Who cares about the US government shutdown?

Sascha: [00:00:02] Welcome to the Dive, the podcast that asks Who said business news needs to be all business? I'm your host, Sascha Kelly. The U.S. government is nearing a shutdown. 

Audio Clip: [00:00:12] The clock is ticking on efforts to avoid a government shutdown this week. 

Sascha: [00:00:16] Yeah, I know. Does this feel like deja vu?

Audio Clip: [00:00:19] The president expressed outrage that one faction in one House Of Congress Is ready to bring the entire federal government to a halt. The United States Congress has two pressing responsibilities. Pass a budget on time and pay our bills on time. If Congress chooses not to pass a budget by Monday, the end of the fiscal year, they will shut down the government, along with many vital services that the American people depend on. The government is partially shutting down because Congress has failed to pass the straightforward legislation necessary to keep the government running. 

Sascha: [00:00:53] America is once again nearing a financial crisis where the government is unable to spend money and needs to shut down everything but the most essential services. Unless the U.S. Congress agrees to pass a series of appropriations bills and allow the U.S. government to spend, America's federal government will shut down. On Friday, the 17th of November. And yet, when this story was pitched in a dive production meeting, it was met with a collective groan. We were saying things like, We've heard this before and nobody cares. But here's the thing. People do care. The effects of a U.S. government shutdown could be catastrophic. It's Wednesday, the 15th of November. And today I want to know if the US government shutdown is all political theatre or is it something I should actually care about? To make the case that we should pay attention is the co-founder of Equity Mates, it is Alec Renehan. Alec, welcome to the Dive.

Alec: [00:01:50] It's so good to be here. 

Sascha: [00:01:51] Before we get into the broader conversation about U.S. government shutdowns, let's focus on the crisis of the moment. What's happening this week? 

Alec: [00:02:00] Yes. So every year the U.S. Congress needs to pass a bill or a series of bills giving the federal government permission to spend money similar to passing a budget. Here in Australia, the president, although they control these federal government agencies, they can't authorise them to spend money without congressional approval. Now, traditionally this has been a pretty routine thing. Both sides of politics agree that the FBI or the Food and Drug Administration or the Federal Aviation Authority should exist. But more and more, this routine government spending has been used as a political football. In 1995, we saw the government shutdown over this 2013, 2018, and now again, we're getting closer to it in 2023. In September, we saw Republicans refuse to pass a government spending bill. And then at the very last minute, there was a continuing resolution which kicked the can down the road until November. And now here we are in November. Such a 45 days later, no closer to a resolution. And we will America faces the same issue. 

Sascha: [00:03:07] And basically, if the U.S. government doesn't pass a bill, we see a government shutdown.

Alec: [00:03:12] Yeah, that's right. If federal agencies don't have authorisation to spend money, they can't spend money. National parks get shut down. Many federal government services go offline. Around 4 million federal employees get sent home and are not paid. And then some, you know, like the most essential of essential services, stay online, but the workers don't get paid. 

Sascha: [00:03:34] Now, we did want to put a point of clarification in here, because this isn't the only time the dysfunctional U.S. political system can fight over spending. There is another fight that we saw earlier this year over the debt ceiling, and it's important that we don't conflate those two. 

Alec: [00:03:51] Yeah, the outcomes and what we see in the political theatre of it all is similar, but they are different. But they are two separate fights over U.S. government spending. The government shutdown that we're talking about now is federal government agencies aren't allowed to spend without congressional approval. And every year Congress appropriates money to be spent by the federal agencies. And this has become a yearly fight over federal government spending. Separately, what we saw earlier this year was a fight over the debt ceiling. Now the US government imposes a borrowing limit on itself and it says we can't borrow more than this amount. And every few years now the US government reaches that debt ceiling limit and rather than cutting IT spending, it needs to borrow more. So it needs to give itself permission to borrow more. If it's not able to borrow more, it defaults on its debt, which would be catastrophic. So there are two separate fights, one over the ability to borrow more money, the other over the ability to spend money. But for our purposes here, what they culminate in is a fight. Over US government spending that could ultimately lead to a US government shutdown. 

