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US shutdown, budgets and the Keystone Cops

Professor Jon Rushman, from Warwick Business School's Finance Group, gives his take on the US government shutdown. Professor Rushman was formerly Managing Director at BlackRock and Barclays Global Investors.

He said: “The annual charade whereby approval is sought from Congress to raise the total amount of debt the Government allows itself is, in a way, an admirably transparent way of ensuring debate around the setting of an important variable. It focusses the attention of politicians and media alike on key spending decisions, and ensures that the choices between alternative spending plans are weighed up in public. Contrast this with many other democracies where the spending decisions are made by the executive and if you don’t like the consequences, you have to vote out the executive. In theory, the American system sounds like a good thing.

“In practice, however, it can easily do more harm than good. Firstly when, as now, the President and Congress come from opposite sides of a political divide the debate becomes increasingly polarised and less and less informative. The brinkmanship and tactical manoeuvring is hardly a model process for finding the best possible solution. Secondly, this polarisation leads to a lack of confidence in the political system. People feel the President is weak. There is general frustration among all citizens at the lack of ability of their Government to get things done. This frustration is felt acutely by those Government employees who may be faced with a great deal of uncertainty personally while having to deal with the increased operational difficulties of their departments. There is a real negative economic impact here. Thirdly, the position of the US as global economic leaders means this uncertainty can have an amplified effect on the confidence of investors and businesses worldwide. The global economic recovery, be it sluggish or fragile depending on your viewpoint, is at risk from any hiccup in the world’s largest economy.

“We have been here before of course, so nobody really believes in the end-of-the world scenarios so popular in 2011. Then, negotiation on the debt-ceiling went beyond what some agencies had cited as ‘the final deadline’. The real hammer blow came several days later when S&P officially recognised the confidence-draining process by down-grading US debt from AAA to AA+. That signalled a sharp downward move for risk assets across the world. With great irony, investors dumped risk, bought the newly downgraded US debt and drove it to record prices, confirming that it was still seen as the safest asset there is.

“Not even the Keystone Cops could organise a repeat of that episode, or so the world hopes.”