Government Shutdown Starts; Congress Remains Deadlocked

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Budget Battle
Evan Vucci/AP
By Andy Sullivan
and John Whitesides

WASHINGTON -- Up to 1 million federal workers were thrown temporarily out of work Tuesday as the U.S. government partially shut down for the first time in 17 years in a standoff between President Barack Obama and congressional Republicans over health care reforms.

The stalemate closed museums and national parks and slowed everything from trade negotiations to medical research, while sparking new questions about the ability of a deeply divided Congress to perform its most basic functions.

However, the standoff didn't prevent the Obama administration from rolling out enrollment in health insurance marketplaces, the centerpiece of the most ambitious U.S. social program in five decades.

Republicans in the House of Representatives wanted to block Obama's signature Affordable Care Act by tying continued government funding to measures that would undermine it. But the Democratic-controlled Senate repeatedly rejected those efforts.

In Washington, museums were closed to tourists and police erected barriers around landmarks like the Lincoln Memorial. The National Zoo shut off a popular "panda cam" that allowed visitors to view its newborn panda cub online.

%VIRTUAL-article-sponsoredlinks%"I think it's outrageous. You know these guys are put into office to help the people, not to hurt them," said federal worker Ronald Jackson, who commuted 55 miles in to work at the Treasury Department only to be sent home.

If Congress can agree to a new funding bill soon, the shutdown would last days rather than weeks, with relatively little impact on the world's largest economy.

But the standoff continued on Capitol Hill as the Democratic-controlled Senate formally rejected an offer by House Republicans to break the logjam.

"This shutdown was completely preventable. It should not have happened," Obama wrote in a letter to government employees.

Whether the shutdown represents another bump in the road for a Congress increasingly plagued by dysfunction or is a sign of a more alarming breakdown in the political process could be determined by the reaction among voters and on Wall Street.

The market appeared to be taking the closure in stride for now. U.S. stocks rose modestly as the S&P 500 (^GSPC) edged up 0.8 percent and the Nasdaq Composite (^IXIC) gained 1.1 percent.

A weeklong shutdown would slow U.S. economic growth by about 0.3 percentage points, according to Goldman Sachs (GS), but a longer disruption could weigh on the economy more heavily as furloughed workers scale back personal spending.

The political crisis raised fresh concern about whether Congress can meet a crucial mid-October deadline to raise the government's $16.7 trillion debt ceiling. Some Republicans see that vote as another opportunity to undercut Obama's health care law.

Failure to raise the debt limit would force the country to default on its obligations, dealing a blow to the economy and sending shockwaves around global markets.

A 2011 standoff over the debt ceiling hammered consumer confidence and prompted a first-ever downgrade of the United States' credit rating.

Analysts say this time it could be worse. Lawmakers back then were fighting over how best to reduce trillion-dollar budget deficits, but this time they are at loggerheads over an issue that does not lend itself to compromise as easily: an expansion of government-supported health benefits to millions of uninsured Americans.

Republicans have voted more than 40 times to repeal or delay "Obamacare," but they failed to block the launch of its online insurance marketplaces on Tuesday. The program had a rocky start as government Web sites struggled to cope with heavy online traffic.

"What I'm hearing from my constituents at home is if this is the only way to stop the runaway train called the federal government, then we're willing to try it," said Texas Sen. John Cornyn, the second-ranking Republican in the Senate.

After missing the Monday midnight deadline to avert the shutdown, Republicans and Democrats in the House continued a bitter blame game, each side shifting responsibility to the other in efforts to redirect a possible public backlash.

A Reuters/Ipsos poll showed about one-quarter of Americans would blame Republicans, 14 percent would blame Obama and 5 percent would blame Democrats in Congress, while 44 percent said everyone would be to blame.

But the shutdown battles of 1995 and 1996 didn't substantially affect public's opinion of then-Democratic President Bill Clinton or his main adversary, Republican House Speaker Newt Gingrich, the Gallup polling organization said.

Political Polarization

This latest shutdown, the culmination of three years of divided government and growing political polarization, was spearheaded by Republicans associated with the conservative tea party movement united in their opposition to Obama, their distaste for the president's health care law and their campaign pledges to rein in government spending.

"While I don't want to shut down government and I would be for short term solutions to keep it open, I think we do sometimes have to take a stand and say: 'Enough's enough,'" Republican Sen. Rand Paul, a leader of the tea party movement, said on CNN.

While some government offices and national parks were shuttered, spending for essential functions related to national security and public safety continued, including pay for U.S. military troops.

Though the impact was likely to be most apparent in the Washington region it will be felt across the country as the federal government maintains offices in every major city and parks and other facilities are spread across all 50 states.

Republican Sen. John McCain, who has opposed his party's efforts to link government spending to Obamacare, said his constituents were angry about the shutdown as landmarks in his home state of Arizona were closed to the public.

"People that had planned for months to go to the Grand Canyon" will be upset to find it closed, he told reporters.

Defense Secretary Chuck Hagel, visiting U.S. ally South Korea early Tuesday, warned that the shutdown would undermine American credibility abroad and lead allies to question the nation's commitment to treaty obligations.

Some analysts said a brief government shutdown -- and a resulting backlash against lawmakers -- could cool Republican demands for a showdown over the debt limit.

Others said they were surprised that a shutdown hadn't happened earlier.

"We have a divided government with such diametrically opposed views, we need a crisis to get any kind of results," said Republican strategist John Feehery, a former Capitol Hill aide.

