With One Day Left, Reid "Not Nearly Optimistic" Shutdown Can Be Avoided: A Run Down Through The Implications

The picture for the ongoing operation of US government is looking bleaker by the day. According to The Hill, "Senate Majority Leader Harry Reid (D-Nev.) said that he'd grown pessimistic since last night's meeting at the White House about the chances to avoid a government shutdown. During a speech on the Senate floor, Reid said that in the hours since a meeting last night at the White House with President Obama and House Speaker John Boehner (R-Ohio), he'd grown less optimistic that a deal could be reached to avoid a shutdown. "I am not nearly as optimistic -- and that's an understatement -- as I was 11 hours ago," Reid said." And while the adverse effects of a government shutdown are appreciated by all, the good thing is that such a move will likely freeze the financial picture of the government at a snapshot of Friday's terms. This will be in advance of a week of heavy bond issuance, amount to over $70 billion. If one were to add $20-30 billion in refund issuance, the debt ceiling (and we mean the real deal - based on debt subject to the limit) which now has an $84 billion buffer until breach as of yesterday, could be busted as soon as next week. What better way to prevent that than to shut down the government completely.

And for those wondering what would be affected in a shutdown, here is a convenient summary from Stone McCarthy:

Obviously, the longer a government shutdown lasts, the more disruptive it will be. Many government services would continue despite a government shutdown, including those related to law enforcement, defense and national security. Most benefits, including Social Security would be paid, although those claiming benefits for the first time or requiring other assistance from the Social Security Administration would probably be out of luck.

Many other services that citizens may take for granted would also stop. For example, it wouldn't be possible to get a passport or visa. According to an Administration official who briefed the press this morning, the IRS would suspend processing of tax returns that are not filed electronically. At this point in the tax refund season, that suspension would affect a lot of returns. As the tax season progresses, the number ff returns that are filed electronically tends to decline. Borrowers seeking mortgages insured by the FHA would have to wait for the shutdown to end. The Small Business Administration would also stop processing loan applications

Some economic releases would be disrupted under a prolonged government shutdown.

The release of economic data that is compiled by government agencies would likely be delayed. As a consequence of the 1995-1996 government shutdown, the December 1995 employment data wasn't released until January 19, and December 1995 retail sales data wasn't reported until January 30. (The blizzard of early '96 may have also played a role.) In some cases, it took a month or two for a normal release schedule to resume, even after the government shutdown ended. Economic data compiled by the Federal Reserve wouldn't be affected since the Fed isn't funded through the Congressional appropriations process. Also, data releases compiled by non-government entities wouldn't be impacted. An example would be existing home sales, which is reported by the National Association of Realtors.

Treasury auctions would not be affected.

According to a memo written by former Reagan budget director David Stockman in 1981, activities exempt from a shutdown include those "essential to the preservation of the essential elements of the money and banking system of the United States, including borrowing and tax collection activities of the Treasury." That memo was in effect, according to the Congressional Research Service in 1996, and we assume it would provide guidance for any shutdown that might occur in the current environment.

Significant numbers of federal workers could be furloughed.

In the five-day government shutdown of November 1995, 800,000 workers were furloughed. That number of workers amounted to just under 40% of the federal workforce of 2.04 million employees (excluding Postal workers, who would not be affected.) That shutdown wasn't a "full" government shutdown because three of 13 appropriations bills had been passed.

In the longer government shutdown of December 1995-January 1996, only 280,000 workers were placed on furlough; that's because another four appropriations bills had been passed since the November 1995 shutdown.

The White House official that briefed the press this morning said that about 800,000 workers would be affected by any shutdown that occurs after Friday. That seems to be smaller share of the federal workforce than was affected in 1995-1996 shutdowns, which were partial. Perhaps a larger number of federal workers are now deemed as essential, which wouldn't be surprising, given stepped up security efforts and our involvement in two wars. (Recall in 1995-1996, there was no Department of Homeland Security.)

Those workers who are furloughed during a shutdown don't get paid (Congress and the President still get paid) during the shutdown. In the past, they have received retroactive pay once they return to work, although our understanding is that Congress must act to make that happen. In other words, the retroactive pay is not automatic.

In other words: the POMO/equity MOMO party will most certainly continue even as most non-stock market speculators find their lives just modestly inconvenienced.