The Shutdown Scam: The GOP Is Now The Second "Government Party"

Nowadays, government "shutdowns" are obviously not all that, and we do claim some expertise on the topic. Since 1975 there have been 14 shutdowns and we have had the privilege of being on-hand up close and personnel during 11 of these.

Five shutdowns occurred while you editor was a member of the US House (1977-1981) and another six during his stint as director of OMB. The idea back then, needless to say, was that shutdowns came about mainly when anti-spenders refused to capitulate to the incessant demands of the swamp creatures for more appropriations, pork and graft.

During the Reagan shutdowns, in fact, that was exactly the issue: They were a fiscal "red line" drawing exercise, which had some modest success in containing the worst excesses of the House porkers (Dems and GOP alike) and the Senate College of Cardinals (senior members of the Senate Appropriations committee who were indistinguishable politically in their bipartisan lust for more booty for their home states).

No more. On the surface the current fight appears to be over DACA, immigration and the Wall, and therefore a purely political enterprise in which both parties are attempting to feed their respective bases with copious amounts of rhetorical red meat.

But, in fact, that's not the half of it----or even the most of it. The Donald's asinine action last fall in trigging the prospective March deportation of 700,000 Dreamers has merely created the opportunity for the xenophobic anti-immigrant faction of the GOP to take a stalled appropriations process hostage for purely partisan purposes.

That's right. There would have been absolutely nothing wrong with adding a rider to the pending CR to avoid the insanity of shipping 700,000 innocent residents----85% of whom are employed or in school----back to the "home" countries they barely remember, if at all. And all because their parents committed a misdemeanor crossing the US border decades ago in search for work; and in an economy that is now fixing to see a 10 million reduction over the next two decades in the native born workforce owing to the quasi-barren white wombs of contemporary social fashion.

The underlying issue behind the appropriations stall, however, is a spending arms race between the two parties. It involves upwards of $500 billion of spending add-ons over two years to an already busted budget that will soon cross the $1 trillion annual deficit mark owing to 25 years of fiscal profligacy built into the baseline ($700 billion deficit for FY 2019) and the $280 billion revenue loss from the recently enacted fiscal bleeding cure---otherwise know as the Christmas Eve tax cut.

So what's different this time has nothing to do with the fact that it apparently took several days of shutdown to get another two-and-one-half-week CR extension; or that the prospective fourth go-round of "rinse and repeat" since the October 1 start of the current fiscal year is just a prelude to another CR after February 8, and then still another after that (all of which is likely).

Nor does it bear upon the current momentum-driven madness of the stock market, and especially not on the nation's $19.5 trillion economy. The impact of shutdowns in the past has been zilch, and so it likely will be again.

Indeed, the incessant jabbering in the financial media about the purported 0.1% versus 0.2% impact on Q1 GDP is not only a bad joke; it is also a testament to the utter foolishness of the Keynesian "flow" obsessed narrative of Wall Street and the mainstream economic commentariat (as opposed to permanent economic structural and balance sheet conditions).

For crying out loud, not a single dime of the big juice from the Federal budget----entitlements, mandatory and interest expense (75% of total outlays)----will be slowed down by a nano-second owing to the "shutdown".

Likewise, most of the Federal work force reported for "duty" on Monday (whether needed or not). Including the military (which is overwhelmingly doing nothing useful at all), the Federal payroll amounts to 3.6 million employees. During the last shutdown (2013) fully 2.7 million or 75% reported for duty and caused spending in their respective department to largely carry on as normal.

So what a "shutdown" amounts to is that 100% of the 75% of the government attributable to entitlement and mandatories doesn't miss a beat; and 75% of the other 25% mostly doesn't, either. Which is to say, in round terms a shutdown reduces to a miniscule 6.25% of government impact, at best.

But the frosting on the cake is that even those bureaucrats deemed "non-essential", such as IRS tax auditors, get a retroactive pay reimbursement from Congress within days of the shutdown's end. Every single time without exception.

In a narrow sense, therefore, the market is on point in ignoring the silly scriblings of Wall Street economists and strategists about the short-term GDP impact. To believe there is any impact at all resulting from a delayed biweekly Federal pay disbursement for a minority fraction of Uncle Sam's work force is to assume that the upwards of 800,000 Federal employees who are being "furloughed" don't have any savings or credits cards to support their normal spending habits at Amazon, Giant Food Stores and or Trader Joe's.

Then again, the average Federal pay rate is upwards of $80,000 per year----so we think they got the cushion and then some. Indeed, that obvious fact surely underscores why the Keynesian spending-driven GDP models come up with laughably tiny, rounding errors on the macroeconomic impact of even extended shutdowns.

Needless to say, however, Wall Street is looking in entirely the wrong place for clues as to the implications of the current shutdown scam. The danger does not lie in adverse impacts on current quarter GDP; it lies, instead, in the implicit confirmation that a fiscally driven bond market collision will soon monkey-hammer the casino revilers, who seem to think that paying 26.3X earnings during month #103 of a business expansion is a swell way to make money.

What is really happening, of course, is that the Trumpite/GOP is proving in spades that America is now saddled with two pro-government parties. This means a good shutdown is going to waste and that there is no stopping the fiscal doomsday machine that is now racing toward a national calamity, unimpeded.

After all, the reason Washington is operating on its 3rd CR of the fiscal year and struggled a whole weekend to get a fourth one lasting a mere 16 days, lies in the utter irresponsibility of the Trump GOP approach to fiscal policy.

