Government faces grim choices during shutdown, default

The federal government faces tough decisions if congressional failure to pass a spending bill by Oct. 1 results in a shutdown, or if Congress does not agree to raise the federal debt ceiling by sometime between mid-October and November.

 
Experts say effects of the shutdown would be more immediately visible, but a debt-ceiling default will likely be more damaging, both in terms of economic growth and by adding to the federal debt in the long run.
 

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The process to deal with each dilemma is different, as are the consequences.
 
For a shutdown, the choices involve deciding which employees and services are so important as to be exempt.
 
“There is a great deal of latitude in that determination for the president,” said Congressional Budget Office Director Doug Elmendorf.
 
For the debt ceiling, the president could decide, for a time, to delay some large payments other than interest on the debt.
 
The first could be a $12 billion Social Security benefit payment, followed quickly by a Nov. 1 payment for military salaries and benefits.

There is general agreement that a government shutdown now will be more widespread and worse than those that happened in the mid-19902 when Bill Clinton and Newt Gingrich engaged in budget warfare.
 
At that time, seven of 13 appropriations bills, including for the military, had been passed, so many agencies stayed open.
 
“Obviously this time will be worse because we have no appropriations bills enacted,” former Senate staffer Bill Hoagland said.
 
The government estimated that it lost $1.4 billion during the 1995 and 1996 shutdowns when Congress decided to pay furloughed employees salaries they would have earned. This time, a multi-week shutdown of similar length would likely cost more.
 
Republicans on the House Appropriations Committee this month distributed a list of consequences of a shutdown as part of an effort to get conservative members to support Speaker John Boehner’s (R-Ohio) measured approach to defunding ObamaCare. That effort failed, and the House is now insisting that President Obama gut his signature reform program as part of a stopgap spending bill.
 
The Appropriations list has broad categories and puts “bad for national security” and “bad for our troops and veterans” at the top. The fact that troops will face delays in getting paid if there is a shutdown will be a major talking point.
 
The troops fall into a category of exempted employees that must work during a shutdown. They will be paid eventually, but furloughed employees will lose pay unless Congress acts later to pay them.
 
To figure out exactly who else works and who stays home, federal agencies must implement shutdown plans.
 
Agencies are expected to reveal their exact plans by the end of this week.
 
On. Sept. 17, White House Budget Director Sylvia Mathews Burwell directed federal agencies to update their plans in preparation for a shutdown.
 
Burwell said that agency leaders should carry out an “orderly” shutdown on the day appropriations run out and take no more than half a day to put their agency in mothballs.
 
Exempted employees include those who protect life and property and who are essential to delivering certain entitlements, such as Social Security, but not others, such as food stamps.
 
In 1996, prison guards and air traffic controllers continued to work, but passports stopped getting processed, contracts for vendors were halted, health research was suspended and national parks were closed.
 
Once again, Social Security administrators would likely have a skeleton staff, but checks could take longer to process, according to the Congressional Research Service.
 
District of Columbia Mayor Vincent Gray has already made clear that, this time, all D.C. services are to be “excepted,” and unlike during previous shutdowns, trash collection will not be suspended.
 
During the 21-day shutdown that ended in January 1996, there were 284,000 furloughed employees without pay and 475,000 excepted workers without pay.
 
National Treasury Employees Union President Colleen Kelley said she expects the number of furloughs to be higher this time.
 
She noted that the furloughs would come on top of those ordered this year due to $80 billion in indiscriminate sequester cuts and one-third year of pay freezes.
 
“They just don’t see any end in sight ... there is no expectation that they should assume they would be paid since that would take an act of Congress,” she said.
 
There is more choice initially with a debt-ceiling crisis but the consequences are dire, concluded a Bipartisan Policy Center (BPC) study this month.
 
The study found that there is enough revenue to continue to make interest payments in any event, so a classic bond default is not really on the table.
 
But failing to make other payments does take demand out of the economy at a vulnerable time, and could cause another lowering of the U.S. credit rating or another stock market drop.
 
Beyond that, Treasury could prioritize the remaining payments or delay major ones. The BPC said Treasury has concluded prioritizing the thousands of payments it must make is technically less feasible.
 
That leaves delay as an option, but the choices there are also unappetizing. If seniors and soldiers get paid, tax refunds and Medicare doctor payments could lapse. 
 
“Federal employee salaries, if they are on the list, they are at the bottom,” Kelley said.
 
If the debt-ceiling crisis continues, the delays would get longer, the BPC said.
 
Brinksmanship in Congress over the debt ceiling in 2011 caused an estimate $18.9 billion increase in interest payments on the debt over 10 years.
 
“It will probably at least cost that much if we go up until the last second,” the BPC’s Steve Bell said. He said an actual default would be a “black swan event” of unknown but enormous magnitude.
 
“A default would lead to some level of chaos in the debt markets, which would lead to a significant contraction in economic activity, which would lead to job losses, which would lead to higher spending by the federal government and lower tax revenues, which would lead to more debt,’ former GOP Sen. Judd Gregg (N.H.), a columnist for The Hill, said in a recent op-ed.
 
As for the effect on demand, defaulting on payments could spark a recession.
 
Economist Mark Zandi told the Joint Economic Committee last week that no matter what the choices are, failing to make $130 billion in payments by November would cause a new recession.
 
“You annualize that, that’s 9 percent of GDP. That comes right out of the economy. We’ll be in the middle of a very, very severe recession, and I don’t see how we get out of it,” Zandi said. “There’s no monetary policy response in the current context. We’re already at a zero interest rate. I just don’t see what policymakers will do.”