After the shutdown and the debt ceiling row – what happens next?

http://www.theguardian.com/world/2013/oct/19/shutdown-debt-ceiling-what-happens-next

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The shutdown is over. The government is open. Does this mean everything is back to normal?

That depends on your definition of normal. Yes, the government is open. Federal employees are back at work. And Congress has kicked the can just a little bit further down the road.

And Thanksgivukkah has been saved?

Yes. Remember when Republicans originally proposed postponing the default by six weeks?

I do seem to recall that.

Well, they were basically asking for more time to hash out a deal without risking the US defaulting on its debt. The deal reached earlier this week provides Congress with that extra time, time that would theoretically allow the Congress to stop “governing by crisis”, as President Obama puts it.

The deal that ended the government shutdown and lifted the debt ceiling came with few conditions, though. The first condition is that Congress get together a conference committee to come up with a budget deal, including tax and spending policies, by 13 December.

That's great. Committees are so effective. Hold on a second, wasn’t there a committee of some sort back in the day?

Yes – you're thinking of the 2011 supercommittee.

If I remember correctly, that attempt at bipartisanship didn’t go all that well …

Right. About three months after its August 2011 launch, the supercommittee failed to come to an agreement. And while some of the 12-member panel still shudder at the memory, four of them – Paul Ryan, Patty Murray, James Clyburn and Rob Portman – got the band back together, with 25 other lawmakers from both parties and both houses. The new committee also includes some conservatives – nine of its members voted against the deal that re-opened the government. These nine will probably try to ensure that the budget contains some things that the Republicans have been fighting for, like cuts in farm subsidies, federal pensions and unemployment insurance.

This is not sounding good at all. If the supercommittee wasn’t able to reach a deal in three months, why would we think that this new, allegedly improved committee can come up with a deal in less than two months?

They probably can’t. First, no one expects any “grand bargain” or a long-term budget to come out of the committee. Second, the deadline is 13 December, about a month before the temporary funding to keep the government open expires, on 15 January. So there will still be some time to come up with an alternate solutions.

Goldman Sachs analyst Alec Phillips says that neither party has high hopes for an agreement that would bridge the differences between the budget resolutions passed by the Republican-led House and the Democratic-led Senate.

Then why have a conference committee at all?

Because there is one more deadline that falls on 15 January. The next round of sequestration cuts will take effect automatically, unless the committee is able to strike a deal.

Wait, wait, wait. We are back to another sequester?

Well, yes. The sequester is a part of the Budget Control Act (BCA), which passed in August 2011 in yet another last-minute deal that helped avoid a default on US debt. The BCA sets a cap on spending for every year from 2012 to 2021, in order to create about $1tn in deficit reduction in over those 10 years.

And what does the committee have to do the sequester?

See, while many may have doubts over whether the committee will be able to reach a deal on the budget, there is hope that the committee might be able to reach an agreement that would help reach some minor compromises that will help blunt the second round of sequester cuts. According to Kevin Logan, chief US Economist at HSBC securities, that would take future spending reductions or revenue gains somewhere else in the longer-term budget projections.

Since Congress has been able to create such future savings in the past, they’ll probably be able to do it again. Logan says that instead of one big compromise, there might be a series of them that will set the overall level of spending “somewhere between the $1,058bn that the Democrats desire and the $967bn target that the Republicans are aiming for”.

So there won’t be another shutdown in January?

Most analysts find it unlikely. The shutdown did not quite go the way Republicans wanted and while its full impact is yet to be seen, it has definitely not helped the US move closer to economic recovery.

US economic confidence dropped by 17 points in the first two weeks of the shutdown. Even before the shutdown, US consumers self-reported that they have been cutting their daily spending from $95 in August to $84 in September – IHS chief economist Nariman Behravesh and IHS Global Insight economist Sara Johnson don’t really expect it to get better. They marked down their forecast of the US economic growth in the upcoming months from 2.2% to 1.6%. According to them, some spending, such as buying computers and cars, is being deferred and should show up later in the early 2014 and other spending, such as consumer eating out, has been lost completely.

OK – what about the debt ceiling?

Right – one of the other conditions of the deal struck earlier this week is that it only extends the debt ceiling until February. However, as Phillips notes, a precedent has been set – since the 2012 election, the debt limit has been increased twice and each time Republicans have failed to attach substantial policy provisions to the increases. While some, like Senator Ted Cruz, might attempt to extract concessions next time round, it is unlikely they will succeed.

The markets have also caught on to this precedent, realizing that Congress isn’t likely to let the US default. They have started to tune out the fiscal drama in the US politics.

That's a good thing, no?

In a way. It's good because that way, the political theatrics of our current Congress have less of an effect on our economy. However, it also makes it more acceptable for this political game of chicken to take place again and again. Even if Congress takes this opportunity to not “govern by crisis”, their inability to come up with long-term solutions is setting another precedent – that of multiple continuing resolutions that barely act as Band-Aids and of semi-annual fiscal drama.

Good times!

Exactly.

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