A two-week stay of compromise, we suppose.
The Senate has approved the continuing resolution that the House passed yesterday, keeping the government funded for two more weeks.
But what then? The low-hanging fruit of Obama-selected cuts has been plucked, and we suspect that we’ll be talking about this a little while longer. Arriving at a budget agreement for the remainder of Fiscal Year 2011 still won’t be easy, especially given the apparent intractability of the newly elected Republicans in the House.
To shed some light on the relevant mechanics of the budget process and the potential macro impact of a shutdown, here’s a brief and handy primer courtesy of the gang at RBS. Click for the pdf, and we’ve highlighted a few passages below:
Here’s the salient bit on exactly what a shutdown would look like, if it comes to that (our emphasis):
While the prospect of a government shutdown sounds ominous, it does not entail a complete cessation of federal services. There are exceptions written into the Anti-deficiency Act (which essentially prevents the federal government from spending money in excess for what has been appropriated). The most notable is that it allows the government to spend money “in cases of emergency involving the safety of human life or the protection of property.” Thus, government agencies and services deemed essential to national security, such as the military, and border and coastal protection, would continue to operate. Emergency and disaster assistance, medical care, and air traffic control are also other areas that would not be greatly impacted in terms of the services provided. Importantly, the Treasury would continue to have the ability to borrow, as the continuation of the money and banking system was deemed essential. Moreover, benefits for which money has already been appropriated would continue to be paid (eg, unemployment benefits and Social Security), although the processing of accepting new entrants into benefits pool may be hampered somewhat. Services that would be severely curtailed or halted include those associated with parks, museums, and monuments, the processing of visas/passports, federal contractors, and services for Veterans. The most immediate impact of a government shutdown would be felt by federal employees. Federal employees would be deemed either “essential” (eg, military personnel) or “nonessential,” with the latter being immediately furloughed (or placed temporarily in a non-pay status). Most agencies that would continue to operate would do so with reduced staffing levels, as nonessential employees would not be allowed to work, even voluntarily.
As for the macroeconomic impact, we can look to history — specifically to the shutdown at the end of 1995 — for guidance, if nothing definitive:
In macro terms, the various ripple effects from a shutdown were a drag on certain sectors of the economy, with the CBO estimating that the shutdown over the three weeks in the fourth quarter subtracted about 0.5 percentage points off of growth in that quarter. Given this, a one-week shutdown now might reasonably be expected to shave a couple of tenths of a percentage point off growth. Of course, economic activity will be boosted by the resumption of government spending once funding is approved. Thus, if the shutdown is brief, the net impact on quarterly real GDP growth would likely be negligible.
Of course, the impact on the economy of the compromise itself, once we get one, is a different matter — and we won’t know how to address it until we see what said compromise looks like.
Economists have been arguing over the macro impact of the House Republicans’ proposal on Friday for around $60bn of cuts in FY2011. At the House Financial Services Committee on Wednesday, Ben Bernanke said that “a couple of hundred thousand jobs” are at stake. This is less than the predictions of Goldman Sachs and Moody’s Analytics’ Mark Zandi, who estimated job losses on the order of 600-700 thousand.
We’d note that some of this depends on taking a closer look at the timing of the budget outlays.
It’s worth noting that RBS does believe that a shutdown is still (just) unlikely, as do we. And on the other side of any resolution to this issue, of course, awaits the even more worrisome problem of the debt ceiling.
Related links:
Government shutdown, economy slowdown? – FT Alphaville
Congress nears deal to avert shutdown – FT
USA, incorporated and indebted – FT Alphaville
Stimulating, selectively and statistically significantly – FT Alphaville