US budget stalemate could undermine nation's economy

30 September 2013 21:33  [Source: ICIS news]

WASHINGTON (ICIS)--The looming possibility of a US government shutdown over the lack of a spending agreement would have little national impact in the short term, manufacturing officials said on Monday, but a longer funding crisis could undermine the whole economy.

In a long-running budget dispute between the Republican-controlled US House of Representatives and the White House, federal authority to spend money will expire at midnight Eastern Time on Monday unless the two sides find a compromise.

Republicans in the House - where constitutional spending authority resides - want to meet the midnight deadline with what is called a continuing resolution (CR) that would provide authority for federal outlays at current levels for a brief period.

However, House Republicans have added language to the CR that would either defund or delay for a year President Barack Obama’s signature healthcare policy, the Patient Protection and Affordable Care Act (ACA, also known as ObamaCare), which was passed by Congress in 2010 and becomes effective on Tuesday, 1 October.

The Democrat-majority Senate has rejected or promised to reject any House measures aimed at undermining ACA, and the White House has said that Obama in any event would veto a bill out of Congress that defunds or otherwise restricts the ACA.

If neither House Republicans nor Senate Democrats and the White House can compromise, the US government’s legal authority to spend money will expire with the clock on Monday.

If that happens, several of the 2.1m federal government employees will have to stay home on Tuesday, and multiple agency services and spending must cease.

If that funding lapse comes into force, it could damage the overall US economy, according to economists at the Manufacturers Alliance for Productivity and Innovation (MAPI).

MAPI, which represents hundreds of US manufacturers including chemicals makers, cautioned that “the longer a federal shutdown lasts, the greater the damage done to the economy”.

MAPI chief economist Daniel Meckstroth said that “a shutdown lasting a few days would not have much of a macroeconomic impact on the economy”.

But beyond a few days, “a longer shutdown results in higher costs of lost pay and postponed programmes, and the reduction in spending spreads throughout the economy”, he said.

While only some 800,000 workers among the 2.1m federal workforce might have to stay home because of the budget crisis - the remaining 1.3m employees likely would be kept on as “essential” personnel - even that 38% reduction in federal payrolls would have a ripple effect in the economy over time.

Meckstroth cited studies saying that the furlough of some 800,000 federal workers would pull $1.7bn (€1.3bn) of federal spending out of the economy each week and shave 0.2 percentage points off US GDP in the fourth quarter of this year.

Each successive week of budget shutdown would have cumulative effect, Meckstroth said.

“A two-week shutdown would cut economic growth by more than 0.4 percentage points, since the supply chain impact on contractors would start spreading throughout the economy,” he said.

Meckstroth said that the Congressional Research Service (CRS) study of the last major federal budget shutdown crisis in 1996 found that federal payments to contractors were delayed, bankruptcy cases were put back, federal law enforcement hiring was stopped, national parks were closed, passport and visa applications were halted, and federally funded clinical health trials were curtailed.

The threat of a government shutdown has already chilled US stock markets, amid investor worries that tens of thousands of federally funded projects and civilian contracts will be halted, forcing layoffs and other related spending cuts in the private sector.

($1 = €0.74)

Paul Hodges studies key influences shaping the chemical industry in Chemicals and the Economy


By: Joe Kamalick
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