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Last Thursday, President Barack Obama signed an agreement to end the first government shutdown in nearly twenty years.  The shutdown, which lasted sixteen days, coincided with another debt ceiling crisis since the Treasury Department’s borrowing authority needed to be raised by October 17th.  The threat of not raising the debt ceiling is what compelled Senate Majority Leader Harry Reid and Senate Minority Leader Mitch McConnell to craft a compromise piece of legislation that passed the Senate and House last week.  However, their compromise creates the possibility of another government shutdown in January and another debt ceiling crisis in February.

While I wrote a topic brief about the looming government shutdown and debt ceiling crisis several weeks ago, I felt that it was necessary for extempers to get a gauge for the fallout of these two latest battles since the shutdown dominated American airwaves for the last two weeks.  This topic brief will focus on the deal reached by Senator Reid and Senator McConnell, the political fallout of the recent shutdown battle, and the economic fallout of the government shutdown and current austerity measures.

Readers are also encouraged to use the links below and in the related R&D to bolster their files about this topic.

Government Shutdown Deal

When the government shutdown went into effect, federal employees that were not deemed “essential” where furloughed, which means that they were barred from working and were not paid.  Also, government agencies, programs, and other “non-essential” functions were closed as well because of a lack of funding.  This resulted in government websites for the U.S. Census Bureau and the National Aeronautics and Space Administration being taken down, the closing of presidential libraries, and controversially, the closing of national parks, monuments, and memorial sites around Washington D.C.  Conservatives alleged that President Obama was trying to make the shutdown as painful as possible and the administration suffered a small public relations setback when it closed the World War II Memorial to veterans.  Government science and research programs also suffered from the shutdown.  As the Guardian reports on October 18th, government researchers found themselves unable to work on their projects, resulting in the loss of significant research or costly delays in ongoing projects.  For example, the James Webb Space Telescope, which is supposed to replace the Hubble Telescope, was not able to go through several important tests during the shutdown.  Also, scientists could not carry out monitoring programs on the environment, food safety, and climate change.  The Denver Post recaps some of the other impacts of the shutdown by explaining on October 18th that the Food and Drug Administration (FDA) furloughed nearly one thousand of its inspectors that visited processing plants, dairies, and other food facilities and claims that the shutdown delayed its response to a salmonella outbreak that sickened people in eighteen states.

As my previous topic brief on this topic explained, the recent shutdown came about because conservative House Republicans sought to use the fight over a continuing resolution to keep the government funded to bring down ObamaCare.  Speaker of the House John Boehner wanted to avoid a shutdown, but could not rally enough Republican votes to send a clean spending measure through the chamber.  House Republicans initially sought to defund ObamaCare, claiming that it usurped individual liberty, that the program is not ready to sign people up on the online exchanges, and that the individual mandate of ObamaCare should be waived for a year like it has for businesses.  Senate Democrats and President Obama refused to negotiate with the Republicans on these issues and President Obama indicated that he would not sign a spending measure that had other strings attached to it.  The result was a deadlock that produced the sixteen day government shutdown.  As the shutdown developed, Republicans changed some of their demands, but all of them were stuck back by Democrats.  For example, the Economist reports on October 19th that Republicans sought to repeal parts of the Dodd-Frank Act that deal with the regulation of financial services and then targeted recent rules by the Environmental Protection Agency (EPA) on carbon emissions.  When these failed, the Republicans also tried to repeal the medical device tax in the Affordable Care Act, but again they were rejected by Senate Democrats.

As the shutdown continued, the United States inched closer and closer to needing to raise the debt ceiling.  The government’s debt ceiling needed to raised over its current $16.7 trillion mark so that the Treasury Department could borrow money to pay the government’s bills.  The Treasury estimated that this needed to be done by October 17th because by that point it would be very difficult for the government to meet all of its obligations to domestic and overseas creditors and payments for government services and entitlement programs.  While some economists disputed whether failing the debt ceiling could result in a catastrophic economic default, it was clear that the centrist and moderate leadership in both parties did not want to take a chance on testing this idea.  With the clock ticking, Senate Majority Leader Harry Reid and Senate Minority Leader Mitch McConnell met and helped craft a compromise plan that would extend the federal government’s funding through January 15th and raise the debt ceiling until February 7th.  The sequestration spending levels that have existed since the 2011 debt ceiling crisis were maintained and in a small concession to Republicans, Democrats pledged to have the Internal Revenue Service (IRS) ensure that those claiming subsidies under ObamaCare actually qualified for them.  President Obama signed this agreement and the government has now reopened, but there is a possibility that this entire political charade may repeat itself in a few months.

