US Shutdown

This is probably the worst and biggest news this year. So this post will be dedicated to try to get you up to speed with what’s going on and how it can affect us.

Firstly, these are some backgrounds information:

  • The US government’s fiscal year runs from October 1 to September 30.
  •  The Republicans control the lower house – the House of Representatives and the Democrats have a majority in the upper house, the Senate.
  •  This shutdown is the first since late 1995. That one lasted 21 days, into 1996.
  • Obamacare is said to extend healthcare coverage to the millions of Americans who lack it. Most of the money for Obamacare comes from new taxes and fees, as well as from cost cuts to other programs like Medicare and other types of funding that will continue despite the government shutdown

So, what’s the deal with US Government shutdown?

– Reason:

  • The new fiscal year has begun, but Congress couldn’t agree on a spending deal in time
  • House Republicans want a bill that include anti-Obamacare amendments
  • Senate Democrats want a spending bill with no amendments attached
  • Congress has one key duty in the Constitution — pass spending bills that fund the government. If it doesn’t, most functions of government — from funding agencies to paying out small business loans and processing passport requests — grinds to a halt. But some services, like Social Security, air traffic control and active military pay, will continue to be funded. Oh, and Congress still gets paid, too.

– Progress:

  •  29th September: The Republican-dominated House passed two spending bill amendments Sunday morning — one that would delay Obamacare for a year and one that would repeal the Obamacare’s medical device tax. The bill went back to the Senate, where Democrats who control that chamber have consistently said any changes to Obamacare would be a deal-killer.
  • 30th September: The Senate rejected the latest House proposal, prompting the House to approve another spending plan that would remove the Obamacare individual mandate. The Senate rejected that, too, setting the stage for a shutdown.
  • Overnight: House members voted to reaffirm the anti-Obamacare amendments that Senate Democrats have said would be a deal-breaker. They also requested a conference with the Senate to work out their differences.
  • 1st October: Second day into the shutdown

– How did it get so bad?

Since the Democrats ceded control of the House of Representatives to the Republicans in 2010, budget fighting between the two parties has become commonplace. Republicans took their victory in the mid-term elections as a sign that Americans were revolting against Mr Obama’s Democratic agenda, and specifically, that Americans were unhappy with the Patient Protection and Affordable Care Act, or “Obamacare” as Republicans label it.

Republicans vehemently rejected Mr Obama’s efforts to overhaul completely the way healthcare is provided in the United States.

Although past budget fights have included larger questions about the size and scope of the US government, this one is very specifically about Mr Obama’s healthcare law, substantial parts of which took effect on 1 October. Republicans have been doing everything in their power to force Mr Obama to delay implementation of a bill they strongly believe was rejected by the American public.

Mr Obama and the Democrats, for their part, are keen to remind voters that the law was validated by the Supreme Court in June 2012 and was a central issue in the 2012 presidential election, which Mr Obama won decisively. House Republicans have already voted 42 times since the legislation was passed either to repeal it or to strip its funding.

– Who is affected? Ten minutes before midnight on 30 September, the White House budget office issued orders for government offices to start shutting down, with workers told to stay at home without pay.

  • This affects all “non-essential staff”, which by some estimates is more than 700,000 of the total 2.1 million-strong federal workforce.
  • National parks, museums, federal buildings and services will all be closed.
  • Pension and veterans’ benefit cheques could be delayed.
  • Air-traffic controllers, active military personnel, and border security guards are to be told to report for work.
  • Even some of the White House staff might have to stay at home and all Smithsonian institutions in Washington are to close.
  • However, workers like teachers, firefighters and doctors will continue to be paid, as they are paid for by the state, not the federal government.

– Economics impacts: It depends on how long it takes for Congress to thrash out an agreement on the budget, which could take days or weeks to play out.

  • The US government has experienced 18 shutdowns in the past 30 years, with the latest one lasting 21 days under US President Bill Clinton in 1995, costing the economy over $1bn.
  • If the Democrats and Republicans reach a deal on the budget within a day or two, the negative effect on the recovery of the US economy will be fairly limited. According to IHS estimates, the daily cost in lost output will be just $300m, which is trivial for an economy whose annual output is 52,000 times greater. However, the daily impact of the economic shutdown may accelerate if it affects confidence and consumer spending, especially with hundreds of thousands of workers left unpaid.
  • If the shutdown were to last about three weeks or so, Goldman Sachs estimates it could shave as much as 0.9% from US GDP this quarter.
  • There would also be an impact on tourism with difficulties renewing passports and driving licences, meaning the transport and travel industries would also take a hit.
  • It will also impact on government workers, who may have to dip into their savings or delay mortgage payments and any other spending until unpaid leave ends.
  • The real concern is if the shutdown spills over into mid-October, when the legislative branch has to agree on raising the federal government’s borrowing authority.
  • Global stock markets fell and the dollar dropped against major currencies with the prospect of a shutdown on 30 September. However, so far the markets have responded relatively mildly since the shutdown went into force. In any case, the impact of the shutdown will most likely be gradual and incremental.
  • In the event that it continues for several weeks, UK economic recovery may be impacted most as America is its single biggest export market.

 

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Alisa L

About Alisa L

Alisa graduated in the Summer of 2014 and is no longer blogging for this site. Alisa, a student from Vietnam, blogged about her third year of BSc Financial Economics and her time as a Course Representative.

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2 responses to “US Shutdown”

  1. Saiful Islam

    Hi Alisa, its a great writing on the US shutdown which provides a comprehensive information about this on-going international issue. Keep on writing on the contemporary subjects. As you wrote in your profile about your interest on the psychological and behavioral aspects, kindly write on this in your upcoming blogs.

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