How long will the crisis last? Analyst opinion
The US public finance system is undergoing one major shock after another: in early March, a sequestration came into force, an equal proportional cut in all budget items, military and civil.
By October 1, Congress was unable to pass the 2014 budget, which resulted in the partial closure of government services. And finally, on October 17, America is threatened with a default, which, in theory, could affect the domestic and global economy as negatively as the recession of 2008-2010. While there have been signs in Washington in recent days that Democrats and Republicans will come to an agreement in time and postpone bankruptcy by at least a few weeks, the question of the ability of America's political system to adequately respond to economic challenges remains on the agenda.
Е.А .: Each of the three acts of the budget drama is in itself quite logical and explainable, and only their combination, according to many commentators, turns the battle between the executive branch and parliament into an absurd formulation.
Let's start with sequestration. Our interlocutor is Stanley Weiger, an analyst at the American Enterprise Institute.
SV: In the summer of 2011, America faced the same problem as today, an increase in the public debt limit. The Obama administration then agreed with Republicans in the House of Representatives that they would raise the borrowing limit in exchange for the establishment of a commission charged with working out a long-term agreement to stabilize the public finance system; it was about a set of measures to optimize expenditure and tax policies. The agreement between Obama and the Republicans also stipulated that if the parties did not agree on what specific expenses to cut and what taxes to increase, then a sequestration would immediately come into force, an equally proportional cuts in all budget items, regardless of how reasonable it was from a government point of view. The negotiators assumed that the prospect of a sequestration was so dire that the members of the specially commissioned commission, in order to avoid it, would come to a compromise. However, this did not happen, the political system misfired, but costs were somewhat reduced.
Е.А .: Reduced, unfortunately, without any hint of logic, and this illogicality only discredits the political class of Washington, emphasizes Weiger.
The next act of the budgetary drama was the termination of the work of part of the public services.
S.V .: A noticeable number of institutions closed almost two weeks ago due to the fact that Democrats and Republicans could not agree on the budget for 2014. Even not so much on the budget - there has been no full-fledged budget legislation in the country for several years now - but on the so-called resolution on the "automatic budget", which extends funding for the state's activities for a period of one and a half to eleven months in the amount of the previous period. On what basis, in the absence of any budget, continue to work unclosed public services? - On the fact that many state programs are protected today, they do not depend on the budget situation. These are, for example, health insurance for the poor and the elderly, social pensions, food stamps. Not to mention the servicing of the national debt. They account for up to 60% of all federal spending. The remaining 40% is divided roughly equally between military and civilian programs. Republicans in Congress agreed with Obama that the Pentagon will be funded at the level that was established after the sequestration, and therefore the Department of Defense continues to function. Thus, only auxiliary personnel of civil services are sent on leave. Theoretically, these are unpaid vacations, but everyone is well aware that these people will receive their salaries in full, but it is not known exactly when.
Е.А .: It is precisely the fact that the lion's share of government spending is protected that allows politicians to take the pose of ideological fighters and play adherence to principles at relatively low rates, says an analyst at the American Enterprise Institute.
The third and potentially most catastrophic act of drama, in the shadow of which the first two played out, is the US sovereign default, which could result from Congress reluctance to raise the public debt ceiling.
SV: Before the US entered World War I, legislators separately approved each new government bond issue by the Treasury Department. Under wartime conditions, this turned out to be unnecessarily time-consuming, and the Ministry of Finance was empowered to promptly issue securities, varying their maturity and coupon rates at its discretion. For itself, Congress retained the prerogative to set only the general limit on borrowings made by the Ministry of Finance. In that distant era, there were no protected items in the federal budget at all. But today, as we have already said, a huge part of the budget is protected, which means that the deputies of the Vollens-Nolens should seek funds for it. If the revenue going into the treasury is not enough for this, Congress is obliged to either raise taxes or borrow money. But a 1-year-old law gives legislators the formal right not to raise the borrowing limit, without which all the costs for which these legislators once voluntarily voted cannot be paid. What this law, however, allows the legislature to do, regardless of which party dominates it at any given time, is to try to snatch budget concessions from the White House if it is ruled by a rival camp.
Е.А .: What does the worst-case scenario look like if the public debt ceiling is not raised?
