Budget Impasse: Who Will Go Down With the Ship?

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The countdown clocks have taken center stage. Less than 24 hours remain until the new fiscal year starts at midnight on October 1, and if policymakers fail to pass a short-term funding measure — known as a continuing resolution — non-essential government operations will begin shutting down come Tuesday morning, and the atmosphere is thick with pessimism.

At issue is the Affordable Care Act (or, Obamacare), which has become so politically divisive that policymakers have had pretty much no choice but to dig trenches on either side of the issue and lob rhetoric-packed grenades at each other. Fighting began in earnest last week with the opening salvo from the GOP. The U.S. House of Representatives passed a CR that would defund Obamacare. Defunding the president’s healthcare law is pretty much anathema for Democrats, and a Senate vote on Friday afternoon sent the CR back to the house sans the defunding measure.

Early on Sunday morning, the House voted on and passed a CR that would not defund Obamacare, but would instead only delay its implementation for one year (the controversial exchanges are scheduled to open on Tuesday, alongside the start of the new fiscal year for the government). The House CR also called for the removal of a 2.3 percent tax on medical devices that is designed to help pay for the ACA.

The ball (or, perhaps more accurately, the hot potato) is back in the Senate’s court. The Upper House is expected to vote on the measure at 2:00 p.m., although Democratic party leaders have already suggested that the House’s latest proposal will be dead on arrival. Led by Senator Harry Reid (D-Nev.), Senate Democrats have called for the passage of a clean CR, arguing that keeping the lights on at the federal government (a move that means 800,000 federal employees are not sent home on Tuesday) is priority number one, and that debating the healthcare law should be done without the pressure of the shutdown.

On the Republican side of the aisle, many policymakers feel that changes to the ACA will either come now or never, and may feel that with the law in place and the president’s veto ready, the only way they can effect change is by using such a controversial strategy.

This afternoon, the Senate is expected to simply kill the House measure, vote on a clean CR (one that does not touch the ACA), and pass it back to the House. If Republicans stick to their guns, they will either scramble to draft new legislation that somehow edits the implementation of the ACA, or they will let the clock run out. In either case, the outlook is not necessarily positive. There is a chance that the GOP would pass a clean CR, and there is a chance that Democrats would find an edited proposal palatable, but most observers — and many policymakers — are not betting on this.

As much as investors would like to put on blast goggles, keep their heads down, and avoid the political trench warfare that is once again coming to dominate Washington, the situation is impossible to ignore. Fiscal policy in the U.S. defines a massive amount of the backdrop against which investment decisions are made and investors — not to mention the public at large — can’t turn away from, even if they don’t want to look.

The amount of damage that a government shutdown would cause the economy depends on its duration. If the lights are out for just a few days, Americans can expect to see just a few basis points shaved off third-quarter gross domestic product growth, and perhaps a few ghostly echoes down the road. A few weeks, though, and the damage to GDP moves from being measured in basis points to full percentage points. Moody’s chief economist Mark Zandi suggests that a three-to four-week shutdown could reduce third-quarter GDP growth by as much as 1.4 percentage points.

This is the kind of catastrophe that people want to see coming. But one of the compounding problems is that simply observing the dysfunction in Washington brews uncertainty, and uncertainty in and of itself has a negative impact on the economy. When businesses can’t predict future conditions, they reduce spending and pause hiring. Households could increase rainy-day savings (what else is political dysfunction if not clouds on the horizon?) and decrease spending themselves.

After nearly breaking into positive territory at the end of May, Gallup’s Daily Economic Confidence Index has declined steadily over the past several months and read -22 between September 26 and 28.

Gallup Daily- U.S. Economic Confidence Index

Source: Gallup

As far as allocation of blame is involved (for however much it’s worth), Americans are pretty much split over who they fault for the current situation. A survey conducted by the Pew Research Center that suggests that blame for a shutdown would be spread pretty evenly between the GOP and the Obama administration. Pew reports that 39 percent of people think that Republicans would be more to blame, while 36 percent think that the Obama administration would be more to blame — 17 percent volunteered the answer that both would be to blame.

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