The hidden costs of the U.S. shutdown
There’s certainly been no shortage of analysis — both political and economic — about the impact of the federal government shutdown in the U.S. It’s been glory days for pundits of all stripes.
The view is that the inevitable damage done by this astonishing political impasse depends on how long it lasts. But the rough math suggests that Americans are looking at lost economic output of about $300 million a day.
If it lasts two weeks, the consensus is a 0.3 to 0.5 per cent clip to fourth quarter GDP. If it lasts a month, it’s a two-percentage point haircut for overall GDP. Given the cost of stopping and starting programs, it would cause a slight uptick in the budget deficit as well.
(RBC economists estimate that a month-long shutdown would reduce Canada's export-levered GDP in the fourth quarter by 0.25 per cent. The U.S. is Canada’s biggest trading partner, importing more than $462 billion worth of Canadian goods in 2012.)
That’s not exactly devastating in the grand scheme of things: the U.S., after all, is a $15.7 trillion dollar economy.
Furthermore, financial markets have taken a very practical stance on the situation — something that’s not always to be taken for granted.
Ahead of the shutdown, there was a selloff in equities, which reflects the likelihood that GDP growth will be negatively affected. Bonds, on the other hand, were treated to a rally because the shutdown delays any decisions — and reduces the possibility — that government stimulus will be scaled back.
Sustaining that rational approach will depend on just how long the standoff lasts. After all, the debt ceiling negotiations that are still ahead at the end of all this have the potential to rock and roil markets in a major way.
But it’s not just about quantifying the economic impact. There will be damage that can’t be quantified — or easily overcome in the future. That relates specifically to confidence, credibility and global reputation.
The longer the shutdown lasts, the more damage will be done to business and consumer confidence. Household spending alone still drives 70 per cent of the U.S. economy and the fragility of business confidence is reflected in recent corporate caution about committing to invest and hire, despite a return to profitability.
Any stability that has endured through the initial phase of the shutdown will be destroyed if it continues past Oct. 17. That’s the deadline for the U.S. Congress to approve a higher limit on the amount of national debt that can be issued by the U.S. Treasury, allowing the government to pay its bills.
As it now stands, the debt ceiling would require Washington to slash $600 billion of annual spending — if an increase can’t be negotiated. That's a huge challenge: it represents four per cent of U.S. GDP and it’s more than enough to throw the U.S. economy into another recession.
Battles over spending are nothing new: Congress hasn’t passed a proper budget on time since 1997. But this time around there’s a nasty new twist.
House Republicans are blocking the budget not because they object to it, but because they object to something else: health-care reform.
Their original demand was to strip all funding from Obamacare. Given that it’s arguably President Barack Obama’s biggest achievement, killing it was never going to be an option. Obviously.
The potential cost is also steep outside the U.S.
Gradual evidence of economic recovery and geopolitical downdrafts in China, India and other emerging powers has recently restored some lustre to America’s “brand.” The country that led the world through much of the last century looked poised to resume its leadership role, restoring some of the stability that had been lost.
If the U.S. defaults on its debt and compromises its own creditworthiness, it will have to pay more to borrow money. It will also squander its reputation as a “safe haven” currency.
As well, the liquidity and relative safety of American Treasury bills makes them widely used as collateral in global markets.
A default could trigger demands by lenders for more or different collateral. That might cause what The Economist magazine refers to as a “financial heart attack.” Although unlike the last one caused in 2008 by the failure of Lehmann Brothers, there would be neither the political will nor the means to right the boat.
Of course this will have a bearing on Canada. Directly, in terms of its role as a major exporter and supplier to an economy that’s being held political hostage. Indirectly, as the cross-border issues on Canada’s agenda get overwhelmed by domestic wrangling.
About the last thing on President Obama’s mind these days is the Keystone XL pipeline — or any of the other files that Ottawa is desperate to push forward.
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