SV: In other words, what happens if coupon payments on US Treasury bonds cease? Their price will collapse, and since many business entities are credited in banks just on the security of these bonds, the entire world banking system can be overwhelmed by an attack of asphyxiation. The strangulation of lending operations, in turn, will inevitably hit the stock markets, as participants run out of working capital to purchase shares. In addition, the interest rate on US Treasury bonds serves as a benchmark for calculating the interest on the mass of other debt instruments, and if this main benchmark wobbles, then transactions with other instruments will stall. These are only first-order consequences, but they are enough to understand that after the American default, the world economic system will find itself in the same, if not worse, situation in which it was at the height of the last financial crisis.
Е.А .: Rumor has it that even if the current borrowing limit runs out on October 17th or somewhere around this date, the United States does not need to declare a default, because the current tax revenue will be quite enough to service the national debt.
SV: Yes, this point of view has recently acquired many adherents who are absolutely sensible, although initially it was voiced only by the most implacable opponents of President Obama. However, the other day, Finance Minister Jack Liu, as if by way of objection, stated that his department did not have either computer software or an appropriate legislative framework in order to rank payments. That is, to proclaim the repayment of the public debt as an indisputable priority number one, and to pay other expenses according to the degree of their importance, as long as there is enough money. I don’t know how sophisticated software the Ministry of Finance possesses, but it is clear that if a crisis breaks out, the appearance of a law on the priority of government payments will not be long in coming.
Е.А .: I'm sure the reporter's interlocutor, analyst at the American Enterprise Institute Stanley Weiger.
Many in Washington share his view that budget turmoil stems from the loss of Democrats and Republicans' ability to negotiate, to feel the limits of what is possible, not to tie together technical problems like raising the national debt limit and essential ones, such as Obama's health insurance reform. In light of this position, the negotiation deadlock on the budget is a consequence of a deep phenomenon, consisting in the unusually increased influence of radicals in the ranks of both leading parties. Things, in the opinion of these analysts, would be even more sad if America did not have independent economic institutions capable of somehow extinguishing the excesses of politicians. Thus, Wall Street, which has influence on the Republicans, is afraid of not raising the national debt limit, and this is pushing the right to make concessions to Obama on this issue. The Central Bank seems to be dampening the political negativity, which, contrary to its plans, decided not to change the course towards monetary expansion, so that budget battles would not inadvertently negate the process of economic recovery.
At the same time, another large and influential group of analysts does not believe that something out of the ordinary is happening in Washington now, indicating a constructive flaw in the political mechanism. In an interview with RS, renowned commentator Michael Baron said, in part:
MB: The United States lives according to the constitution of a presidential republic, in which, unlike a parliamentary one, the predominance of one party in the legislature does not mean its dominance in the executive branch, and vice versa. The Founding Fathers of America created a system of checks and balances precisely in anticipation of the collisions that we are now experiencing, and were by no means afraid of them. Rather, on the contrary: they worried that the momentary radical majority in their utopian aspirations could impose irreversible harmful changes on the people, and took steps to minimize the likelihood of such a majority emerging in all branches of government at the same time. I don't see anything wrong with Obama not wanting to sacrifice his brand legislation, health insurance reform, especially after a landslide election victory, or that the Tea Party Republicans see Obama Medicine as a threat to economic growth and want to not violating any laws, torpedo her. Moreover, according to polls, most Americans are very unhappy with it. It is worth recalling that since 1976, the partial closure of public services has occurred seventeen times, mainly when the Democrats had a majority in Congress and did not want to fund either Reagan's initiatives, or - and who will believe it now? - the proposal of his party member, President Jimmy Carter, to pay from the state budget for abortions to poor women. Since the late 60s of the last century, America has lived 70% of the time with multi-party branches of government. James Madison and 39 other authors of our constitution did not want to create an active state, their goal was to create a state with limited power.
Е.А .: There are several discussed draft agreements between the White House and the House of Representatives on various aspects of the confrontation. One of them looks as follows: the Republicans delegate to the president the authority to personally raise the limit of public debt, while keeping the legislature the opportunity to veto this decision with a qualified majority of two-thirds of the vote. Obama, for his part, has been lagging behind on a number of health insurance reform provisions, such as introducing more scrutiny of the income of citizens eligible for subsidized insurance and postponing by two years the introduction of a targeted tax on medical device manufacturers, the amount of which will go to subsidies for buyers of medical policies. ...
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