The Looming Springtime Shutdown of the U.S. Government

Spring is approaching in Washington, and most investors know what that means: the start of federal budget debate season and the annual ritual known as "rhetoric for dollars."

However, this year the rhetoric and its consequences could really hurt investors, as in turmoil for stock and bond markets, if Capitol Hill lawmakers and the president don't compromise and reach an agreement on the budget.

Congressional Republicans, now in control of the U.S. House of Representatives, and President Obama have until March 4 to agree on a budget or a stop-gap measure known as a continuing resolution, or another temporary extension, to keep the U.S. government funded and open. On March 4, the current stop-gap funding measure expires, and the U.S. government runs out of money.

Without an agreement by March 4, several U.S. government agencies will be forced to close, and Social Security checks, and other federal payments, could be delayed.

What's the GOP's Real Strategy?

Congressional Republicans, now in control of the House in good part due to support from voters who want federal spending cut substantially, say there won't be a government shutdown. But the latest House Republican action hardly defuses the crisis and potential fiasco.

On Wednesday, it was reported that House Republicans passed a continuing resolution that contains about $60 billion in cuts from this year's budget, fiscal 2011. Obama administration officials have already issued a statement indicating that President Obama will veto that resolution in its current form.

House Democratic Whip Steny Hoyer (D-Md.) said: "If the government shuts down, it will be the Republicans' responsibility," politico.com reported.

Senate Republican Whip Jon Kyl (R-Ariz.) said talk of a shutdown is greatly exaggerated. "The government isn't going to shut down," Kyl told Fox News Tuesday. "Nobody is talking about shutting the government down."

However, on Wednesday House Speaker John Boehner (R-Ohio), increased that probability by ruling out another, short-term, stop-gap funding bill, which would give both political parties more time to reach an agreement.

Boehner said he's "not going to move any kind of short-term [funding bill] at current levels. When we say we're going to cut spending, read my lips: We're going to cut spending," politico.com reported.

Will Republicans Repeat Gingrich's Mistake?

Further, although budget-cutting zeal from Tea Party voters and other conservatives may be pressuring congressional Republicans to slash spending at any cost, history may provide an important electoral lesson concerning the federal budget, U.S. government operations and voter attitudes.

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In the fall of 1995, then Speaker Next Gingrich (R-Ga.) chose to shut down the federal government rather than pass an alternative budget, after then President Bill Clinton vetoed a Republican-crafted budget, due to its cuts in Medicare, education and environmental programs.

Gingrich blamed Clinton for the shutdown, which had two stages. But most Americans, apoplectic that the world's richest and most technologically advanced democracy, somehow couldn't find a way to maintain basic public services -- blamed the Republican-led Congress. And Clinton's approval rating rose both during and after the crisis. Voter distaste for Gingrich's government shutdown, along with a very strong U.S. economy, were factors in President Clinton's reelection in 1996 over Republican challenger, former U.S. Sen. Bob Dole.

While a government shutdown isn't likely to interrupt the U.S. Treasury Department's operations -- under most circumstances the department will still be able to issue bonds -- just the sight of federal buildings and departments temporarily closing and senior citizens upset about their missing monthly Social Security checks -- would hardly be calming for U.S. stock and bond markets.

Finding Common Ground

Of course, a government shutdown need not occur. All President Obama and congressional Republicans have to do is find common ground and do what's reasonable. President Obama can do so by outlining reasonable cuts in nonessential programs; congressional Republicans by scaling back their draconian reductions specified in the continuing resolution. Finding common ground here would also serve as a case study for responsible decisionmaking for a nation that needs to tackle the big issues of entitlement reform and taxes in the quarters ahead.

Finding common ground. Acting reasonably. True, those attributes are usually in short supply in Washington, no matter what the season.