In Their Own Words: How 13 CEOs Feel About the Economy
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Government Shutdown Starts; Congress Remains Deadlocked


So you're seeing a lot of strength in housing, and it's coming from almost every place geographically ... So that's sort of the big winner. Auto and that whole complex is a big winner. They're doing over 15 million cars this year, up from 8.5 at the bottom. And then you have the energy complex, which is really, really a revolution. This is hard to underestimate the impact of energy and all the natural gas that's being produced and all the subsidiary types of things that come from that activity. And if you add on top of that, technology which is still a very big pocket of strength and quite robust in the United States, you've got some really good stuff happening.

On the other hand we do have the U.S. government at work, trying to decrease growth as rapidly as they can. And so they've, unfortunately, had some success in that area, and that leaves us somewhere in the 2%-plus area.

We think that the next big risk in the industry is rising interest rates. And so we're very focused on what happens when interest rates return to a more historically normal level.

On the positive side, economic fundamentals in the United States continue to improve. The main impediment to growth appears to be the speed and nature of the withdrawal of fiscal stimulus. Debate has actually now opened up on how and when to withdraw some of the monetary expansion. All of this is very good news.

At the same time, the rest of the world looks no stronger. Europe is mired in a recession, Asian growth seems more modest and Japanese attempts to restimulate their economy through monetary stimulation have set off further downward pressure on interest rates and currency values.

The overriding driver of recovery in the housing market remains the underproduction of both single and multifamily product throughout the economic downturn and up to and including this year. Over the past 5 years of housing production, we've built an average of under 700,000 single and multifamily homes total per year, with an average obsolescence rate of approximately 300,000 per year. This compares to a need for new dwelling units per year of between 1.2 million and 1.5 million.

This year, a significantly stronger year of building activity, we will produce approximately 950,000 single and multifamily dwellings, and again, will underserve the country's needs. We have more than absorbed the overbuilding of the early to mid-2000s, and have been underproducing for a protracted period of time. This shortfall will have to be made up, and the builders of both multi and single-family products have been pushing to increase production.


I think when you look at some of the economic indicators, housing starts are up, prices are up on housing. I think housing is a really important measure for us because we have a lot of jobs around that. A lot of contracting roofers, et cetera, around that. All of that is positive. And so we're feeling like we're coming off the end of the year with some momentum, and that will certainly help us.

I think there's reason to be very optimistic when you consider that demographic tailwind that will continue over the next 5 to 10 years, certainly. And then when you think about just the economy itself and you look at the strength of the balance sheets of consumers and corporations, the amount of liquidity out there, combined with the depth of the housing correction, I think there's a good argument we made that the housing cycle we're in right now will be strongest of the last 3 that we've seen.


Although we have seen recent improvements in the U.S. economy, growth is relatively light and confidence remains fragile. In addition, while the market generally feels better about the tail risk in Europe, the economy is challenged.

Given the continued uncertainty in the market, we are not managing the firm with the hope that the macro backdrop will improve. We are focused on managing through a continued difficult operating environment.

We continue to be very concerned about the prospects for the financial markets and the economies of North America and Western Europe, accentuated by potential weakness in China. There continues to be a big disconnect between the financial markets and the underlying economic fundamentals.
Markets are firming. If the economy continues to expand like it is, I think you'll see the banks loosen up. And if sort of rates go up a little bit but underwriting loosens up a bit, I think you'll see similar demand, if not more. That's why we're not troubled by a little uptick in interest rates right now.

The situation in Europe is not even slightly better. It's probably slightly worse. Even if we do not have a Greece event, if you will, the environment is moving from an economic standpoint to recession. And so the mood with our clients over there is still to be thoughtful and to be very mindful about the way they invest. And when clients are thoughtful and mindful, they tend to wait a little bit more and to think further on when and how much they're going to invest. 



"I think the whole thing about the 2% extra payroll tax wasn't helpful. Don't forget, in America, the average household makes $50,000. 2% is $1,000 a year. I mean, after tax, that's a hurt in their pocketbook. Gas prices have been going up. I -- and you've seen the retailer results, the Walmarts, Kmarts, Targets, Costcos of the world had, had results less than they expected, not very good. So it's weak. I don't think it's -- I'm not ready to declare it's a permanent decline or a second dip on the recession there, but it's a little nervous as far as what's going on up there."



We're really proud now that the [government budget] deficit could only be $600 billion in the year, and while that's encouraging, it doesn't do anything to fix the long-term problem, and the long-term problem is entitlements. If you take a look at the Medicare and Medicaid in particular and some on Social Security that while debt as a percent of GDP is we'll say around 75% today and under the new estimate grows to 83% by the end of the decade ... You take those same numbers, go up to the next decade and it goes to 135% debt as a percentage of GDP largely driven by the baby boomer generation retiring which no politician, Republican or Democrat, really wants to talk about. They're more than willing to say we got to reform entitlements but as soon as you say well, like what, that's when they all start to back off because they don't want to anger the voters.

I think there's a lot of concern about central banks not just in the U.S., China elsewhere, and maybe they stretched themselves out, and they played this maybe game, you want to call it for quite a while and maybe they are getting a brick wall, and the days of easy and free money may be coming to an end or at least maybe tapering off. But it probably wouldn't be good [for the global economy in the short-term], maybe good for long-term because then it would be more based upon fundamentals rather than speed injections.

Photo: Park Electrochemical

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