Shutdown: Shut What Down?

One of the more amusing sidelines in the ongoing shutdown saga is just how much the whole thing is grandstanding. The central point being that a shutdown is not really a shutdown. Here are some key things to remember:

1. Only about half of government workers would be furloughed. That’s 800,000 paychecks not going into the economy. The last time the Republicans managed to shut government down it shaved about 0.5% off GDP in the quarter affected. The damage would have been greater had those workers not received backpay to compensate them for their lost wages.
2. The other half of the government workforce will stay on the job. Why? Because they deal with stuff even the Republicans don’t want to stop. Like sending out Social Security checks. Which makes you wonder why bother. If you’re going to make such a fuss, why don’t you really shut down government? The answer is obvious: because the voters would throw such a hissy fit you’d be slaughtered at the next election. The middle class loves the goodies it gets from government. Stopping those checks, shutting down Medicare, etc would cause such harm, no one, not even the most extreme libertarian wants to go that far.
3. So the shutdown is a facade. It is a faux shutdown designed to placate the Tea Party people who now seem to run the Republican agenda.
4. Plus the shutdown will most likely be short lived: the deadline occurs over the weekend during which negotiations will continue. The result is that a deal will probably be reached early next week, and the shutdown will be hardly noticed in practical terms.
5. But: what if the shutdown lingers on? Well. That is a real problem. A really big problem. Presumably the effects would cascade through to the private sector, so much of which is tied to government contracts and cash. A longer term shutdown would also compound its way through and start to interfere with departments left open. The interconnectedness of government implies that there will be unintended consequences galore in a longer shutdown. GDP would take a much larger hit although I doubt we would decline into recession immediately.

So the Republicans are causing a lot of angst over what would be window dressing for their hardcore supporters. Government would survive. The economy might wobble, but it would manage.

So why bother?

Who knows?

Presumably it is important to someone.

Besides the bigger issues are the cuts being agreed to. At $38 billion they are large and include some very middle class focused stuff. So the damage is not in the shutdown it is the fiscal austerity we are being plunged into. And that is truly bad.

I have said here before, and I say it again: we do not need to make short term cuts. Indeed such cuts will harm the economy. Longer term we need to find a way to finance our health care system so it doesn’t swamp the economy. But we do not need to get rid of the deficit, we simply need to contain it within bounds where we do not have to resort to odd fiscal strategies, and where it is benign. A persistent deficit is actually healthy as long as it doesn’t overwhelm everything else. So our concern should be mild at most.

Then again there is a school of thought – Modern Monetary Theory or MMT – that says even that mild concern is off base. That school argues that since the US prints its own money its can always meet its obligations. By redeeming its bonds with cash it is simply substituting a short term “demand” liability for a longer term “fixed maturity” liability. The net balance sheet is unaltered. So any country with a printing press can never go bankrupt. It may not be able to borrow, but so what? Simply print whatever cash you need rather than go into the credit markets to borrow. Heck it saves interest costs. So the notion that the US is subject to the whims of creditors who might take fright at huge deficits is an illusion. The beneficiaries of that illusion are the creditors themselves. The entire austerity argument rests on the link between deficits and inflation. The bigger the deficit, the more money we print, the higher inflation. That’s the establishment view. It doesn’t hold water but it holds sway in the credit markets.

It is this view that leads me to argue we should not be concerned with the deficit. Rather we should be making every effort to mobilize those resources currently not fully employed. Getting those idle resources back to work would propel us back to a higher wealth creation trajectory and solve most, if not all, our economic problems. Our problem is not the accounting gap between our revenues and expenses, it is that we are littered with idle workers and factories currently not generating wealth. The economy is way below its capacity. Every day we stay there we are losing money that could be applied to debt, wages, investment, and other very desirable opportunities.

But we lost that argument somewhere along the way and are left with the current nonsense.

So a shutdown looms and the political posturing obscures the real debate we should be having.

Typical.