The Issue: Default -- disaster in the making

By MARCELLA KREITER, United Press International  |  Oct. 6, 2013 at 4:30 AM
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Shutting down the U.S. government was only the first salvo in what promises to be an ugly battle in coming days over both the debt ceiling and the 2014 fiscal budget.

The fiscal year began last Tuesday with neither a budget nor the spending authority Washington needs to keep all aspects of government functioning. Some 800,000 federal employees were furloughed, disrupting such services as new filings for Social Security, veterans benefits and national park, museum and monument operations.

Essential services like the military, border patrol and air traffic control were unaffected although some workers were required to report without the prospect of being paid at the usual time. Social Security checks went out and Medicare payments were unaffected.

Democrats, from the President Obama on down, refused to negotiate and characterized the dispute as a blackmail effort by members of the Tea Party faction of the Republican Party to impose their ideological will on the country. Republicans whined about a lack of flexibility from Democrats when it comes to renegotiating terms of the Affordable Care Act -- aka Obamacare -- which the GOP and the Tea Party in particular want repealed (the House voted more than 40 times to repeal the ACA and attached a defunding rider to the continuing resolution).

Several Republican congressmen insisted the majority of Americans backed what they were doing but polls by CBS and Pew indicated the public was against shutting down the government because of Obamacare.

The bigger issue, though, is the debt ceiling. Treasury Secretary Jack Lew has warned come Oct. 17, he'll have only $30 million on hand, half to two-thirds of what he needs to pay the bills on a daily basis. Unless borrowing authority is increased, the United States will be in danger of default for the first time in its history -- something Lew says could trigger a recession worse than the one that hit in 2008.

Default is not a pretty sight. Just look at Greece and Argentina. The rest of the European Union has been trying to keep Greece out of default for the better part of two years, fearing a default could cause a domino effect. Argentina has been trying to dig out of its sovereign debt crisis since 2002. Should the world's largest economy start missing payments, the ripple effect would be staggering.

"Credit markets could freeze, the value of the dollar could plummet, U.S. interest rates could skyrocket, the negative spillovers could reverberate around the world, and there might be a financial crisis and recession that could echo the events of 2008 or worse," the six-page treasury report issued Thursday said.

Additionally, Social Security checks and other regular payments could be delayed, some indefinitely.

Last time the wrangling went down to the deadline, in July 2011, credit-rating agencies lowered the U.S. rating, meaning the cost of borrowing money went up, and financial markets took a beating. Ditto at the beginning of the year when the government approached the so-called fiscal cliff and an 11th-hour deal was stitched together -- actually it was past the 11th hour since the deal was not worked out until the deadline had passed.

"As we saw two years ago, prolonged uncertainty over whether our nation will pay its bills in full and on time hurts our economy," Lew said in releasing the report. "Postponing a debt ceiling increase to the very last minute is exactly what our economy does not need -- a self-inflicted wound harming families and businesses. Our nation has worked hard to recover from the 2008 financial crisis, and Congress must act now to lift the debt ceiling before that recovery is put in jeopardy."

Obama accused Republicans of holding a gun to the country's head.

"The American people elected their representatives to make their lives easier, not harder. And there is one way out of this reckless and damaging Republican shutdown: Congress has to pass a budget that funds our government with no partisan strings attached," he said Thursday in an appearance at the M. Luis Construction Co. in Rockville, Md.

"Now, I want everybody to understand what's happened, because sometimes when this gets reported on everybody kind of thinks, well, you know, both sides are just squabbling. ... I want everybody to understand what's happened here. The Republicans passed a temporary budget for two months at a funding level that we, as Democrats, actually think is way too low because we're not providing help for more small businesses, doing more for early childhood education, doing more to rebuild our infrastructure. But we said, OK, while we're still trying to figure out this budget, we're prepared to go ahead and take the Republican budget levels that they proposed.

