Shutdown and default: the worst-case scenario
I’m not saying the worst is going to happen. But if it does, matters could get depressingly bad, disturbingly fast.
How bad? Start with Treasury Secretary Jack Lew’s estimate of the potential damage from a failure by Congress to increase the nation’s borrowing limit. On Sunday morning’s TV talk shows, he pointed out that credit markets could freeze, the value of the dollar could plummet, and US interest rates could skyrocket. Think 2008 all over again. [http://www.csmonitor.com/USA/DC-Decoder/2013/1006/Congress-playing-with-fire-on-debt-limit-warns-Treasury-Secretary-Jack-Lew-video]
The Lincoln Memorial closed during the United States federal government shutdown of 2013. (Source: Flickr user reivax via Wikimedia Commons)
But it’s actually much worse than that. Almost nobody in the commentariat mentions that the US economy is currently being held together by deficit spending and quantitative easing. Rapid economic growth as experienced during the mid-20th century is over and done with. [www.ted.com/talks/robert_gordon_the_death_of_innovation_the_end_of_growth.html] However, our financial system is set up to require constant growth. This is a serious problem, and the only solution anybody has come up with so far is for the Federal government and the Federal Reserve to purchase a few more years of ersatz growth with borrowed money. Financial markets would crash without a constant injection of quantitative easing (QE), and Main Street would wither without monthly deficit-funded infusions from Washington. Absent ongoing stimulus (which is admittedly not a permanent solution), we would be hurtled back to the deflationary hell of five years ago. It’s hard to see how a US government debt default could fail to get us there.
That’s just the potential economic fallout from default. The possible political consequences are almost as unfathomable. According to Jonathan Chait, writing in New York Magazine, the current Democrat-Republican impasse is actually a foreseeable, if not inevitable, outgrowth of the American political system, with its division of power between a separately elected President and Congress. [http://nymag.com/news/politics/nationalinterest/government-shutdown-2013-10/] Chait cites the opinion of the late Spanish political scientist Juan Linz that “All such systems are based on dual democratic legitimacy: No democratic principle exists to resolve disputes between the executive and the legislature about which of the two actually represents the will of the people.” The current standoff, in which both sides believe they have an enormous amount to lose by compromising, could—again, in the worst instance—come to represent the most serous constitutional crisis since the Civil War.
There are also looming geopolitical repercussions. If the United States defaults, other nations may ditch the US dollar as reserve currency. That would have serious ongoing consequences for the American economy, but it would also reduce the nation’s international political clout. Last week, President Obama had to cancel a key Asian trip to deal with the domestic shutdown crisis. Chinese leader Xi Jinping did show up as scheduled, looking confident and in charge. The US empire has been fraying for the past decade anyway; default could speed that process dramatically.
In the worst case, the United States could emerge from the current political crisis in a way that renders it, only months from now, economically and politically unrecognizable.
Again, none of this is inevitable. Cooler heads may prevail. But the worst-case scenario is hardly far-fetched. Look at the incentives.
Congressional Republicans have boxed themselves into a corner. By taking the nation’s government and economy hostage and making heavy demands, they incur high political risks. They stand to lose power and legitimacy unless they come away from the confrontation with some tangible gain they can trumpet to their base. (Indiana Republican Congressman Marlin Stutzman: “We have to get something out of this. And I don’t know what that even is.” [http://talkingpointsmemo.com/livewire/gop-congressman-says-he-doesn-t-know-what-republicans-want-in-shutdown-fight]) The higher the price the country pays for the standoff, the greater the Republicans’ need for some reason to say it was all worthwhile.
Meanwhile Mr. Obama believes that if he gives in to Congress, a precedent will have been welded into place. Every time the debt ceiling needs to be raised, there will be opportunity for Congress to make further demands. Elections will cease to matter. Obama probably regrets his negotiations with Congress in a similar standoff in 2011, which resulted in the Sequester. The current dispute is not just about Obamacare. It is about maintaining the scope of presidential power in the face of a congressional effort to dramatically reduce it. Obama’s historic legacy is at stake.
