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As Shutdown Stretches on, Debt Ceiling Questions Loom

Aron Szapiro

Aron Szaprio: As the shutdown stretches into its fourth week, I've been getting a lot of questions about whether anything has changed. I wrote a column earlier in the shutdown explaining that we've got a lot of experience with these, and longer ones  of course slightly ding the economy. But the big story is that shutdowns are really a lagging indicator of governmental dysfunction and a leading indicator that it will be hard for Congress to accomplish much going forward.

Shutdowns have been a regular feature of American government ever since Congress set up the modern appropriations process way back in 1974. If I can paraphrase "Casablanca": This is just like any other shutdown, only moreso.

The window for this Congress to pass bipartisan legislation that could help ordinary investors was always going to be pretty limited, given the realities of divided government. These efforts might have included cleaning up the tax bill to fix technical errors, making it easier for 401(k) savers to access guaranteed income, or adjusting required minimum distributions—to name a few things Congress is pursuing. Obviously, this shutdown makes doing any of those things more difficult.

This shutdown also raises some questions about Congress' ability to deal with something even more important for ordinary investors and potentially the entire U.S. economy: the debt ceiling. The media often conflates shutdowns and the debt ceiling, but they are very different, and I want to explain that. The shutdown simply means Congress has not appropriated funds to keep federal agencies running. In contrast, failing to raise the debt limit could lead to a financial catastrophe--that's not my analysis, that's the official line form the U.S. Treasury Department, U.S. Government Accountability Office, and basically every other expert who has looked at the U.S. defaulting on its obligations.

So coming back to the shutdown and investing, after March 1, the government will need to take "extraordinary measures" to avoid defaulting, and those measures will last for a few months. Ordinary investors should be aware that in 2013, the last time it looked as though Congress might not raise the limit, the market avoided Treasury securities that matured around the dates when the government projected it would exhaust the extraordinary measures. 

So, looking ahead, ordinary investors shouldn't be surprised if we see an increase in rates and a decline in liquidity if it looks like the debt ceiling fight is going to be dramatic again. The current state of the shutdown may presage such drama.

In terms of when this might end, no one knows for sure. But there is an unusual dynamic that is not that encouraging. Previous shutdowns have been due to Congress adding riders to appropriations bills the president deemed unacceptable. The president then has an incentive to make the shutdown hard for ordinary Americans, to push for an end to the impasse. This shutdown is reversed: The president wants the policy riders, and he has an incentive to make the shutdown as painless as possible by taking a broad view of what government can do. For example the president has tried to keep parks open and has said he will try to send tax refunds during a shutdown. That may mean things go on for longer than they otherwise would have.

For Morningstar, I'm Aron Szapiro.