The Last U.S. Federal Government Shutdown
March 29, 2011
A budgetary impasse between democrats and republicans caused the suspension of non-essential federal services during November 14-19, 1995 and from December 16, 1995 to January 6, 1996. The U.S. economy was growing then at a very similar pace to now. GDP advanced 2.8% at an annualized rate in both the final quarter of 1995 and first quarter of 1996 compared to 2.6% and 3.1% in the final two quarters of last year. Unemployment is at 8.9% now and hopefully trending lower versus 5.6% then and trending lower. CPI inflation at the time of the mid-90s shutdown hovered around 2.6% (3.0% core). Now it is at 2.1% (1.1% core).
The dollar was worth JPY 101.9 and DEM 1.419 (which has a euro translation value of $1.378) then, some 24% stronger than now against the yen but just 2.0% firmer against Europe’s dominant currency. The dollar did not move much on balance against the mark during the 1995-6 shutdown but rose 2.5% relative to the yen. Ten-year Treasury yields slumped from 5.94% on November 14, 1995 to 5.55% on January 6, 1996, and the Dow Jones Industrials at 5180 stood 6.3% higher at the end of the episode than at the beginning.
This first game of fiscal chicken had its origins in politics. The shape of future history suggests that the republican leadership badly miscalculated, but one only perceives that with the benefit of hindsight. In fact, conditions at the time looked reasonably favorable for attempting the gamble. Growth was decent. Inflation was acceptable and in a multi-decade downtrend. Reversing a massive fiscal deficit had been the mission of Ross Perot’s surprisingly successful third-party run for the presidency just four years earlier. One could be excused for thinking November 1995 to be the right moment in the political calendar to play the fiscal deficit card again, except that late 1995 wasn’t late 1991 because steps had been taken already to swing the deficit favorably. The timing of the 1995 shutdown was good from an economic standpoint but puzzling from a political one.
A second shutdown this spring, in contrast, appears decently timed politically but flawed economically. After swinging into surplus, the deficit has returned to deficit with a vengeance. Never mind that the primary cause of the deficit’s spike is the Great Recession and a sub-normal recovery. The accusation of drunkenly wild Washington spending is not supported by the GDP data, which show growth in government spending slowing from 2.8% in 2008 to 1.6% in 2009 and a mere 1.0% in 2010. Those are the facts, but image trumps truth in politics, and the perception is deeply rooted that Washington politicians are spending way too much.
A shutdown should do more damage now than then. The U.S. recession in the early 1990s was far milder than the Great Recession and was more removed in time by November 1995 than is the case of the present moment from the last U.S. downturn. Moreover, vestiges of the Great Recession persist. Only twenty months from 1948 until the Great Recession had a jobless rate greater than the present level, and all but one of those was associated with the early 1980s when the back of double-digit inflation had be be broken. A downturn in housing provided the spark that began the Great Recession. In fact, it was a common belief early in the recession that sustained recovery would not be possible until housing hit bottom. An upturn in residential real estate ended in mid-2010 and has now been completely reversed, leaving the Case-Shiller-20 index 31.8% below its July 2006 peak and still falling.
The global economic environment, like America’s, remains highly brittle. Each day, investors and entrepreneurs keep an eye on unrest in North Africa and the Middle East, Japan’s series of related catastrophes, Europe’s sovereign debt woes and high long-term interest rates — another vestige of the post-2007 financial crisis — and the relentless climb of commodity prices.
The world has changed radically during the past fifteen years, making the experience of 1995-6 an unreliable guide to what might occur if it happens again this spring. Communications are very different now. The Internet was at a rudimentary stage then, and smart phones had not been invented. Many emerging economies had been growing briskly, but as a group they had not yet evolved into the engine of world growth played now. U.S. dominance in geopolitics was unqualified a mere six years after the Berlin Wall came down and even less distant from the fall of the Soviet Empire. Hardly anybody knew about Islamic terrorism, and even fewer cared about such. 1995 was still part of the the post-WWII era, and the mid-range of the American baby boomer generation was an age of only 42 years old.
I expect a Federal government shutdown soon and fear it may last longer than during the first episode. The cultural dissimilarity between early 1996 and early 2011 increases the possibility of a shutdown now. The warnings of Fed Chairman Bernanke and other authorities about the perils of this game of chicken are surrounded by too much uncertainty to act as a real deterrent. Like fifteen years ago, the instigation for a shutdown will be political, and the reasons not to have one cannot be sufficiently understood in advance to trump the politics that makes a shutdown so tempting and seemingly righteous.
Copyright Larry Greenberg 2011. All rights reserved. No secondary distribution without express permission.
Tags: U.S. Federal shutdown
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