Roosevelt Institute | Cornell University

Debunking the Myth: Is America Really the “World’s Hottest” Economy?...or are Partisan Conflict and Government Shutdowns Leading to Increased Economic Stress?

By Sydney EisenbergPublished February 14, 2019

Republican President Donald Trump and Vice President Mike Pence meet with Democrat Speaker of the House Nancy Pelosi and Senate Majority Leader Chuck Schumer.
In President Donald Trump’s February 5th State of the Union address, he flaunted America as having the “world’s hottest economy,” and he also proudly exclaimed that we are on the brink of an “economic miracle.” However, the US stock market is slowly recovering from hitting a more-than-one-year low shortly before the new year, and the effect of the longest government shutdown in history has yet to show its true impact.

In early December 2018, Congress was prepared to sign a budget deal to fund the federal government through 2019. In fact, the Senate was prepared to pass a bipartisan stopgap spending bill that would have provided $1.3-$1.57 billion dollars in funding for a border wall [6]. However, after political pressure from conservative news media and other prominent Republicans, President Trump declared that he would not sign any budget deal unless it also included $5.7 billion dollars for a border wall. Therefore, on December 22, 2018, the federal government partially shut down, and, over the following 35 days, the shutdown expanded and minimized operations .

All non-essential functions were suspended, and nine departments and several agencies were operating at minimal capacity and as the shutdown continued, about 800,000 workers were “living without pay” [7]. According to the New York Times, while half of those workers were working without pay but with the expectation of backpay, the other half were suspended without any promise of receiving a retroactive paycheck [7]. Hundreds of employees, in particular TSA officers, called in sick to work other jobs just to make ends meet, causing delays and security concerns at airports across the country. According to a New York Times analysis, the average federal worker had missed about $5,000 or more in unpaid wages by the fourth week of the shutdown, leaving hundreds of thousands of employees unable to make monthly bill payments and cover other expenses. [9].

By  the end of the shutdown’s fifth week, President Trump finally caved to bipartisan political pressure and signed a temporary budget, one that did notinclude border wall funding, that will fund the federal government until February 16th. However, until a budget is finalized, there remains a looming threat that the government will once again shut down after the current three-week stopgap period ends. Now, with less than two weeks left, President Trump is lauding the economy and praising the “economic miracle” facing the United States. Despite the President’s claims of economic prosperity, the full impact of the shutdown, tariffs, and partisan conflict over policy have yet to fully reveal themselves.

In his second State of the Union address on February 5th, President Trump bragged that “an economic miracle is about to take place in the United States,” but the reality of the current American economy does not quite tell the same story [11]. According to a Chicago Tribune “fact check” of the Address, even though the economy is expanding at the “fastest [rate] in four years,” nearly every independent economist is predicting slower growth over the next year as higher interest rates and increased tariffs begin to reflect in the economy [10]. On top of that, the government shutdown is expected to have a much larger impact than initially predicted. By the fourth week of the shutdown, the government was estimated to have already missed approximately $200 million in unpaid wages each workday [8]. For a five-week shutdown, that estimate accumulates to about $5 billion in wages, and at least half of that must now be retroactively paid to federal employees who spent the shutdown working rather than furloughed. Furthermore, according to Forbes, the shutdown had an estimated impact of reducing economic growth by 0.13 percentage points every day, as opposed to the predicted 0.10 percentage points [1]. Although this difference may appear small, it actually creates large ripple effects in the economy that are beginning to reflect in first quarter* GDP slowdowns [1]. The Economist has reported that over $3 billion in annual GDP  for 2019 has already “been permanently lost,” not to mention the impact of the non-monetary effects of the shutdown, such as failure to issue business permits and tax refunds among other agency functions that were not operating [2].

What else can the federal government and President Trump do to ensure that the first quarter growth does not dip down into the negatives? Right now, the United States federal government must avoid another shutdown. The House of Representatives, currently controlled by a Democratic majority, is unlikely to provide any border funding for any ill-founded irrational calls for ineffective border security. However, Senators from both sides of the aisle seem willing to compromise on an effective border security solution. If the Senate forms a bipartisan budget deal, with or without wall funding, the House may be willing to sign on as well. That leaves one last player in the game, so to speak: President Trump. He has consistently  been the wild card in the federal government. He has caved to external political pressure, fails to listen to members of Congress -- regardless of party affiliation -- and seems to only be willing to sign a budget deal that satisfies his desire and desperation to secure border wall funding. Despite the President’s unpredictability, even top ranking Republican Congressmen seem unwilling to let the government funding lapse into another shutdown, fearing both the political and economic ramifications of another “Republican and Trump” shutdown. February 15thwill be the moment of truth, where President Trump and Republican members of Congress  will either prevent a second shutdown, or once more fall into an impasse in which neither party will compromise.. And what if President Trump once again refuses to sign any legislation that does not include the full $5.7 billion in border wall funding? Hopefully, a second shutdown will be evidence enough that Congress should proceed with a presidential veto override.

With first quarter growth already predicted to be slower than previous quarters and permanent GDP loss due to the shutdown, the fate of the US economy will be uncertain until February 15th. Hopefully, hyper-partisanship will falter in order to protect the greater good of the economy.

 

 

*In the Forbes article referenced in this paragraph, first quarter refers to the economic/financial quarters that run concurrently with the calendar year, as opposed to fiscal years that run from October 1 to September 30.

Works Cited

[1]       https://www.forbes.com/sites/chuckjones/2019/01/16/white-house-more-than-doubling-the-shutdowns-negative-impact-on-the-economy/#5105cd2359a1

[2]       https://www.economist.com/united-states/2019/02/02/americas-government-shutdown-took-a-toll

[3]       https://www.economist.com/graphic-detail/2019/02/04/americas-government-shutdown-has-undercut-the-presidents-popularity

[4]       https://www.economist.com/graphic-detail/2019/02/06/donald-trump-doubled-down-in-his-state-of-the-union-speech

[5]       https://www.cnn.com/2019/01/30/politics/conference-committee-meeting-to-avoid-shutdown/index.html

[6]       https://www.wsj.com/articles/shutdown-has-been-a-year-in-the-making-11547498818

[7]       https://www.nytimes.com/2019/01/02/us/whats-affected-government-shutdown.html

[8]       https://www.nytimes.com/2019/01/15/us/politics/government-shutdown-economy.html

[9]       http://fortune.com/2019/01/16/federal-worker-missed-wages-government-shutdown/

[10]     https://www.chicagotribune.com/news/nationworld/politics/ct-trump-state-of-the-union-fact-check-20190205-story.html

[11]     https://www.nytimes.com/interactive/2019/02/05/us/politics/trump-state-of-union-speech-transcript.html

[12]     https://www.washingtonpost.com/politics/2019/02/06/president-trumps-state-union-transcript-annotated/?noredirect=on&utm_term=.c3b61eb1c7b0#annotations:16432513

[13]     https://www.google.com/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=2ahUKEwiniNaG2rvgAhVudt8KHQPwAC4QjRx6BAgBEAU&url=https%3A%2F%2Fwww.hollywoodreporter.com%2Fnews%2Ftrump-pelosi-schumer-argue-camera-government-shutdown-wall-1168278&psig=AOvVaw3piORrUga_ZSixfk7VtMov&ust=1550250169111187