Washington insanity reached new heights yesterday as Congress failed to agree on an appropriations bill to keep the federal government running, even though it had known the September 30 deadline for over six months. This inaction brings Washington dysfunction to a new high (or low). Up until now, Congress had arrived at each fiscal precipice and averted catastrophe with a compromise. Now, finally, Congress has gone over the edge.
How did we get to this point? Initially, the House Republican leadership sought to introduce a “clean” bill that would fund the government for another few months. But the conservative (tea party) wing of the Republican Party demanded that the appropriations bill remove funding for Obamacare, the President’s signature health reform law. That condition (as the Republicans well knew) was unacceptable to the Democratic-led Senate and the President. The Senate, as it said it would do, stripped out the Obamacare defunding provision and sent the bill back to the House. The House thereupon inserted new conditions – including the deferral of Obamacare implementation for a year – and sent the bill back to the Senate. Once again, the Senate made clear that any changes to Obamacare were unacceptable and the government shut down.
A few thoughts before we discuss what happens next:
- The Republicans seem to be fighting the last war. Obamacare was passed by Congress, signed by the President, and upheld by the Supreme Court. Obama was reelected to a second term. The Republicans have long said they will use “forcing events” such as funding the government to get the President to accept deficit-reducing spending cuts. But the House bills proposed no meaningful spending cuts, just further attacks on Obamacare, which the President and the Democrats simply will not accept at this point. The futility of the Republican action is demonstrated by a bizarre coincidence. The very day the government shut down, Obamacare’s health care exchanges (marketplaces) went live, the most visible first step to the law becoming effective in January.
- Defunding Obamacare is largely illusory anyway. The great bulk of funding – premium subsidies for lower- and middle-income people purchasing health insurance – is already funded under the law and cannot be stopped without a full legislative repeal. The funding now in play is only for administration, and agencies can move money around to meet implementation needs in any event.
- The Republican actions arguably hurt only their own cause. Segments of the country might remain skeptical of Obamacare, but polls show that large swaths of the electorate are unhappy with a government shutdown and more people blame the Republicans. The last government shut down, between November 1995 and January 1996, resulted from disagreements between newly-elected Speaker Newt Gingrich and President Bill Clinton. Most observers believe Congressional Republicans bore the brunt of the blame then, helping Clinton secure election to a second term later that year. Republican actions now similarly might complicate the party’s efforts to take over the Senate next fall while retaining the House majority.
Both parties seem largely leaderless at this point. Speaker Boehner realized that a clean extension of funding was in the best interest of his party (not to mention the country), but was unable to get the Republican rank-and file to follow his lead. At almost the same time, the President asked Congress to authorize military action in Syria and approve Larry Summers as Fed chairman, and the Democrat rank and file refused to follow his lead. This lack of leadership will make future negotiations more difficult.
The most concerning aspect of the situation is the lack of an end game strategy. Arguments over spending cuts and tax increases can be compromised, but threats to derail Obamacare are non-starters with the Democrats. It is difficult to see how a compromise can develop without the Republicans (or the Democrats) backing off their fundamental position.
And next up is the debt limit. Treasury officials now estimate the United States will need to borrow additional money by mid-October. But the government cannot borrow more unless Congress increases the total debt the nation is allowed to issue. Failure to increase the debt limit will render the United States unable to pay interest on the debt already outstanding, resulting in a default.
There is a thin silver lining in the current situation. At least the Republicans drew their line in the sand over a shutdown -- which has bearable, albeit negative, economic effects -- rather than over a debt default. A compromise on the latter is likely if the Republicans shift their focus from Obamacare to their more typical demand of spending cuts, demands that succeeded the last time the debt limit was negotiated in August 2011. The President has said he will not negotiate over the debt limit. But if negotiations are couched as addressing the dual needs to re-open the government and raise the debt limit, a compromise is foreseeable. I continue to believe the United States will not default on its debt.
Since early this year, I have been predicting volatile markets in the fall as the country approaches the twin deadlines of funding the government and raising the debt ceiling. That time is now upon us. Because I believe the United States will not default on its debt, any downturn based on Washington dysfunction should be temporary, reversing when a compromise is reached. This is not to suggest that investors should sell equities in anticipation of a downturn, because they will not know when a compromise is imminent so they should buy back in. But market volatility due to a perception of Washington dysfunction could be a buying opportunity.
Andrew H. Friedman is the Principal of The Washington Update LLC and a former senior partner in a Washington, D.C. law firm. He speaks regularly on legislative and regulatory developments and trends affecting investment, insurance, and retirement products. He may be reached at www.TheWashingtonUpdate.com.
Neither the author of this paper, nor any law firm with which the author may be associated, is providing legal or tax advice as to the matters discussed herein. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness. It is not intended as legal or tax advice and individuals may not rely upon it (including for purposes of avoiding tax penalties imposed by the IRS or state and local tax authorities). Individuals should consult their own legal and tax counsel as to matters discussed herein and before entering into any estate planning, trust, investment, retirement, or insurance arrangement.
Copyright Andrew H. Friedman 2013. Reprinted by permission. All rights reserved.
