The US government has shut down for the first time since 1995-1996. Approximately 800,000 government workers are on furlough and 'non-essential' services have been suspended. The signs are not positive for a quick resolution, and the longer it takes, the harder it will become.
Ostensibly, the shutdown is about President Obama's healthcare initiative, and is the latest of many (by some count over 30) attempts to dismantle it. The Republicans, particularly those from the Tea Party end of the spectrum, abhor the policy and the growth of 'big government'.
But this is not really about healthcare; it is about politics. Electioneering has already started for next year's mid-terms. The fight is good Republican politics; it is against two things their voters don’t like, president Obama and the healthcare bill. There is also a battle within the Republican Party. The more centrist Republicans are nervous about being ousted by more right-wing Republicans, and are being pushed towards the extremes. The central actor, in theory the person leading the Republican debate, is House Speaker John Boehner. But instead he is being led, and held hostage, by the Tea Party faction. He faces the choice to compromise (and lose his job shortly afterwards) or to stand strong (and shut the government).
This is pure politics, not policy.
Why should this matter to the international community?
If short-lived, the government shutdown will have little direct impact economically outside the United States. Goldman Sachs has estimated that a three-week shutdown could cut up to 0.9% off this quarter's GDP, but the impact so far on the stock market has been minimal. The 1995-96 shutdown cost the federal government $1.5bn, a figure which is unlikely (given other spending) to have a significant impact today on America's slowly recovering economy. Thus, there is unlikely to be any major impact on the global economy.
However, there is a significant indirect international implication. This is the strongest indicator yet of Washington's dysfunction. Coming on top of the cut-short attempt by Obama to win Congressional approval for a limited military strike on Syria (indications were that it would have failed if brought to a vote), the shutdown raises the perception that America's bitter partisan politics is preventing it from acting responsibly, both domestically and internationally. America can no longer be relied on.
The implications for America's reputation and power could be significant.
The upcoming challenge
There is a far more important element however on which attention should be focused. The raising of the debt ceiling, according to the US Treasury, needs to take place before October 17. If Congress doesn't agree on a rise, America will default on its debts. The implications of this are clear for those who hold US debt, for potential future investors, and perhaps more profoundly, for the US dollar as the trusted reserve currency.
The government shutdown and the debt ceiling rise are loosely tied together for two reasons. The inability of the parties to come together now to prevent a shutdown make it more likely that they will go over the edge again when the debt ceiling debate comes up. And even if a solution is found now between the two parties, the same issue – healthcare – is likely to once again be on the table in the run up to October 17. President Obama has made it clear that raising the debt ceiling can not be tied to any policy (such as healthcare); he has shown no willingness to compromise.
It’s not known how this will play out. The face-saving measures that Speaker Boehner has already tried have been rejected by his colleagues on the right, and it is not clear what else might be available. Someone will have to back down. Obama has no incentive to do so for this would set up a very unfortunate precedent. On the other hand, now that the deed is done, the pressure could well increase more on Democrats than Republicans.
Meanwhile, the cost to America's reputation could be severe. The cost to its power – the belief that America can get things done – will take time to mend. And if, in two weeks, the parties cannot agree on raising the debt ceiling, the cost to its global economic leadership will likely be irreparable.
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