Senate Passes Stopgap Bill to Avert a Government Shutdown

The shutdown looks like it could be shut down.

A handful of Republicans joined nearly all the Democrats in th U.S. House of Representatives Saturday afternoon to pass a stopgap measure proposed by House Speaker Kevin McCarthy (R., Calif.) to avert a government shutdown.

“If there’s one thing you should start understanding, not just that I’ll never give up, but I’m a type of conservative that wants to get things done,” McCarthy said at a press conference after the vote. “It’s easy to be a conservative that wants to do nothing. But I believe America wants to find the conservative that can make government work efficiently, effectively, and accountable.”

McCarthy says that his focus in the appropriation process would be to cut “wasteful spending in the wokeism” and securing the border.

The measure to fund the government until mid-November now heads to the Senate, which had mere hours to act ahead of a midnight deadline when the current year’s funding for the government is set to expire.

With Democrats seemingly supporting the measure, there remained hope that the Senate—which had earlier been on its way to passing a bipartisan funding bill of its own—would approve the resolution and pass it along for President Biden’s signature in time to beat that deadline.

Given the frequency of government shutdowns in recent years, investors have largely shrugged them off as nonevents. Traditionally, there has been a mild drag on economic growth for the duration of a shutdown, with growth rebounding by a commensurate amount once Congress passes spending legislation and the government reopens.

The outlook wasn’t so benign this time around.

Until Saturday afternoon, lawmakers in Washington appeared locked in a bitter standoff over spending legislation, leaving the government all but certain to shut down just after midnight on Sunday, Oct. 1. If that happened, an estimated 800,000 workers would have been furloughed, while hundreds of thousands of others would have been working without pay. The vast network of government subcontractors would also have been out of work, and unlike their federal counterparts, they wouldn’t have received back pay.

Those lost hours of work, and the resulting hit to consumer spending, were estimated to cost the U.S. economy $6 billion a week, according to calculations by Gregory Daco, chief economist at EY-Parthenon. That would have meant shaving 0.1% off real gross domestic product in the fourth quarter for each week that the shutdown lasted.

Republicans had joined with Democrats Friday night to defeat a stopgap measure proposed by McCarthy that would have slashed spending and imposed harsh new immigration controls.
The measure that passed Saturday sustained most spending at current levels for 45 days, though it lacked funding to aid Ukraine in its war with Russia, which most Democrats had supported.

Libby Cantrill, head of U.S. policy at Pimco, described the politics at play as a “Sophie’s choice” for McCarthy. His options appeared to be either to work on bills that would appease a small cadre of far-right lawmakers but had no shot at passing the Democratic-led Senate, or work across the aisle to keep the government open but likely risk his speakership.

He appears to have opted for the latter.

The challenge, Cantrill said, is that those political dynamics wouldn’t have changed even after the funding deadline passed, which is why she was worried the conflict could have become protracted. “Our concern is that the reasons why the government would shut down are, in some ways, the reasons why it may not reopen quickly,” Cantrill told Barron’s before Saturday’s House vote.

The economic impact of a brief shutdown would have been “very negligible,” Daco said before the vote. But the costs would have piled up until a deal was struck. While economic and political analysts had expected a shutdown to last for at least two or three weeks, there was growing concern that disagreements in Congress are so entrenched that it could have stretched on far longer than that—perhaps more on par with the 2018-19 partial shutdown that lasted 35 days, the longest in U.S. history.

This spending fight could have lasted longer than others for two reasons. For one, there was nothing on the political calendar that would have forced the two sides together by a particular time, especially because missing the deadline to pass the spending legislation in the first place would have had only mild consequences. 

That was in contrast to recent fights over the debt ceiling, the breaching of which would have carried crippling economic and financial ramifications.

The previous full government shutdown, in 2013, was tied to a debt-ceiling fight, and lawmakers ultimately compromised and passed the necessary appropriations bills just before reaching the so-called X-date, which would have forced the country to default.

The impasse, with all of its accumulating costs, would have hit the U.S. economy alongside a handful of other headwinds. Oil prices, for one, are rising, pushing headline inflation up and cutting into consumer spending. Student-loan payments are on track to restart after more than three years of forbearance programs. The last of the Covid-era stimulus money that has helped keep the child-care industry afloat is about to run out. And tens of thousands of autoworkers are on strike as employees push for higher wages.

Plus, for as long as the government is shut, the Federal Reserve wouldn’t receive most of the economic data it uses to craft monetary policy, including updated figures on jobs, inflation, and economic growth. That could have made it harder to see how the economy is reacting to various external factors, such as higher interest rates, and raise the odds of a policy misstep.

All that added up to it looking like “a tough quarter,” Mark Zandi, chief economist at Moody’s Analytics, said before the House vote.

Write to Jacob Adelman at [email protected] and Megan Cassella at [email protected]