Today for only the 19th time in history, the US government has found itself in a "funding gap", a technical term for shut down. One of the reasons why this event is not being taken too seriously by the financial punditry, markets or much of the media, is that looking back not only have most government shutdowns been brief affairs, lasting less than 10 days - with the occasional outliers, such as the 21-day closure in 1995 and the 16-day halt in September 2013 - they have had little to no impact on either the market or the economy.
And yet, as Goldman writes, after the two political parties breached the shutdown Rubicon, there is a distinct possibility that this time the shutdown lasts "a few weeks" if not longer. The reason is one of both optics and motives: according to Goldman's political economist Alec Phillips, "both sides appear to think they could gain from a [lengthy] shutdown." He explains:
Democratic leaders appear to believe that a shutdown would highlight the DACA immigration issue, which a large share of the public, including a majority of voters who supported President Trump in 2016, generally support according to most public opinion polling (87% of the public and 79% of Republicans according to a CBS News poll released January 18).
Meanwhile "Republican leaders appear to believe that Democrats, who are in a good political position going into the midterm election according to generic ballot polling and other metrics, would suffer from a shutdown."
In other words, "If both sides believe the other side will be blamed, neither has the incentive to avoid a shutdown."
Making matters worse, there is nothing in the immediate future that will make conflict resolution an urgency: traditionally a drop in the market would serve as an incentive for political parties to reach a compromise, although as we have extensively discussed in the past year, risk assets no longer respond to political events or narrative. This means that without the market intervening as an "arbiter" - i.e., underoging a sharp correction - the two sides are likely to dig in and avoid any tangible negotiations, let alone a compromise.
As a result, while a bitter episode of fingerpointing has erupted, with both sides trying to make the other look like the villain, the US now faces the threat of a protracted shutdown with no end in sight.
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In practical terms, events from the first day of the shutdown seem to confirm this scenario. As The Hill reports, Republican and Democratic leaders on Capitol Hill lashed out at each other on Day One of the government shutdown Saturday, trading barbs and casting blame "as a resolution to the funding impasse appeared nowhere in sight."
The rhetoric took a harsh turn, with Democrats complaining that President Trump is an erratic, unreliable negotiating partner and Republicans bemoaning Democrats’ intransigence over what the GOP sees as unreasonable immigration demands.
“Both sides are dug in. … I wouldn’t be surprised if we’re here tomorrow,” Rep. Bill Pascrell (D-N.J.) told The Hill after huddling with fellow House Democrats in the basement of the Capitol.
And, if Goldman is right, he shouldn't be surprised if he is still there in several weeks time.
There is of course, hope for a breakthrough: both chambers are in session Saturday –– a rare weekend workday when many lawmakers were griping about risking vacation plans and overseas trips. But it appears to be largely a day dedicated to theatrics and PR management: no votes are scheduled to reopen the government as the sides continue to air their grievances in press conferences and on cable news shows.
Meanwhile, with neither Republicans nor Democrats willing to budge, congressional leaders let the insults fly on Capitol Hill and it increasingly looked like the shutdown would run into the work week, furloughing hundreds of thousands of workers.
Senate Minority Leader Charles Schumer (D-N.Y.) told reporters trying to work out a deal with Trump was like “negotiating with Jell-O,” while House Minority Leader Nancy Pelosi (D-Calif.) used a floor speech to decry Trump’s “all-around incompetence” and “inefficiency.”
Schumer: “Negotiating with this White House is like negotiating with Jello.” (via CBS) pic.twitter.com/zGq2xiIGBc— Kyle Griffin (@kylegriffin1) January 20, 2018
On the other side, Speaker Paul Ryan (R-Wis.) placed blame for solely at the feet of Senate Democrats: “One party in one house of this Congress is deliberately holding this government hostage.”
Trump also got involved in the spat using his favorite medium: “Democrats are holding our Military hostage over their desire to have unchecked illegal immigration. Can’t let that happen!” Trump tweeted.
Democrats are holding our Military hostage over their desire to have unchecked illegal immigration. Can’t let that happen!— Donald J. Trump (@realDonaldTrump) January 20, 2018
But the most direct confirmation that nothing will change for a while came from Rep. Gerry Connolly (D-Va.) who after the House Democratic Caucus meeting said that he’s increasingly “pessimistic about reopening the government in any kind of expeditious way."
The reason? "Largely because of the intransigence of Republican leadership," he said even though it was the Democrats votes that led to the shutdown.
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Meanwhie, and as further indication that the shutdown will last, neither party appeared to even agree on what should be the first step to ending the government shutdown. Republicans insist that the government should reopen before they would resume negotiations on immigration, a non-starter for democrats.
House Majority Leader Kevin McCarthy (R-Calif.), who has been in talks with Sen. Dick Durbin (D-Ill.) and House Minority Whip Steny Hoyer (D-Md.), said “we’ll go back to the table when the government’s back open." GOP leaders, particularly Ryan, have been adamantly opposed to attaching any DACA provision to a spending bill, saying it’s an independent issue that should be addressed separately.
Members of both parties have been in talks about shielding young undocumented immigrants from deportation in exchange for enhanced border security. The Trump administration first made plans to rescind the Obama-era Deferred Action for Childhood Arrivals (DACA) program last year, which granted temporary work permits for qualifying immigrants brought the U.S. illegally as children.
"We have been, and we continue to be, willing to work together in good faith on immigration,” Ryan said Saturday on the House floor.
Pelosi, meanwhile, insisted that lawmakers need to agree on parity between defense and nondefense spending, disaster relief, a path for DACA and other priorities before supporting another stopgap measure, or continuing resolution (CR).
“It’s no use having another CR unless we have the terms of engagement of how we go forward on the … parity, on the pay-fors, on the pensions, on the DACA and on the border security,” Pelosi said at a press conference in the Capitol. Many House Democrats are hinging their support for a CR on stronger assurances that DACA protections become law.
“Let’s say they give them a vote in the Senate. It doesn’t solve the impasse if Republicans in the House [don’t follow suit],” Rep. Luis Gutiérrez (D-Ill.) said Saturday. “This is going to take Speaker Ryan to say, ‘I will give them a vote.’ ”
In a word: chaos. And what's worse, now that the natural offset to any government shutdown no longer works, namely a market crash which tends to push both sides to the negotiating table quickly and efficiently, it is unclear what if anything with lead to a resolution from the current standoff.
Unless, of course, there is a market crash.
Going back to the Goldman analysis, the bank was sanguine on market risks, at least in the near-run. However, in case the shutdown drags on for weeks, it will get very messy. Here's why:
The main risk around the funding deadline is that it could eventually interact with the debt limit, which will need to be raised in March, we estimate. By resolving the DACA issue in the near term, this would reduce the risk that the issue comes back into play around the much more important debt limit deadline. Unlike government shutdowns, which financial markets tend to shrug off, markets could have a stronger negative reaction if the upcoming debt limit increase became entangled in the current set of issues.
In other words, should the government shutdown persist, eventually stretching into late February or even early March when the debt ceiling fiasco will also be on deck, then stocks just may do something they have not experienced in years - a drop of more than, gasp, 5%...