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By Matías Vernengo, Associate Professor, Department of Economics, University of Utah. Originally published at Triple Crisis.
Economic historian Carlo Cipolla famously noted that human beings fall into four basic categories: the martyr who takes an action and suffers a loss while producing a gain to others; the genius or prodigy who takes an action by which he/she makes a gain while yielding a gain also to society; the crook (and liar too) who takes an action by which he/she makes a gain causing others a loss; and the stupid person who causes losses to others while deriving no personal gain and even possibly incurring losses. At first glance, the shutdown of the government and the looming debt-ceiling crisis seem to indicate that we are dealing with idiots, the likes of Michele Bachmann, Ted Cruz, Louie Gohmert, Steve King, and other Tea Party Republicans.
After all, there is no rational reason to shut down the government to preclude what is essentially a Republican-designed health law (created by the Heritage Foundation), that would create the conditions for finally attaining universal health coverage in the United States, a goal that all the other advanced nations have achieved decades ago. In particular, the alternative to “Obamacare” proposed by the GOP is nonexistent, and basically means leaving millions of Americans without proper medical care. On top of that, the shutdown, together with the previous sequestration, and the overall contractionary fiscal stance, will most likely make the very slow recovery even slower, maintaining an unnecessarily large portion of the labor force unemployed.
The debt ceiling, which we are still approaching, even if at a slower pace because of the shutdown, will make matters even worse. There is a certain degree of uncertainty of what could happen if an agreement on the debt ceiling is not reached. I tend to believe that there will be neither a run on the dollar nor a collapse of the world economy, as some expect. It seems unlikely that the euro, or the yen, let alone the yuan, would replace the dollar. Europe and Japan are not really thriving, and investors are not going to flock in mass to Chinese assets, since it is far from clear that an economy controlled by a single party with extensive ability to intervene in contracts provides more security than U.S. bonds. Markets might very well assume that the U.S. crisis is temporary, and as in previous crisis in the United States, like the Lehman Brothers collapse back in September 2008, flock to the security of the dollar.
But I do believe that it will force a significant additional fiscal contraction on an economy that cannot take it, and may very likely lead to a new recession. It must be emphasized that the actual net level of debt, once intra-government holdings (by the Fed and other agencies and trusts) are discounted, is actually not high by historical standard (around 60% of GDP rather than 100%, which is the gross amount), and the rate of interest on it is at historical lows. So actually borrowing more to get the economy out of the slow recovery would be the sensible thing to do.
However, it would be a mistake to conclude that we have been dominated by a group of rogue and irrational idiots hell-bent on destroying Western Civilization in the name of Christian values and some crazy, ill-defined notion of freedom. It is important to note that over the last two years the radical elements within the GOP have actually achieved something. They have consolidated a contractionary fiscal stance, barring any possibility of the fiscal expansion that we need for a healthy recovery. They play in the United States the same role that the Troika (European Commission, European Central Bank, and International Monetary Fund) plays in Europe, and that the International Monetary Fund (IMF) has traditionally played in developing countries. And austerity is at the service not only of cutting expenses on services that affect the neediest in society, but also keeping wage demands in line, and so protecting the interests of corporations and the few that benefit from that.
So if the public faces of the shutdown are the Tea Party-ites in Congress, with Ted Cruz and his filibuster as their poster child, it is important to remember that these groups have received the backing of foundations and shadow groups controlled by a few wealthy plutocrats, like the Koch brothers. It is those wealthy at the top, who are not affected by the shutdown, that should be blamed for the current crisis. Class warfare, not stupidity, and the crooks and liars at the top, not the “idiots” in the public spotlight, are the problem.