The US Government Shutdown and Debt Ceiling Row

Far from being a passing shadow, the curious developments in America was symptomatic of a defining paradox of the political economy of that country and at the same time reflective of the continuing crisis of the international capitalist order. But a brief chronicle of the main events will be in order before we come to their deeper implications.

The US government staggered into a partial shutdown due to lack of funds when the Congress missed a 1st October deadline to pass a budget necessary for funding the federal government, after Republicans (who constitute a majority in the Congress) stubbornly demanded changes in the Affordable Care Act – a healthcare law nicknamed Obamacare -- which the Democrats refused. As a result of the shutdown, national parks, museums, federal buildings and services were closed down and about 8 lakh federal workers sent on unpaid leave. Only some critical parts of the government ranging from the military to air traffic controllers remained open. The last time such a thing happened was in 1995-96.

The initial fight over the healthcare law soon turned into a bigger debate over the statutory debt ceiling. The Congress is required by law to set an absolute limit on federal government borrowing, which can be revised by the Congress alone. So far as a growing economy naturally requires an extended borrowing space, this limit has been frequently revised upward since 1917, when the rule was introduced, and particularly since the onset of neoliberalism. On occasions, however, the opposition party has sought to use this provision to extract concessions from the government. Thus in end 1995 and early 1996, during the Presidency of Bill Clinton, the US government was partially shut down in two spells for a total of 27 days owing to Republican objections to budget proposals on social sector spending. In August 2011 Republicans in the House of Representatives allowed the passage of a bill to raise the country’s debt ceiling only after President Obama signed legislation designed to reduce the fiscal deficit by more than US$2 trillion over 10 years. A government shutdown was thus averted.

This year, both sides were more adamant. Congressional Republicans – mainly the hardliner Tea Party faction within it – refused to pass a budget resolution unless their demand of watering down President Obama’s signature healthcare law was met. They oppose Obamacare because they see it as a socialistic measure, while in point of fact it is only a small step toward the miserably inadequate health security system that prevails in the US. The White House and Democrats did not relent, confident that Republicans would be forced to bow down under public pressure.

And they were proved correct. A series of opinion polls showed that Republicans were carrying the brunt of the blame for the shutdown. Their funding sources like the US Chamber of Commerce, the National Association of Manufacturers, the National Retail Federation called for an end to the confrontation and a raise in the debt limit; one of them even declaring its opposition to Tea Party candidates in the next election. Pressure was coming also from overseas creditors such as China. Furloughed Federal workers started demonstrating for an end to the shutdown. Credit rating major Fitch put the US on a negative watch, warning that it may lose its top-grade AAA credit rating.

But the Grand Old Party (GOP, initially known as Gallant Old Party) – as the Republican Party is often called – remained a divided house in the Congress, with moderates willing to negotiate a deal with the Democrats and hardliners refusing to budge even at the instance of Republican Speaker John Boehner. On the 15th day into the shutdown, leading Republican Senator John McCain said, “Republicans have to understand we have lost this battle, as I predicted weeks ago, that we would not be able to win because we were demanding something that was not achievable.”

The next day, 16th October, pragmatic Republican leaders in the Senate took the initiative in their own hands and agreed on a last-minute (17th October was the doomsday date after which defaults would start) deal with Democrats to reopen government and raise the credit limit. According to the agreement, workers sent on leave would be paid their dues and the government would be funded up to 15th of January next year. The raise in ceiling would last until 7th February but the Treasury would be allowed to take recourse to “emergency measures” to pay its bills for some time beyond that date.

Legislation to this effect was passed in the Senate and then in the House on 17th. The President promptly signed it, ending three weeks of high drama that had already shaved $24 billion from the US economy and pushed the world’s richest nation to the brink of a debt default. A panel of Senate and House members, comprising both Democrats and Republicans, will now start negotiations on a new budget. Needless to say, that will not be exactly a cakewalk.

In fact, the ‘solution’ is widely believed to be only a temporary respite – just kicking the can down the road – as Americans are fond of saying. The recent defeat will not mellow the Tea Party hardliners but make them more desperate. Sometime next year they are likely to confront the government in the Congress on the same issue.

Going by the US and international corporate media, the recent troubles appear to be a fallout of the intransigence and foolhardiness of Congressional Republicans. What is missed out in such simplistic accounts is the source of what happened in August 2011 and October 2013: the peculiarity of the US economy and polity, of its international position, seen in the wider context of the general crisis of neoliberal capitalism.

The peculiarity or defining paradox of the US political economy today is this. Unlike in the past, when it was an ascending power both in the economic and military senses, the world’s largest economy now finds itself in a phase of historical decline (measured in terms of share of world GDP, trade and manufacture, etc) but continues to be the lone, unchallenged military superpower. It relies on the second aspect to counteract the first, using the military muscle to grab and control oil, gas and other natural resources. This is why the US economy perforce remains predominantly a war economy, where arms and ammunitions, war technology and post-war reconstruction fetch endless contracts and profits for the country and its corporations. There is a subtle change, however: the traditional model of military-industrial complex has been upgraded, in this era of financial capital, to what an analyst aptly called Pentagon-Wall Street economy, where Wall Street bankers control a lion’s share of war industries. But this model can sustain itself only on a rapidly rising national debt which is required to finance huge military expenditure, to compensate for revenue losses caused by huge tax cuts and other concessions to the corporation’s and rich individuals, and lately, for bailing out greedy, reckless financial institutions in crisis. The towering mountain of debt can be managed so long as the national currency of America is accepted as the international currency and US Government securities are trusted as the safest investment option. This trust has received a body blow from the recently displayed “political brinkmanship and reduced financing flexibility” – as Fitch put it -- and a likely repetition next year will erode it further. And that is really ominous for America. As state-run Chinese news agency Xinhua commented, the deal “was no more than prolonging the fuse of the U.S. debt bomb one inch longer.”

In a way the recent turmoil in the corridors of power showcases a prolonged struggle between two historical tendencies: financial profligacy or excessive sovereign (and also private) borrowing to augment/maintain private profit and macroeconomic growth versus attempts to control it through a series of legislation starting from the Second Liberty Bond Act of 1917. Dilemma over this trade-off between borrowed prosperity and financial discipline is likely to flare up again and again in various forms in the years to come. And when that happens in the Mecca of capitalism, surely that means something for the world economic order.

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