The US Government Shuts Down for the First Time in 17 Years

Political impasse has prompted for a partial shutdown of the US government.

From the Bloomberg:

The U.S. government began its first partial shutdown in 17 years, idling as many as 800,000 federal employees, closing national parks and halting some services after Congress failed to break a partisan deadlock by a midnight deadline.

Congressional leaders have scheduled no further negotiations on spending legislation, raising concerns among some lawmakers that the shutdown could bleed into the more consequential fight over how to raise the U.S. debt limit to avoid a first-ever default after Oct. 17.

Chances of a last-minute deal -- seen so often in past fiscal fights -- evaporated shortly before midnight as the House stood firm on its call to delay major parts of President Barack Obama’s health-care law for a year. Senate Democrats were equally firm in refusing to concede and planned a morning vote to reject the House’s call for formal talks.

Liberal media immediately raised the shutdown bogeyman, as Currency Wars author Jim Rickards points out

From another Bloomberg article

A partial shutdown of the federal government would cost the U.S. at least $300 million a day in lost economic output at the start, according to IHS Inc.

While that is a small fraction of the country’s $15.7 trillion economy, the daily impact of a shutdown is likely to accelerate if it continues as it depresses confidence and spending by businesses and consumers.

What the shutdown really means is that current political trends have simply been unsustainable. The real shutdown (a crisis) will inevitably arrive if current trends won’t be reversed.

And importantly the shutdown will only be symbolic. Eventually like the so-called taper, there will be some compromise on the debt ceiling and the Obamacare.

Austrian economist Robert Higgs sees the irony

Government shutdown? Nonsense. Only in our dreams will the U.S. government shut down. The current flap about an impending shutdown represents only the latest episode in the soap opera that stars the government as the hysterical teenage drama queen.

For fiscal year 2013, which will end in a week, estimated federal revenue is expected to be about $2.7 trillion. In real terms, this revenue is roughly equal to the amount the government spent ten years ago, near the beginning of the Bush II administration.

Yet there has been little evidence that shutdowns extrapolates to economic harm.

First Trust’s Brian Wesbery and Robert Stein even sees positive effects from the previous shutdowns (bold mine)

Some pundits and analysts say a shutdown will hurt the economy, but it’s hard to say that based on history. The Washington Post recently listed every shutdown from 1976 to 1996. There were 17 shutdowns totaling 110 days. Out of those 110 days, only 6 days were during recessions. That’s very few given that we were in recession about 14% of the time during that twenty–year period.

Of course, maybe that’s because politicians are more likely to forge a budget agreement during economic downturns. But the last and longest shutdown doesn’t appear to have hurt the economy either. 

That was the three-week shutdown from mid-December 1995 to early January 1996 under President Clinton. Real GDP grew 2.3% in the year before the shutdown, a 2.9% annual rate in Q4-1995 and then at a 2.6% pace in Q1-1996, despite the shutdown and the East Coast Blizzard, a multiple day massive snowstorm in January that was followed by large floods.

The real result of the 1995-96 shutdown was that politicians could no longer hide the fact that government was overspending. And when politicians can’t hide, when the public finally finds out the “Emperor Has No Clothes,” there is a political reaction. In the late 1990s, that reaction slowed government spending relative to GDP dramatically and the US eventually moved into surplus.

Meanwhile the Gallup sees ambiguous  impact from a shutdown: 

As the federal government prepares to shut down for the first time since 1995/1996, historical Gallup data reveal that the repercussions of that past conflict ranged from none to short-lived, in terms of Americans' concerns about the U.S. and the political players involved.

The Gallup says that perhaps the 'shutdown' may exacerbate the public’s already faltering confidence on the economy

Beyond the politicians though, Americans' confidence in the economy is already floundering and their satisfaction with the way things are going in the U.S. remains in the low-20% range. If history is a guide, it is possible that their views of the situation in the country may worsen in the short term, which for an economy -- and job market -- still in recovery, is troublesome. But, long term, it is unclear whether a possibly short-lived government shutdown will ultimately negatively impact the economic situation in the U.S.

It’s important to note that all previous shutdowns has had different circumstances that led to the unique historical event, as shown by the Washington Post here. For instance some shutdowns occurred during recessions.

So market reactions on shutdowns, such as the S&P 500, has largely reflected on the underlying trend rather from the event itself. And given that most shutdowns occurred during the bullish epochs, the outcome tends to give weight on the positive. The chart above from JP Morgan highlights on these. But blindly interpreting returns without understanding the circumstances behind the shutdown events would be like seeing the forest for trees.

And this gives weight to the suggestions of FT and the Gallup where shutdowns tend to have short-lived effects. So a shutdown seems neither bullish or bearish over the long run. 

This means that there will be bigger forces that will drive the markets.

The shutdown only reminds us of this resonating words of the great Frédéric Bastiat

Government is the great fiction, through which everybody endeavors to live at the expense of everybody else.