The compromise plan also calls for a bipartisan budget committee, headed by Representative Paul Ryan (R-Wisconsin) and Senator Patty Murray (D-Washington) to create a long-term budget agreement.  Twenty-seven other members of Congress will join them on this committee.  The United States has not passed an official budget in more than three years because of ideological differences between both parties.  Republicans do not favor tax increases and many have signed “no tax” pledges to win their party primaries, but Democrats do not favor spending cuts to entitlement programs, which are some of the biggest areas of federal discretionary spending that are in need of reform.  Democrats also favor higher taxes on the wealthy, which Republicans claim will hurt business growth.  These battles will likely happen in committee because, as the Christian Science Monitor explains on October 18th, Senator Murray is in favor of acquiring new tax revenue and keeping entitlement reform to a minimum, while Representative Ryan favors significant reforms to entitlement programs and opposes significant tax increases.  Ryan’s controversial budget plan in 2011, which called for the introduction of a Medicare voucher program, made him a darling of fiscal conservatives, but a mortal enemy of the Left.  Ryan’s appeal to fiscal conservatives helped make him Mitt Romney’s running mate in last year’s presidential election, but social conservatives are distancing themselves from Ryan because it has been revealed that he is trying to work on a “grand bargain” with Democrats on immigration reform.  Having a bipartisan budget committee is not a new invention and this is what is supposed to happen to craft a budget.  However, as the Christian Science Monitor reports on October 17th, the Republican House and Democratic Senate did not convene one earlier this year as they should have after each chamber passed its own version of the federal budget.  Republicans refused to appoint negotiators at that time and when they changed their mind just before the shutdown, Democrats refused.  The Monitor laments that Ryan and Murray will likely accomplish little because of their ideological differences and because the Reid-McConnell agreement does not set out any guidance for what would constitute an ideal agreement for both parties.  The looming midterm elections will also complicate the formation of a long lasting budget agreement that could produce tax increases and spending cuts because neither side wants to be seen as selling out their principles.

Political Fallout

After President Obama signed the compromise accord, which extempers should note passed the House without a majority of Republican votes (144 Republicans voted against it, but 87 Republicans joined all 198 House Democrats to approve the measure), the media went into overdrive to determine who won the shutdown.  On its face, it appears that President Obama emerged victorious because he did not give any sizeable concessions to the Republicans.  He also acquired a relatively clean debt ceiling increase and government spending measure, which was his initial goal.  Politico on October 18th broke down the participants in the government shutdown drama and gave mixed reviews to President Obama, Senator Reid, Senator McConnell, Speaker Boehner, and House Minority Leader Nancy Pelosi.  Politico argues that Boehner comes out as a bloody winner because Tea Party Republicans applauded his willingness to stand up with them against the President, despite Boehner not agreeing with their tactics to produce a shutdown.  Senator McConnell received praise from top Democrats, including Senator Charles Schumer (D-NY) who said that he put the country above his party and this may assist his re-election efforts in Kentucky, where he faces a significant Democratic challenger in Kentucky Secretary of State Allison Lundergan-Grimes.  Extempers really should pay attention to this Kentucky race because most of McConnell’s elections have been close and Grimes is a well-funded challenger.  McConnell also faces a Tea Party challenger, but more about that below.  Senator Reid and Representative Pelosi also came out as strong leaders of their caucuses because they kept votes in line and prevented sizable defections to the Republicans, which could have forced President Obama to make significant concessions to reboot the government and raise the debt ceiling.

