacare already going live, the Republicans are further hurting the economy and their own chances of taking the White House in 2016.