Why This US Government Shutdown Is Different

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1:10Bloomberg Audio Studios, podcasts, radio, news. A lot of people are saying Trump wanted this, that I wanted this closing and I didn't want it. But a lot of people are saying it because I'm allowed to cut things that should have never been approved in the first place.

1:37I'm Stephanie Flanders, Head of Government and Economics at Bloomberg, and this is Trumponomics, the podcast that looks at the economic world of Donald Trump, how he's already shaped the global economy, and what on earth is going to happen next. This week we're asking, why is this US government shutdown so different from others we've seen, and what could it mean for the US economy? Now, government shutdowns in Washington aren't new, but they have become more common in a politically polarised country in which the two main parties don't want to agree on anything. And this latest one is the third shutdown under President Trump.

2:13He had two in his first term, including one in 2018 that lasted 35 days, the longest on record. As we record this on Wednesday, the 8th of October, the shutdown is entering its second week, having started at midnight on October 1st when Congress failed to pass a stopgap funding measure. But already it feels a bit different politically and economically. Different politically because this time around both sides seem to want to shut down and the standoff between them feels less like a dispute about funding than a constitutional struggle over the relative strength of the executive in America's political system.

2:51That's a feeling that's intensified by the body language of both sides and the Director of the Office for Management and Budget, Russell Voight, seeming to relish the opportunity of talking about mass layoffs and holding up billions of investment funds earmarked for projects in democratic-controlled states. That's one reason why the economic stakes also seem unusually high this time. I mean, typically, any economic impact of the federal workers not getting paid during a shutdown gets completely offset when the government reopens and they get the money they're owed. If that doesn't happen, or if there's deeper cuts, it could have a more lasting impact, and at a particularly sensitive time for the economy when the labour market's already weakening, and many think we could be on the brink of a recession.

3:35Deepening government cuts and heightened uncertainty could just push the economy over the edge. But the longer the shutdown continues, the less likely we're going to know what's really happening, because those crucial economic statistics aren't being gathered by all those furloughed federal workers. And neither would the Federal Reserve know what's going on potentially as it goes into its next meeting at the end of the month. So there really is a lot at stake here and more than enough to talk about with my guests. Matthew Glassman, a senior fellow at the Government Affairs Institute at Georgetown University and a former appropriations staffer on Capitol Hill.

4:10Matt, thanks very much for joining us. Thanks for having me. And as ever, from Washington, our own Anna Wong, Chief U.S. Economist at Bloomberg Economics, and reminding you she was also an economist at the Federal Reserve before she joined us and on secondment at the White House Council of Economic Advisers during President Trump's first term. Anna, welcome back. Happy to be here again.

4:36Matt, one of the reasons that we invited you on is you've written an excellent piece for Politico on this topic, and we allow people who listen to Trumponomics to read non-Bloomberg publications. Your big assertion there was that this was a different kind of shutdown, and we should perhaps take it a bit more seriously than the shutdowns we've seen in the past. So broadly, why do you think there's so much at stake? I think in past shutdowns, we've typically had one party trying to leverage the shutdown to achieve a policy goal. So you can think about the Republicans in 2013, they want to repeal Obamacare, right?

5:09So they're going to proudly say, we are not going to fund the government until you do this. It didn't work, of course. And in 2018, same thing with Trump and the wall. I am not going to vote for spending bill or sign a spending bill until you give me my wall or the Democrats with DACA. We are not going to go with the spending bills till you give us DACA. And those are all sort of like policy fights. Here we have something a little deeper, and that is the Democratic concern with Trump's unilateral spending moves, right? There are bargains for appropriations bills because they can be filibars from the Senate, so the parties have to work together.

5:39And those have been sort of undone by the Trump administration this year through processes called rescissions and also things called impoundments, where the president is unilaterally trying to cancel some of that spending. And that makes bargaining for the next bills impossible. How can you bargain if the president is just going to pull the rug out from under you? And so that's underlying what the Democrats are doing here, a real fight over the very appropriations process. And that's something different than sort of a policy hostage situation. It's a little weird, of course, because they have translated that into a fight over health care where they're claiming they want to extend ACA subsidies, which is sort of like a classic policy hostage shutdown.

6:18But we do have this bigger issue in the background, which is how can they bargain with someone who is just going to turn around and cancel the bargain. I said at the beginning, both sides seem to want the government to shut down. Why is that not being the case in the past? In past shutdowns, the side that wasn't trying to sort of leverage the shutdown to win policies had a clear message. Reopen the government and then maybe we'll negotiate with you. We don't want a government shutdown. Here, it's more complicated because the Trump administration sees this Democratic-induced shutdown as a way for them to further their ideological project of shrinking the federal workforce and increasing sort of presidential control over the agencies.

