Trump: Shutdown Will Last ‘as Long as It Takes’

Plus, did the tax cuts make America poorer?

Shutdown Will Last ‘as Long as It Takes’

Welcome to 2019!

It’s a new year, but the same old shutdown, as the impasse between President Trump and congressional Democrats grinds through its 12th day with little sign of progress.

  • This could go on for days, or even weeks, Senate Majority Leader Mitch McConnell indicated Wednesday after a meeting between top lawmakers and the president at the White House.
  • With the holidays over and a new Congress set to be sworn in Thursday, the president invited McConnell and other congressional leaders to a “briefing” about the border wall in the White House situation room — the first sign of direct talks between the parties since the partial shutdown began on December 22.
  • “Border Security and the Wall ‘thing’ and Shutdown is not where Nancy Pelosi wanted to start her tenure as Speaker! Let’s make a deal?” Trump tweeted Tuesday. But ahead of his meeting with top lawmakers, Trump stood by his demand for more than $5 billion in border wall money and declined to say whether he would sign off on legislation that included less.
  • "The $5 billion approved by the House is such a small amount compared to the level of the problem," he said, adding that the shutdown could last “a long time” or could be over quickly — but that he’d be willing to keep the government shut down “as long as it takes” to secure funding for the wall.
  • Before Christmas, Vice President Mike Pence had reportedly offered Democrats a compromise that called for $2.5 billion in border security and immigration funding. Trump on Wednesday said that he would not accept that amount, again highlighting the difficulty of negotiating with the administration.
  • Wednesday’s meeting ended without any indication of compromise, though the president invited lawmakers to return to the White House on Friday.

What Happens Next

Democrats, set to take control of the House on Thursday, plan to pass six appropriations bills to fund most shuttered departments and agencies through the end of the fiscal year in September, at levels Senate Republicans have previously accepted. They also plan a separate bill funding the Department of Homeland Security until February 8, without providing additional border wall money that Trump wants.

Those House votes won’t be enough to reopen the government — they’ll just put the ball in McConnell’s court. The Senate GOP leader has made clear he will not move forward on any legislation until Trump publicly approves it, and the White House says that the Democratic plan is a “nonstarter.” Trump has said he won’t sign off on bills to reopen the government unless he gets money for the wall, but he has failed to clarify just what that means.

As the president and Democratic leaders each try to ramp up the pressure on the other side, the government departments and agencies affected by the shutdown are reaching what Politico called “a breaking point in their ability to go on with minimal disruption.” Many departments and agencies that were able to use leftover funds to continue operating through the initial days of the shutdown have now run out of cash.

The National Zoo and 19 Smithsonian museums are now closed, for example. And federal workers who got paid Friday for the pay period that ended December 22 now face the prospect that they’ll miss their next paycheck. The American Federation of Government Employees filed a lawsuit Monday against the Trump administration, alleging that the shutdown is illegally forcing more than 400,000 federal employees to work without pay.

Why the Shutdown Fight Makes No Sense…and Could Last a Long Time

This shutdown is already one of the longest since modern budget rules took effect in 1976 — and it could drag on for a while. One reason, as Bloomberg’s Jonathan Bernstein points out: Both sides probably think they’re winning.

Democrats know they’ll take control of the House on Thursday and that polls show Americans blame Trump more for the shutdown. The latest Economist/YouGov poll finds that nearly half of those polled say Trump is more to blame, compared to 35 percent for congressional Democrats. And 40 percent say that Trump should accept the $1.6 billion Democrats had previously agreed to provide for border security, while another 19 percent say Trump should accept less than $5 billion he has demanded.

In Trump’s case, though, it’s not quite clear what winning means. He’s demonstrated his willingness to fight for a barrier of some kind on the border with Mexico, keeping his conservative base behind him, but he doesn’t appear to be any closer to securing funding for a wall. And as the shutdown continues, Trump may risk alienating Republican lawmakers. “The incentives for congressional Republicans to stick with him are already unusually low, and now he’s shutting down the government over a policy that few of them care about very much,” Bloomberg’s Bernstein says. “At the same time, his foreign-policy decisions are angering many in his party and financial markets are in turmoil.”

Trump is volatile and unpredictable. He had little leverage to force Democrats to agree to his wall funding demands, but chose to force a shutdown anyway. He has even less leverage now. He could continue the standoff, or he might decide to accept a deal that doesn’t meet his demands and seek to spin it as victory. “It’s impossible to predict how these negotiations will end,” Bernstein says, “because one side isn’t guided by logic.”

The New York Times Editorial Board suggests that, at some point, the pain inflicted by the shutdown may start to weigh on Trump, forcing him to back down from what they see as an “empty political stunt” and begin genuine negotiations: “After all his bluff and bluster, if the president backed down now, he would incur the wrath and ridicule of hard-right pundits like Rush Limbaugh and Ann Coulter, who seem to call the shots in this White House, as well as die-hard supporters who still think a concrete wall — or at least some ‘artistically designed steel slats’ — will Make America Great Again,” they write. “But there is likely to be a limit to how much Mr. Trump can make Americans suffer for an empty political gesture.”

The bottom line: Wednesday’s unproductive meeting with congressional leaders may be an indication that we’re nowhere near that limit yet.

