Why You Don't Want A Government Shutdown

By Stephen D. Simpson, CFA | April 06, 2011 AAA

As Congress continues to play chicken with itself, the clock is ticking on a looming shutdown of government services. In simple terms, the inability of Congress to pass a budget will force the federal government to curtail "non-essential" services until such time that a budget is passed or an alternative emergency funding measure can be put into place.

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Many people are worried about what a government shutdown could mean, and it's no wonder as the media has been full of ominous stories about far-reaching impacts. Remember, though, this is not an unprecedented event and there have been more than 15 such occurrences in the past 35 years. Most shutdowns last a little more than a week, though they have stretched as long as three weeks (the famous, or infamous, shutdown that occurred during Bill Clinton's presidency). (For more on how the government spends, check out What Is Fiscal Policy? And Do Tax Cuts Stimulate The Economy?)

While a shutdown, should it occur, will certainly be inconvenient, it will not crush the economic recovery nor will it do lasting damage.

Delays in Abundance
When the shutdown goes into effect, non-essential government workers will be told to stay home. Every department and provider of government services has its own policies about what constitutes "essential", but it is safe to bet on some significant delays especially in any processing of applications.

Recipients of Social Security, Medicare and Medicaid will continue to get payments (or receive treatment, as the case may be), but the processing of new claims and applications will be likely be postponed throughout the entire shutdown (or at least significantly delayed). Likewise, passport and visa application processing will stop (or at least slow to a crawl). FHA loan applications will see delayed processing as well, and that could be significant given that FHA loans are a bigger part of the housing market than in prior shutdowns. (Don't be overwhelmed when filling out these forms. Find out what you need to do in Understanding FHA Home Loans.)

As this shutdown would be occurring in the midst of tax season, it is an open question as to how many employees within the IRS would be deemed "essential". It is almost beyond belief that the government would shut down the IRS completely at such a time, but it seems reasonable to assume that a prolonged shutdown could easily delay processing and refunds. The processing of paper returns will likely stop and audits would be suspended, but helplines would likely stay open (wait times could be longer, though) and all regular deadlines stay in effect.

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Essential Services Will Stay in Place
For those who have little interaction with the Federal government, not much is going to change in a short shutdown. The FBI will still be operating, as will Homeland Security, air traffic controllers will report to work, and the criminal courts will continue to operate.

However, "essential services" is really a subjective concept and many people could find themselves affected on the margins. In prior shutdowns there were examples of certain kinds of court cases (bankruptcies, for instance) being put on hold. Likewise, while direct providers of healthcare stay in operation (nurses and doctors at VA hospital will be on the job), some programs for our veterans will likely get shut down or drastically slowed down. Some agencies can run on reserve funds but when they run out the offices will need to close until an agreement is reached. (For more on government spending, check out Breaking Down The U.S. Budget Deficit.)

Facilities Will Close, Workers Will Be Home
With the shutdown of the government, national parks such as Yellowstone, and other public destinations like the Smithsonian museums will close. Likewise, it looks like close to half of the Federal workforce will be classified as "non-essential" and sent home during the duration.

Workers who remain on the job will find that they have to wait to get paid. By law they will get their money eventually, but the delay will be tied to the duration of the shutdown. For those workers furloughed and sent home the situation is less clear. Congress must authorize back-pay for furloughed workers and while it has done so in the past, there is no guarantee that this Congress will. What's more, those working under contracts with the Federal government will not be paid for work missed during the shutdown.

Follow-On Effects
There is no question that there will be secondary effects to any government shutdown. Communities and businesses near major national parks often rely heavily on tourist traffic to those sites. With the parks and museums closed down, it could mean hard times for hotels, restaurants, and other service providers and that lost business will eventually flow through to other businesses as well.

Likewise, it is difficult to say just how many businesses working on Federal contracts will be idled by this shutdown. While a brief shutdown may not be more than an inconvenience, an inability to get paid may force businesses to send workers home and delay payments to their own suppliers - a complication that a recovery economy does not need. Likewise, new loans, loan guarantees, and grants could be suspended or significantly delayed, with those actions likely to send ripples through the economy.

The Bottom Line
Given the relatively modest economic impacts of prior shutdowns, members of Congress may feel that a standoff over the budget and a Federal shutdown is a game of chicken they can afford to play. While there have been shutdowns before during tough economic times and it did not irreparably harm the economy, this is the sort of shock that a recovery economy does not need.

A brief shutdown will largely mean inconvenience and delays for many people, as well as ruined vacations for some families. Should the standoff stretch into weeks, though, the ramifications of hundreds of thousands of unpaid Federal workers for that period, and likely hundreds of thousands more of workers whose work is tied to the Federal government and/or contracts, could be more severe.

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