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Jul 26 2011

Collateral damage caused by government shut down

While many of us wonder what might be the long-term ramifications of a government default and shutdown if the debt ceiling is not raised by August 2, for many people this is not merely an academic exercise but a real and immediate danger.

Recall that about half of American households are ‘economically fragile’ in the sense that in an emergency they could not lay their hands on $2,000 within 30 days. They live from paycheck to paycheck. What will happen to such households if government employees get furloughed and don’t get paid or to similarly situated seniors if the social security checks don’t go out? How will they pay their rent and mortgages?

This should be a sobering reminder that politics is not a game. Ordinary people get hurt.

6 comments

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  1. 1
    Vincenzo

    Well, in the specific case of Social Security, it is a separate agency of the federal government, with its own stash of reserves. Since it currently still runs a surplus, it would be able in principle to pay checks for a while longer. But, its stash is in Treasury bonds, and in the longer run, Social Security may have some major issues.

    A bunch of things come to mind, some the opposite of the next.
    For one thing, governments often use scare tactics to obtain compliance: it is legitimate to ask whether the debt ceiling is really the heavens crashing down on us. On the other hand, it does seem that a technical default would cause serious trauma for both Wall Street and Main Street, although its exact consequences are quite difficult to quantify. But regardless, the whole story is probably less about government debt and more about the future of the marriage between mainstream republicans and the Tea Party. A topic that was discussed extensively in this blog a while back.

  2. 2
    Tim

    Paul Krugman says it quite eloquently:

    “You have to ask, what would it take for these news organizations and pundits to actually break with the convention that both sides are equally at fault? This is the clearest, starkest situation one can imagine short of civil war. If this won’t do it, nothing will.

    And yes, I think this is a moral issue. The “both sides are at fault” people have to know better; if they refuse to say it, it’s out of some combination of fear and ego, of being unwilling to sacrifice their treasured pose of being above the fray.

    It’s a terrible thing to watch, and our nation will pay the price.”

    http://krugman.blogs.nytimes.com/2011/07/26/the-cult-that-is-destroying-america/

  3. 3
    Steve LaBonne

    Vincenzo, unfortunately, because of the ill-advised payroll tax cuts enacted last December, SS is NOT now in surplus. (All of the usual dirty hippies who are always right and always ignored by the Village warned that those tax cuts would weaken SS while providing no meaningful economic stimulus.) There will not be enough cash coming into the Treasury from payroll taxes to cover the August checks. But as usual, NOBODY could have predicted…

  4. 4
    Jeff Hess

    Shalom Mano,

    In recognition of George Orwell’s Politics and the English Language, I’ve sworn of the phrase collateral damage in favor of innocent victims.

    I’m open to other suggestions as well.

    B’shalom,

    Jeff

  5. 5
    Dual LNB

    Yes indeed… a very sobering thought. And here’s another one – who actually owns all the debt that the US owes? And what do they trade in… after all money in essence is just paper… what of value is it that the debt holder is requiring as collateral?

    Food for thought…

  6. 6
    Vincenzo

    Steve: (just to wrap this up), Social Security has assets of $2.6T (as of 2010) and current yearly expenditures of $713B. Thus, even if Social security were to stop receiving any payroll taxes whatsoever for a few months, it would still be able to make payments out of assets.

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