Shutdown to slowdown? How Washington’s mess is hurting business

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Scott Livingston, who runs his family's Connecticut-based manufacturing business, was fairly sanguine at first about Washington's latest budget skirmish.

That changed when he found out about a problem with one of his company's shipments. The client – the federal government – couldn't receive the order because there was no one around to inspect it. The inspector was among 800,000 federal workers sent home on Tuesday after Congress failed to renew the government's spending authority. No delivery, no money.

"It's frustrating that our government can't get its act together," said Mr. Livingston, chief executive officer of East Hartford-based Horst Engineering & Manufacturing Co., which makes component parts for aerospace, medical and technology companies. "We were just getting into a mode where we were reinvesting in the business again because we had increasing confidence."

Mr. Livingston wasn't the only one who initially shrugged when the U.S.'s elected representatives failed at what Democratic Senator Patty Murray called the "absolute bare minimum" of governing: keeping the lights on. Congress and President Barack Obama had gone to the fiscal brink a half dozen times since Republicans reclaimed the House of Representatives in 2010.

Stock markets rose on Tuesday, the first day of the shutdown. Social media reflected the nonchalance: Twitter buzzed with comments about the loss of the "Panda Cam" at the National Zoo trended. Marvin, a restaurant and bar in one of Washington's hipper neighbourhoods, hosted a "Shutdown Happy Hour" that started at noon.

But with the cessation of non-essential government services now certain to extend into next week, the light-hearted Happy Hours are giving way to more sober offerings, such as discounted lunches for federal workers. On Thursday, a Lutheran church located eight blocks north of the White House invited locals to attend a "Partial Shutdown Night Prayer." The panda jokes have subsided, replaced by laments about how the shutdown kept the Labour Department from publishing its monthly jobs report on Friday.

President Obama cancelled plans to attend summits in Asia next week, a setback to negotiations aimed at completing a trade agreement between the United States, Canada, Japan, Vietnam and other Pacific nations by the end of the year. The Standard & Poor's 500 index finished the week barely changed.

None of this is a good omen for the deadline that really matters: Oct. 17, when the Treasury says it will run out of ways to pay the country's bills unless the legislated debt ceiling is raised.

Reports toward the end of the week that House Speaker John Boehner has been telling fellow Republicans that he won't allow that to happen eased anxiety somewhat, and almost all economists agree that a shutdown that lasts even a couple of weeks would be more like a bruise to the economy than a body blow. But that is mostly a mathematical calculation. Harder to measure is the impact Washington's chronic dysfunction is having on the animal spirits that drive the world's largest economy.

At a minimum, politics is throwing sand in the gears at a moment when the U.S. is struggling to reach highway speed. The economy is getting close to where it was before the financial crisis. Companies are profitable and are hiring again, if only slowly. The problem is the next phase in the recovery will require a leap of faith: investment. And it takes a bold executive to commit money over the longer term when he or she has no idea what tax or regulation Washington might change and politicians insist on a brinksmanship approach to budgeting.

"We're looking at several substantial investment opportunities," said William Marsh, who owns American Bar Products Inc., a maker of cold-finished metal bars near Philadelphia.

"In what would normally be an incredibly easy time to make a decision and pull the trigger instead is very difficult," Mr. Marsh said, citing the uncertainty over future tax rates.

Business uncertainty

In September, Mr. Boehner floated an idea that would have avoided a showdown over keeping the government open. The Tea Party faction of his caucus rejected it as too wishy-washy. These lawmakers were intent on upending the Affordable Care Act, Mr. Obama's 2010 law designed to make health insurance more accessible for those unemployed or working in jobs with few benefits.

Mr. Obama won a second term defending his bid to extend health benefits, and the Supreme Court rejected a challenge to its constitutionality. Tea Party Republicans were determined to attack it anyway and decided they would do so by using the budget and debt-ceiling deadlines as leverage. Mr. Boehner, so far, has sided with them because he otherwise would need Democratic support to legislate.

The heads of Wall Street's biggest banks met the President and congressional leaders to warn them about the damage their latest spat could inflict on financial markets. The intervention had little noticeable effect. More than 200 trade associations, including the Chamber of Commerce, sent a letter to lawmakers last month begging them to avoid a shutdown. Lawmakers didn't listen.

Across the country, businesses large and small are exasperated by interruptions that management consultancy IHS Inc. estimates amount to $300-million (U.S.) a day. But they also are grappling with a deeper problem: Their influence in ending these fights looks limited and there may be more such battles ahead. A business community that prides itself on an ability to thrive without the help of government now is confronting the great irony that politicians that do nothing can cause the greatest harm of all.

The National Center for the Middle Market, a research group at Ohio State University, has been tracking executives who run companies with annual revenue between $10-million and $1-billion. Middle Market reckons these firms account for one third of the U.S.'s private sector gross domestic product.

For the past two years, respondents had signalled increasingly stronger intentions to invest. Those indications have now plateaued, an odd change given that economic data including initial jobless claims and factory production point to a recovery from the recession that started in 2008. Anil Makhija, a finance professor who leads the Middle Market group, blames Washington politics.

"Government has introduced uncertainty after uncertainty," Prof. Makhija said. "Given the frequency with which we've thrown wrenches into the system, and then we act surprised that the economy hasn't taken off? There is no question in my mind that it is having an impact."

"This is the biggest mess yet," said Richard McNeel, chairman of Lord Corp., a Cary, N.C.-based maker of industrial adhesives and parts with annual revenue of more than $850-million.

Mr. McNeel, a lifelong Republican and a member of the board of directors of the U.S. Chamber of Commerce, says he almost never agrees with Mr. Obama. But he's come to support the President on one issue: The relentless games of chicken over budget making must end. That's a view he also shares with many in the party he's always supported.