Sascha: [00:05:05] That was a good description, Alec, So I can see how that different now, but I can also see how they're easily conflated in the news cycle. Let's get back to the crisis of today. In September, then House Speaker Kevin McCarthy put a stopgap measure on the floor of the House that kicked the can down the road, as you said, until November. But even doing that annoyed members of his party so much that he lost the speakership. 

Audio Clip: [00:05:29] The yays are 216, the nays are to ten. The resolution is adopted. Without objection, the motion to reconsider is laid on the table. The office of Speaker of the House of the United States House of Representatives is hereby declared vacant. 

Sascha: [00:05:50] New House Speaker Mike Johnson has proposed a plan, but that doesn't look likely to pass. 

Alec: [00:05:57] Yeah, that's right. Mike Johnson's spending bill is another stopgap spending bill. It doesn't give federal agencies the ability to spend for the whole year. It kicks the can down the road until now, half of it in January, half of it in February. He's made it more confusing as if it needed to be. The people don't like it. Some hardliners in his own party, the Republican Party, want a government shutdown. They want to force this issue and they want to enforce big spending cuts. Some in the Democratic Party don't want to kick the can down the road again. They want to get a full appropriations bill for the rest of the year. But the other thing that's annoyed both sides of politics is its admitted funding for some key priorities. It omits funding for Israel, which is seen as very important for most American politicians, but particularly the Republicans. And it omits funding for Ukraine, which again is broadly supported, but particularly supported by the democratic side of politics. All that culminates in most people not being happy with the bill and it making it quite unlikely that it's going to pass. Mike Johnson hopes to get it passed by Tuesday US time. So by the time we release this episode, we'll know if it's passed the House. Sascha If I was a betting person, I would be saying it's probably not going to pass the house. Yeah, even if it does pass the House, then it needs to pass the Democrat led Senate and also signed by Joe Biden. So wrapping this all together, it doesn't look like Mike Johnson's going to have a lot more success than his predecessor, Kevin McCarthy. 

Sascha: [00:07:37] Which Alec just brings us to this looming deadline of Friday. The government shutdown. And the shutdown confusingly isn't a full government shutdown. 

Alec: [00:07:47] Yeah, so there are some services which just have to keep going. The Secret Service, they need to keep protecting the president and high level officials. The Federal Aviation Authority needs to continue to have air traffic controllers managing flights in and out of the US. The US Centre for Disease Control keeps key staff to ensure there's not an infectious disease outbreak. So there are some essential functions that stay on. But many of these workers don't get paid during a government shutdown, but the majority of the 4 million federal employees are sent home. So it's not a full shutdown, but it's a massive shutdown. 

Sascha: [00:08:29] And Alec, this is the second time in as many months that the government has started the preparations for a possible shutdown. And this is kind of the problem. It's happened so many times, always averted at the last minute or a shutdown is ended within days of it starting, that the general public has kind of become desensitised to it all. We're just a few days out from another one and the world is reacting with kind of a collective shrug, and that might end up being the biggest problem of them all. Let's talk about that after the break. Welcome back to The Dive. Today, we're talking about the possibility of a U.S. government shutdown and that deadline is looming. It's coming up this Friday. Don't reach for your phone, though, to see if there's something that's more interesting out there. We've acknowledged that this isn't a topic that fills people with interest and that in itself is kind of the problem, isn't it, Alec?

Alec: [00:09:28] Yeah, that's right. We've seen so many government shutdowns or most shutdowns recently. Everyone kind of just expects a last minute deal to be reached. They say all of this noise this week is just political brinkmanship that will ultimately be resolved. But do you know the problem with brinkmanship is, Sascha, eventually you get desensitised to just how dangerous a game you're playing. 

Sascha: [00:09:53] Yeah, and I remember this being a plot point in not one but two Aaron Sorkin shows, The Newsroom and The West Wing. 

Audio Clip: [00:10:00] We will not vote to keep on footing the bill. He will be held responsible for shutting down the federal government, then shut it down.

