No compromise as shutdown heads into second week


October 7, 2013

Heading into the second week of the shutdown, leaders in Washington have showed no signs of willingness to compromise.

The Department of Defense announced over the weekend that it will be calling back to work many of its furloughed civilian workers after determining a bill passed by Congress just prior to the shutdown gives the agency the authority needed to pay civilian personnel. On Saturday, the House continued its strategy of passing smaller measures to fund certain areas of the government by passing legislation to provide back pay for more than 800,000 furloughed federal workers in spite of the consistent message from Senate Majority Leader Harry Reid (D-NV) and President Obama that they will not support these types of individual measures instead of a “clean” spending bill free of other provisions.

Meanwhile, a group of moderate House Republicans is looking to garner the support of 100 of their Republican colleagues to bring a short-term “clean” continuing resolution to the House floor. This would keep the government funded as congressional leaders and the White House negotiate on a long-term spending deal and a debt ceiling increase.

Each passing day of the government shutdown increases the chances that a broader compromise will be needed for a debt ceiling increase to pass Congress. Such a compromise could include some relief from the current across-the-board spending cuts implemented last spring. It is important to note, however, that such a deal has eluded Congress and the White House since 2011, when they dealt with the first so-called “fiscal cliff.” It also makes the passage of debt ceiling increase legislation more vulnerable, especially within a timeframe comfortable for financial markets.

The economy may suffer during this period, as rapidly changing headlines could potentially lead to slower hiring, lower spending on capital goods and consumer goods, and volatility in financial markets. A quick agreement on both the debt ceiling and the shutdown, on the other hand, could nudge the economy and markets back onto their pre-crisis growth path. For more on the government shutdown’s effect on markets and the economy, read the latest from TIAA-CREF Chief Economist Tim Hopper.