In a better-case scenario, and a more likely one, the standoff is resolved before the nation defaults. The Tea Party’s big-business backers are already yanking its leash. [http://maddowblog.msnbc.com/_news/2013/10/09/20886987-gop-losing-powerful-allies-in-hostage-crises?lite] President Obama has offered House Republicans the possibility of a short-term debt-cap increase and funding of the government to make time for negotiations; while House Speaker Boehner initially rejected this, it is probably the best face-saving measure available.
However, if both sides hold firm and the nation defaults, we’re headed into uncharted territory. And only an understanding of ecology (as well as politics and economics) reveals the true dangers ahead.
Back in the early 1970s a famous computer-assisted study of the physical systems that support economic growth (agriculture, natural resources, and the ability of the environment to absorb pollution) concluded that world industrial output would likely peak and decline in the early 21st century. [http://en.wikipedia.org/wiki/The_Limits_to_Growth] That study, which has been validated by recent research, [www.csiro.au/files/files/plje.pdf] did not consider the roles of financial or political systems.
At first economists scoffed at the idea that economic growth might not continue forever. But today, one by one, economists are beginning to recognize that, as Stephen B. King, chief economist at HSBC wrote in a recent New York Times op-ed, “We are reaching end times for Western affluence.” [www.nytimes.com/2013/10/07/opinion/when-wealth-disappears.html?pagewanted=1&_r=0]
In 2008 it became clear that, as limits to growth are encountered, the inherent instability of financial systems can precipitate a much faster crash than would otherwise be the case. It also became clear that governments and central banks will undertake extraordinary measures to avert a fast-crash scenario. The rapid expansion of household debt, which had kept the growth balloon inflated since 1980, effectively ceased with the advent of the Great Recession. The balance sheet of the Fed stretched dramatically, and the Federal Government’s debt levels soared, as policy makers strove to keep the economy from imploding.
But government debt quickly became a political hot potato, and that helped lead us to the present impasse.
In 2013 we are learning that the US political system is rigged in such a way that backstops against a fast financial crash may fail.
Some aspects of our 21st century dilemma are inevitable: you can’t run an ever-growing economy on non-renewable resources without eventually facing symptoms of depletion and scarcity (e.g., high oil prices). Some aspects are slowly cumulative, like the buildup of greenhouse gases in Earth’s atmosphere and the consequences for ecosystems that support life on our planet. But we also face looming crises brought on by the design of our political institutions, and by the personalities and tactics of specific leaders. One would hope that these latter crises could be more easily averted than those tied to the very sinews of our industrial way of life.
We can’t prevent some unfortunate results of processes that humanity set in motion decades ago: we’re already committed to a certain amount of climate change, given past greenhouse gas emissions; we’ve already unleashed a mass extinction event and made a wasteland of the oceans. But we can avoid the worst-case scenario. Here’s what to do: Release the hostages. Pass a new debt limit and re-open the government, no conditions attached. Then get to work designing a post-growth, post-fossil fuel economy that protects people and planet. Do it in that order. Simple. Go to it. Hello, Washington, anybody listening?
Update: October 16, 2013. Today (just 24 hours before the default deadline) it appears that a bipartisan deal has been reached by Senators that will also likely pass in the House and be signed by President Obama. The deal would reopen the government and raise the debt ceiling enough to get the nation through the next three or four months. It is unlikely that the Tea Party Republicans in the House who set the stage for the crisis will pay much of a price in terms of support from their constituents even though they achieved almost none of their initial aims and (by most accounts) needlessly hurtled the nation toward economic ruin. Therefore more “government by crisis” seems nearly certain. Many commentators are drawing the conclusion that the US is simply becoming ungovernable. All the more reason to work on community resilience-building.
Help build resilience. DONATE NOW