Everything you need to know about the longest government shutdown in the US history

New Delhi | Published: January 17, 2019 2:53:07 AM

The partial US shutdown, which started on December 22, 2018, reached its 26st day on Wednesday, with no resolution in sight yet.

us, us dollar, us economyWhile the US Dollar Index fell by 0.5%, the S&P 500 improved by 11% after a stock market crash in December.

By Rutuja Morankar

The partial US shutdown, which started on December 22, 2018, reached its 26st day on Wednesday, with no resolution in sight yet. The Donald Trump administration is still adamant on its demand for $6 billion to build a wall on the US-Mexico border. Given the ongoing tensions, the possibility of a national emergency cannot be ruled out.

In the period of the shutdown, there was a mixed reaction from the markets. While the US Dollar Index fell by 0.5%, the S&P 500 improved by 11% after a stock market crash in December. The 10-year bond yields softened only marginally in the same period to 2.7%.

Financial markets seem to have so far ignored the shutdown event risk—focusing on hopes of a positive outcome from US-China trade negotiations and a dovish Federal Reserve, thereby implicitly assuming that the ego-fight driving the shutdown will be resolved soon. This risk may, however, come to the fore in case the issue remains unresolved.

The story so far

This partial shutdown is the longest in the history of the US. The other longest one happened in December 1995. The current shutdown has led to 9-10 government departments closing down along with certain public services such as parks. Subsequently, around 800,000 federal employees have been either furloughed (a temporary leave of absence) or are working without pay. A typical Federal worker has missed about $5,000 in pay from the shutdown so far.

The US-Mexico border is over 2,000-miles long. The Department of Homeland Security proposed to get a budget of $6 billion to build over 200 miles of the border in the coming fiscal. While this amount forms a small percentage of the overall budget ($4-5 trillion), it has become a strong point of principle debate between the President and the Democratic Party. There is bipartisan agreement in both the Houses on a short-term spending bill that will allow the government to reopen and also allocate $1.3 billion to the Department of Homeland Security. However, this bill does not have any allocation for the border wall. President Trump has indicated that he will not approve such a bill unless it has $6 billion additional allocated for the border wall. He had also openly spoken about declaring a National Emergency in order to get the wall built.

Where do the two parties stand?

Democrats, who now control the House, oppose any funding of the border wall. Nancy Pelosi, the Speaker, in her address recently stated that under no condition will the Democratic Party agree to border wall spending. She also indicated that they will support measures that are more technologically enabled to contain the threat of illegal immigration. The Democrats intend to get a symbolic political victory on this issue. Several key Republicans have voiced their agreement with the proposed Democratic Party bill to fund the eight other departments of the government, apart from Homeland Security. As many as eight Republican representatives broke rank in the House to vote for a bill that would open the Internal Revenue Service (IRS). There is enough coalition support to opening the government, but the President’s office is not in agreement.

Can Trump use emergency powers to build the wall?

President Trump requires two components to build the wall—the authorisation to start the construction and the land to build the wall on. Currently, a significant portion of the land on which the wall is to be built is private property of citizens. In case of an emergency, the President has the powers to unilaterally authorise construction without Congress’s approval. However, he cannot seize private property in an emergency without paying the market price for it. The question then becomes, will President Trump be able to reallocate funds from the defence budget or would it be disallowed by the courts, which, at this point, seems more likely.

What will be the impact of a prolonged shutdown?

This shutdown has increased the uncertainty of the state of the economy and the movement of interest rates. If it continues for longer, it will likely hamper business confidence and government data releases such as Nonfarm payrolls, inflation. It remains a challenge for the Fed to decide on interest rate hike without reliable data and definitive signs of continued recovery. The Fed is maintaining a dovish stance on rate hikes following the shutdown and increased concerns on growth despite the guidance for two hikes in 2019 in their previous meeting.

Many federal workers will continue to miss their paycheck and stay away from work. There is a possibility that President Trump could end the standoff in the coming weeks if the anxiety about the economic impact grows.

The committee for federal budget has estimated the total cost of the US-Mexico border at $25 billion, which will be around $200 per US household. So, even if the current demand of $6 billion is approved, this could only be a short-term resolution.

Uncertainty in the US government, the US-China trade war, and concerns of an impending slowdown continue to pose risks for the US economy. The shutdown also makes the discussion about raising the debt ceiling more difficult, which is expected to happen before March 2019. Congress is likely to extend the funding for some months. However, a prolonged standoff over the borrowing cap increases the risk of a ratings downgrade from Aaa/AA+.

The author is a corporate economist based in Mumbai

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