The ongoing battle on Capitol Hill threatens America’s economic health and could affect countries with close ties to it

A little over a week ago at the stroke of midnight, a pall of fiscal gloom descended over the U.S. capital and then spread its tentacles of furlough-misery outward across the nation.

The government shutdown had arrived, not so much with a bang but with a collective groan of despair by millions of middle class families that faced the prospect of wage garnishments and public service curtailments, worsening with each new day of the stalemate in Washington.

At the heart of the paralysis gripping the three branches of the U.S. government is a brazen attempt by conservatives in the House of Representatives, especially Tea Party Republicans, to set the clock back on what is now popularly known as “Obamacare,” President Barack Obama’s epoch-making legacy of health-care reform.

That they are seeking to achieve this despite the Affordable Care Act winning approval from both houses of Congress, the U.S. Supreme Court, and ultimately from the American public in last year’s elections, suggests a certain measure of desperation on the part of the Republican fiscal hawks seeking to reconnect with the conservative electoral base.

Their weapon? The threat of denying Mr. Obama an increase in the debt ceiling, with the potentially destabilising consequence of sending the limping post-recession economy into a tailspin of economic fluctuation and creeping stagnation.

Unless the furlough of 8,00,000 workers in non-essential services that began last week yields significant budget savings, the deadline for the government to raise the debt ceiling is October 17. After that point, as Mr. Obama said, America would be considered a “deadbeat,” unable to pay bills it has already “racked up.”

Does this matter to anyone except Americans? The short answer is yes, but how much it matters is a more complex question. The impact would likely be mediated through two mechanisms.

Trickle-down effect

The first is a “trickle-out” effect, where the slow bleed of public sector employment and the gradual crumbling of public confidence in the future will degrade the U.S.’s “price-earnings” multiple or perceived future value as a destination for investment. The second mechanism is a credit ratings downgrade and the likely shock to global markets.

Each is worth considering separately.

Although American history has witnessed no fewer than 17 government shutdowns and 17 years have passed since the last one occurred, the ongoing battle on Capitol Hill poses a clear and present danger to the U.S.’s macroeconomic health much more than, say the Clinton-era closure of 1995-96 did.

When Mr. Clinton squared off against erstwhile House Speaker Newt Gingrich in 1995 the government shutdown came on the back of an economic boom fuelled by Silicon Valley’s dynamo’s, mushrooming technology and Internet start-ups.

In 2013 the U.S. still maintains a lead over other nations in high-tech fields such as biotechnology but this is hampered by the hangover of economic sluggishness from the recession years.

For example the unemployment rate has taken an inordinately long road to climb down to 7.3 per cent, but under Clinton it was steady at approximately 5.6 and economic projections for further growth were optimistic.

This difference in unemployment would be even starker if the fact that labour participation has by now dropped to its lowest level since August 1978 were to be considered.

With across-the-board furloughs now in place for about a week the shutdown is estimated to have already cost the economy something in the range of $1 billion per week in the lost pay of affected federal workers.

Soon the depth of the cutbacks will reach a point where international effects get amplified. For example, the closure of national parks and museums closed has already impacted tourism. Try visiting the Statue of Liberty in New York or any of the beautiful national parks and you will be disappointed.

Trade links may be hit too, for example via hold-ups in ports and airports where staff not involved in the direct operation of passenger movement logistics, including security personnel, may be downsized. This could lead to consignment delays and higher costs for exporters located, for example, in India.

Other small but potentially important cuts could matter to non-Americans. The State Department has said “Consular operations domestically and overseas will remain 100% operational as long as there are sufficient fees to support operations,” referring to funds outside the annual congressional appropriation. However in previous shutdowns, passport issuances have slowed.

At a strategic level, analysts have argued that the cancellation of Mr. Obama’s trip to Southeast Asia, including Malaysia, the Philippines, Indonesia and Brunei — entirely because his attention was preoccupied with the shutdown — could have been a setback for the White House’s “Rebalance towards Asia” plan.

This is all the more salient in the context of West Asia recently cornering the lion’s share of Washington’s attention following developments in Syria and Iran.

Ratings downgrade

Yet, even this multidimensional trickle-out effect may be dwarfed by the speed and magnitude of the shock waves that will come out of a credit ratings downgrade. When Standard & Poor's Credit rating agency downgraded the U.S. federal government’s rating from AAA to AA+ in August 2011, markets worldwide felt the jolt.

Many emerging markets, including India, that did well during the 2002-08 boom years have since passed inflection points in their growth trajectory and now operate in a climate of greater uncertainty about future reforms and sustained growth.

Neither Americans nor those in countries that enjoy a strong economic relationship with the U.S. can afford the pain that will be unleashed if the will of the small but determined group of conservatives in the House of Representatives prevails.

narayan@thehindu.co.in

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