Inside the Beltway, negotiations continued Friday over a US federal government budget patch. As of this writing, last-minute talks continue but no agreement exists—and if the situation persists unchanged, aspectsof the federal government will turn into pumpkins at midnight.
Now, most US government shutdowns historically haven’t been very long-lasting—recall that 1995’s shutdown was a couple of weeks. Other examples were even more fleeting. To the extent the shutdown drags, some government employees could be impacted through the lack of a paycheck—a rather painful consequence stemming from politicalposturing. (Might we suggest Congress distribute its pay—which wouldn’t be interrupted—to these folks pro-rata for however long government is shut?)
Notions of a government shutdown derailing US economic growth are largely misplaced. While one can easily get into a theoretical argument between Keynesian stimulus and a “crowding out” effect regarding the benefits or drawbacks of government spending on growth, what’s more important is to reasonably assess the US economy’s state today. Even a fast glance at the non-government parts of our economy shows near record corporate profits, consumer spending that’s recouped its modest-recession driven losses, solid corporate revenue growth in recent quarters, and more. Moreover, it isn’t like some austere federal budget was a contributor to 2008’s financial panic and recession. Government hasn’t been the sole force driving US GDP to new highs recently, and assuming some of the government does go dark, a few days or weeks without more of Uncle Sam’s frequently poorly allocated discretionary expenditures are highly unlikely to overturn growth.
Many tie together concerns over a shutdown and the ongoing debate over increasing the debt ceiling for the 76th time. US federal debt is projected to reach the ceiling by May 16th, and some fear a shutdown would result in no debt ceiling increase—driving a US default. But the facts don’t support the fear. First, this assumes no agreement is reached in the five weeks between now and then. And more importantly, the debt ceiling is not truly a ceiling in a concrete sense. It’s a largely political invention designed to make Americans think politicians care about limiting debt to curry political favor. Consider: The US hit the debt ceiling in 2004amid a highly contentious election season—and we don’t recall a US default, foreigners shunning our bonds, dollars being replaced by silver ingots, or a market calamity. Like then, the US has options to circumvent the debt ceiling. Government can, and has, borrowed from intra-governmental sources, like the government worker’s pension fund, only to repay it upon reaching agreement on a debt ceiling. Moreover, the US has sufficient tax revenueto service the debt today—though other spending would likely have to be curtailed—which means the debate would be about choices. (And if you’re concerned about the macroeconomic impact of those choices, see the above.)
A potential government shutdown is for all intents and purposes equivalent to a National Football League lockoutin April. You don’t miss any games (or gamesmanship, in the government’s case), and you get a lot of blustery talk along the way. If one really believes the present debate in Washington is about finances, then consider that then-Senator, now-President Obama was a rhetorical deficit hawkduring the Bush years—while Republicans increased deficits. That all might seem quite hypocritical now, but to politicians of both parties, it’s just business as usual. And that business is all about which party has more power and which wants it.
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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.