Economic, political stakes loom as US shutdown threat rises

The last government shutdown — the longest in US history — occurred during Trump’s first term, spanning more than a month in late 2018 and early 2019.

The White House’s threat to leverage an Oct. 1 government shutdown to conduct mass firings of federal employees — and Democrats’ refusal to cave to President Donald Trump’s demands — raise the political and economic stakes of a perennial event that markets have grown to ignore.

The last government shutdown — the longest in US history — occurred during Trump’s first term, spanning more than a month in late 2018 and early 2019. Since then, last-minute compromises have averted disruptive government closures.

This year, however, a shutdown appears nearly certain as Democrats and Republicans harden their positions ahead of the deadline.

The White House issued a memo late Wednesday saying that a shutdown would trigger widespread dismissals of employees in government programs that do not align with Trump’s priorities. Democratic leaders insist they won’t accept a spending bill without concessions on health care, like extending Affordable Care Act insurance premium subsidies and canceling Trump’s Medicaid cuts.

Republicans have focused on an aspect of the Democratic funding proposal that could ultimately allow some states to cover more undocumented immigrants with health insurance coverage. The Trump tax law aims to punish states that do that by reducing their Medicaid reimbursement rates.

Trump seized on this message on Thursday, arguing that Democrats want to give “illegal aliens” access to health care. Democrats, however, are not seeking to grant undocumented immigrants access to Obamacare subsidies or federal Medicaid as part of their wish list.

The hardball tactics worsen the potential disruption to a US economy with an already weakening labor market.

Investors are closely watching the standoff in Washington and the effect it could have on unemployment and key economic data releases. Andrew Hollenhorst, Citi’s chief US economist, said that layoffs during the shutdown could increase the “amount of near-term economic drag.”

“The most apparent effect, at least initially, for markets would be the delay of key data releases including the September jobs report,” Hollenhorst wrote in a note on Thursday.

Jitters about a government impasse were among the factors weighing on equities Thursday, according to some investors. While the S&P 500 pared some of its morning declines, portfolio manager Vikram Rai of Fny Capital Management LP said that stocks will likely grind lower in the days ahead until the “shutdown mess” is resolved.

Among the concerns is the threat of mass government layoffs and investors are on high alert for anything that can impact the outlook for the labor market and the Federal Reserve’s interest-rate path.

Senate Democrats, whose votes Republicans need to pass a spending bill in that chamber, remained resolute on Thursday, a stark contrast to just six months ago when several in the party caved to GOP demands during the last shutdown fight.

Democratic Senator Chris Van Hollen of Maryland, whose state is home to many federal workers, denounced Trump for “mafia-style blackmail, with his threats ultimately harming the American people.”

Republican congressional leaders were largely quiet on the mass firing threat but Senator Bernie Moreno of Ohio said he’d back permanent dismissals in a prolonged government shutdown. At the White House, Trump pinned the blame on Democrats for demanding that health care priorities be addressed in any spending package.

“This is political by the Democrats. They asked us to do something that’s totally unreasonable,” Trump said.

The threat of mass firings came after Trump scrapped plans to meet with Senate Minority Leader Chuck Schumer and House Minority Leader Hakeem Jeffries, both of whom said they won’t be intimidated.

“These unnecessary firings will either be overturned in court or the administration will end up hiring the workers back,” Schumer said in a statement. Senate Democrats last week blocked a short-term Republican spending bill and demanded negotiations to extend expiring health care subsidies and avert a surge in Obamacare insurance premiums.

Yet Schumer himself publicly worried in March that the Trump administration would seek to use a shutdown to eviscerate agencies, suggesting that court challenges could roll back some of Trump’s unilateral spending cuts if the government stayed open. Senate Democrats provided key votes to advance a Republican spending bill then, but Schumer has changed tactics now after a backlash from the party’s progressive base.

Typically, many federal workers are temporarily sent home during a shutdown and receive back pay once it ends. Workers deemed essential for functions like national security work without pay until the shutdown ends.

The OMB memo, however, makes clear the administration would instead use a shutdown to gut programs it does not support. That could lead to large numbers of federal workers losing their jobs. Even if courts ultimately reverse the firings, those workers could face a long period without pay.

Newly unemployed federal workers would face a tough hiring environment. Job growth has slowed sharply in recent months, and in the Washington area, earlier efforts to shrink government spending have made it particularly difficult for many workers to find job opportunities that match their skills.

The unemployment rate in Virginia, where many federal workers and contractors live, has climbed nearly every month this year. The jobless rate has also risen in both Washington and Maryland.

Everett Kelley, president of the American Federation of Government Employees, a union representing federal workers, urged Trump and Democrats to negotiate an agreement to avoid a funding lapse.

“The only path forward is compromise,” Kelley said. “The president and congressional leaders must sit down and negotiate in good faith.”

Democrats have argued Trump has already engaged in illegal mass firings without congressional approval. Trump could face political risks of his own if he were to fire large numbers of federal workers and slash popular public services. And he could be blamed if the economy then tipped into recession.

Budget expert Bobby Kogan of the left-of-center Center for American Progress said reductions in force are governed by regulations and collective bargaining agreements, and spending money to carry out permanent dismissals might also violate laws governing shutdowns.

Jeffries told reporters Wednesday he believes courts would be able to operate and adjudicate such matters in a shutdown, though federal court officials warned this week due to tight budgets they would start to shut down by Oct. 3.

The administration might argue that the preparation for the reduction in force took place before the actual shutdown and no violation occurred. They might also argue in court that statutory minimum staffing — like that in place to keep a stripped-down version of USAID functioning — no longer applies in a shutdown.

Even without mass firings, the OMB has leeway to define essential and non-essential activities during a shutdown and to make those decisions based on Trump’s agenda. That could focus more of the shutdown pain on Democratic priorities.

One key advantage for the White House referenced in the OMB memo is that core Trump priorities of the military and homeland security are already funded outside of the annual appropriations process. They were given a $320 billion boost in the giant Trump tax bill, and that money can still flow during a shutdown.

Senate Republican leaders will hold another vote on a no-strings stopgap through Nov. 21 after senators return to Washington Monday. They’ll need at least seven Democrats to pass the bill.