"So the Senate passed that with no strings attached -- not because it had everything the Democrats wanted. In fact, it had very little that the Democrats wanted. But we said, let's go ahead and just make sure that other people aren't hurt while negotiations are still taking place.

"So that's already passed the Senate. And we know there are enough Republicans and Democrats to vote in the House of Representatives for the same thing. So I want everybody to understand this: There are enough Republicans and Democrats in the House of Representatives today that, if the speaker of the House, John Boehner, simply let the bill get on the floor for an up-or-down vote, every congressman could vote their conscience -- the shutdown would end today.

"The only thing that is keeping the government shut down; the only thing preventing people from going back to work and basic research starting back up, and farmers and small business owners getting their loan -- the only thing that's preventing all that from happening, right now, today, in the next 5 minutes, is that Speaker John Boehner won't even let the bill get a yes-or-no vote, because he doesn't want to anger the extremists in his party. That's all. That's what this whole thing is about."

White House spokesman Jay Carney told reporters if differences aren't resolved -- or at least put aside -- by the debt ceiling dealine, it would be "catastrophic.

"And unfortunately, we've seen from Republicans in the House, where one faction of one party, of one house in one branch of government is driving the train, there seems to be a willingness to engage in a strategy that threatens default and perhaps ultimately causes default," he said. "So that's why it's important for people to understand the consequences, and because we don't have a lot of time. ...

"The president will not let the full faith and credit of the United States to be held hostage by these partisan ideological demands. ...

"If there are Republicans out there who think that default is not a bad thing, they're profoundly wrong -- profoundly. And the idea that you can pay some of your bills but not all of them -- you try it next month. See what happens if you pay your -- make your car payment but not your mortgage. Try that for a few months and see what happens. Your credit rating is going to go into the toilet and you're going to be in trouble -- you won't be able to borrow money anymore, and you're the -- people's understanding of the full faith and credit of [an individual] will change dramatically.

"You've got to pay your bills. And you've got to pay them on time. We always have. The United States always has."

If the issues were really spending deficits and the growing national debt, the government never would have shut down. Estimates indicate the shutdown costs $300 million a day, adding to the deficit, not trimming it. The situation boils down to ideology when it comes to government's role and its obligation to help those least able to help themselves -- the elderly, infirm and the poor.

The poor, elderly and poor-and-elderly already have taken a hit with the 10-year, $40 billion cut to the Supplemental Nutrition Assistance Program.

When it comes to Obamacare, studies indicate repealing it would actually add to the deficit.

Obama has said he's willing to negotiate on entitlement programs and already has said he is open to changing the way cost of living increases are calculated for Social Security.

"Open the government, and we'll negotiate with you on anything you want to negotiate with," Senate Majority Leader Harry Reid, D-Nev., said Thursday.

The National Review quoted Boehner as telling some congressmen privately he won't allow the United States to default. Other reports, however, said Boehner told Reid privately in early September he wanted to pass a clean continuing resolution but apparently changed his mind when the far-right objected.

The shutdown already is rippling through the economy. Aside from the hundreds of thousands of federal workers who won't have a paycheck to pay their bills, banks are unable to complete mortgages because they can't get income verification from the Internal Revenue Service and the Federal Housing Administration doesn't have the personnel to guarantee loans. The tanking of the housing industry is what triggered the Great Recession. As for small businesses, their access to $93 million a day has been cut off because district offices are closed. States that depend on federal money for some of their programs are laying off workers in those departments.

"I believe that, if the shutdown remains in place for an extended period of time, it would reduce GDP by 1- to 2 percent and raise unemployment by as much as an extra percentage point. This would reflect direct effects on federal workers, spillover effects on contractors and other businesses, and the negative effects of extra uncertainty on economic activity. But these would be small compared to the huge costs of a government default if the debt ceiling is not raised in 2 weeks," Harry Holzer, professor of public policy at Georgetown University and author of "Where Are All the Good Jobs Going," said in an email.

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