The U.S. economy is doing very nicely, as underscored by the recent strong jobs report and contrary to what you might glean from the commentators. Strong growth is likely to continue, subject to one very important risk which, while modest today, appears to be growing. Beware the government – caveat imperium – most recently, the partial shutdown.
That the economy is doing so well should not surprise anybody. All that was needed to rise above anemic growth was to lift the Obama administration’s heavy regulatory hand. Once the hand was lifted, the economy blossomed, just as the Chamber expected it would.
Slow growth doesn’t just happen, and expansions don’t just fade away. Both result from poor policy. Just as Obama-era regulations slowed growth, President Trump’s trade policies threaten to do likewise, though, thankfully from a macroeconomic perspective, they have not yet caused serious economic dislocation.
Now a new concern has appeared: The government’s partial shutdown. The shutdown’s economic effects are of two types. Some will argue direct effects arising simply from monies not spent, reducing the level of demand in the economy. However, if one embraces this view then one must also acknowledge the additional growth that would flow from the additional spending on the border President Trump is demanding.
Of far greater and more lasting importance are the dislocations arising because government service has been disrupted. The simple reality is individuals and businesses depend in many ways on the federal government to facilitate commerce. If one flies commercially these days, there’s a good chance the security lines will be longer than usual because the TSA agents aren’t being paid. Thankfully, many agents are showing up for work anyway.
Government often requires permits of various types before a business is allowed to undertake an activity. Many of the permit granting agencies have gone dark for lack of funding, which means some commercial activities are delayed or cancelled altogether.
The government’s tentacles go deep into commercial activities. Every truck weighing 55,000 pounds or more is required to pay an annual Heavy Vehicle Use Tax to the IRS. Federal law requires states to verify with the IRS the tax has been paid before the state can register or renew a vehicle registration. But the IRS is caught in the partial shutdown, which means with every passing week more commercial vehicles are lacking the necessary paperwork to operate.
On the other end of the spectrum, the shutdown can have substantial effects on capital markets. The Securities and Exchange Commission provides regular guidance on company disclosure requirements and must sign off on most initial public stock offerings. “Asking the SEC to shut down is a bit like asking someone to hold her breath. You can do it for a while without disastrous consequences, but at some point you turn blue and the effects become quite serious,” said former SEC commissioner Joseph Grundfest.
The longer the shutdown continues, the more these indirect effects will weigh on the economy, subtracting billions from GDP and reducing jobs and wage hikes. The bottom line is, the government’s partial shutdown is putting an unwelcome damper on the economy.
The good news is the shutdown is a purely man-made, presumably temporary problem. Congress and the President need only come up with the deal they know they must eventually find. In the meantime, caveat imperium.