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Fiscal confidence strained by Obamacare, budget threat

SHFWire photo by Gavin Stern
Treasury Secretary Jake Lew laughs Tuesday as he recalls that partisanship during the administration of Ronald Reagan wasn’t nearly as bad as it is today. He was the keynote speaker at the Economic Club of Washington breakfast.

WASHINGTON – Republican lawmakers have turned the Affordable Care Act into a sieve, through which the entire world economy must pass, by leveraging two critical October deadlines – a raise in the debt ceiling and a bill to fund the federal government – to defund or delay the Affordable Care Act, better known as Obamacare.

However, these tactics have drawn the concern of economists, who say that the political fight is damaging the economy.

“You have both the debt ceiling and the fiscal new year budget. They’re both coming together and producing a huge amount of uncertainty,” said Matthew Canzoneri, a professor of economics at Georgetown University. “Somebody needs to resolve it.”

On Wednesday, The Federal Reserve Open Markets Committee released a surprise policy statement, in which it described a weaker-than-anticipated economy as a reason to continue its recession-era stimulus program of buying Treasury bonds, called “quantitative easing.”

The Gross Domestic Product expanded by 2.5 percent in the second quarter of 2013, according to the Bureau of Economic Analysis, representing modest growth that was slightly below the Fed’s June economic forecast.

Canzoneri said that legislative policy is “holding the economy back.”

“The Fed is just hanging in there and trying to show it’s worried about the recession,” he said.

Susan M. Collins, a professor of public policy and economics at the University of Michigan Gerald R. Ford School of Public Policy and a senior fellow at the Brookings Institution in Washington, described the recovery as “fragile” and said she was glad that the Federal Reserve would continue its $85 billion per month bond-buying program.

The unemployment rate was 7.3 percent in August, according to the Bureau of Labor Statistics, above the Fed’s target of 6.5 percent, when it plans to wind down the stimulus. The Fed now forecasts that the country will reach “full employment” by 2016.

Collins blames Congress for injecting uncertainty into the market by taking the country’s finances to the brink.

“The recovery is fragile in key sectors, and uncertainty is going to add to those risks,” Collins said. “The fed has been the grownup in the room and has been handling the challenges remarkably well.”

Many Republicans in Congress said they would not vote for a bill to fund the government – called a continuing resolution – if that funding includes Obamacare. The Republican-controlled House of Representatives passed an Obamacare-defunding continuing resolution on Friday, but it is certain to fail in the Democratic-controlled Senate or by the stroke of President Barack Obama’s veto pen.

If Congress fails to pass a resolution by Oct. 1, the federal government will shut down for the first time since 1996.

In addition, Republican lawmakers have refused the raise the debt ceiling, which would allow the government to borrow money to pay its bills, unless Obama agrees to delay Obamacare, cut spending and approve an oil pipeline from Canada to Texas.

Treasury Secretary Jack Lew, who spoke Tuesday to the Economic Club of Washington, said failing to raise the debt ceiling is an unprecedented – and highly destructive – political bargaining chip.

“The debt limit has nothing to do with new spending. It has to do with spending that Congress has already approved and bills that have already been incurred,” Lew said. “Failing to raise the debt limit would not make these bills disappear.”

The government breached the debt ceiling in May, but has been continuing to fund its operations using cash reserves. Lew said he expects those reserves to run out by mid-October. If that happens, the government will fail to pay its bills and will be in default of its obligations – possibly at the same time as a government shutdown.

The default would be a stronger blow to the economy than a government shutdown, Canzoneri said, because foreign investors would lose confidence and stop buying U.S. debt. Interest rates would shoot up, and the country would be faced with higher taxes or more budget cuts to make up the difference.

“We’re really getting a free ride based on the safety of U.S. government debt,” Canzoneri said.

The first time Congress flirted with default was in 2011. That gambit led to a downgrade in the U.S. credit rating.

“Trying to time a debt-limit increase to the last minute could be very dangerous,” Lew said, calling the resulting turmoil “a self-inflicted wound.”

Obama has said he won’t negotiate with Republicans over the debt ceiling.

“They want to threaten default just to make sure that tens of millions of Americans continue not to have health care,” Obama said Friday in a speech at a Kansas City auto plant. “The entire world looks to us to make sure the world economy is stable. We can’t just not pay our bills. And even threatening something like that is the height of irresponsibility.”

Even if the government avoids default or shutdown, defunding Obamacare would have serious consequences, said Stephen Zuckerman, a health economist at the Urban Institute in Washington.

Zuckerman said that insurance companies have already invested significant resources into setting up Obamacare. A delaying would harm an insurance industry that expects the law’s health-insurance exchanges to open Oct. 1.

“You have a lot of health insurers that have already sent bids to the exchanges, and all these bids are conditional on the individual mandate,” Zuckerman said. “They’re expecting new customers drawn from the general pool of the uninsured population, many are healthy younger individuals.”

Zuckerman said insurers would claim that their bids were no longer valid, because they were relying on healthy customers to offset the cost of those with significant health issues.

Further, there would be confusion about the expansion of Medicaid, a program that provides health-care coverage to the poor. Zuckerman said it’s unclear if the Medicaid expansion would be lumped into a defunding of Obamacare.

“The most important thing that the ACA does is it expands Medicaid,” Zuckerman said. The District of Colombia, California, Connecticut, Minnesota, New Jersey and Washington have already expanded their Medicaid programs, with 19 more states set to join them in 2014. The Supreme Court ruled in 2012 that states can refuse to participate.

In addition to the Medicaid expansion, Zuckerman said several popular insurance regulations have already taken effect, including a 20 percent cap on administrative costs and expanded coverage for dependents up to 26 years old. The mandate that all Americans must have health insurance coverage begins in 2014, with open enrolment running from Oct. 1 to March 31.

The Congressional Budget Office estimates that the Affordable Care Act will reduce the budget deficit by $200 billion over a 10 years, while insuring 93 percent of nonelderly, legal residents by 2022, compared to 82 percent in 2012.

Collins said avoiding the economic consequences ahead is no mystery.

“There are very clear options on the table – it’s not a question of if there are ways to address the challenges going forward,” Collins said. “It means they have to work together.”

Gavin Stern is the 2013-14 post-graduate fellow for the Scripps Howard Foundation Semester in Washington Program. He may be reached at [email protected].

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Fiscal confidence strained by Obamacare, budget threat