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The Boehner shock

Oct 04,2015 - Last updated at Oct 04,2015

Ever since the financial crisis erupted in 2008, media outlets and specialists alike have devoted much attention to anticipating negative shocks to the global economy.

Today, the focus is on the state of the Chinese economy, the timing of the US Federal Reserve’s normalisation of interest rates and the various policies under discussion in the United States’ presidential election campaign.

But the most damaging shocks often hide in plain sight — and then hit precisely when and where almost everyone thought stability would prevail.

One such risk is that political partisanship will cause another disruption to the US federal government’s finances, weakening the American economy and roiling world financial markets.

This warning may seem strange. After all, the last big partisan fight (in 2013 over funding the government and raising the debt limit gained little for the Republicans who instigated it — other than significant damage to their reputation for responsibility). And the current Republican leadership, eager to strengthen their party’s electoral chances in 2016, very much wants to project an image of sober good sense.

Yet a major and destabilising confrontation over public finance now seems unavoidable, particularly following House Speaker John Boehner’s surprise announcement that he will resign his position and his seat in Congress at the end of October.

To see why, one need look no further than the House Ways and Means Committee, whose current chairman, Paul Ryan, is a leader of the hardline Republican insurgents who had scorned Boehner for being too willing to compromise with President Barack Obama and House Democrats.

Ryan’s committee plays an important role in setting America’s fiscal agenda, reflecting both the constitutional requirement that revenue bills originate in the House of Representatives and political realities (the House is traditionally less fractious than the Senate).

Unlike in 2013, the strategy of Ryan and his allies this time around is unlikely to include a threat to default directly on federal government debt. And Republicans on the committee claim that social security payments will be made on time.

So what other bills do they plan not to pay as part of a showdown over legislation to keep the government funded?

In fact, it is difficult to say exactly what the threat is — and that is part of the problem.

Uncertainty about government contracts and various kinds of payments can have a broad impact on the economy.

The difficulty of working through the full economic implications is precisely what discourages consumers from making purchases and causes firms to postpone investment.

The US Government Accountability Office (GAO) published a helpful report in July that spelled out some of the consequences of the 2013 confrontation over the debt ceiling — including how it pushed up the government’s borrowing costs and the negative impact this had on the economy.

But the Republican majority in Congress simply ignores this type of sensible analysis.

As a result, a partial government shutdown is entirely possible, with the Republicans imposing a form of prioritisation on government payments: some people will be paid what they are owed, and others will not.

This will fuel uncertainty, sap economic confidence, and almost certainly hurt the Republicans at the polls in 2016.

So why is it likely to happen?

One reason is to be found in the decentralised nature of American politics, which leaves elected officials relatively unbeholden to party leaders.

Some Republican supporters and donors have obviously moved to the right in recent decades. But as James Kwak and I explained in our book on US fiscal policy, “White House Burning”, the time when the Republican right favoured responsible budgets and financial stability has long since passed.

Now the right — increasingly catering to a Southern, rural and white constituency — cares much more about shrinking the federal government and in recent years has viewed shutting it down or threatening non-payment of debts as a way to “starve the beast”.

Moreover, the Republicans’ uncompromising stance has been reinforced by the extreme position taken by many within its congressional delegation that Planned Parenthood — a healthcare provider that primarily serves women — must be defunded as a condition of any budget deal.

Boehner’s resignation, though viewed by some as clearing the way for a short-term deal to fund the government, merely underscores the limited ability of any “responsible” Republican leader to control the party’s increasingly fundamentalist caucus.

In the US, as elsewhere, debates about fiscal policy should be open, with clear statements of alternative goals and balanced assessments of how best to pay for what government does.

Unfortunately, a debate and the compromises that follow are not what the Republicans have in mind.

Boehner’s forced departure makes it likelier than ever that the US — and the world — will soon face the prospect of another self-inflicted economic shock, caused entirely by the Republicans’ scorched-earth budget tactics.

 

 

The writer is a professor at MIT’s Sloan School of Management and the co-author of “White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You”. ©Project Syndicate, 2015. www.project-syndicate.org

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