Oct. 1, 2023, is the deadline to avert yet another government shutdown. At this point, the chances are high that partisan politics will once again disappoint the country and most voters.

 

The truth is that the U.S. has a long history of dysfunctional shutdowns. There have been 20 such incidents since 1976. The longest single shut down in history occurred from Dec. 22, 2018, until Jan. 25, 2019.

 

The credit or blame for that debacle goes to former President Donald Trump. Trump held government workers and the nation hostage to fund his pet folly, a border wall between the U.S. and Mexico. How important was that issue? The subject has disappeared entirely from the political realm with even the most radically conservative right-wingers dropping the issue as an embarrassment.

 

As the House of Congress returns to business this week, far-right Republicans have made it clear to Speaker Kevin McCarthy that there is no way they will support legislation to keep the government open unless they see substantial spending cuts, including less aid to Ukraine, tough new border policies, and in the case of Rep. Marjorie Taylor Greene and others, an impeachment inquiry against President Biden.

 

Behind the scenes presidential candidate Trump has been orchestrating a Biden impeachment effort among members of the Freedom Caucus and just had dinner this past weekend with his henchwoman Greene on the subject. Speaker McCarthy caved in to the impeachment demand on Tuesday, hoping to appease his opponents, but that was not enough to satisfy their demands. 

 

Readers may recall that this same group of dissidents sabotaged the debt-ceiling talks and were largely responsible for the subsequent downgrading of the nation's debt by the credit agencies. Americans will pay for their actions in the form of higher interest rates for U.S. government debt for decades to come.

 

On Tuesday, Rep. Matt Gaetz, the Florida Republican, delivered a floor speech that outlined the conservative case for ousting the speaker. He and others in his group, the "Freedom Caucus," believe McCarthy failed to honor the promises he made to win the speakership. They are disappointed with his handling of the budget process and his reluctance to investigate President Biden and his family. Gaetz, by the way, is the guy the Department of Justice refused to prosecute for sex trafficking with underage women (although a Gaetz associate was sentenced to 11 years in prison for the crime).

 

Economists believe that a shutdown normally reduces economic growth by 0.15 percent for each week it lasts. Why? Federal government spending amounts to roughly one-quarter of Gross Domestic Product. A shutdown will immediately reduce that spending. If a shutdown is short, whatever loss of spending that occurs is usually made up once the government is back in action. "Short" is the key word here.

 

A Moody's economist, Mark Zandi, estimates that if for some reason this shutdown were to last a lot longer, for example, a full quarter, the impact would be a 1.2 percent hit to fourth-quarter economic growth. How likely is such a historically unprecedented event to occur?

 

The House would need to pass 12 appropriations bills in the next nine working days to fund the government before the deadline. It has not passed a single one thus far. The U.S. Senate is already preparing to pass a short-term funding bill (called a continuing resolution) to give legislators time to hammer out a full-year agreement. The thinking is that unless that happens a shutdown is almost guaranteed. Unfortunately, there is no guarantee that the hard-liners will even agree to that.  Gaetz made it clear that any attempt to pass a resolution by McCarthy would trigger a move to remove him from office immediately. The hard-liners suspect that a short-term resolution would only lead to a bigger spending bill that would thwart their objectives. 

 

Lending credence to that suspicion is the fact that several Biden administration priorities including an additional $24 billion for Kyiv, $4 billion for his border security program, and $12 billion for a FEMA disaster relief fund are already part of the resolution that would be passed by the Senate.

 

Further complicating the problem is the position of the speaker, himself. Many of the Freedom Caucus are threatening to depose the speaker if he does not give in to their demands or attempts to turn to Democrats for the votes, he may need to avoid a shutdown. If McCarthy were ousted, it would almost guarantee a protracted shutdown in my opinion.

 

Normally, government shutdowns do not have much of an impact on financial markets, however. There have been exceptions such as the 4 percent decline in stocks during the Trump debacle. That could happen again if the antics in Congress were to escalate further.

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.