The Government Shutdown

Over the last ten years, a number of congress members have been elected on a fairly nihilistic platform, voting against practically any spending bill (unless it buys tanks). This is a good way to get elected but it makes it hard to govern. The government has to spend money. While the Republicans have majorities in both houses, there is a huge difference in political philosophies between members of that party. So the current shutdown was probably inevitable.

What does a shutdown entail?

Apart from “essential services” (active military, FBI, air traffic controllers etc, and the congressional gym) federal government functions are frozen, and about 800,000 federal employees will be furloughed.

National parks, monuments and the Smithsonian museums in Washington will be closed. Other things that stop are processing of applications for passports and visas, and the maintenance of U.S. government websites. The Internal Revenue Service and the Federal Housing Administration close. In the 2013 shutdown there were delays in approving 200 drilling applications at the Bureau of Land Management and consideration of 700 applications for small business loans totaling $140 million.

Unless you are an anarchist (or a freedom caucus congress member), this seems bad. And, if the shutdown lasts a long time, the disruptions will get worse due to the backlogs involved.

What does this mean for the markets? 

Since 1976 there have been 18 shutdowns. The S&P 500 returns are summarized below.

Figure One: S&P 500 returns during government shutdowns.

The average daily return is -0.06%. This is significantly different from the average daily return (since 1976) of 0.04%. But nothing massively bad happened. There were no crash events.

The shutdown is a pathetic failure of governance, but it isn’t a catastrophe for the markets.