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The worst-case scenario for a government shutdown
Just how bad can things get?
A government shutdown could wallop a still-unstable market.
A government shutdown could wallop a still-unstable market. (Mario Tama/Getty Images)
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government shutdown looks all but inevitable. On Sunday, House Republicans passed a second continuing resolution (CR) that asks for a one-year delay of ObamaCare's individual mandate and a repeal of a medical-devices tax.

Senate Democrats will almost certainly — like they did on Friday — strip the House bill of any language involving ObamaCare and send it back. Their argument is that this law was already passed by Congress and deemed constitutional by the Supreme Court. As a delay of the individual mandate would more or less make ObamaCare unworkable, it's unlikely Democrats would see it as just another setback, like the employer mandate that was delayed until 2015.

That means on Monday, at the stroke of midnight, the gears of government will probably grind to a halt. If that happens, 800,000 federal employees will be forced to take furloughs and others, like those in the military, will have to work for IOUs.

But things could get really bad if this stand-off continues.

The U.S. economy, of course, hasn't completely recovered from the Great Recession — and a government shutdown would certainly not help things. Mark Zandi, chief economist at Moody's, predicts a drop in annual economic growth of 0.2 percentage points in the fourth quarter — and a 1.4-percentage point drop if this goes on for another three or four weeks.

And if the impasse continues for two months? That, Zandi tells USA Today, "would likely precipitate another recession.''

Slow economic growth and a stagnant job market have been the norm since the financial crash. The markets, however, have recovered nicely. All that could in jeopardy if Democrats and Republicans can't resolve their differences soon, writes Politico's Ben White:

Markets have been relatively calm ahead of a possible shutdown. But stocks began declining last week after hitting record highs, mostly on fear over a shutdown. And the cost to insure U.S. Treasury securities against default last week soared to its highest level since the debt ceiling crisis of 2011. Markets often react late — and sometimes violently — to events in Washington. [Politico]

At first, most Americans won't notice significant changes in their lives. They will still receive their Social Security and Medicare checks if the government shuts down at midnight. If it's not resolved by Nov. 1, however, checks could be delayed by two weeks — a big problem for seniors who are living month-to-month.

The doomsday scenario centers around the debt ceiling. If Congress can't agree on a budget before mid-October — when the federal government is expected to hit its borrowing limit — then the United States could default on its debt.

Should that happen, the non-economic-apocalypse-inducing approach is that the United States prioritizes some payments over others. In that case, as Matthew O'Brien notes in The Atlantic, we would see a 32 percent cut in government spending, or "mega-austerity," that would "cost us millions of jobs at an annualized pace" and take a hammer to consumer confidence.

If the U.S. government can't prioritize its debt, whether due to legal or logistical reasons, then the U.S. economy could be irretrievably damaged. Not only could we see another recession, but also higher interest rates if investors get rid of U.S. Treasuries they fear might default. That, O'Brien writes, would mean disaster:

The worst part comes after the crisis has passed. It's that interest rates wouldn't come back down to where they were before the crisis. Investors would decide that our 200-year long experiment with republican government had turned into one of the banana variety. In other words, they would decide to invest their money in countries that don't periodically threaten to default for no good reason. Interest rates would be forever higher than they would have otherwise been, and that would drag our standard of living forever lower than it would have otherwise been. [The Atlantic]

In sum, if Congress takes a week to come to an agreement on the budget, the damage to the economy will be real, but the United States won't become Thunderdome. After that? Well, let's just say the stakes are very, very high.

Keith Wagstaff is a staff writer at TheWeek.com covering politics and current events. He has previously written for such publications as TIME, Details, VICE, and the Village Voice.

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