When the current federal government shutdown began a month ago, the media warned of financial market mayhem due to decreased government spending. Things could still go south, but so far we’ve actually seen the opposite: The stock market has continued to break records. If the federal government were truly central to day-to-day economic life, this should have sent investors running — but it didn’t.
Investors delivered a resounding verdict on non-essential government operations: They are of little importance to the real economy.
For all the noise about “critical services,” the actual economic engine — markets and consumer spending — runs on private momentum rather than federal mandates. Some worry about the decrease in government spending hurting the U.S. gross domestic product (GDP), which includes government spending as a factor in calculating overall growth. But unlike high-level calculations that by definition consider federal largesse to be growth, Wall Street is pragmatic: If something matters economically, it prices it in, and the shutdown does not seem to have made much of a dent.
Even the temporary halt in key federal data releases — jobs, inflation, and consumer spending figures from the Bureau of Labor Statistics and the Census Bureau — barely rattled investors. Instead, they’ve relied on private-sector data from providers, including ADP’s payroll and labor data and ISM’s manufacturing index data. Private sources filled the information gap themselves — in ADP’s case, using the opportunity to launch new labor reports after previously being crowded out by the government. When D.C.’s political bodies shut down, private industry adapts.
Some of the ostensibly critical functions of our regulatory bodies, such as the Securities & Exchange Commission (SEC), have proven to be not so critical. On October 30, travel tech firm Navan had its initial public offering on the Nasdaq, despite a furlough of SEC employees who would typically approve such launches. It follows another IPO earlier this week by MapLight, a biotech firm that became the first such launch during the shutdown. The companies did this through an alternative process approved by the SEC, whereby filings would be effective 20 days after listing a target price range for their IPO’s shares. The 20-day timeframe is not ideal, as a private company’s valuation can fluctuate dramatically, but they will be corrected by the market anyway, while companies enjoy the benefits of going public while bypassing the red tape they’d have to suffer through during normal operations.
Meanwhile, the private self-regulatory organization FINRA — the Financial Industry Regulatory Authority — never shut down. Because it funds itself through member fees rather than congressional appropriations, the self-regulatory body remained quite active in monitoring investment banks and broker-dealers throughout the shutdown. The one regulator run by the industry, not by Washington, proved the most reliable during the shutdown by virtue of its market-based incentives, while bodies dependent on Congress have been hobbled. Though FINRA itself is imperfect, its ability to hold member firms accountable without depending on a functioning District of Columbia may be a model for future industry associations to self-regulate their own industries more effectively, efficiently, and consistently than the federal government.
This isn’t to dismiss the concerns of those who’ve been furloughed and expect a paycheck, particularly as back pay and long-term employment prospects for non-essential government employees are unclear. However, the past month has shown that much of that “non-essential” activity was indeed not essential, and perhaps even inferior to private solutions — particularly relating to federal interference in markets.
The parts of the financial system that operate on market incentives — where performance and risk have immediate consequences — kept moving. The parts dependent on appropriations and bureaucracy ground to a halt. Private entities adapt because they must. Bureaucracies wait to be told they can.