Metaphor of the Day

“President Trump and his coterie of immigration hardliners seem to be the last people in D.C. not to understand that America will not be building a 1,900-mile wall along its southern border any time soon. They have hijacked an empty plane and are issuing demands like it's full of women and children. The stupidity is staggering.”

– Opinion writer David Faris, at The Week. Faris argues that, to avoid the “ugly, destructive budget battles that have characterized the past decade,” the U.S. should consider "either a mechanism that automatically renews existing funding levels for some set period of time (3 or 6 or 9 months, for instance) or even mandates spending increases indexed to inflation for the duration of the standoff." Read his full piece here.

Why the Next Fiscal Fight Could Be Much More Dangerous

The partial government shutdown has had limited impact so far, but the dysfunction currently on display in Washington doesn’t bode well for another fiscal fight on the horizon, says Chris Krueger of Cowen Washington Research Group. The U.S. will need to raise the debt ceiling sometime after the current suspension expires in March, and the ongoing conflict in the nation’s capital raises the possibility that the process may not go smoothly. Failure to raise the debt ceiling in a timely and orderly fashion could have lasting negative effects, including a loss of market confidence in U.S. debt.

Here’s how Krueger summarized the potential dangers ahead in a note to clients:

“If the shutdown is any indication, the failure of basic forms of government competency should give some pause around a much larger fiscal deadline: the debt ceiling. On March 1 the debt ceiling will be hit and the Treasury Department will begin ‘extra-ordinary measures’ (EM) to keep the U.S. from entering technical default scenarios. When these measures expire is known as the ‘X-Date,’ which could be sometime in the June/July timeframe. … We would note that EM has never (to our knowledge) been utilized in a rate-rising environment - and this is a Treasury Department that does not have the benefit of the three previous rounds of EM (the most recent round in early 2018 was relatively short). Five words that should cause market participants concern regarding the debt ceiling: ‘execution risk with extraordinary measures.’ Treasury is remarkably short staffed and EM is at best an imperfect function of government. The fear is that Treasury's projections on incoming revenues are off, the X-Date is breached, and the U.S. missed a Social Security payment or something to that affect."

A workaround named Gephardt? Democrats are taking steps to reduce the potential for stumbling into those negative outcomes, however. The new House is poised to pass a package of rule changes that includes a revival of the so-called Gephardt Rule, which automatically includes a provision to raise the debt ceiling whenever the House passes a budget that exceeds the existing limit.

NPR’s Susan Davis wrote that, “The rules change — coupled with Senate Majority Leader Mitch McConnell's longstanding promise that the U.S. will not default on its debts — greatly diminishes the odds of a default threat in the new, divided Congress.”

But there’s always a chance: The House is only one of the players involved in raising the debt ceiling. “There are three sources of people who can refuse to raise the debt limit — the president, the Senate and the House — and now one of them has been removed,” Stan Veuger of the American Enterprise Institute told MarketWatch. But that leaves the Senate and President Trump in position to throw a wrench into the process. While the Senate is unlikely to put up a fight over the issue, the president remains a wild card, as always — which means the debt ceiling will remain a potential source of serious conflict in the weeks ahead.

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Op-Ed of the Day: Trump’s Tax Cuts Probably Made America Poorer

Economist Paul Krugman took another look at the 2017 tax cuts in The New York Times Tuesday, arguing that they are “even worse than you’ve heard.”

Many critics of the tax bill have complained that while it encouraged multinational corporations to bring home billions of dollars in overseas profits, much of that cash has been used for stock buybacks rather than the long-term, economy-strengthening investments that were promised. But Krugman says that complaint falls short, since in his view, very little money has been brought home by U.S. companies. Even worse, the tax cuts may be lowering overall national income, leaving most Americans worse off in the long run.

On the first point, Krugman argues that the surge earlier this year in overseas dividends paid by foreign subsidiaries to their parent companies in the U.S. was little more than illusion produced by accounting entries in companies’ books. After moving money around internally, each company’s overall balance sheet “hasn’t changed at all,” Krugman writes, and there’s no reason to think the accounting maneuvers have meaningfully affected the investment outlook of any given firm. To support his claim, the economist cites data from the U.S. Bureau of Economic Analysis, which shows little change in net capital inflow to the U.S. in the wake of the tax cuts.

On the second point, Krugman argues that the tax cuts produced a significant windfall for foreign investors in U.S. companies, with money that was previously being collected by the federal government now flowing overseas. Roughly a third of U.S. corporate profits are claimed by foreigners, which means roughly a third of the corporate tax cut is now leaving the country. The size of the outflow is so large that it could negate any positive GDP growth resulting from the tax cuts. Given this effect, “the tax cut probably made America poorer, not richer,” Krugman writes.

Read Krugman’s full analysis.

Drugmakers Hike Prices to Start 2019

More than three dozen pharmaceutical companies raised the prices of hundreds of drugs effective January 1, The Wall Street Journal reports. The average increase was 6.3 percent, according to an analysis by software provider Rx Savings Solutions. Drugmaker Allergan said it raised the price of 51 products, including 27 that went up by about 9.5 percent and 24 that saw prices rise by just under 5 percent.

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