However, all the talk from Politico needs to be interpreted as the musings of those that are in the Beltway and pay careful attention to politics.  For the rest of America, the government shutdown was an embarrassing feature of what has become a dysfunctional government on the national level.  The Pew Research Center revealed some interesting findings in polls about the government shutdown on October 18th.  Of those surveyed, only 19% of Americans say they trust the government to do what is right most of the time and 55% of Americans say that they are frustrated with the government.  Americans seem to confine their anger to those that are in the political class, as majorities have good opinions of government agencies (the IRS excluded) and government workers.  What is interesting about the Pew poll is that Americans of different political persuasions find common ground on blaming the political establishment, as 64% of Democrats, 57% of Republicans, and 55% of independents argue that members of Congress are to blame for the current mess and not the structure of the government.  It is unclear whether any of these sentiments will produce an incumbent backlash in the 2014 midterms because voters traditionally feel that their member of Congress is not the problem.  Still, this poll data seems to confirm President Obama’s remark at the end of the shutdown that there were “no winners.”

While everyone may have taken a hit from the shutdown, as President Obama’s approval ratings fell, Republicans suffered the most, which mirrored their performance during the last government shutdown in 1995-1996.  The Huffington Post on October 18th explained that a Gallup poll found that only 28% of Americans have a favorable opinion of the Republican Party, which was the lowest score that it has ever registered in a Gallup poll since Gallup began polling voters about their attitudes toward both major parties in 1992.  Washington insiders allege that Speaker Boehner was apologetic to President Obama in meetings because he wanted to avoid a shutdown, but could not control his caucus to get them to support a clean spending measure.  While the Tea Party gave needed energy to the Republican Party in 2010 and gave it control of the House, it has also proved a disaster in public relations and Senate elections.  For example, the Tea Party’s challenging of moderate Republicans has arguably cost the Republican Party Senate seats in Delaware, Indiana, Missouri, Nevada, and Colorado over the last two election cycles.  In each of those races, a Tea Party challenger either ousted a Republican incumbent (e.g. Richard Lugar in Indiana) or defeated other moderate challengers that had better chances of winning the general election in primaries (e.g. Christine O’Donnell defeating Mike Castle in Delaware) which helped the Democrats retain or pick up those seats.  In the last election, Tea Party candidates in Indiana and Missouri made significant gaffes when discussing their views on abortion, which helped their Democratic challengers win.  What makes this more frustrating for the Republican establishment is that Mitt Romney carried both of those states in 2012, but could not provide coattails for these flawed challengers.

The shutdown has added to Republican woes because Tea Party enthusiasts like Senator Ted Cruz (TX) urged a shutdown to defeat ObamaCare.  Cruz created havoc in the Senate Republican caucus and Senator Kelly Ayotte (R-NH) criticized him for putting the Republican Party in an unwinnable situation.  For Republican moderates, the Tea Party is something they have to appeal to in order to avoid damaging primary battles, but they fear that the group is making the entire party appear extremist.  Republican moderates liken the Tea Party to the John Birch Society of the 1960s, which accused liberals of communist sympathies and demanded firm anti-communist positions from political candidates.  The recent shutdown battle has confirmed to business groups that they need to get more involved to protect moderate Republican candidates that are more willing to compromise with Democrats.  Breitbart Online, which is a highly conservative source, reports on October 18th that business groups like the Chamber of Commerce are canvassing for moderate and centrist candidates that could defeat Tea Party Republicans in primaries and support low tax, light regulation, and immigration reform policies on Capitol Hill.  On the opposite side of the coin, the Economist of October 17th claims that Tea Party Republicans do not see the latest budget fight as a defeat because they think they were sold out by party leaders.  Already former Alaska governor Sarah Palin has called for the Tea Party to start challenging Republicans that voted for the latest debt compromise in 2014 primaries.  The Los Angeles Times on October 17th noted that this strategy is in full swing as Senator Thad Cochran is facing a primary challenge in Mississippi.  Cochran has served in the Senate since 1978, but is facing a challenge from “constitutional conservative” Chris McDaniel, who is also supported by the low tax special interest group the Club for Growth.  Senator McConnell is also facing a Tea Party challenge from local businessman Matt Bevin, which is forcing McConnell is pour money into a primary race and distracting him from his general election campaign.  The Tea Party also hopes to defeat Lindsey Graham in South Carolina because of his willingness to forge compromises on issues like climate change and immigration reform.  Only in Kentucky is the risk of a Tea Party victory likely to endanger the fate of a Senate seat and cause it to change parties in the general election, but the arrival of more Tea Party Republicans to the Senate could spell disaster for future compromises in Washington D.C. and further polarize the climate.  It could also lay the foundation for a bloody Republican civil war in the 2016 presidential primaries that would make previous bitter primary battles, like those of 1964 and 1976, look like child’s play.

