In-depth analysis on Credit Writedowns Pro.

Why a US government shutdown is likely

Yesterday, I wrote why a US fiscal standoff should mean recession in Q2. As an adjunct to that, I wanted to add a few words about the political process on how we get the standoff to a government shutdown and recession. As always, these are not advocacy pieces, just predictions of what is to come. I don’t think a standoff or shutdown is productive but the politics favour this.

The stage is set with President Obama playing to his base, telling us that the Republicans would be “irresponsible” and “absurd” for allowing the debt ceiling to lead to shutdown or default. His line is “America cannot afford another debate with this Congress about whether or not they should pay the bills they’ve already racked up.” Notice, he does not dispute the deficit hawk line that America’s deficit is bad and that it needs to be cut. Rather, he intimates that he would prefer to make those cuts via an amicable negotiation. And I expect he would prefer different cuts to the Republicans and would like any cuts to be less onerous than the Republicans.

[private_gold]

The Wall Street Journal opines:

Mr. Obama’s tone suggested that battle lines already have hardened ahead of the next budget fight. Republicans showed no signs of backing away from their push to reduce the federal deficit. “The president and his allies need to get serious about spending, and the debt-limit debate is the perfect time for it,” said Senate Republican Leader Mitch McConnell (R., Ky.).

So that’s where we are – a standoff.

[/private_gold]

Here’s the thing; given how Congressional districts are divided in the United States via redistricting, members of Congress are more and more ideologically ‘pure’ as the districts have been drawn to favour one party politics intra-district. And from the perspective of the House of Representatives, this means that the base of the Republican members of Congress is ideologically opposed to tax and spending increases.

[private_gold]

Stan Collender has a wonderful column highlighting this:

I’ve repeatedly been told that, with redistricting in place, House Republicans are relatively certain they’ll be able to maintain the majority at least through the end of this decade if they continue to appeal to the GOP base in their congressional districts.

The GOP’s base’s two biggest economic issues are tax and spending cuts. Therefore, taking a hard line in all budget debates is what makes the most sense politically and makes it most likely that Republicans will be in power for years to come.

Yes, not only is this is an admission that a Senate GOP majority and a Republican president may not happen for a while, it’s also the strongest possible indication that House Republicans are happy to sacrifice the prospects for a national Republican party win to preserve their own influence and prestige. It also points out how and why House and Senate Republicans are often at odds with each other these days: The compromises that appeal to the Senate GOP may well be anathema to their House counterparts, and the take-no-prisoners attitude the House GOP adopts will likely hurt Republicans in the Senate.
The impact of this thinking is clear from the Politico story. If to a House Republican the opinion of your base in your district is far more important than the results of a poll of a representative national sample of voters, then the GOP’s or Congress’ overall approval rating is largely irrelevant.

That makes previously unthinkable moves like a default or a shutdown far more understandable…and likely than was the case in the past.

This means that, the Republicans having allowed tax increases in the deal from early January are much less likely to allow the debt ceiling and sequester to proceed without extracting tax and spending concessions. Politico puts it this way:

The truth is [Republican Speaker of the House John] Boehner is at the mercy of a Republican Conference that is far more resistant to compromise than he is. Boehner was embarrassed when he had to pull his plan for raising taxes — and then watched as three-quarters of his members opposed him on the final tax increase bill after Christmas. He might be the weakest speaker of his generation right now — and there is a fair amount of back-biting about who to blame for the recent debacles.

To pacify conservatives, he made two promises to his members that will greatly restrict his ability to craft a compromise in the spending fights ahead. The first promise was to bring to the floor only legislation a majority of his members support and do it through the committee process. The second was to increase the debt limit only in exchange for a dollar-for-dollar decrease in spending in the time period covered by that debt increase.

Likely that means that the debt ceiling cannot be resolved without the pending cuts over which the President has said he would not negotiate. 

Conclusion: A US government shutdown is not just possible, it is likely by the end of March. The potential for a default also looms.

[/private_gold]

About 

Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.