WASHINGTON (10/9/13)--The government shutdown and what will happen if the federal deficit deadline isn't met were the topics in an exclusive interview conducted Monday by MarketWatch
"Breaking News" with Credit Union National Association Chief Economist Bill Hampel.
As furloughs began a second week, Hampel noted that the shutdown has had a significant but localized effect--a "micro" rather than "macro" effect. "There's a sharp effect for each one in a small subset of the population," he said.
For instance, the shutdown affects 800,000 workers, but that is a few--less than one half of 1%--out of a 150 million-worker labor force. The Internal Revenue Service isn't answering its phones, but not many people call the IRS in October. Those planning a trip to a national park will find it closed, but in a population of 330 million, how many would be taking a trip to a park, he asked.
"The shutdown is significant but for a few or a small number," Hampel said. If it were to last the whole month, the economic growth--which is currently 2%--might drop to 1.9%--which would not be game-changing, he said.
However, while the stock market has been flat since the shutdowns began and financial markets are not expecting serious effects, the real problem may become consumer confidence. "There's been a significant deterioration in the confidence that the public has in government, particularly Congress, and its ability to solve problems," Hampel said. A drain of confidence could put the kibosh on economic growth, but he noted that many people are just going on with their lives rather than paying attention to the news.
Not meeting the Oct. 17 deadline for the federal deficit, however, is a "completely different matter, much more significant," Hampel said. On the day after the deadline, the government will have two choices, he said:
Immediately balance the budget and cut spending to the current revenue levels. "The trouble is, there is mandatory spending, such as unemployment compensation, Medicare, and the salaries of the military and civilians." If the government has to balance the budget then, the economic hit "will be eight times worse than it was during the last sequester and it will cause The Recession of 2013, 2014 and 2015," Hampel said.
Start defaulting on a few loans. "If the government doesn't pay its regular payments on time, then the second half of October will mean the immediate reversal in Treasury bonds and securities," he said. Treasuries are considered "absolutely safe," with people all over the world putting funds into them when they are concerned about the economy in their own countries. But not paying the bills would mean people in other countries would start pulling their money out of treasuries. The result: "Interest rates would soar, probably worse than the Great Recession."
Currently, the stock market is going sideways. "People understand how catastrophic piercing the debt ceiling would be," Hampel said. "It would be game over."
In 2011, the last time the debt ceiling was at issue, the stock market declined 10% and forced Congress to act. "You would think that this would have been educational for Congress, that it would be a nuclear option and destroy the economy."
The probability of that happening is low, Hampel said. "Congress probably will resolve the matter at the last minute to avoid any catastrophic consequences," he added.
Use the link to hear the conversation.