Updated October 1: The federal government has shut down because the House and Senate could not agree on a government funding bill by September 30; President Obama and Democratic leadership refused to come to the negotiation table as Republican lawmakers sought to defund Obamacare as their price to continue funding government programs. In a few more weeks, lawmakers will then have to come together to agree to raise the nation’s $16.7 trillion debt ceiling or risk defaulting on its obligations. Brookings Economic Studies scholars weigh in on how the government shutdown and a failure to raise the debt limit would affect the American economy.
Henry Aaron, The Bruce and Virginia MacLaury Chair and Senior Fellow, Economic Studies:
(from his recent New York Times op-ed, “Our Outlaw President? Obama Should Ignore the Debt Ceiling.”) The only defensible option for the president if the debt ceiling is not raised is to disregard the debt ceiling. The action would be unconstitutional because it would be illegal. Financial markets might react negatively, but not nearly so negatively as if the United States failed to redeem bonds or to pay interest on its debt.
Douglas Elliott, Fellow, Economic Studies:
(from his recent Forbesop-ed, “The Federal Government Shutdown: A Marriage Of Bad Policy And Toxic Economics.”) I do not want to be writing this column about the likely shutdown of the federal government. The shutdown will create costly inefficiencies, distract our leaders from more important tasks, and reduce our influence in a dangerous world by making us look incompetent and divided. It’s not even good politics for the Republican party that is forcing the issue and will be blamed by most Americans for the result, even if it serves the ideology and the political agenda of a minority within that party.
Former Brookings Expert
Partner - Oliver Wyman
Former Brookings Expert
(from her recent Washington Post interview, “Alice Rivlin Was In Charge of the Last Government Shutdown. This is What She Saw.”) [I]t’s not just about federal employees. The emphasis on employees not getting paid is important, but remember those employees buy stuff and you have a lot of people impacted who will never recover. They run the lunch counter where a whole bunch of employees regularly eat and that sort of thing. I was in a cab today with a cab driver who said, “My wife works for the government, we just closed on a house, have a bigger mortgage. What do we do if she isn’t paid for a while?”
(from his recent op-ed, “It’s Groundhog Day Over the Debt Ceiling“) The debt limit “debate” is not about limiting the size of government, entitlement reforms, or tax reform. The proof of that is that there are no major items like that on the table right now. Instead, Republicans in Congress are yet again debating whether Congress should authorize the government to pay for spending—wait for it—that Congress has already authorized the government to undertake! Yes, it really is that silly of a situation…. The U.S. recently suffered economic costs just by flirting with the idea of not raising the ceiling. The debt ceiling showdown of 2011 has been estimated to have cost taxpayers $1.3 billion for that fiscal year and $18.9 billion over 10 years…. In the end, the debt ceiling should simply be raised to pay for spending that Congress has already authorized and not used as a tactic that could hurt the United States, with no apparent gains.
A government shutdown is not the end of the world. It’s just a bad way to run a government. A default, on the other hand, could cause a financial crisis, even a depression. The president needs to hang tough. If the country’s economy is being taken hostage, what does he do? It’s simple. He doesn’t negotiate. If he does the hostage takers will just do it again, and again, and again.
Gary Burtless, John C. and Nancy D. Whitehead Chair and Senior Fellow, Economic Studies:
Between September 12 and 15 the Washington Post and ABC News conducted a survey of 1,004 adults in which respondents were asked the following question: “If the government cannot borrow more money to fund its operations and pay its debts, do you think that would or would not cause serious harm to the U.S. economy?” In response, 73% said that a cutoff of government borrowing would cause serious harm while 22% said a cutoff would not cause serious harm.
Respondents were also asked whether it would be better “for Congress to raise the debt limit so the government can keep paying its bills and obligations or for Congress not to raise the debt limit and let the government default on paying its bills and obligations?” Americans split about evenly on this question, with 46% responding that Congress should raise the debt limit and 43% saying Congress should not raise the debt ceiling. Astonishingly, more than a third of the respondents who thought Congress’s failure to raise the debt ceiling would cause “serious harm to the U.S. economy” also said Congress should not raise the debt ceiling. In other words, a sizeable percentage of American adults say Congress should adopt a policy that they believe will seriously harm the economy. Among Republican respondents who think failure to lift the debt ceiling would inflict serious harm, more than half say the debt limit should be left unchanged.
If many voters think Congress should take a step they know will cause serious harm, it is reasonable to wonder what offsetting gain they expect to achieve as a result of this destructive step. Unfortunately, the Post-ABC pollsters did not pose this question. We know that a vital minority of adults think it is desirable to inflict serious economic harm on our pocketbooks and livelihoods. The mystery is why the hoped-for apocalypse seems worthwhile. Do these voters think they’re so far down they have nothing left to lose? They’re wrong.
Bill Frenzel, Guest Scholar, Economic Studies:
Both sides of the budget fight are adamant. No serious negotiations are apparent. A short shut-down, has become probable. A shut-down of a day or two is harmful, particularly in this area, but survivable. The real danger is the second problem, the debt ceiling, still weeks away. If polarization continues, and causes default, the result would be catastrophic, both to the U.S. and the world.
Will the American business community sit idly by and watch Trump undertake a trade war with China? They have a lot at stake in this. [Trump's stream of anti-Chinese Tweets poses risks of being misunderstood.] China would regard a potential challenge as more dangerous than it actually might be.