Economic Fallout

As the Republicans try to sort out their internal problems, the current fiscal dysfunction in Washington is taking a toll on domestic and international markets.  The New York Times of October 16th explains that during the 2011 debt ceiling fight, consumer confidence fell to a thirty-one year low and it reduced third quarter GDP that year by 1.4%.  With the latest fiscal fight, the Economist on October 19th reports that consumer confidence fell to a nine-month low and fourth quarter economic growth may have contracted by as much as 0.6%.  The New York Times previously adds more alarming data, saying that the sixteen day shutdown may have taken $12 billion out of the economy.  It also explains that uncertainty over fiscal policy since late 2009 has caused corporate borrowing costs to rise by 0.38%, which has cost the business sector $150 billion in lost output and 900,000 jobs from being created.  The Times and the Economist of October 15th concur that short-term borrowing costs have risen in light of the government shutdown and debt ceiling fight, although long-term borrowing costs have remained relatively stable.  Nevertheless, short-term borrowers have seen interest rates rise on their holdings and the cost of insuring America’s debt has also increased substantially over the last month.

One of the biggest concerns about the United States is that its long-term fiscal picture does not look good, with the “baby boomers” retiring and straining entitlement programs and the government not having enough incoming revenue to pay for it all.  The Economist summarizes America’s debt problems the best n October 19th when it says that the United States “taxes like a small-government country but spends like a big-government one.”  The International Monetary Fund (IMF) has predicted that if the United States wants to lower its debt to sensible levels by 2030, then it will need a “fiscal adjustment” (meaning some type of tax and spend policies that reallocate resources) of 11.7% of GDP, which is more than any other country in the world except Japan.  However, not all economists agree that spending cuts are essential or as important as Republicans and (some) Democrats make them out of to be.  Al Jazeera on October 18th suggests that entitlement programs like Social Security and Medicare are essential to maintaining the American middle class and that austerity programs will not reduce the America government’s debt-to-GDP ratio because if the government reduces spending, then it will contract the economy, which will thereby make the debt burden worse in the long run.  The New Republic on October 18th also breaks down America’s budget situation and suggests that austerity and spending cuts are the wrong recipe for fixing the economy because instruments like sequestration are preventing substantial investment in the economy via contracts for private companies and money for federal employees.  The federal budget deficit is currently declining, which makes some Republicans happy, but the question is whether austerity measures will produce a more effective economy and economists like Paul Krugman argue that they will not.  This same argument is currently playing out in the European Union (EU) where Germany is demanding Greece, Spain, Portugal, Ireland, and other nations facing fiscal trouble tighten their belts and cut spending, but most of these nations prefer money to launch massive stimulus programs to get their respective economies back to adequate levels of growth.

The worst thing that could happen to the economy is both parties fail to reach an adequate budget settlement by January 15th.  If they fail, the result will be a second government shutdown.  Senators like Ted Cruz have not ruled this out, but Senator McConnell made it clear over the weekend that there would not be a second shutdown because it would prove disastrous for the Republican Party.  The same political battle may take place over the debt ceiling.  In both cases, the parties have to resolve the tax versus spending argument that has divided their parties for more than a generation.  Republicans must accede to some tax increases, while Democrats must accede to some measure of entitlement or social welfare reforms.  This is the recipe for a long-term agreement, but there appears to be little political impetus to make it work.  Democrats may also try to hold out in the next round of talks for overturning the sequester, which would appeal to Republicans as well since they want defense cuts to be overturned, but they recognize that abolishing it completely would make them appear fiscally irresponsible and prone to more mania from the Tea Party.  As a result, the likely outcome of the current process is to “kick the can down the road” and put off large fiscal fights until after the 2014 midterms, when both sides let voters pick whose economic ideas they prefer more.