Wednesday, April 6, 2011

The Government Shutdown and the U.S. Government’s Credit Rating

The political observers I am hearing from are saying that it is almost certain that the House of Representatives will not be able to pass a stopgap spending measure and the U.S. government will shut down on Friday afternoon. As evidence, they cite White House preparations for a shutdown and a statement from the House Speaker that the deadline for avoiding a shutdown has already passed. They are split over the question of whether the shutdown will last only until Monday, or for weeks, perhaps running through the end of the fiscal year in September.

The United States might not have been formally downgraded by the credit rating agencies, but the failure of governance that the current situation represents has already unofficially harmed the country’s credit rating. This, not incidentally, is bad news for the federal budget, as it increases the amount the government must spend on interest payments — the exact scenario that got Greece and Ireland into financial trouble.

In theory, the United States could avoid that slippery slope by addressing the most urgent matters in a separate bill that could be just a page or two in length. By political convention, though, the government’s fiscal health and continuity can’t be addressed without a comprehensive spending plan. Constitutionally, spending plans have to originate in the House of Representatives. There is no mechanism for breaking a deadlock in the House beyond the House members’ own sense of duty.

The economic statistics that go with a federal government shutdown could easily look like a depression, with whole sectors of the economy thrown into suspense. For example, the real estate market would be on hold, with sellers not eager to sell during a period when many home mortgages are unavailable. Emergency budget adjustments by states would add to the economic slump. Households that spent their tax refund in advance would have to make similar emergency spending cuts when they realized the tax refund check is not on the way.