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US government shutdown could rattle fragile economy

If the US House of Representatives fails to reach a compromise over budget cuts, the federal government will go unfunded and partially shutdown. A shutdown could shake global confidence in the fragile American economy.

ÛS Congress in sunlight

If the US House doesn't compromise, government will shut down

Republicans and Democrats in the House of Representatives continued to lock horns over America's budget deficit on Friday with a shutdown of the US government looming should the two sides prove unable to reach a compromise by midnight.

Republicans, buoyed by the fiscally conservative Tea Party movement, have called for drastic budget cuts over the next decade in order to reign in Washington's ballooning debt. For the current fiscal year, Republicans are seeking some $40 billion (27 billion euros) in budget cuts.

Meanwhile, Democrats countered the Republican demand with $33 billion in reductions, arguing that deeper cuts could send America's fragile economy into a tailspin just as it begins to work its way out of the worst crisis since the Great Depression in the 1930s.

President Obama met with Republican leader John Boehner and Democratic leader Harry Reid for emergency negotiations earlier this week. Although both sides of the political aisle said progress had been made toward compromise, a solution is outstanding.

"The only question is whether politics or ideology is going to get in the way of preventing a government shutdown," Obama said in an unscheduled appearance in the White House press briefing room.

Conservative revival

The current battle over budget cuts has more to do with a disagreement about the size and role of government within American society than hard numbers, according to Christian Lammert, an expert on American domestic politics with the John F. Kennedy Institute for North American Studies at the Free University of Berlin.

"What we see here is the first battle between Democrats and Republicans after the midterm elections," Lammert told Deutsche Welle.

The Republicans made major electoral gains in the midterms, seizing the House of Representatives from Democrat control and almost equalizing the balance of power in the Senate.

This turnaround came just two years after Republicans suffered a bruising defeat in the 2008 presidential elections, viewed by many as a referendum on the controversial neo-conservative policies of President George W. Bush.

However, the federal government's bailout of the financial sector and nationalization of the automobile industry in the wake of the economic crisis sparked a conservative revival that coalesced into the Tea Party movement.

Role of government

The Tea Party energized the demoralized Republican base, sending 100 new members to the House of Representatives. These new members believe that the government has grown too big and needs to be drastically reduced in order to save the nation from financial ruin.

"The problem is in the House," Isabel Sawhill, an economist with the Brookings Institution in Washington D.C., told Deutsche Welle.

"The specific problem is the conservative Republicans who represent the Tea Party," Sawhill said. "[They] are mostly new to the Congress and were elected on a pledge to cut spending deeply and are now insisting to their leadership that this be done. "

Last Tuesday, Republican lawmakers introduced a budget for fiscal year 2012 that envisions $6 trillion in cuts over a 10 year period, targeting the nation's major entitlement programs. Medicare, public healthcare for the elderly, would effectively be privatized through a voucher system. Meanwhile, Medicaid - public healthcare for the poor - would be turned over to the states under a block grant system.

"This is a completely different way of organizing government in the United States," Lammert said. "They want the shrinkage of government much more than Democrats want it."

Demonstration against Obama in front of Lincoln memorial

The conservative Tea Party movement has a powerful voice in Washington

Blue Dog Democrats

However, Josef Braml - an expert on American domestic and economic policy - emphasized that the desire to cut deficits is not limited to the Tea Party movement within the Republican Party.

Blue Dog Democrats, who come from center-right districts across the American Midwest and South, are also fiscally disciplined and have made spending cuts a priority. Unlike European democracies, elected officials in the US do not always have to tow the party line.

"There are no parties compared to a parliamentary system," said Braml, who works with the German Council on Foreign Relations. "In a parliamentary system, the party would follow the executive head. But the US doesn't have party discipline in this narrow sense."

This flexibility presents an opportunity for Tea Party Republicans and Blue Dog Democrats to build a bridge between the two parties. That bridge could lead to a compromise on cuts thereby foregoing a government shutdown.

However, with the 2012 presidential elections just around the corner, partisan politics are playing an important role in the debate over deficits. Members of both parties are trying to position themselves as the winners.

"At this point it's a game of chicken about who blink firsts and who can get the most concessions from the other side," Johannes Thimm, an expert on American politics with the German Institute for International and Security Affairs, told Deutsche Welle.

"The politics is about - if the government does shut down - who gets blamed for it."

National Interest

In the end, if House Democrats and Republicans fail to reach a compromise that prevents a government shutdown, both parties will likely face consequences with mainstream America at the polls.

According to Braml, the United States will face negative consequences on the global markets as well. With investors already questioning America's fiscal solvency, it is in the political interest of Republicans and Democrats as well as the broader national interest to avoid a shut down, Braml said.

Newly pressed dollar bills

The dollar is not as strong as it once was

"It has become a national security issue," he continued. "As Obama made it clear, the biggest national challenge to America in terms of security is its economic situation. When you look at the situation, then you realize that the budget is an issue."

The controversial question, however, is whether to implement deep budget cuts now or to wait until the American economy becomes more robust. Conservative Republicans argue for drastic measures now. The economist Sawhill disagrees.

"All mainstream economists are pretty much speaking with one voice," Sawhill said. "We should reign in our budget deficits over the longer term but right now is not the time to do it because we do have very high unemployment. We should enact some restraint now, but we should do it gradually."

If America does not voluntarily reign in its spending, it will likely be forced to do so, according to Braml. China and Japan - which have financed American consumption for years - are losing their patience. In response, the Federal Reserve has begun printing more dollars in order to sustain the American lifestyle.

However, printing money could ultimately undermine the value of the dollar and shake the very foundations of the American economy.

"How long can you print money without losing trust in the dollar?" Braml said. "Some people at Harvard University say the dollar is as safe as Pearl Harbor was in 1941."

"Maybe they're right."

Author: Spencer Kimball
Editor: Rob Mudge

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