Equity markets are holding their gains despite the bond-market's bid this morning (and weakness in Nov bills).. it seems the optimism is a little premature...
Source close to last night's talks tell me CR deal is not as close as many press reports; House Rs far from ready to move on a clean CR
— Robert Costa (@robertcostaNRO) October 11, 2013 [5]
Everyone is pointing to national polls blaming the Repblicans and this there is pressure to act... do not forget "All politics is local"
Via BofAML,
Looking at the national polls, one would think that a deal is long overdue. A CBS News poll conducted on October 1 and 2 found that 72% of Americans disapproved of the strategy of shutting down the government to try to battle the Affordable Care Act and just 25% approved. Polls also show Republicans are getting hurt more than Democrats.
All politics is local
A bigger risk is that, in the end, the national polls may not matter. Gerrymandering has not only helped create a deeply divided Congress, it has made most seats in the House safe. Recall that currently the House is divided into 232 Republican, 200 Democrats and 3 unfilled seats. Before the shutdown, 175 Democratic seats and 211 Republican seats were “currently safe,” according to the Rothenberg Report. In other words, Republicans need just 7 additional seats out of 49 “lean” or “toss up” districts to reach the 218 majority. As Charlie Cook argues, it will take a “tsunami” year for Republicans to lose the House.1 He notes that in each of the four recent “tsunami” elections, the party of the President was the one pushed out of power in the House.
Cook also points out that the shelf life of negative poll ratings is short. Favorability ratings for both House Speaker Gingrich and President Clinton dropped dramatically during the 1995-6 shutdown, but had almost fully recovered a few months later. A shutdown right in front of the election may be politically dangerous, but one a year before may not.
The Iowa electronic market offers a less sanguine view of Republican prospects. The trading volumes in this market are very low, so the results should be interpreted with caution. Nonetheless, they are illustrative. Before the shutdown, the market was pricing in about a 20% probability of Republicans losing the House in the midterm elections. Since the shutdown that probability has been bouncing around 40%.
Who gets hurt?
So if incumbent politicians don’t get hurt, who does? There are several ironies to the government shutdown. First, the shutdown hits the wrong part of the budget. It is meant to be a way to stop the fast-approaching Affordable Care Act. However, the Affordable Care Act is a mandatory spending program and is not affected by the shutdown. More broadly, the shutdown hits discretionary spending, a part of the budget that has been cut repeatedly and is falling as a share of GDP. Rapidly growing entitlements are exempt.
The second irony is that the shutdown is a step backward in fixing the budget deficit. The House has voted unanimously to pay furloughed Federal workers retroactively. Once the shutdown is over, the Senate is likely to concur. As a result, the shutdown is effectively a multi-week paid vacation for many Federal employees, with no lasting reduction in government pay. At the same time, the process of closing and reopening the government adds several billion dollars to the deficit. Moreover, the longer the shutdown, the bigger the shock to confidence, spending and tax revenues.
Who really gets hurt? In essence, the shutdown is effectively putting Federal workers on a paid vacation so they cannot help individuals or firms that depend on “nonessential” government services. Hmmm.