If there is one truism about politics in the U.S. it is that giving money away helps to win votes. Taking money away is a losing proposition.
When the Big Beautiful Bill was passed this summer, just before the 4th of July and amid much theater, there were smiles everywhere, even begrudgingly among Democrats. The handouts weren’t even; the bill clearly gave more to the wealthy than the poor. But new gifts like some tax relief on tips, or more money to be spent on border security resonated to many. The downside was that less revenue and more spending threatened to blow out the deficit over the next decade. That worried some in Congress and many economists. But not the general public.
To pay for this largesse, President Trump expanded tariffs and Congress voted to end the extension of subsidies funded after the Covid pandemic to expand payments, mostly to the poor and near poor, under the Affordable Care Act. The subsidies are scheduled to stop at the end of 2025.
If you harken back to the summer of 2017, Senator John McCain famously walked up to the Senate rostrum, turned his thumb down, and doomed Trump’s attempt to kill ObamaCare. Actually, the Republican mantra at the time was “repeal and replace”. But no replacement was ever offered. Why? Because any less expensive replacement wouldn’t look as good to voters as what was already in existence. The threat to cut health care support was enough for Democrats to run in the 2018 mid-terms on the threat that if Republicans could retain control of all of Congress, all the good stuff within the Affordable Care Act would eventually go away. The net result was that Democrats regained control of the House and flipped 40 seats, almost all based on one campaign issue, healthcare.
Now back to today. Republicans are in the same position. They took away health care subsidy support via the Big Beautiful Bill and Democrats want to put that back. It’s just about the only issue that Democrats seem to be able to run on today that plays well with voters. Obviously, the state of the economy next November will be of prime importance. But if the U.S. is not in recession, inflation remains reasonably moderate and most people still have jobs, the one weakness for Republicans will be their eagerness to defund healthcare support.
I have no idea when the current stalemate will end. There will have to be some compromise that allows all sides to save face. It will probably end when both sides feel political damage keeping government services shut down.
Bottom line: Americans on both the left and right are increasingly fed up with governmental dysfunction. The shutdown only amplifies the mess. So does the fact that Congress hasn’t passed a single appropriations bill yet. That’s why so many workers are furloughed this time around. Furthermore, voters in red states like Texas, Missouri and Tennessee are the ones who will be hurt most by the withdrawal of healthcare subsidies. Republican Senators of those states know this. They will be the ones most eager to find a solution.
While the media has a field day amplifying the pain of a shutdown, Wall Street continues to move to record highs. The shutdown means no data interference with the rally. No jobs report that might show weakness. No inflation report that might show the path toward 2% is filled with potholes. All the market knows right now is that the Fed is almost certain to cut the Fed Funds rate another 25 basis points this month, that the 10-year Treasury yield of 4.1% is at the lower end of its 2-year range, and that earnings season set to start in a little over a week looks pretty promising. Markets assume the shutdown will end sooner rather than later. While the White House threatens hundreds of thousands of additional layoffs, that isn’t likely to happen. And workers furloughed will be given back pay in time for Christmas.
If the healthcare subsidies are extended, in whole or in part, that doesn’t help efforts to lower the deficit. In a world of Trump, it is important to look at the facts rather than listen to the words. In his first term, deficits rose and so did government spending. Reminder once more: you get votes for giving money away. The Big Beautiful Bill was full of handouts. The offset was largely to be tariffs. That’s happening. It appears that annualized, tariffs could bring in $400 billion per year or more. The negative impact of tariffs hasn’t been felt fully yet but the pain isn’t catastrophic. The other plus is the benefit of lower interest rates. There is a lag between the timing of a Fed rate cut and the impact on interest actually paid on the debt. The only immediate impact is interest on debt scheduled to roll over within the next year. Lower rates will help but a higher debt burden (future deficits have to be financed) means that the pace of increases will slow, not necessarily that interest paid will decline in a meaningful way. The final lever that will help to reduce deficits in 2026 is the increase in tax receipts related to higher reported income with particular help from higher capital gains tax receipts. That’s how Bill Clinton turned a deficit into a surplus in the late 1990s, the last time that happened. If the deficit in fiscal 2026 can come down, that would be a plus for Republicans. In simple math, can higher tax receipts and tariffs offset the Big Beautiful Bill’s goodies and giveaways? Even with an extension of the healthcare subsidies, right now my guess is that the net result will be a lower deficit.
That’s why Congress will find a way to extend some or all of the subsidies for some period of time and why the stock market rally can continue for now.
One last point on the market. Early October is normally a seasonally weak time for the market, a time of apprehension prior to earnings season and a time when most corporations are forbidden from buying back their own stock. That will all flip in a couple of weeks after earnings are reported and companies resume stock repurchases. When markets are up strongly through the first nine months, they almost always add to gains in the fourth quarter as taxable investors defer taking gains hoping to defer profit taking (and tax obligations) to the new year. Obviously, this assumes that the economic data stays within reasonable boundaries.
Today, actress Elisabeth Shue turns 62.
James M. Meyer, CFA 610-260-2220