NOMPU SIZIBA: A meeting yesterday between US President Donald Trump and the Democrats on the US/Mexico border war turned into stalemate, with the president allegedly thumping his fists on the table as the Democrats would not give in to his demand that they sign off on funds for his campaign pledge to build a border wall along Mexico. The partial government shutdown is now on its 20th day, and half a million federal workers are set not to be paid for the first time this week, owing to the current impasse. But how long can the deadlock possibly last? Apart from the inconvenience of people not being paid, what other negative impact is this situation likely to have?
Well, to break down the possible political and economic impact I’m joined on the line by Maarten Ackerman, who is an economist at Citadel. Thanks very much for joining us, Maarten. Over half a million people or breadwinners are likely not to be paid by the Federal Government because of this impasse. At a human level this is very negative indeed and will no doubt not be forgotten.
MAARTEN ACKERMAN: Yes. Good evening. I think President Trump is using this as leverage, unfortunately, trying to get one of his last election promises passed, and that’s to build the wall. You are right. The people who are taking the pain at the moment are the voters or citizens on the ground – add in the thousands that won’t get paid this week. He is playing a very fine game, because next year he might want to stand for a second term and, if he continues this way, he might lose a couple of voters. You can add to that the situation with the trade tensions with China, which are also going to cost the US citizens a little more in terms of what they pay for normal products and goods. So it’s a very fine game.
NOMPU SIZIBA: If the situation continues as it is, what other possible ramifications will this have? Obviously, those people are unfortunately not getting paid, but we are hearing about certain tourist areas not being open, which will have an impact on tourism, revenues and so on.
MAARTEN ACKERMAN: Eventually the government shutdown is of non-critical services. It won’t be people who work in hospitals or police services and such. But you are correct in saying that it is impacting the tourist industry as well. And then the ripple effect – if 800 000 people don’t get paid, they don’t spend. If you don’t get your tourists, and the museums are not open, eventually it will cost the US economy during the quarter. The US economy is still fine at this point in time, though it is slowing. Some indicators are showing that it will slow further this year, and this is something that they don’t need at this point.
I also think it’s very important to understand that it’s not that the Democrats don’t want to work together. They were willing to pass a couple of fundings to re-open the government. They are on the same page in wanting to increase security; they just feel that, regarding the suggestion about building a wall or a fence – he’s now talking about a fence – there are more efficient ways of doing that. But I think President Trump, like I said, wants to deliver on that promise he made, and it’s unfortunate at the moment that they are not moving forward.
NOMPU SIZIBA: Mr Trump is able to call a state of emergency. On what grounds could he do that, and what would the implications be of invoking such? Does it mean that he would be able to just run over roughshod, and get the money somehow? What does that mean?
MAARTEN ACKERMAN: If he declares a state of emergency, he has the power to fast-track and get the funding requirement or the bill through parliament [Congress] to get the funding. But it is quite serious to call a state of emergency in terms of what happens after that. So I’m not sure whether he will do that. That’s why I said he’s using this as a bit of leverage and he’ll see how far he can push getting the deal done. To call a state of emergency is possible, but I’m not sure he will do that in this environment. He must think about his popularity. We know the Democrats went with the House in last year’s November elections, and these kind of things are possible and will remain quite possible for the rest of his term, when they will really struggle to get onto the same page to make any decisions.
NOMPU SIZIBA: Maarten, in the run-up to the government shutdown, this was attributed to some of the market volatility that we saw in December. But since then what impact, if any, has the shutdown had on US markets and markets in general, as other issues like the trade talks seem to have dominated the situation?
MAARTEN ACKERMAN: I think since December markets are obviously up, year to date, more than 3%. Markets are a little calmer at this point, and I think for a couple of reasons. The one is the Fed. Also the minutes that came out yesterday indicated that they would think twice about hiking again. They will definitely consider the strength of the US economy but, as mentioned, they will take into account what’s happening in markets at this point. If there is any chance that the Fed will hike more slowly this year, or even skip a hike at the next meeting in March, that will be very positive. That’s what we see in markets at this point.
And then, in terms of the trade negotiations, we are not sure yet whether there will be any agreement. The feedback from China so far is that they are making progress, and it seems that they are moving in some direction. Yet again, I think Trump has an incentive to get to some deal because for the first time since he has been in power, the US economy is now slowing and markets have taken a knock, especially in December. If he continues quite aggressively with trade tensions with the Chinese, and markets continue down this trend, eventually the United States public will start to blame Trump, and say it’s because of his policies that the government is being shut down, that the markets are under pressure and the economy is slowing down. So he is very much at the end of what he can push through to get some of his promises delivered.
NOMPU SIZIBA: So, Maarten, who is going to blink first? If Mr Trump doesn’t, he runs the serious risk that the American electorate will punish the Republican Party for the consequences that are associated with the partial government shutdown.
MAARTEN ACKERMAN: Yes, I fully agree with you. But, given his personality and his ego, and the fact that he walked out during that meeting yesterday, I’m not sure whether he will be first to blink. The Republicans are well aware of this and they might try to influence him. But the bottom line is we have already started seeing change in the midterm elections in November.
So, if he continues this way, it will make it very hard for him to stand for a second term, or for the Republicans to be successful again, come next year, 2020. He will definitely still think about his voter base, those who voted him in. Those are what they call the Rust Belt, the old manufacturing region in the US. It’s for these people that he made promises about bringing jobs back home, and that’s why he is talking tariffs. They actually don’t need tariffs, because the economy is doing quite well. You need to impose tariffs only if you want to protect the economy from job losses. At the moment anybody who wants to work can work – there are more jobs available than there are people to do those jobs.
Trump is definitely doing all these things as part of his political propaganda, trying to talk to his more conservative voter base. It’s also for these people that he started talking about the wall. We keep on talking about the wall, but what he is saying behind that is that illegal immigrants are taking away jobs, illegal immigrants are increasing crime in the country, and they are contributing to drug trafficking. All those things are true, and that’s why the Democrats are agreeing with that now, saying he will definitely need, from a social security point of view, to look into those matters. But to have $5.6 billion spent on trying to build a wall, which might not even work as they hope, is what they disagree with. They think there are more efficient ways of controlling those kind of risks that the US faces across the border.
NOMPU SIZIBA: Especially when there are so many other priorities. Thanks very much, Maarten, for your time on this subject.