The US government has shut down for more than 22 days, recording the longest in the history of the United States. Trump strongly insists on the 5 billion dollar budget allocation to the construction of a wall along the border of US and Mexico, opposed by Democrats. While the shutdown affects 800,000 government employers, Trump has been refusing to compromise on the $5.6bn funding plan on walls. On January 10th, he even warned that prolonged shutdown could cause declaration of national emergency. He twitted, “The damage done to our Country from a badly broken Border – Drugs, Crime and so much that is bad – is far greater than a Shutdown, which the Dems can easily fix as soon as they come back to Washington!”
While he can declare an immigration emergency, it would not guarantee him enough funding for the wall. The immigration emergency fund is around $20 million per year, far lower than $5.6 billion he requires. Another way to finance it is using a national defense budget. The Secretary of Defense can initiate a construction project without getting permission from the authorities under the state of national emergency. That said, the amount of funding is limited to $50 million per year and if the president fails to assure that it is critical for national defense and security, he can be accused for abuse of authority.
As the shutdown is prolonged, Senator Lindsey Graham proposed opening up the government and starting a three-week negotiation. If no compromise is reached after the negotiation, “there’s not much left except the national emergency approach,” he said. However, since President Trump is more interested in getting the budget for the wall than a settlement of shutdown, it would not be all plain sailing. While Trump is shifting the blame for the shutdown to the Democrats, according to a CNN poll, 55% say the President is responsible for the long-lasting shutdown, while only 32% say the Democrats are.
According to a report by Ned Davis Research published on January 22nd, 2018, shutdowns reduce GDP by 0.3% on average for following reasons: delays in loan processing, delays in payments of social security and health care benefits, delays in issuance of passport and visa, and credibility drops. National parks are closed and some government workers are forced to take leave without pay.
Their effect on the stock market is not significant, however, according to LPL Financial Research. Out of 20 past shutdowns, 9 have ended in falls of S&P 500 return and the rest have seen 0% or even positive returns. Mark Stoeckle, the CEO of Adams funds, said “Events like a government shutdown are just part of the growing noise coming out of Washington that investors should ignore.” Government shutdowns may postpone some administrative process and yet it would be normalized in a few days or in a few weeks.
However, James McCormack, Fitch global head of sovereign ratings said that the current US credit rating of triple-A would be at stake if shutdown persists after March 1st. “If this shutdown continues to March 1st and the debt ceiling becomes a problem several months later, we may need to start thinking about the policy framework, the inability to pass a budget and whether all of that is consistent with triple-A,” he said. The US government needs to raise the debt limit by then, and although chances of failures do exist, they are low.
By Ahrim Kim