The Land Of The Free Is Starting To Look Ungovernable

REUTERS/Eric Thayer

AS MIDNIGHT on September 30th approached, everybody on Capitol Hill blamed everybody else for the imminent shutdown of America's government. To a wondering world, the recriminations missed the point. When you are brawling on the edge of a cliff, the big question is not "Who is right?", but "What the hell are you doing on the edge of a cliff?"

The shutdown itself is tiresome but bearable. The security services will remain on duty, pensioners will still receive their cheques and the astronauts on the International Space Station will still be able to breathe. Some 800,000 non-essential staff at federal agencies (out of 2.8m) are being sent home, while another 1.3m are being asked to toil on without pay (see "The federal government: Closed until further notice"). Non-urgent tasks will be shelved until a deal is reached and the money starts to flow again. If that happens quickly, the economic damage will be modest: perhaps 0.1-0.2% off the fourth-quarter growth rate for every week the government is closed. The trouble is, the shutdown is a symptom of a deeper problem: the federal lawmaking process is so polarised that it has become paralysed. And if the two parties cannot bridge their differences by around October 17th, disaster looms.

Battles over spending are nothing unusual--indeed, Congress has not passed a proper budget on time since 1997. But this battle represents something new. House Republicans are blocking the budget not because they object to its contents, but because they object to something else entirely: Barack Obama's health-care reform, a big part of which started to operate this week (see "America's health-care upheaval: Will it get better?"). Their original demand was to strip all funding from Obamacare. In other words, they wanted Democrats to agree to kill their own president's biggest achievement. That was never going to happen. As the deadline for a budget deal approached, Republicans scaled back their demands. Instead of defunding Obamacare, they said that its mandate for individuals to buy health insurance (or pay a fine) should be delayed for a year.

The bane of budgetary brinkmanship

That may sound more reasonable, but it is not so, for two reasons. First, delaying the mandate could wreck the whole reform. Obamacare sits on two pillars. Everyone is obliged to have insurance, and insurance firms are barred from charging people more because they are already ill. If only the second rule applies, the sick will rush to buy insurance but the healthy will wait until they fall ill before doing so. Insurers will have to raise premiums or go bust, making coverage unaffordable without vast subsidies. Obamacare will enter a death spiral and possibly collapse. For some Republicans, that is the goal.

The second reason is that Republicans are setting a precedent which, if followed, would make America ungovernable. Voters have seen fit to give their party control of one arm of government--the House of Representatives--while handing the Democrats the White House and the Senate. If a party with such a modest electoral mandate threatens to shut down government unless the other side repeals a law it does not like, apparently settled legislation will always be vulnerable to repeal by the minority. Washington will be permanently paralysed and America condemned to chronic uncertainty.

It gets worse. Later this month the federal government will reach its legal borrowing limit, known as the "debt ceiling". Unless Congress raises that ceiling, Uncle Sam will soon be unable to pay all his bills. In other words, unless the two parties can work together, America will have to choose which of its obligations not to honour. It could slash spending so deeply that it causes a recession. Or it could default on its debts, which would be even worse, and unimaginably more harmful than a mere government shutdown. No one in Washington is that crazy, surely?

Step back from the edge

America enjoys the "exorbitant privilege" of printing the world's reserve currency. Its government debt is considered a safe haven, which is why Uncle Sam can borrow so much, so cheaply. America will not lose these advantages overnight. But anything that undermines its creditworthiness--as the farce in Washington surely does--risks causing untold damage in the future. It is not just that America would have to pay more to borrow. The repercussions of an American default would be both global and unpredictable.

It would threaten financial markets. Since American Treasuries are very liquid and safe, they are widely used as collateral. They are more than 30% of the collateral that financial institutions such as investment banks use to borrow in the $2 trillion "tri-party repo" market, a source of overnight funding. A default could trigger demands by lenders for more or different collateral; that might cause a financial heart attack like the one prompted by the collapse of Lehman Brothers in 2008. In short, even if Obamacare were as bad as tea-party types say it is (see "Lexington: Cruz missile"), it would still be reckless to use the debt ceiling as a bargaining chip to repeal it, as some Republicans suggest.

What can be done? In the short term, House Republicans need to get their priorities straight. They should pass a clean budget resolution without trying to refight old battles over Obamacare. They should also vote to raise the debt ceiling (or better yet, abolish it). If Obamacare really does turn out to be a flop and Republicans win the presidency and the Senate in 2016, they can repeal it through the normal legislative process.

In the longer term, America needs to tackle polarisation. The problem is especially acute in the House, because many states let politicians draw their own electoral maps. Unsurprisingly, they tend to draw ultra-safe districts for themselves. This means that a typical congressman has no fear of losing a general election but is terrified of a primary challenge. Many therefore pander to extremists on their own side rather than forging sensible centrist deals with the other. This is no way to run a country. Electoral reforms, such as letting independent commissions draw district boundaries, would not suddenly make America governable, but they would help. It is time for less cliff-hanging, and more common sense.

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