Gov't shutdown poses big risks to both parties

[April 06, 2011]  WASHINGTON (AP) -- Democrats and Republicans say the last thing they want to do is to shut down the government. But with budget talks showing little signs of a breakthrough, there are growing worries that a stalemate could hurt the economy's fragile recovery.

Many economists and budget analysts suggest that a government shutdown, if it's lengthy, or even a deal that calls for deep short-term spending cuts could stifle economic growth and lead the country back into recession. Private forecasters already have lowered their growth projections for this year based on surging fuel, food and raw material costs, and tensions in the Middle East and North Africa.

"I think the economic damage from a government shutdown would mount very quickly," said Mark Zandi, chief economist of Moody's Analytics, who has been an economic adviser to both GOP and Democratic lawmakers. "And the longer it dragged on, the bigger the hit to business, consumer and investor confidence, the greater the odds of a renewed recession." He puts the danger zone at two weeks or longer.

The current spending authority for the federal government expires Friday at midnight, and so far President Barack Obama and his Democratic allies on Capitol Hill have been unable to strike a deal with defiant House Republicans.

Obama on Tuesday rejected a GOP bid to keep the government open for one more week at the cost of $12 billion in additional GOP-proposed spending cuts. "There is no reason why we should not get an agreement," Obama said following a White House meeting with congressional leaders.

But House Speaker John Boehner, R-Ohio, vowed to keep fighting for "the largest spending cuts possible," clearly reflecting an outreach to the GOP tea party wing.

Separately, the chairman of the House Budget Committee, Rep. Paul Ryan, R-Wis., unveiled a far-reaching GOP plan that would slash federal spending by about $5 trillion over the coming decade, reconfigure Medicare and other federal health programs, and cut the top tax rate for both individuals and corporations from 35 percent to 25 percent.

The large tea party contingent elected to Congress in November "did not come here for a political career. They came here for a cause," Ryan said. But even some budget hawks suggest the focus of that cause may be too narrow.

David Walker, former U.S. comptroller general and now head of the deficit-reduction advocacy group Comeback America Initiative, said Ryan's proposal is a good "first step" but it doesn't go far enough on cuts in defense or other national security spending and fails to advocate the other leg of any sound deficit reduction plan: tax increases.

And while Ryan's proposals look to the future, Walker suggested much of the attention of lawmakers is misplaced and focuses mostly on the short term. Lost in the debate, he suggested, is the need to agree to spending levels for this year and next "that will not undercut the recovery.

"The threats to our future are the ones that lie ahead, that largely are not being discussed and debated," Walker said. That includes guaranteed benefit entitlement programs like Social Security, Medicare and Medicaid, which are facing an onslaught of retiring baby boomers.

The annual deficit is projected by the White House to reach a record $1.645 trillion in the 2011 budget year that ends Sept. 30. But trillion-dollar-plus deficits are a direct result of the deepest economic downturn since the 1930s, driven up by a drop-off in tax revenues and increased spending to boost the economy by both presidents George W. Bush and Obama.

When the economy recovers, some of this deficit will shrink on its own. As recently as 2007, the year before the recession, for instance, the budget deficit was just $161.5 billion.

At the core of the dispute is a difference of opinion over how to tackle one of the nation's biggest festering economic woes: continued high unemployment. It now stands at 8.8 percent and is not expected to return to pre-recession levels of 5 percent to 6 percent for several more years.

"We believe that cutting spending will help create more jobs in America," Boehner said Tuesday. He contends a smaller government and lower corporate taxes will encourage more private-sector job creation. But Democrats, and many economists, generally dispute that, especially in the short run, since spending cuts also mean layoffs for government workers and contractors.

Many economists argue that more government support is still needed to keep the recovery going. And Obama has warned from the outset against withdrawing government stimulus spending too abruptly.

In Britain, the government embarked on a course of deep, painful government spending cuts, and it proved to be a big drain on economic growth, threatening a fragile recovery. Allen Sinai, chief global economist at Decision Economics, said the route that Britain took was "the right way to go" but "too much is risky."

Sinai, in London on a business trip, said in a phone interview that "time is running out" on finding ways to dig out of the U.S. government's $14 trillion debt hole. He said if U.S. policymakers allow the government to shut down it will be widely perceived by the public as "unacceptable, inexcusable, irresponsible and childish. They look like a bunch of kids in a playground. As a citizen, I am outraged."

In two government shutdowns in late 1995 and early 1996, each lasting a few weeks, the public generally blamed Republicans, led by then-House Speaker Newt Gingrich, rather than President Bill Clinton.

But a new poll by the Pew Research Center suggested that this time the public might blame both sides. Some 39 percent said Republicans would be more to blame if a shutdown occurs, 36 percent said it would be the Obama administration's fault, and 16 percent said both sides would be to blame.

Pew director Andrew Kohut said in an interview that Gingrich had a much higher negative profile than Boehner has and "the public began to have worries that he was going to take things too far."

"A minimal shutdown, where it doesn't look like everything is going to come to a grinding halt, is less likely to cause a furor. But if there is a major prolonged shutdown, there'll be quite a clamor about it," Kohut said.

Peter Morici, a business economist at the University of Maryland and a former chief economist of the U.S. International Trade Commission, says it's "tough to forecast the consequences of a fiscal train wreck" and a lot depends on whether Obama and his Democrats or congressional Republicans emerge with the upper hand.

"What counts, though, is whether the newly elected conservative majority in the House of Representatives keeps its mandate as measured by the polls," Morici said. "What frightens me about this is the Republicans don't have real solutions. And even if they did, they could lose their mandate. And then it's back to what we've got now."

[Associated Press; By TOM RAUM]

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