6:54So the administration, and this is President Trump and OMB Director of Vote, have, you know, said, if you shut down the government, we are going to do things like start cutting federal workers or potentially even closing whole agencies or defunding things completely, permanently. And so there's a sense that this shutdown is not simply open or closed, but can the Trump administration leverage this to sort of further their own separate ideological ends? And that gives both sides incentives. There is this big group of Republicans caught in the middle who really just want the government open, like sort of a traditional anti-shutdown view.

7:25But the administration certainly sees this as an opportunity to take advantage of. We'll come back to you on the sort of constitutional aspects of this. But Anna, simply, why are the economic stakes particularly high? As you mentioned, the economy is in a particularly fragile state right now. And it's even perhaps at a turning point stage. Is it turning toward a deeper recession into a new recession? Or is it actually in the face of recovery? And even before the shutdown, the economic picture was particularly blurry. Economic data was sending various message. And now we are at a very sensitive point of the monetary policy cycle where the Fed is on the cusp of cutting again.

8:13But it's unclear whether this cutting cycle would continue or would it be cut short because of concerns of rising inflation or actually rising inflation. So without the data, it's just very difficult. Just remind us, how would you normally think about the economic impact of all these furloughed workers? So for each week of shutdown, there's a rule of thumb that says it will knock off about 0.2 percentage point off the annualized quarterly GDP growth. However, once the shutdown is over, then you'll see a commensurate rebound in GDP. So as long as this shutdown is over by mid-November, the fourth quarter GDP should be relatively unaffected.

9:00However, in terms of labor statistics, furloughed workers would be counted as temporarily unemployed if they are recorded correctly. And so that means that 750 ,000 furloughed workers will roughly translate it to an increase of the unemployment rate from currently 4.3 % to 4.6 % to 4.7%. And the non-farm payrolls, furloughed workers would still be counted as employed as they will continue to be paid. And Matt, how do you view the sort of aggressive posture of certainly Russell Voight from the Office for Management and Budget, who's had this very kind of macho stance, writing memos about accelerating the shrinking of the federal workforce.

9:45But it's not supposed to be even possible to not pay furloughed workers. And it's not even clear that he can fire workers in response to a shutdown. So how do you think that's going to play out? I mean, are we going to see more cases going to the courts? Perhaps, but the thing pushing back on this is sort of the political position of the Republicans. The way to sort of win a shutdown if someone else is trying to use it against you is to just say, nope, we are not giving into demands. We don't, you know, we don't give into demands of hostage takers. Reopen the government. We're going to negotiate.

10:16Votes actions are sort of undermining that by doing things to leverage the shutdown from their own side. And you saw the reaction of Republican senators when he said they might not pay furloughed workers. That's totally off message politically. And all of a sudden, it looks like both sides are trying to leverage the shutdown. So I think there was a pretty strong reaction on Capitol Hill towards sort of OMB director and the president just being like, stop, stop trying to leverage this and just let us tell them to reopen the government. And you can see it reflected in public opinion. In past shutdowns, the side that just wanted to reopen the government and then continue to negotiate has always politically had the upper hand.

10:50And we're not seeing that this time. The Democrats currently are doing better in the polling than the Republicans. And I think that's in part because the administration is muddying the waters by themselves trying to leverage the shutdown to their own ends. And you've had this kind of funny thing on social media where on the one hand you've got Carolyn Levitt in the White House briefing room saying no one is enjoying the shutdown. And at the same time, the president tweeting out memes that suggest that maybe he is having a bit of fun. But you mentioned the public. You could say that the Democrats are also not negotiating.

11:19There's been no negotiations happening on the Hill. So what are the risks here for the Democrats in terms of public opinion? The risks are that they will be perceived as the party not wanting to just cleanly reopen the government. That's always been the risk in past shutdowns. And we've seen this with the Republicans in 13 and Trump in 18, that you just lose the public if you try to demand policy concessions in order to reopen the government. That said, the Democrats have done an excellent job so far of turning this into a fight over health care subsidies rather than a fight over whether the government should be open or closed.

11:52In past shutdowns, it's been almost impossible for the party shutting the government down to get their message through. And the issue has always come down to should the government be open or closed. Because of sort of the mixed messages from the Republican side, I think the health care message and the unity of the Democrats have brought that through in a way that has really turned this into sort of a health care subsidy debate rather than a should the government be open or closed debate. And so for now, I think that's the Democrats' best issue. It's not a secret why they're turning this into health care.

