The US government shutdown is just a distraction – the soaring markets are a far bigger problem

It is a fun political story for the wonks of Washington DC, but in economic significance it barely registers

Hamish McRae
Saturday 20 January 2018 16:24 GMT
Trump has used shutdown to encourage people to vote for more Republican senators
Trump has used shutdown to encourage people to vote for more Republican senators (Reuters)

To anyone outside the United States, the idea that the government should shut down is both troubling and absurd. It is troubling that governments don’t just shut down, well, anywhere else, even in those African nations disparaged by the President. But it is also absurd because in practice the US government doesn’t actually shut down at all. What is happening is the legislature is exerting its control over the executive by stopping funding, and this is the 18th time it has done so since 1976. Congress likes to show the administration who is boss.

It is a fun political story for the wonks of Washington DC, but in economic significance it barely registers. I suspect in this case things will be sorted pretty fast. Meanwhile there will be minor irritations, with some of the more mundane government services being suspended. For example, visitors to national parks may find the loos are locked. It is possible, too, that some federal employees may have to wait for their salaries to be paid, which would be pretty disgraceful. But the big things such as security at airports are so far unaffected. In past shutdowns, there has been minimal impact on the wider economy.

Before Europeans sniff at the curious way that those Americans run themselves, they should remember that in 2010-11, Belgium ran without a government for about 18 months, and the mighty Germany is still struggling to form one right now. All democracies have their quirks.

This is the moment the US government went into shutdown

So the adult reaction to the shutdown is to see it as business as normal – well, pretty much normal. For those of us interested in global economics, the more striking aspect of President Trump’s first year in office is the way the US economy has cantered on regardless of the turmoil inside the DC beltway. Growth is decent enough, at around 2.5 per cent in 2017, with the same expected this year. Unemployment is the lowest since 1973.

And the markets? Ask yourself this question: if in October 2016 you had known that Donald Trump would become the US President, what would you have expected to happen to share prices in America? Up or down? He has now been in the post for a year and the Dow Jones index is up 31 per cent. That is the greatest rise in the first year of any presidency since Franklin D Roosevelt took office in 1933, when the Dow nearly doubled, but Roosevelt did take over at the bottom of the deepest recession the US has ever experienced.

But it would be wrong to make too much of this rise. Actually the Dow did pretty well in the first year of President Obama, up some 28 per cent, so while The Donald may seek to claim credit for what has happened, it will have much more to do with what is happening to the US economy at this stage of the economic cycle.

That leads to a further question, which is whether the one bit of significant legislation that the administration has got through Congress, the tax cut, will help or hinder the economy. In structural terms tax reform is welcome, and the President can point to some quick wins, such as the $38bn (£27bn) of tax being paid by Apple as a result of legislative changes. Whether the detail of the reforms is optimal is another issue, and many criticisms have been made.

Whatever you think of the structural effects, though, the cyclical impact is troubling. Basically the US economy is being given a boost just as it approaches full capacity. Yes, I know that in a service-led economy it is hard to assess what full capacity means, and it may well be that unemployment can go lower yet without triggering inflation. But we also know that all expansions come to an end – there is such a thing as the business cycle – and this one will soon be the second-longest since the Second World War. We are only one year into the presidency and a downturn before 2022 might be on the cards.

We cannot know the trigger for that downturn. It could be sharper-than-expected increases in interest rates. It could be an asset price meltdown. It could simply be that the expansion runs out of puff, for sometimes they do. But common sense warns us to be prepared.

Viewed from an economic point of view, the shutdown is a distraction. As long as things are fixed reasonably swiftly it won’t matter. The problems and triumphs of the US economy are bigger than the person who happens to be President.

If the shutdown carries on, we will need to talk again. But personally, the big worry is an asset bubble, the popping of which could have serious consequences far beyond the US. We are not yet there, but there is a frothy feeling that bodes ill for the future.

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