Government shutdown grows more likely; how bad would that be?

How much economic damage would a government shutdown cause?

That’s an increasingly less hypothetical question given the slow pace at which the Senate is considering a bill to fund the government beyond Monday, when current funding expires.

Fortunately, some prominent economists gave the Senate Budget Committee some answers to that question at a hearing Tuesday afternoon. Their consensus: If the government shuts down for only a few days, the economy would suffer only minor damage.

They’re more worried about the next fiscal crisis — raising the debt ceiling. If Congress fails to raise this borrowing limit before the federal government runs out of money to pay its bills, the economic impact would be “cataclysmic,” said Mark Zandi, chief economist for Moody’s Analytics.

As the economists testified, Sen. Ted Cruz, R-Texas, was on the Senate floor, vowing to speak as long as he could stand, in his effort to defund Obamacare. Cruz is demanding that as a condition of passing legislation to fund the government beyond Sept. 30, the end of the federal government’s fiscal year. No matter how long Cruz speaks, however, the Senate will take its first procedural vote on the temporary funding bill on Wednesday.

Senate Majority Leader Harry Reid, D-Nev., plans to strip the bill of a House-passed provision that would defund Obamacare.

Under the current schedule, the Senate wouldn’t take its final vote until Sunday, and the House wouldn’t receive it until Monday — the deadline for getting a funding bill passed by both chambers.

That would put the House in “a pretty tough spot,” said Senate Majority Leader Mitch McConnell, R-Ky., who said he wouldn’t object to speeding up consideration of the bill to give the House more time to respond.

If the House changes the Senate bill on Monday, that would be “a surefire way to shut down the government,” Reid said. There wouldn’t be enough time left to work out the differences in the two chambers’ bills before funding runs out.

So government agencies may have to shut down, except for essential functions, for a day or two. That would be “no big deal,” Zandi said. But if the shutdown lasts a month, it would depress economic growth, he said. For example, homebuyers wouldn’t be able to get Federal Housing Administration loans, businesses wouldn’t be able to get Small Business Administration loans, and students wouldn’t be able to get federal student loans.

If the impasse continues into November, and Congress hasn’t raised the government’s debt limit, then we’re in real trouble, Zandi said. The Treasury Department would use what it cash it has to pay the nation’s debts first, but it may not be able to make other payments on time, such as money owed to Social Security. This could create a panic — global investors would wonder how long the U.S. government would put its debt payments ahead of sending checks to Social Security recipients, Zandi said.

This would create turmoil in financial markets, cause interest rates on mortgages to spike, and make it harder for businesses to raise money. Stock prices would plummet, businesses would be forced to lay off workers and unemployment would surge, Zandi said.

The Federal Reserve couldn’t pump money into the economy in order to stop this slide because it is “at the end of its rope,” he said.

The resulting economic downturn could be as bad as the Great Depression, or even worse, Zandi said. The negative effects would be felt “for decades to come,” he said.

That’s scary stuff, but another economist, Allan Meltzer, doesn’t think we’ll come to that. First, he thinks an agreement likely will be reached to raise the debt ceiling, despite Republican conditions for such a move, and Democrats’ insistence that they won’t negotiate on this matter. Even if the debt ceiling isn’t raised in time, the negative reaction to this failure would be so strong that it would compel Congress to reach an agreement shortly afterward, thereby containing the economic damage, Meltzer said.

Melzer, a professor at Carnegie Mellon University and a distinguished visiting fellow at the Hoover Institution, agreed with Zandi that political uncertainty is holding back the economy, and that the fights over government funding and the debt ceiling are contributing to that.

But the biggest problem that’s holding back businesses from growing are the nation’s unsustainable long-term deficits and the threat of higher taxes, he said. Those two issues need to be addressed in order to get the U.S. “back on the growth path,” he said.

“Uncertainty is the enemy of investment,” he said.

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