What is a Government Shutdown?
The Constitution provides for Federal spending to be proposed by Congress AND agreed to by the President. When the parties fail to produce a funding bill, the Government may be forced to “partially” shut down.
Failure to pass a budget has led to a shutdown about 20 times. Many of these did NOT involve any reduction in workers.
The history of government shutdowns is illustrated in the table on the left. (https://fileunemployment.org/news/us-government-shutdown-second-time).
The current Shutdown began while the same party controlled Congress and the Presidency. The only other time this has occurred was during the Carter Administration.
During a Shutdown, workers deemed “non-essential” are furloughed. The determination of which functions of government are to be kept running is made by the Office of Management and Budget (OMB).
“Essential” staff are required to continue working during the shutdown but may not be paid on time. Essential and non-essential employees receive full back pay with benefits when the Shutdown concludes.
Affected areas, considered non-essential, include national parks, museums and monuments. Also impacted is NASA, which furloughs roughly 85% of its staff.
Of the 2.1 million Federal public employees, about 850,000 (40%) are deemed non-essential.
A shutdown does NOT affect the normal issuance of benefit checks. Social Security, Medicare, Medicaid and Welfare are not subject to alteration. However, new beneficiaries will not be processed during the shutdown.
Food stamps payments are funded through next month. The Military and virtually all personnel involved in Law Enforcement, Medical Care or Safety remain on duty.
Mail Service, which is “self-funded” and outside of the Budget, is unaffected. (That the USPS can lose $Billions per year and be “self-funded” is not possible). (https://fileunemployment.org/news/us-government-shutdown-second-time).
Completely insulated are the elected Politicians of Washington, including Congress and the President. They are paid ON TIME throughout the Shutdown. According to the Constitution, their pay cannot be changed except by direct law. Who legislates their pay? THEY DO. How convenient. (Sarcasm, intentional).
Shutdowns Effect on the Stock Market and Economy
Investors treat Shutdowns as economic “Non-Events”. They are not material in affecting stock prices nor do they have any lasting impact on the economy.
During the current shutdown, the Standard & Poor’s 500 (SPX) has gained nearly 7%.
The 2013 Shutdown was estimated to have “Cost” $24 Billion and reduced GDP by 0.6% in the 4th quarter of 2013. (https://www.latimes.com/business/la-fi-government-shutdown-costs-20181224-story.html).
If the estimate of $24 Billion is taken at face value, it amounted to less than 0.16% of annual GDP.
The back pay for the 800,000 furloughed workers in 2013 was $2.5 Billion. This was compensation for work not performed, or SHEER WASTE. In fact, many workers are FORBIDDEN from checking e-mails or performing any duties.
The largest component of “Economic Cost” is the loss of output from workers. In the current shutdown, 380,000 workers have been idled compared to the 800,000 in 2013.
The smaller number of affected workers is the result of prior funding bills for Defense and Veterans Administration. These departments will run normally. (http://www.crfb.org/papers/qa-everything-you-should-know-about-government-shutdowns).
Office of Management and Budget Report
In November 2013, the OMB issued a report called “Impacts and Costs of the October 2013 Federal Government Shutdown”. (https://obamawhitehouse.archives.gov/sites/default/files/omb/reports/impacts-and-costs-of-october-2013-federal-government-shutdown-report.pdf).
According to the report, the Federal Government Shutdown:
- Halted permitting, which delayed job creating transportation and energy projects.
- Hindered trade by not promptly issuing import and export licenses.
- Disrupted private-sector lending to individuals and small businesses.
- Halted Federal loans to small businesses and homeowners.
- Delayed the Alaskan crab fishing season, costing fisherman thousands of dollars in lost revenue.
- Disrupted tourism and travel by closing national parks and the Smithsonian.
For 16 days. For 16 days.
Only number 6 was calculated. The loss in revenues from visitors amounted to a whopping $11 million.
Great Political Theater, But Little Else
Contrary to the belief that furloughed workers are victimized, the net result to them is paid time-off. They also make MUCH more than their Private Sector equals.
Civilian Federal workers make on average 17 percent more than similar workers in the private sector, according to a 2017-2018 report by the Congressional Budget Office. The report included salary and benefits.
The average Federal worker could go UNPAID for two months and still earn more than their private sector equivalent. (2 months/12 equals 16.7%). (https://mises.org/wire/furloughed-federal-employees-are-still-paid-more-you).
A SILENT BENEFICIARY of all the exaggerated drama is the Media itself. Tragedy and victimization are ratings bonanzas. (https://www.forbes.com/sites/markjoyella/2018/12/26/government-shutdown-coverage-pushes-msnbc-to-big-win-over-fox-news/#3d1ddd293dd9).
So how do you survive a Government Shutdown? Turn off the TV and catch up on some of our archives on every conceivable investing, economic and financial topic. Be Informed, Not Misled!