Sascha: [00:10:14] And that kind of adds to it. You feel like you're just watching a TV show. Someone's going to sweep in at the last minute, solve everything, and then we can hit the commercial break. And just like on TV, we've seen these shutdowns before, and it has always been fine, hasn't it? 

Alec: [00:10:28] Yeah, it's always been fine. We really started seeing them in the 1980s. We saw, you know, a one day shutdown in 1981, in 1991, a four hour shutdown in 1984, 4 hours again in 1986. Reagan had a lot of short shutdowns and that really kicked it off. 1993 days, 1995, five days. 

Sascha: [00:10:50] Actually, a trivia fact for you, Alec. The Lewinsky affair with Bill Clinton, that happened during a shutdown. That's why Monica Lewinsky was in the West Wing, because all the official staff had to leave. So they were relying on interns to do the work. 

Alec: [00:11:03] That is fascinating. I did not know that. Yeah, there you go. And we've seen more recently some longer shutdowns. 2013 was 16 days with the Obama administration, more recently, 2018 to 20 1935 days. So, yes, Sascha, we've seen them before. And yes, they're resolved and they're all fine. But just because they're resolved doesn't mean there aren't consequences. The 4 million Americans are employed by the federal government and don't get a paycheque. Certainly feel like there's consequences and it disrupts a swath of federal government activities from scientific research to, you know, financial oversight. But there are bigger consequences sort of bubbling under the surface. And the more shutdowns we see in the more almost shutdowns, we say, the worse those consequences are becoming. Markets and rating agencies are getting really worried about the level of dysfunction in US politics. There are three big rating agencies and poor downgraded the US in 2011 from its triple-A credit rating. So that was a little while ago. But this year the other two ratings agencies have warned Fitch in August downgraded America from triple-A to A-plus. And Moody's just last week kept the triple-A rating, but lowered its outlook on America's credit from stable to negative. And they specifically cited political polarisation in Congress on spending as a danger to America's fiscal health. 

Sascha: [00:12:38] I know this is a small point, Alec, but just the fact that the writing down from triple-A is double A-plus. 

Alec: [00:12:45] I know. 

Sascha: [00:12:45] You're speechless. Oh, yeah. Okay. Just give them Double-A. Let's go with the battery system, shall we? 

Alec: [00:12:51] Yeah. But, you know, like these ratings, they may not seem that important, but the lower your credit rating, the more it costs to borrow. An America borrows a lot of money. The federal government debt is in the trillions. And the more it costs to borrow, the more of your federal budget goes to paying back that debt and servicing that debt. So that alone isn't great. But that's not the only consequence. A U.S. government shutdown at the moment will greatly increase the risk of a recession in America next year. Goldman Sachs estimated that each week the government shutdown it'll shave about 0.2% of GDP. And then such a third financial consequence is the timing of this government shutdown. Just after 18 months of aggressive interest rate rises would really exacerbate some of the, I guess, the financial challenges that America is facing at the moment. Customers are already, you know, being challenged with massive interest rate increases on their mortgages, although America has more fixed mortgages than Australia. Different conversation, but also car loans, some regional banks are really starting to struggle and their credit have been downgraded because of their large exposure to, you know, the troubled commercial real estate sector or, you know, America's auto loan sector. The fact that millions of people will be without work because they're employed federally and then thousands or millions of more businesses that do business with the federal government will also suffer. It's not good for America's economy. And, you know, in many ways that's not good for the world economy. So political dysfunction in Washington is going to have ripple effects. And so we will all be affected by it unless Mike Johnson and the Republicans and Democrats in Congress can get something sorted in the next three days. 

Sascha: [00:14:46] Well, there you go, Alec. I think we should leave it there for today. Fingers crossed something does happen by the time this episode goes out, or at least by Friday. We'll certainly be watching. Tell us what you learnt today that surprised you about the U.S. government shutdown? If anything? We'd love to hear from you. Get in touch contact@equitymates.com. All right. Right there in your podcast app Big thanks to Danny who got in touch after our SBF episode last week and said he reckons SBF is going to be sentenced to 30 to 45 years. We'll be watching early next year to see if you're right, Danny. I think we'll leave it there for today, Alec. 

Alec: [00:15:21] Sounds good.