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US Government Shutdown Over Obamacare Has Serious Implications For Global Economic Recovery

09/30/2013 07:58 am 07:58:25 | Updated 01 October 2013

Once again Europeans may be forgiven for looking on baffled at the bizarre maneuverings of Washington's political class this week as the US government careers towards a shutdown. The Affordable Care Act (ACA), better known as Obamacare, remains the President’s signature legislative achievement, having made its torturous journey through Congress in 2010, emerging with the promise of finally providing coverage for an additional 30 million people that had been cast adrift by the country’s failing health care system.

Yet despite being signed into law more than three years ago, the legislation, a major part of which is due to be finally implemented this week, threatens to derail not only the US government but provides an ominous portent for the US debt ceiling debate, with severe implications for Britain, the eurozone and beyond.

Unlike the single-payer systems of Europe and Canada, the ACA offers a mechanism for those without insurance to pool together for lower health insurance premiums through state-run exchanges, scheduled to open on Tuesday. This follows several provision that have already been implemented, most notably a ban on insurance companies hiking up premiums based on pre-existing medical conditions.

Even before it became law, Obamacare had been the target of vehement hostility, representing for some an unwelcome federal intrusion into medicine, for others a step towards a European socialised system, and to a vocal few confirmation that the President was indeed the anti-Christ. Still, the law was passed and was subsequently upheld during a Supreme Court challenge, followed by the 2012 election in which the GOP candidate, Mitt Romney, ran on a platform of repeal, effectively turning the vote into a referendum on Obamacare. It was a campaign that Romney and the Republicans lost, despite myriad shortcomings of the Obama administration over the previous four years.

Even after being signed, upheld and then ratified by the electorate, the law remains almost pathologically unpopular with members of the GOP, so much so that the Republican-led House Of Representatives has fielded more than 40 (mostly symbolic) challenges to the ACA since 2012. As Alex Waddan, a US specialist in Leicester University’s department of politics, points out, all major social welfare policy change is controversial, "but comprehensive health care reform is especially so," he tells the HuffPost UK. That's not to dismiss Obamacare as just another difficult piece of legislation, amounting to "the biggest health care shift since at least the mid-1960s and the introduction of Medicare and Medicaid."

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Senator Ted Cruz has led a seemingly unwinnable fight to repeal Obamacare

Both the Clinton and Bush (43) administrations failed to pass welfare reforms, while the last comprehensive social policy that was successfully introduced was the 1996 Personal Responsibility and Work Opportunity Act, a Republican-backed welfare reform bill signed by Clinton despite opposition from the left.

Yet what is distinct about the current fight is its longevity. As Waddan makes clear: "What is unusual about Obamacare is three years after it became law and a year after the Supreme Court upheld most of its provisions, the battle to repeal it still rages."

Such is the dogmatism within a minority of Republican members that the ACA has become a proxy war between a Tea Party faction bent on repeal and the establishment GOP. And with the implementation of Obamacare drawing near, the so-called "extreme wing" has spent the past week attempting one last assault, dragging a seemingly rudderless party with it, by threatening to close down the government unless the Democrats agree to delay the individual mandate for a year (thus giving the GOP an opportunity to take both houses of Congress in the 2014 mid-term elections, effectively killing the law for the reminder of Obama’s second term).

On Tuesday, Tea Party-backed Senator Ted Cruz, aided by a pair of "comfortable tennis shoes", spent the best part of 21 hours speaking in favour of defunding the law. It proved a bizarre oratory with little practical purpose beyond raising the Texas senator’s profile and solidifying his position as head of the extreme faction which make up about 18% of the elected GOP.

With the Democrats holding a majority in the Senate and Obama wielding the power of veto, Republican ambitions of passing a measure that tied government funding to a one-year delay of Obamacare had no chance of success, leading to this week's likely shutdown and the temporary closure of some federal agencies and welfare provisions. A similar shutdown in 1995 led to a decrease in Q4 growth in the US, which, if it happens again, could have a knock-on effect for growth in the UK. More worrying, however, the fight over Obamacare could be a prelude to a more critical battle ahead - the increase of the US debt ceiling.

Last week, US Treasury Secretary Jack Lew implored Congress for a speedy resolution on an agreement to raise the $16.7 trillion statutory limit on government borrowing, which is likely to expire on the 17 October. The Republicans have already agreed to raise the limit, but only if it’s tied to a raft of conservative causes, concessions the President has flatly refused to countenance. Should the parties reach a similar impasse as they have over tying Obamacare to the budget, the effects would have far graver repercussions for the US and beyond, leaving British officials looking on with nervousness.

The Bank of England is already holding off printing more money as Ben Bernanke is expected to start winding down the Federal Reserve quantitative easing programme. However, the US being unable to service its debts could force the Federal Reserve to inject another dose of credit in order to keep things steady, which would likely force the Bank of England’s hand as they rush to keep the shaky economic recovery on track in Britain.

barack obama

Obama: 'I will not negotiate on anything when it comes to the full faith and credit of the USA'

Their efforts to steady the British economy could see interest rates increase, investors take fright and the FTSE 1000 tumble. Businesses would inevitably suffer should US debt ceiling paralysis take hold due to its trading relationship with the UK, receiving 16% of British exports. "The US is the UK’s individually biggest export market so it matters hugely what happens there," Martin Beck, UK economist at Capital Economics, tells the HuffPost UK. Beck anticipates that the economic shock would not be as severe as the full brunt of the Eurozone crisis in 2012, partly because the share of UK exports going to the EU is 45%, many times more than go to America.

Yet the European economy would be in line for a similar shock should the US default. Jonathan Loynes, chief European economist at Capital Economics, tells HuffPost: "If the US recovery comes to a grinding halt and there’s serious market volatility then that’ll have quite serious knock on effects on Europe." However, Loynes adds a caveat. Congress could just be engaged in another bout of political brinksmanship. Even if it is an act, Loynes warns that the political instability could show how weak America’s finances are.

"It is worrying that these sorts of episodes seem to be occurring at such a regular basis and it’s indicative that the US fiscal position is not in such a good shape and at some point they’ll have to implement more fiscal tightening,” he said.

Yet for Waddan, the current wrangling over Obamacare could in fact help negotiations over raising the debt ceiling. "If the House Republicans need a chance to let off steam and that happens over the continuing resolution bill to keep government open then perhaps the debt ceiling negotiations might be easier." he said.

"The administration has insisted that it will not negotiate over the debt ceiling, but the House republicans might simply see that as giving them more leverage. On the other hand, the potential consequences of default - and no-one really knows what the consequences would be - should make everyone think twice before going down that route."

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