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On Tuesday the US federal government shut down. It’s a big word and a surprising event. But while commentators worldwide flock to the drama, very little has actually happened in an economic sense. The markets agree and while expectations of a shutdown were mildly priced in, the Nasdaq and New York Stock Exchange share indices strengthened on the day.
The US government has shut down 18 times since 1976 – the latest and longest of these taking place from December 15, 1995, to January 6, 1996. The shutdown this year will last until the Republican-controlled House of Representatives and the Democratic-controlled Senate reach an agreement on government spending for the 2013/14 fiscal year, which kicked off on Tuesday.
Every year, spending legislation in the US needs to be approved by the US Congress, which requires approval by a majority vote in the Senate and the House of Representatives, as well as by the president. This year, the House of Representatives refused to back the budget unless President Barack Obama rewrote certain conditions contained in the Affordable Care Act, known as Obamacare, which was also due to take effect on Tuesday.
It was a petty case of blackmail and the bill was bounced back and forth until the eleventh hour and beyond. On Tuesday, the US woke up without a budget for the year and as a result all but the most essential government services were forced to shut down. The consequence: over 800 000 public servants were forced to go on unpaid leave. This includes 97 percent of Nasa employees, 94 percent of the Environmental Protection Agency, 80 percent of the Treasury, 52 percent of Health and Human Services, 50 percent of Defense, and 33 percent of Transportation.
National parks, museums and famous monuments were closed. Visa applications to the US were delayed if not stalled, civil litigation ground to a halt, as did most government research institutions. The most embarrassing of all for Republicans is that the Affordable Care Act will go untouched and funding will continue as planned.
It is a big hit for US morale but beyond that, depending on the duration of the shutdown, the economic impact is minor. Discussion is under way on whether staff on temporary leave will be paid retroactively. If not, there will be a commercial backlash as the income normally accruing to them does not find its way into the spending cycle. If the shutdown lasts for more than two weeks, which is unlikely, this imposed frugality may extend to grant receivers.
The major impact will be on the response from US civilians and their attitude towards their government. The major difference between the 1995 shutdown and this one is that in 1995 the US was going through a period of strong growth. Now, just when American society considers itself to be in a time of struggle and unemployment remains above 7 percent, the government has ground to a halt based on a few technicalities in a law that seeks to give open access to health care.
The fracture in Congress is concerning as within the next three weeks the Senate and the House of Representatives will have to agree on whether to raise the $16.7 trillion (R167.7 trillion) debt ceiling, or default on the US’s payment obligations.
Delayed visa applications are but a cold breeze compared with the economic tempest that will sweep the world if the US were to bicker its way to default.
* Pierre Heistein is the convener of UCT’s Applied Economics for Smart Decision Making course. Follow him on Twitter @PierreHeistein