Understanding the US Government Shutdown

Understanding the US Government Shutdown

I have been getting questions from Chinese and Singaporean readers about the US government shutdown, so let me try and simplify and answer some of the questions I have been getting.

Why did the US government shutdown?

The US government is marked by a strict separation of powers.  The President heads the executive branch with carries out the legislation that has been passed by the Congress, which is comprised of two bodies the House and Senate.  The House is elected based upon population with each state guaranteed at least House representative.  Each House member elected represents about 700,000 people though it will vary somewhat.  California, New York, Texas, and Florida as the most populous states have the highest number of representatives while smaller states only have 1 representative.  The Senate however, is elected with each state having two representatives.  In other words, California the most populous state with 38 million people has the same number of senators as Wyoming with just over 500,000 people.  According to the US Constitution, the Congress is co-equal with the executive branch headed by the President.  Two final important points.  First, the US House of Representatives is the body responsible for originating spending legislation according to the US Constitution.  Second, the entire design of government is to restrict powers and force compromise.  Whether it is between political parties or big states and large states, as is the difference between the House and Senate.

The reason the structure of government matters is simple.  The Republicans control the House of Representatives by a significant majority while the Senate and Presidency are controlled by the Democrats.  The Republicans have passed a variety of budget authorization or spending bills that would allow the government to function but given different policy priorities, the Democratic Senate and executive branch have rejected these spending bills because they do not agree with spending priorities of the Republicans.  When the government does not have the authorization to expend funds, it must shut down.  There is even a law that makes it a criminal offense to authorize the expenditure of funds without legislative or regulatory approval.  This law was passed by Congress because they feared that the executive branch would authorize spending money that had not been authorized by elected representatives.  Consequently, government agencies must wait for legislative funding authorization before spending money, authorize spending money, or incurring liabilities.

Is the government shutdown unprecedented?

No.  According to the Washington Post, the United States government has shut down 17 times within modern history.  While this current shut down does appear as if it will be longer than most previous shut downs, it is by no means unprecedented.  Most everyone of those shut downs involved conflicts over funding priorities.

The President and Congress as co-equal branches of government are free to argue over what are the funding priorities of government, but there is nothing anywhere that says legally nor is there any precedent that says the President and Congress cannot argue over whether to change laws or fund them at different levels.  That is a normal function of negotiation of the divided branches of government.  There is nothing unique or unprecedented about this shut down.  All government shut downs have occurred because the President and Congress have different priorities about where to allocate funds or how much to spend.

Is the government entirely shut down?

No.  Much of this stems from what are called “essential” employees and where specific government bodies receive their funding.  For instance, most employees linked to the US military agencies are deemed essential employees and are still working.  Also, many agencies that receive their funding from specific fees, like the Securities and Exchange Commission (SEC), rather than from taxes are still largely operating.  However, even many parts of the SEC are not operating depending on their specific funding source.  According to one news report, 83% of the US government is still operating as normal.  Furthermore, according to a bill that appears to be passed into law, government employees will be paid during the government shutdown.

So what is the real problem?

The House Republicans are seeking to pass various limits on the health care bill known as “Obamacare” while Senate Democrats and the Obama administration have rejected all bills with any limitations.  Before I continue, I believe it is important to note my bias that I believe Obamacare is a badly flawed piece of legislation.  While many of its objectives are admirable, as a piece of policy it is a disaster.  Though an explanation of why could easily comprise numerous columns, let me give you one reason why.  In order to claim that Obamacare does not negatively impact the US public deficit, it accrues most of the 10 years of tax receipts but only pays 6 years of expenditures for most programs.  Any government program that claims it is deficit neutral by counting 10 years of tax collection and comparing it to 6 years of expenditures is an unmitigated disaster waiting to happen.

The United States is facing an impending public financial crisis in the future without rapid change.  If state and local government debt is included into public debt figures are included, the United States is the fifth largest debtor country relative to economic output.  According to a study from Northwestern University, if unfunded liabilities are counted such as pensions, we should add another $3 trillion adding roughly another 20% of GDP to our debt load.  The enormity of the public debt in the United States must be addressed and cannot be understated.

The exploding US debt over time has largely been a bipartisan effort.  Republicans and Democrats share very similar levels of blame.  For instance, Republicans had little qualms about incurring large deficits during the Bush years, with lots of Democratic votes on his major initiatives like prescription drug benefits and expansion of education spending.  Democrats, especially under Obama, have rarely met a spending bill they didn’t like.  It is no coincidence that spending over almost any rolling period, longer than one year to the next, has grown at relatively similar rates.

The current problem, however, is that Democrats refuse to even entertain the concept of serious reductions in spending or entitlement reform.  The Obama administration has already negotiated significantly higher taxes on labor and capital, both via the Affordable Care Act and the sequester which included significantly higher tax rates.  It bears worth noting that what passes for a spending “cut” in Washington is not an actual decline in spending but rather  a lower rate of growth.  Even the current year subject to sequester spending rules will still see significantly higher levels of spending.  Furthermore, entitlement spending is growing so much faster than discretionary spending that you cannot tackle the United States deficit without reforming entitlement programs.

Two last points to think about, one political and one economic:

1.While Obama is complaining loudly about the Republican demands that he delay the individual requirement to buy government mandated health insurance, he delayed the corporate requirement to do so without the legal authority to do so.  It bears asking why he delayed the corporate mandate on health insurance without legal authority while he complains about Republicans seeking to legally delay the individual mandate.

2.Since 2000, though this pattern holds over longer periods of time, government spending grew at a rate that was nearly twice GDP growth.  That is the definition of unsustainable.