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Analyzing the Impact and Implications of Government Shutdowns: A Comprehensive Study

1. Introduction to Government Shutdowns

This study provides a comprehensive review of the government shutdown environment. It begins with the various definitions of a government “shutdown,” which provides a clearer understanding of the closing actions as well as the existing laws that trigger them. By recognizing the wide range of outcomes that may result from closings, further measures can be adopted that ameliorate or alleviate the potential for disaster. In contrast to the literature, this study identifies how technology and legal changes have been used to alter business practices to ensure continuity of operations. The discussion of rule and regulation alteration is of particular interest, as it identifies the categories (states, companies) and the implications of modifications and their risks. The mathematical model presented rates the size of funding gaps to the magnitudes of recontracting that have been affected. Furthermore, it identifies when the funds are disbursed to the terminating agencies. The least evident consequences of a closing are the observable outcomes in the US dollar and currency markets, and the study provides a comprehensive review including fluctuations and directions in the value of the greenback. Effects are noted by time period, agency, and industry. Terminating requirements and Treasury’s power to alter payments are reviewed. Finally, the investigation provides important recommendations for both the avoidance of future closings and for the effective and efficient management of situations as they occur.

A government shutdown can occur in any environment in which a dominant agency acts as a revenue collector and distributor. In times of contentious budgets or divided Congresses, the government can shut down due to a lack of fiscal allocations – an environment that acts to starve the government of funds it needs to operate. The most observable outcomes of current shutdowns are political theater and the consequences of operations ceasing or slowing. However, other less visible outcomes manifest themselves in unique ways. Shutting down the government creates a distortion in currency markets due to shifts in demand for US Treasuries. In addition, Treasury and federal system modifications to existing laws are implemented, creating risks and side effects for the economy, the dollar, and the American citizens.

2. Historical Overview of Government Shutdowns

The federal government has a long history of shutdowns reflecting the failure of lawmakers and the president to agree about government revenue and spending levels. These debates have frequently led to government stoppages and furloughs involving the partial or full closure of federal facilities. Past government shutdowns, indeed, have not constituted simple disputes; rather, they dispute the state of the U.S. economy, mechanisms of government terror, control over large federal scientific projects, and fundamental questions regarding public policy from abortion to gun control to campaign finance. Antecedents of contemporary federal government shutdowns are thus highlighted. The goals, issues, and impact of past U.S. government shutdowns should be understood in any contemporary situation, including current and future budget disputes, but such understanding requires knowledge of past shutdowns, and why and how they occurred.

Scholars, politicians, and the American public have long expressed concern about the importance of government functioning. However, there have been remarkably few government shutdowns in modern U.S. history, and existing scholarship can do little more than speculate about the ramifications of one of the longest U.S. government shutdowns beginning in 2018. This is because only short covering a timespan of a few weeks to a few days, few government shutdowns have occurred. A comprehensive introductory overview of past government shutdowns is therefore offered to put concerns about the ramifications of these brief interruptions in government services and personnel into a historical context.

3. Economic Effects of Government Shutdowns

A 2019 Congressional Report on the Economic Effects of Government Shutdowns noted that the estimated economic cost of the 35-day partial shutdown (December 22, 2018, to January 25, 2019) could be an expenditure between 0.1 and 0.2 percent in annual growth in the first quarter of 2019. In terms of value, the reduction in GDP for the quarter was estimated to be between 2.5 and 6.0 billion dollars less. The admitted reduction in retail sales and the gross domestic product for such large economies, such as the United States, can hamper the rest of the global economy. This also depends on the intertwined linkages with other world economies. However, attempts to measure the true economic impact of government shutdowns have shown widely divergent results. In a study on the effects of the 2013 shutdown, the Office of Management and Budget, in a forecast from its Office of Economic Analysis, predicted an economic loss of between 2 billion and 6 billion dollars. This implied a loss of 0.1 percent in annual growth in the fourth quarter of 2013. However, the board also warned that the actual amount would change as a reflection of the duration of the closure.

The economic effects of government furloughs and shutdowns can be traced to the reduction in services and wages paid to non-essential workers caused by the partial closure of facilities. The cost is paid through the reduction in various services provided by the government during the short and long term. The federal government is the largest employer in the United States, and furloughs federal workers (such as those experienced during a shutdown), limiting or stopping their wages, will mean that they have to reduce their consumption to meet daily living needs. Depending on the length of the closure, the economic loss can be substantial. Furloughed employees can negatively affect employment and consumer confidence in the economy. Federal employees in nonessential functions are the first group affected by a shutdown. By definition, employees in such functions are less likely to find such tasks in the private sector.

4. Political Ramifications and Public Opinion

Our key findings are that a government shutdown appears to be a zero-sum game in which blame is credited by the public to one side (Congress or the President) over the other, rather than to both. There is some ambiguity as to what this gaming indicates. It is often suggested by members of Congress, and indeed the President himself, that public concern for the budget deficit is result enough to persuade the public that government shutdowns are necessary and are an effective political tool. The motives for arguing over the budget deficit are examined. Fears and concerns about the budget deficit play a strong role in American elections. If it were seen that government shutdowns were a method of gaining and/or holding power, rather than of reducing public debt, then the glue that holds public opinion in check throughout the crisis would be compromised, weakened, and reformulated.

The political ramifications of the budget conflict that leads to government shutdowns could be extensive, enduring, and far-reaching. Our study does not fully probe the depths of these effects. However, several aspects of these effects should be noted. In this section, we present our views on the implications of a government shutdown for the political fortunes of the two chief protagonists—the President and Congress. Specifically, we seek to clarify the impact of a shutdown on the perception by the voting public of who is to blame for the shutdown. We refer to the perceived decision rules on who is to blame, and the motivations of the two principal political actors – the President and the Congress.

5. Strategies for Mitigating the Impact of Government Shutdowns

Approach. The strategy to achieve these objectives is to analyze government scholarship reports on past government shutdowns and to use these to estimate the direct and indirect fiscal impacts on the federal budget and the national economy. We will supplement these direct and indirect estimates with information and expert advice provided by interested parties at the Congress, the various federal departments and agencies, think tanks, and external consultants familiar with government shutdowns and legal and accounting issues. Data from past government shutdowns will be used to estimate the macroeconomic and budgetary impacts of modern federal shutdowns. Reported anecdotal evidence on actual impacts experienced during specific past government shutdowns will be gathered and abstracted.

Objectives. The objectives of the project are to assess the impacts of government shutdowns in terms of macroeconomic and budgetary impact, as well as on specific, high-priority areas. Then, to propose a menu of policy alternatives such as the reauthorization and modification of certain types of continuing resolutions, the establishment or strengthening of escrow accounts, and new fiscal rules to minimize the impact of government shutdowns. In the end, such a focused approach could help show policymakers the benefits of taking the hard decisions required to cover the maintenance costs of government activities in a timely fashion, rather than impose costly work stoppages upon the nation that significantly delay the work of government and hurt many people.