"I can't imagine myself ever switching parties," said Mr. McNeel, who is 67. But "this whole Tea Party scene is driving me nuts," he said, describing the frustration he feels about the business community's impotence in the Republican-dominated House of Representatives as that party all but ignores the business lobby.

"I don't think it ever has been this bad," said Steve Caldeira, president of the Washington-based International Franchise Association. "It is a very difficult environment to navigate."

The assumption that business controls the Republican Party and the unions control the Democratic Party no longer stands up. For years, each party has been redrawing the boundaries of congressional districts to their advantage, creating political fiefs for whoever wins the dominant party's nomination. Because moderate voters generally ignore primaries, more strident candidates who appeal to hyper-partisans have a distinct advantage.

Just this week, Taylor Griffin, a former staffer in George W. Bush's administration, launched a campaign to unseat the incumbent Republican in a district in eastern North Carolina, declaring that the "federal government is growing and spreading like a virus and I intend to stop it." Mr. Griffin called his opponent, Walter Jones, the "most liberal Republican" in the House. "The most liberal Republican in the House of Representatives should come from San Francisco, not from eastern North Carolina," Mr. Griffin said in the statement announcing his campaign.

"There are Republican members today that are much more concerned about being primaried on the right flank than they are of losing in the general [election]," said Dan Danner, president of National Federation of Independent Business. "They might be determined by some group to be a 95-per-cent conservative and they're concerned a 99-per-cent conservative by somebody's measure is going to run against them in the primary."

The root of the business lobby's influence on politics is money. Groups such as the Chamber of Commerce and the National Federation of Independent Business single out candidates they like and shower them with public endorsements and financial support. But in Washington, trade associations are no longer the only game in town. Deep-pocketed and ideologically driven outfits such as the Heritage Foundation, which supports smaller government, have become an equally important source of campaign finance.

"American big business has lost control of the Republican Party," said Mark Mizruchi, a sociologist at the University of Michigan and author of The Fracturing of the American Corporate Elite.

It's no surprise that investment, a crucial driver of any economy, would suffer if the party that has traditionally supported corporate interests stopped listening to CEOs.

Corporations are still highly effective in wielding influence on company-specific or industry-specific issues, Prof. Mizruchi said. But "there's tremendous ineffectiveness on anything that requires broader collective action."

A distaste for Obamacare

Polls suggest the majority of Americans blame Republicans for the budget impasse. And given the Republican leadership's unsuccessful attempt to avoid the shutdown, the key players are those tied to the Tea Party. Politicians such as Mick Mulvaney from South Carolina and Tom Graves of Georgia say they were elected to take on a policy that violates the small-government principles in which they and their voters believe. Closing the government and the hypothetical threat of default are minor obstacles in the path of their cause.

For outsiders, especially Canadians, where state-sponsored health insurance is a birthright, the Tea Party stand often is dismissed as beyond reason. But the story of Tracie Sanchez, who owns Lima Pallet Co. Inc. – a maker of wooden shipping pallets in Lima, Ohio – might explain some of the objections business people have about Obamacare.

When the world economy descended into a deep recession in 2008, Ms. Sanchez says she was faced with a choice: She could fire people or stop providing their health insurance. She chose the latter, and the company survived.

Now, Lima Pallet's sales have nearly rebounded to where they were before the financial crisis. In fact, Ms. Sanchez thinks she could be doing better. She would like to add a second shift, or even buy some adjacent land to expand. She toyed with purchasing a couple of struggling competitors. But she says she can't do any of it.

Her current head count is 49 – more than the 30 or so people she employed before the recession. But adding one more person to her staff would force her to insure each of her full-time workers under a condition of the Affordable Care Act. The cost of health insurance, she claims, is greater than what she would make from expanding.

"Whoever in Washington decided that 50 is small business I have no idea," Ms. Sanchez said. "I could put on a second shift tomorrow if I could go over 50 employees and not have to have health care. It's frustrating."

When Republicans call Obamacare a "job killer," this is what they mean. The distaste for the program isn't unique to the Tea Party clan; it is pervasive among Republicans. Mr. Obama and the Democratic Party pushed their unique approach to universal health care through Congress when they controlled both houses after the 2008 election.

Democrats feel that was their right after winning a broad mandate. Republicans think their opponents violated the American tradition of legislative compromise. While polls are harsh on Republicans for triggering the shutdown, they essentially are split on whether Obamacare is a good policy. Unlike Mr. McNeel, Ms. Sanchez has no problem with the Republican Party's tactics. "I'm hoping they stand their ground," she said.

Mr. Obama told CNBC this week that this time is different. "This time I think Wall Street should be more concerned," he said.

That might have been a cynical call for traders to put some more heat on Congress. Recent history shows lawmakers sometimes need a sharp fall in equity prices to focus their minds.

But it might also have been a legitimate warning. After years of waiting for the gridlock to end, the old ways of doing things in Washington may be over.

"People keep asking, 'When do we get back to the normal legislative process?" said Stan Collender, an expert on the federal budget and a partner at Qorvis Communications. "And I keep telling people: This is the new normal."

Mr. Danner said the same thing. "The question is, `What's the new normal?' " he said. "We don't want to keep doing this. Maybe if you keep knocking your head against the wall, you discover that it doesn't feel so good."

But Mr. Danner isn't counting on that. He said he and other trade associations are considering getting involved in primary campaigns by backing business-friendly candidates seeking party nominations in districts that are one-party bastions.

If Mr. Danner goes ahead with that plan, its guaranteed "business-friendly" will mean a willingness to co-operate. "A good many of the people we are talking about these days, the interests of business or small business are not their top priority," he said. "We're not only about just trying to make a rhetorical point."