Flicking the Switch…

Federal Government Spending last thirty years

The recent talks about a possible shutdown of the Federal Government in America is quite disconcerting and emphasises the general public's opinion that politicians will always put their personal agenda before the greater good of the country. Despite the wrangling between the Republicans and the Democrats in the last few months, an agreement has still not been made and it looks as if sealing a deal before the government runs out of funds is looking bleak. The Republicans, and especially the new “Tea Party” movement, are flexing their muscles and showing the Democrats that their spending-spree days are over. They are using the current dire situation to their advantage to force through spending cuts that they say are justified despite the sluggish recovery the US is experiencing. What they aim to accomplish with this move is to show Obama that they take the current $1.65 billion deficit seriously and he needs to do more to balance his books.

Wrangling in the Congress

Obama and Boehner
Source: Politico

In spite of this, negotiations are still underway between Senate Majority Leader Harry Reid and House Speaker John Boehner. Not even Obama’s continuous meetings with congressional leaders have helped to break a deal. There is now less than a day left before the federal government runs out of funds and the current continuing resolution that is funding the government expires at midnight Friday, 8 April. The likelihood of this “shutdown” happening is much larger now than it was in previous weeks and thus Obama has instructed his government to start the process of designating which employees will be furloughed (meaning that they are placed temporarily on non-duty, non-pay status), and which employees would be required to continue working.

Government activities related to financial markets are not expected to be affected in any significant way by a “shutdown,” should it occur.  The FED, FDIC and OCC are not expected to be affected and to continue with business as usual. The Treasury might furlough some staff, but the main departments of debt issuance and tax collection would not be affected. One department that would be affected quite severely and is causing some concern is the Federal Housing Admin (FHA).  In America FHA issues mortgages to property acquisitions (15% of all home purchases in 2010) and their importance in the housing market is even more important when considering their refinancing activities. If disruptions do occur then the FHA would not be able to issue any more loans and many experts raised their concerns on this point since the housing market in America is still in shambles after the financial crisis and still slowly pulling itself out from the crash. By withdrawing FHAs loan issuing abilities, more pressure could be created in the housing market and house prices might drop even further. This could lead to a vicious cycle that would stop consumers from spending due to fears of rising loan costs.

Other affected government areas

By viewing the picture above one can see which areas will be affected, partially affected, and which will not be affected at all. The two largest groups, postal workers and active duty military, are expected to continue working as normal, but they can expect a delay in receiving their pay checks until the shutdown is over. Other departments that are critical to the US security are expected to be maintained on status quo, but a few civilian workers might be furloughed from Defense and Homeland Security. Regarding social security payments, the payments will not be affected, but people who are applying for benefits will experience delays. The department with the most furloughed staff will be the Interior Department. Their main responsibilities are the national parks in the US and one expects that around three-quarters of their staff have to go on non-duty service.

History repeating itself

I find it interesting that despite all the concerns and media coverage this possible “shutdown” is experiencing, this has happened before, as recently as Bill Clinton’s presidency in 95/96. The reason behind that “shutdown” was then president Bill Clinton refused to accept the spending bill with the cuts that was passed by the Republican controlled congress and thus vetoed against it. The house speaker Newt Gingrich then threatened to refuse to increase the debt limit, thus forcing the Treasury to suspend funding to avoid the US going default. This struggle between the leaders lead to the suspension of all non-essential government services between November 14 to November 19, and again from December 16 to January 6, 1996. In the end the general public blamed the Republicans for the shutdown and many say that this was the reason behind Bill Clinton’s successful reelection later that year.

In the end, I do believe that the parties must agree and both Obama and John Boehner may have to give a bit more than they would like to avoid the closure. In comparison to the last closure, the state of the economy today is much more dire and sensitive to political instability. That the Republicans and Democrats would threaten the recovery of the US economy is quite astonishing and something that I do not believe they would do in the end. I guess we just have to wait and see if Obama has to “flick the switch” and turn off his government on Friday.