12:18It's by far their best issue with voters. And to the degree that this becomes a healthcare debate, they will benefit from it politically. To the degree it becomes a debate whether the government should be open or closed, they will be hurt. But for now, they're doing fine. That said, shutdowns aren't static. Like, they get worse and worse and worse in terms of their impact on actual citizens, on agencies, and federal workers. Military paychecks are going to get missed next Wednesday, civilian paychecks this Friday. And those sorts of things, programs start to run out of money, airport lines get longer, and those sort of things build up the pressure.

12:48And so you could very easily see public opinion reverse in the Democrats here and really start to hurt them. Yeah, we've been monitoring that on just on the airlines, for example, because there's a core staff who are still working, but then they're calling in sick. And we've seen some delays at airports yesterday. It looks like the fear is that could intensify.

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14:18Matt, you're describing something where, for the first time in a while, the Democrats are potentially losing at least one small part of a political battle. It's not been a good year for them. And I just wonder, the president's quite good at noticing those things and, you know, turning things around. I wonder how you read what the comments he had at the beginning of the week, where he seemed to also recognise that it just being about healthcare was not going to be good for him, and that maybe if there was a deal to be done, he could be the one to get the credit for it. Yeah, for sure. And I think this is one spot where you see differences between Trump and the congressional Republicans quite starkly.

14:54They each have sort of their own ideological projects. And Trump's has been going after his enemies, which he I think largely perceives as this professional liberal class of government workers are very often in his target zone. Whereas Republicans on the Hill, their ideological project has for a long time been sort of cribbing or reducing or eliminating Obamacare. The president is perfectly happy to compromise on health care, just as he seemed perfectly happy to compromise on things like abortion. He doesn't have sort of that traditional Republican streak about those things. That throws them off message because they are caught between sort of their ideological view of health care and then their desire to be in line with Trump, particularly in the House.

15:28I do think a health care compromise is coming. One of the weirdest things about this shutdown is in the past shutdowns, the policy demand of the people shutting the government down has been a nonstarter. Like President Obama was never going to sign a law repealing Obamacare, right? and the Democrats were never going to go for a border wall. But a healthcare compromise to extend these subsidies is something a lot of the moderate Republicans want and I think is going to happen whether there's a shutdown or not. So this shutdown is about now turned into an issue that is actually solvable through compromise.

15:57And that makes it a little bit different than past shutdowns too. Anna, I mean, just sort of switching back to the economy, I mean, it obviously is going to make a difference in people's cost of living if some of these big increases in health insurance come through, but we won't know what's going to happen with that for a few months. If you're the Federal Reserve, and we've talked about the Fed a lot in different contexts and the threats to its independence and other things over the last few months, but even if they weren't facing a quite aggressive White House in the last few months, they'd be facing a tough choice when it comes to the economy.

16:25So talk us through how problematic it is for them if some of these sort of core economic data are not available when they go into that next meeting at the end of the month. So the next meeting is October 28th to 29th. And before that, we were supposed to have received the September CPI report on October 15th and also weekly jobless claims reports and also, of course, the nonfarm payroll for September. And if the shutdown lasts beyond October 18th, for example, then the collection of the unemployment rate for October would be disrupted. And price quotes for CPI for October would also be disrupted.

17:10So basically, the Fed would be going into not just the October meeting, but also going into the December meeting, sort of lying blind on both inflation and jobs. And this is quite different than the 2018 shutdown, for example, because back in 2018, the BLS was actually funded. So CPI and non-farm pay was not actually disrupted. And so to see how shutdown affected collection of economic statistics, you have to go back to 2013. But even then, the shutdown lasted only two weeks. And that already reduced the CPI price quotes by 25 % for collection in October. and also disrupted or reduced the number of responses in the unemployment survey, causing more error in the unemployment survey.

18:00And just to be clear, what happens if you've just not collected the data, the labor force survey, for example, that goes uncollected for that month, right? I mean, what would they normally do? Yeah, so for the unemployment rate survey in 2013, a BLS resumed collection a week after they normally do it. And they have to kind of ask the respondents, what was your status two weeks ago? So they're basically asking people to recollect something that happened in the past, as opposed to asking them what happened just now, right? So this is a sampling error. And again, in practice, how could that affect what the Federal Reserve does at the end of October?