These clowns want to spend $120 billion on disaster relief without a single dime of off-setting cuts; raise defense by $80 billion when the Pentagon is already a $620 billion swamp of waste; appropriate $33 billion for an utterly idiotic Wall on the Mexican border when the problem could be solved by cancelling the $32 billion per year "War on Drugs" and putting up guest worker sign-up booths along the border; and authorizing tens of billions on top of that to pay for the backroom "deals" that were made in order to get the votes for a massive tax bill that not a single Senators or House member had read before it was ram-rodded into law by desperate GOP leaders on Christmas Eve.

So this shutdown is indeed different. Unlike the case back in the day, there is no fiscal red line whatsoever at issue; only a prospective eruption of more red ink and an interim game of political chicken about 700,000 Dreamers, who at the end of the day will not be deported and who will eventually get a path to citizenship.

That's because they, and millions of more immigrants to come, comprise the only available "growth" margin for the US work force in the decades ahead; and therefore constitute the next generation of Tax Mules which will be absolutely necessary to support today's 50 million retirees. That is, as their population inexorably swells toward 100 million during the next four decades.

Meanwhile, it is not just the trillions of added red ink to fund tax cuts for corporations and the wealthy and to finance the GOP spending spree that is at issue. The GOP is proving itself to be the second pro-government party in even more insidious and craven ways.

To wit, it can no longer say with an iota of credibility that the short-term inconvenience of the shutdown is occurring in the name of 150 million current taxpayers and future generations of unborn Federal debt mules.

Instead, it has gone full retard in the opposite direction. Appropriations or no, the GOP spent the weekend bleating loudly about its sincere desire to keep  open every department, bureau and operational outpost of the Federal leviathan including the tea tasters board and the Washington monument.

Moreover, instead of allowing the shutdown to generate some short-term disruption of Federal services in order to impose a modest dose of pain on the public as bargaining leverage against the big spenders, the Trump White House has been bending over backwards to turn what has become the joke of a shutdown into a complete farce.

In fact, the President's budget director, Mick Mulvaney, was out over the weekend insisting that even the most innocuous and unimportant activities of the Federal government would remain operative during the shutdown. Worse still, that the Trump Administration would do a far better job of keeping the government open during a shutdown than did Obama.

That's right. You can't make this stuff up because what budget director in his right mind would refer to the suspension of activities lacking a constitituti0nally mandated appropriation as "weaponizing" a shutdown?

It puts you in mind of Barack Obama's pointed answer during the 2008 campaign when he was asked whether unlike Bill Clinton he had ever "inhaled" while smoking weed. In one of the truer statements Barry every uttered, he replied: "Yes, that's the whole point of it!"

We are going to manage the shutdown differently; we are not going to weaponize it,” said Mr. Mulvaney, who in 2013 was among congressional Republicans accusing Mr. Obama’s Democratic administration of closing popular elements of government, such as national monuments, to turn public opinion against the GOP. Senior administration officials said Friday night they had sought to apply “flexibility” to shutdown rules.

Mr. Mulvaney said national parks would remain open, unlike in 2013, though trash collection would be suspended. He said he believed the parks would be adequately staffed to maintain security......  Fannie and Freddie will be open. The Post Office will be open. The TSA will be open."

In this vein, Speaker Ryan was even more pathetic. He offered not a word about the impending fiscal catastrophe. That is, a legislative mess in which Washington will spend most of the current fiscal year  (FY 2018) mud-wrestling over short-term CRs, but which is heading for the mother of all budget disasters eight months from now when FY 2019 commences.

To wit, the GOP is targeting $4.6 trillion of spending versus a post-tax bill revenue take which will be lucky to generate $3.4 trillion of receipts. Relative to the US economy that amounts to the absurdity of taxing 16.5% of GDP while spending 22.5%----and during month #111 thru months #123 of the current so-called business expansion.

Stated differently, the Trump-GOP have taken the inherited fiscal disaster and turned it into an outright calamity. As recently as ten years ago, no one left, right or center would have recommended a 6.0% of GDP Federal deficit at the tail end of what would be the longest economic expansion in recorded history.

But now the second party of government is heralding it's spending and deficit spree in a manner that is more Keynesian than the Great Thinker himself. In that context, the Fiscal Fake from Wisconsin could muster no more than a school-yard rebuke to the Dems for causing the fiscal soccer ball to get temporarily stranded in the weeds.

“We do some crazy things in Washington, but this is utter madness,” the House speaker, Paul D. Ryan of Wisconsin, said, adding, “Senate Democrats shut down this government, and now Senate Democrats need to open this government back up.”

No they don't. Instead, the GOP needs to look hard in the mirror and note the consequence of its own craven politics. That is, in becoming the second pro-government party it has morphed the only tool left to stop the nation's fiscal doomsday machine---a government shutdown to bargain for deep spending cuts---into a complete scam and farce.

Needless to say, that's the real reason why this time is so very different. They will kick the can again on February 8 and several more times thereafter---until they run out of cash and smack into the reinstated debt ceiling of $20.44 trillion some time in March.

At length, in the wake of another debt ceiling suspension on top of the rolling CRs, the fiscal breaking point will come sometime next fall as both financial arms of the Federal government dump bonds on Wall Street with malice aforethought: The Treasury will be borrowing up to $1.2 trillion on FY 2019 just as the Fed is unloading $600 billion from its bloated balance sheet.

If you think the law of supply and demand has been repealed by the financial gods in order to make Bubble Finance sustainable---why then there is nothing to sweat.

Otherwise, now would be an opportune time to get out of the casino. The GOP has vacated its historical function as the party of fiscal rectitude and has now become the second pro-government party in the land.

Accordingly, there is nothing left to stop the nation's fiscal doomsday machine that again today was given a 16-day hall pass on the road to catastrophe.

The bond market "yield shock" that will trigger the next crash is thus only a matter of time.

 

 

 

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