us government shutdown

us government shutdown

The Impact and Implications of the US Government Shutdown

1. Introduction to Government Shutdowns

If the appropriations process for a fiscal year has not been completed, with either the President signing the regular appropriations into law or such laws funded through a President’s capacity to obligate and spend funds, then the government shuts down, starting on October 1st or the beginning of the fiscal year.

The US federal government runs out of legal authority to spend money or obligate funds periodically. This is often because the President and Congress are unable to agree to both annual appropriations and a President’s legal authority to spend or obligate such funds. The current congressional process is to pass separate appropriation bills for the operation of each department and major independent agency of the government. The fiscal year for the government begins on October 1st in the year preceding the calendar year for which it is named and ends on the next September 30th.

2. Causes and Triggers of US Government Shutdowns

Offering an appropriate and sustainable normal federal government budget is a complex challenge that has an interest and a cost to every district. However, as the first clause of the US Constitution’s “general welfare requirement” and the two remarkable provisions of the 27th amendment state, in the event of the failure of the two houses to agree on an appropriation for a fiscal year, any member cannot vote to give themselves a raise until after an intervening election. Each clause recalls two fundamentally important questions of democratic politics: how to limit and allocate state power more efficiently while also enhancing public welfare, and how should the Congress’s and the President’s individual and collective freedom be checked with full respect for their private interests and decision-making preferences without undermining their shared responsibility and promotion of the public interest?

The roots of US government shutdowns lie in the failure of the bicameral legislature to secure, within a defined time process, an agreed overall set of appropriations that enable the annual budget submitted by the President to be translated into legislation and fund the state at the start of the next fiscal year. By the end of a long political process, in which polarization between the two major parties has grown, a combination of several factors can ultimately shut down parts of the government: a high level of inter-branch political contestation over a fundamental issue of public policy, the constitutional separation of the government’s central financial administration from the legislative branch, and the absence of a formal budget order that prevents the government from legally spending money without annual Congressional authority. When appropriations for federal agencies lapse or are vetoed, those agencies’ spending authority to absorb obligations on behalf of the American people expires, and unless and until new legislation is enacted, they cannot legally use their appropriations to fund their activities.

3. Economic and Social Consequences

The capacity of the federal government to mobilize personnel beyond core departments and maintain programs has been thinning over previous decades. This means that in the event of long-duration budget tensions, the resultant loss of confidence, consumer, household, and corporate welfare, and the chilling effect at a time of existing trade tensions and high global debt and interest rates could be the most detrimental. Data provided by S&P Global show that government spending and investment decreased at an annualized rate of 3% in the past five US government closure events, causing millions of lost work hours for affected workers. If the current closure continues into March, the lost output will exceed $6 billion or 0.2% of quarterly GDP.

Several US agencies repurpose their resources. For instance, mission-critical federal employees (such as law enforcement agents, food inspectors, and air traffic controllers) are required to work without pay, as are departments receiving fee income for their services. While the latter will recoup lost salary income once the government is reopened, for hundreds of thousands of federal employees affected, their salary freeze can have dire consequences. The unpaid wage bill makes repayments difficult for lower income households and installment credit delinquency or early debt repayment.

4. Political Ramifications and Public Opinion

The results from the political perspective provide a mixed view. A short-term implication is that the government shutdown likely had a slight negative impact on stock market performance. Over the long term, this episode as well as the debt ceiling debate and resolution, potentially changes the views that can be formed about the US economy. The US has experienced lower-than-expected growth (short-term), but the real long-term implications depend greatly on the economic costs. The fact that there has been more use of brinkmanship has raised questions and concerns about US political risk and thereby potential changes in the risk environment. It is important to note that politicians on both sides of the aisle are playing a dangerous game with the fiscal and economic health of the country. Such tactics, especially if played too frequently, may remove the confidence and trust that financial market participants have in the US government and its fiscal policy framework. It could lead to financial markets not valuing the dollar as the prime currency as they have throughout the past century.

The political ramifications of the US government shutdown are important. There was an expectation heading into the government shutdown discussions that the Republicans would come out on top. Events did not unfold as many had predicted. To provide a political perspective to the government shutdown and resolution, I use information from a public opinion poll. A Quinnipiac University poll conducted on October 7 and 9, 2013 reveals that 74% of Americans surveyed disapproved of the way the Republicans in Congress have been handling their job, while only 17% approved. Their opinion of the President’s handling his job as President was 45% approve, and 49% disapprove. Their opinion of the way the Democrats in Congress were handling their jobs was that 60% disapprove, 32% approve.

5. Mitigation Strategies and Lessons Learned

Although the strategies outlined in this paper have proven to be effective, in part by virtue of the relatively short-lived episode, no pandemic plan survives first contact with a pandemic. Generally, crisis management teams operate in “stress” mode for a short time, often compared to that triggered when relocating an entire operation center. Crisis management capabilities are finite. They dilute every day if they are not kept at a high level of readiness. We can already see a danger of complacency setting in. Once an organization survives one crisis, it is easy to believe you are bulletproof. Despite the success of the US payments system, wiser counsel would suggest that a resilient, robust, and reliable operational capability requires more than just formalizing the plans and procedures to enhance and assure “business as usual” and that, indeed, the role of stakeholders is crucial in planning, mitigating, and responding to the operational and payment system implications of any such events.

The support we received from the over 100 stakeholders involved in the preparation of this paper resonates with the flexibility, openness, collaboration, and dedication of both the public and the private sectors of the US payments system to serve the needs of the economy. Their cooperation has helped provide an understanding of the impacts of the US Government Shutdown on the system, on the public and private sectors’ priorities, and on the mitigation strategies undertaken, as well as some of the lessons learned that might apply to future significant operational events.