National emergency on the US-Mexico border
- After signing a spending bill that does not give him the money needed for a border wall, President Trump declared a national emergency on the US-Mexican border that will allow him to divert funds to build the wall.
- The Democrats do not think that the situation on the US-Mexican border constitutes a national emergency and they think that it is not up to the President to divert funds that have already been appropriated by Congress.
- While the Democrats are likely to challenge President Trump’s national emergency in court, they face an uphill battle that will end in a Supreme Court with a conservative majority. However, they may be able to delay the actual use of diverted funds for most or all of the remainder of Trump’s first term.
- The conflict between the House of Representatives and the President brings the country closer to a constitutional crisis that will hurt confidence among consumers, businesses and investors. With the economic expansion showing signs of fatigue, the political upheaval would increase the probability of a recession, which we think is already larger than 50% for 2020.
Last Friday, after signing a new budget deal through September 2019, averting another federal government shutdown on February 16, President Trump declared a national emergency on the US-Mexican border that would allow him to divert funds that had already been appropriated by Congress for other purposes to the construction of a border wall. The budget deal made in Congress fell short of the $5.7bn requested by President Trump for the construction of the border wall on the US-Mexican border that he promised during his 2016 presidential campaign (which he said would be paid by the Mexicans). The bill adopted by Congress provided only $1.37bn for new physical border barriers. Consequently, President Trump declared a national emergency on Friday. In the ‘Presidential Proclamation on Declaring a National Emergency Concerning the Southern Border of the United States’ he invoked the National Emergencies Act, which he claims will allow him to divert funds that have already been appropriated by Congress to building a border wall. The White House has identified about $7bn that could be diverted from a military construction budget ($3.5bn), a Defense Department drug interdiction fund ($2.5bn), a Treasury Department forfeiture fund ($600mn), and other sources.
What is a national emergency?
A US president declaring a national emergency is nothing new. In fact, the first President of the United States, George Washington, was also the first president to use emergency powers. Based on the Militia Acts of 1792 he took over the state militias to suppress the Whiskey Rebellion, which had started in response to the federal government imposing a tax on whiskey. In 1976 the presidential powers were formalized in the National Emergencies Act. Through this law the US Congress has delegated emergency powers to the President such as suspending various laws, but also authorizing military construction projects and using existing defense appropriations for these constructions.
Of the 59 national emergencies that have been declared since 1976, 32 are currently active. The oldest national emergency are the 1979 sanctions blocking Iranian government property declared by President Carter in response to the Iran hostage crisis. In fact, President Trump now has 4 national emergencies in effect. A national emergency expires if it is not renewed annually, if it is terminated by the President or by a joint resolution of the Senate and the House of Representatives signed by the President.
Can it be contested?
The Democrats do not think that the situation on the US-Mexican border constitutes a national emergency and they think that it is not up to the President to divert funds that have already been appropriated by Congress.
There are two routes the Democrats can take to overthrow the national emergency: through the courts and through Congress. If the Democrats contest the national emergency in court, they have an uphill battle as a national emergency has never been challenged successfully. The courts have been reluctant to second guess the President on what constitutes a national emergency. What’s more, if it ends up in the Supreme Court the Democrats will face a conservative majority (5-4) including President Trump’s two appointments (Brett Kavanaugh and Neil Gorsuch). So a win seems unlikely, but going through court the Democrats could delay the wall construction project considerably, possibly for years, through a court injunction blocking the diversion of funds. Note that the next presidential election is in November 2020. So the Democrats may be able to hold up the funds in court until either a new president takes office, or until a second term for President Trump. The House of Representatives could also challenge the President in court for averting funds that have already been appropriated by Congress.
Other legal challenges could come from the states or landowners. Three Texas landowners have already filed a lawsuit because the wall would infringe on their property rights. Meanwhile, California and New York intend to file law suits too. California argues that President Trump wants to divert money from drug-fighting efforts, which could endanger the residents of California. What’s more, California points out that Trump’s remarks on Friday that he ‘didn’t need to do this’ shows that the President himself does not believe that a national emergency is warranted.
Challenging the President on the national emergency or on the diversion of funds through Congress seems difficult as the Republican majority in the Senate is likely to support their president. In fact, Republican Senate Majority Leader Mitch McConnell has already said that he would support President Trump on the emergency. Nevertheless, some Republicans have their doubts about President Trump’s national emergency. It could set a precedent and encourage future Democratic presidents to declare a national emergency on healthcare insurance, climate change or gun control. What’s more, the House of Representatives could still make life difficult for President Trump. In fact, the Judiciary Committee of the House of Representatives said it had launched an investigation into the emergency declaration.
Impact on the economy and markets
On the bright side, President Trump’s signing of the spending bill has averted a government shutdown. The federal government will be funded through September, so we don’t have to worry about another shutdown before then. Note that the Congressional Budget Office (CBO) estimated that the shutdown between December 22 and January 25 – the longest in history – reduced Q4 GDP growth by 0.2 ppts and Q1 GDP growth by 0.4 ppts. The CBO also expects the delayed payment of salaries for 420K federal government workers to boost Q2 GDP growth by a full percentage point. So this scenario remains intact. Had President Trump not signed the deal, the damage to Q1 GDP growth would be larger.
The diversion of funds is likely to be held up in the courts for most or all of the remainder of President Trump’s first term. This means that this amount of government spending (about $7bn) will be withheld from the economy, which would have a negative impact on GDP growth. Indirectly, the national emergency and its challenge in the courts and Congress is likely to have a negative impact on confidence among consumers, businesses and investors. A battle between the White House and the House of Representatives about the validity of the national emergency and the President’s right to divert funds that have already been appropriated by Congress is getting us closer to a constitutional crisis. Meanwhile, developments in the Mueller investigation could add to the political uncertainty going forward. With the Democrats now in the majority in the House of Representatives they could make President Trump’s life very difficult with subpoenas or even impeachment proceedings. While we think that President Trump will not be convicted by the Senate, the political turmoil will weigh on the economy and financial markets. With the economic expansion showing signs of fatigue, the political upheaval would increase the probability of a recession, which we think is already larger than 50% for 2020.
 The total costs for the wall are estimated at $23bn.
 Blocking the Property of Persons Involved in Serious Human Rights Abuse or Corruption, Imposing Certain Sanctions in the Event of Foreign Interference in a United States Election, Blocking Property of Certain Persons Contributing to the Situation in Nicaragua, and last Friday’s National Emergency Concerning the Southern Border of the United States.
 The law also requires Congress to ‘meet to consider a vote’ on each emergency every six months. In 43 years of the National Emergencies Act, Congress has never done so.
 Since funds are being diverted, they would not change government spending if the money could be spent without delay.