18:44Or do you think that their decision is kind of baked in at this point? So in the last FOMC meeting, they flagged in the dot plot that the median wanted to cut 50 basis points more. It was a very close call. And without a shutdown, I would have thought that given indications of many inflation measures edging up again, they would not be cutting in October. But because of the shutdown and the uncertainty to economic activity and also increased upside risk to employment, I think they will follow through with a 25 basis point cut this October. Interesting. Well, Matt, I mean, that would be an upside for the president from all this.

19:23The tradition of the podcast these days, the moment you decide to talk about the shutdown, the government's going to reopen again. So even as people are listening, something miraculous might have happened on late Wednesday night or something. But given your experience and given the analysis of what's going on and how much each side has at stake. But also, as you said yourself, the fact that it's actually over something quite doable on both sides, the sticking point, even though there's these very high stakes, actually, the single thing that the Democrats are focused on is something that could be fixed.

19:54How do you think this is going to end? I mean, I think how it ends is relatively clear. You will get a Democrats voting to reopen the government unconditionally and Republicans promising a good faith negotiation over the health care subsidies, which will be extended. And so that sort of allows everybody to win in some sense politically. Leader Schumer of the Democrats will get sort of the credit for having fought that his liberals want. And the Republican moderates will get their health care subsidies. The Republican leaders will have not just given away the health care subsidies, angering their base.

20:32And Trump will end up with no further restrictions on sort of executive spending encroachments that have gone on. That's sort of the terms that I think are mostly imaginable. As to how long it goes, I think there's a bunch of pressure points. And the first one is really next Wednesday with the military pay. In the 18 shutdown and the long shutdown, DOD was funded. So we didn't have this issue of soldiers missing checks. But that pressure point to me is sort of the front end window of when this would end sometime middle of next week. If they go through that and they're still in a stalemate, then you start to talk about longer term.

21:07But I do think there's a good pressure point to end this sometime next week. But what you've described is something that they could do tomorrow. If you think the Democrats are actually willing to give in without having a solid assurance on the health insurance subsidies, then it just seems odd that they would hold out this far and make that their point and then only accept a sort of good faith promise from an administration and from a Republican leadership that has not, they would say, not shown them a lot of good faith, you know, with the rescinding of past funding and other things. Yeah, I mean, and that sort of highlights how sort of this shutdown is both very high stakes over these constitutional issues of executive power, and also very low stakes.

21:46It's over a healthcare policy that was probably going to be compromised anyway, in the next couple months, whether there was a shutdown or not. And so part of what you're seeing here is that the sort of going through the motions of the shutdown is a exercise in coalition management. Remember, Schumer did not go to shut down the government last March. And that really had much of the liver wing of his party sort of nipping at him pretty bad over the last six months. And for him to not engage in a shutdown now probably would have lost them forever and maybe cost him his job, if not his seat in the Senate going forward.

22:20And so part of what both sets of leaders are doing right now is fighting for their base's admiration. And yes, you could end the shutdown today, but is the left flank of your party for Schumer or the right flank of your party for Johnson and Thune and in some ways Trump going to accept that as a worthy effort and a worthy fight? And I think the answer today is no. And I think the answer next week might be maybe. And I think in a month, the answer would definitely be yes. And what will the public think about it? Who will benefit in the end, do you think? Unknown. I mean, the one thing we do know about shutdowns is traditionally the party trying to leverage it has lost politically.

22:54But in every case, both parties have seen blame taken upon them. It's kind of like, you know, war, right? It does. You can't increase sort of like the overall happiness with both parties. Both parties are going to see a negative. It's just who sees a more negative. And I think we're seeing that in the polling right now. Like the typical citizen is not thrilled with either party in these situations. I suspect, you know, the longer this dragged on, the more it would tend to shift to hurt the Democrats. But so far, they've defied that and they've done an excellent messaging job. And I think the president has made some sort of errors in judgment about how to approach this such that right now, if it ended, it would probably call it a draw, but no harm to the Democrats, which would be exceeding expectations in these things where going into this, I don't think anyone thought sort of the Democrats were going to come out better on the other side of this.

23:40Interesting. I remember when I was in the US Treasury in the late 90s, and there was one time when we thought we were heading into a shutdown. And of course, the big debate internally was about everybody wanted to be considered an essential worker, and it was kind of insulting not to be an essential worker. But it does seem like the definition of an essential worker has been much tighter this time around. Even in this conversation, we've said, you know, previously the Pentagon was funded, this time it isn't. Previously the BLS was funded, this time it isn't. I mean, Matt, is there a sense in which the administration has heightened the cost of this?