In retrospect, the US Fed was probably at its prescient best when, last fortnight, it decided not to begin its taper even though most indicators, be they the revival in GDP or in jobs, signalled it was time to start winding down the bond purchases. Though investment growth had revived strongly, from -0.36% in Q4 FY12 to 1.38% in Q2 FY13, the Fed had its eyes on the debt ceiling talks and decided not to withdraw the stimulus in case there was a stalemate—not only would this result in government expenditure falling, even private consumption would get affected as a result, endangering the still nascent recovery. And rightly so, given that Moody’s Analytics has said a 3-4 week shutdown could shave off 1.4 percentage points from US Q4 GDP growth. Global stock markets have by and large taken the shutdown of the US governmentin their stride—it has happened 17 times in the past and though the last time was 17 years ago, the Democrats and the Republicans have managed to pull the US back from the brink ever since their standoff over Obamacare, the President’s package for, according to him, reforming Medicare and Medicaid. Both together rose from 1.8% of GDP in 1985 to 4.6% in 2012— together with social security, the spend on these programmes will rise from around 7% of GDP right now to around 14% by 2038 according to the baseline projections by the impartial Congressional Budget Office (CBO).
It was in this context that President Obama brought in Obamacare, a programme to subsidise the sale of medical insurance to those who got no cover, and he planned to fund this through a combination of higher taxes and cuts in Medicare and Medicaid. While the cuts are proving more difficult than imagined—think of the Indian government cutting kerosene subsidies to fund the Food Security Bill, won’t happen—the CBO has dramatically hiked its estimates of the cost of Obamacare, from a $944 billion over 10 years estimate in 2010 to a $1,856 billion estimate in 2012. While the tax hike estimates have also risen, as have the projected cuts in Medicare and Medicaid, the short point is the Democrats and the Republicans need to negotiate on what cuts are acceptable and which are not. Right now, the President refuses to negotiate, possibly as he feels a government shutdown will hurt the Republicans more or because he feels negotiation