A global insight to the United States shutdown and its repercussions

It has been 17 years since the last US shutdown occurred in 1995-1996 during Bill Clinton’s presidency. The longest period of time this happened was 21 days. Government shutdown takes place when the President and the Congress fail to reach an agreement on the budget needed to fund federal services. During a shutdown thousands of federal workers are sent home so that government activities can be reduced, thus affecting several economic sectors of society.

Why does this happen in the US?

Shutting the government down is a part of the democratic system in the US, because the president is considered to be head of the State as well as head of the Federal Government. In the US new laws need to be approved by a majority of the legislative bodies and because several political parties are involved the majority has to agree to it.

The shutdown in 2013 occurred mainly because the Republicans decided to delay the Democrat President’s healthcare initiatives, primarily the Patient Protection and Affordable Care Act, also known as ‘Obamacare’

Obamacare was signed into law in 2010 by President Obama in order to decrease healthcare spending and to provide affordable health insurance to more US citizens. Up until now more than 100 million Americans have benefited from this new law.

The majority of the Republican party oppose President Obama’s healthcare reforms and are using the shutdown and the debt ceiling deadline as a bargaining chip to agree a budget in which Obamacare would be severely limited.

Domestic Repercussions of the Shutdown:

Domestically over 800,000 American government personnel face unpaid leave without any guarantees that they will receive their salaries once activities resume.

Several governmental sectors are significantly reducing the number of staff during the shutdown, such as the Department of Commerce who sent 87% of the employees home; the Department of Defense with 50%; the Department of Energy with 69%; the Department of Health with 52%; the Department of Transport with 33% and so on.

These huge reductions in personnel along with the reduction of governmental services will  reduce the benefits and delay the payment of thousands citizens; healthcare, educational and transport services will also be affected. The longer the shutdown will last, the larger the consequences will be for society and the economy, both locally and globally.

 Global Repercussions:

The global repercussions are reliant on the duration of the shutdown: the longer it lasts, the greater the consequences; if it is temporary the global economic impact will be limited. Goldman Sachs calculated that a three week standstill would reduce the United States’ GDP by 0.9% this quarter. During the last standstill, which lasted 21 days, it cost the government 1.5bn dollars.

On the other hand the standstill represents a dysfunction in the American Government. According to Xenia Dormandy, Dean of the Academy for Leadership in International Affairs:“The shutdown raises the perception that America’s bitter partisan politics is preventing it from acting responsibly, both domestically and internationally. The implications for America’s reputation and power could be significant.” (Dormandy, 2013)

The primary global repercussion: the debt ceiling and the Dollar:

Currently a lot of concerns are revolving around the 17th October – the deadline that politicians need to meet to agree upon raising the US debt ceiling. The debt ceiling is simply the limit and maximum quantity of money that the government can borrow at any time. According to American law, once the limit is reached, the Treasury cannot issue a new debt unless the Congress has agreed upon it. At the moment this limit stands at around 16.7 trillion dollars.

If politicians fail in reaching an agreement by this date, the US will default on their debts. This would lead to major consequences for any prospective investors and for US debt holders and, perhaps more crucially, the image and reliability of the dollar as global reserve currency would be gravely affected.

The Dollar first became an international currency during the Bretton Woods Conference after World War II, and until today it is used by many countries for commercial transactions. If the dollar were to collapse it would have a profound effect on the global economy.

After the US shutdown in October 2013, the dollar’s value has so far reached its lowest point in 8 months in comparison to other currencies, although it is recovering slowly.

What happens next?

However the main issue with the shutdown is not the debt ceiling nor the dollar but the overly partisan politics between Democrats and Republicans in the Congress. The Democrat controlled  Senate and the Republican controlled House of Representatives cannot agree on the budget because of the healthcare reforms that so many Republicans are so ideologically opposed to. This highlights one of the major flaws in the US governmental system that allows a non- elected party so much power over decision making.

Many commentators point out that in any event the Congress should at least vote to raise the debt ceiling to avoid a default and note that now is no time for the Republicans to make a political point with so much at stake – especially seeing as if the Republicans win the 2016 elections, they will be able to repeal Obamacare by using the legislative process. The question is who will the American voting public blame for the shutdown and how much of a role will it play in the next elections?

*Cover image ‘Capitol Hill, Washington DC’ by KP Tripathi

 

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