Government Shut-Down?

Economics Without The B.S.**: Government Shut-Down?

[**  Double entendre intended.]

The Ripple Effects of

Our Intrusive Federal Government Economy

With the Federal Government shut-down because of a dispute over ObamaCare (aka Affordable Care Act), the question Liberals, Conservatives, Libertarians, Democrats, and Republicans are all trying to answer is “Will you feel the effects of a Federal Government Shut-Down?”

Well first we need to define what a Federal Government Shut-Down is.  Is it just a layoff of federal workers so that no work gets done?  Is it stopping funding of government operations?...stopping spending on federal contracts?...freezing government spending at current levels (of the last year)?  Judging by the last government shut-down during the Clinton Administration, federal workers were laid-off for less than 30 days total.  However the threat of a government shut-down started at the end of a fiscal year (September) going into the new fiscal year with the threat that funding would be stopped.  That threat lasted for over 100 days and it affected the way some bureaucrats hold or transferred money to keep some programs going while holding other programs in check.  It was estimated that the Shut-Down during 1995/1996 cost GDP growth around one percent, and that was at a time when we had a much stronger economy.

Will it hurt the economy this time?  Will I feel the results when the Federal Government shuts down?   The Federal Government portion of our GDP (the economy) is running between 22-24%, which is sizeable but it depends on what you do and where you live.  Social Security and Medicare, two of the biggest government programs, are funded by their own accounts and not by the general funds that are affected by a government shut-down -- and there is over $2.5 trillion in the Social Security Trust Fund and it has been operating at annual deficits only in the past couple of years at approximately $40-$50 billion.  The biggest portion of government spending that would be affected would be defense spending.  So it depends on if you live in a community with a big defense presence or military contractors/suppliers doing business with the government.  Farming communities may see a direct Federal Government presence; and, there may be a few other programs like the Small Business Administration or a university research project funded by the National Institute of Health.  But a lot of other federal spending comes through state and local government entities, like highway funding and education.  So, a federal government shut-down is not always that visible or easy to figure the impact.

Who will know if the Shut-Down hurts the economy?  It is somewhat ironic that the people who track unemployment and GDP growth statistics are considered non-essential workers and are part of the laid-off workforce.  I don’t know how these figures will be reported if the shut-down drags on for a while.

We have a $16 trillion economy.  Every ¼% loss of GDP amounts to $10 billion each three month period.  Some have estimated a ½% loss of GDP if the shut-down is prolonged.  In 1995/1996 the loss was estimated at 1%.  We have a weak economy this time and it is hard to determine just what the impact will be.  Also, if this shut-down is prolonged, lasting more than three months, there could be a multiplier effect since we have a consumer economy that dominates instead of a large commercial/industrial sector to supplement a consumer economy.  We do not know what an economic slowdown here would do to the international economy that is tied to us and we to them.

More ironic is the people who want to shut the Federal Government down are the ones who have been preaching fiscal responsibility and giving economic arguments for economic growth.  If they continue in their ways, we will find out.

The threat of a shut-down this time has been coupled by Republicans to defunding ObamaCare.  But ObamaCare has already been funded, so shutting down Government doesn’t stop implementation of ObamaCare.  Or is it political gamesmanship?  Who takes the blame in the eyes of public opinion when the Federal Government is shut down?  Who will yield first?  Politically, if you want to hang yourself, will your opponent save you from the rope or feed you more rope?  Will public opinion shift as this drags on?  Aside from public opinion, the Mother’s Milk of Politics is money and both sides have used the Shut-Down to raise money.  So, when they have milked the situation for all it is worth, will they be ready to settle?  Moderates and Independents await the results after the food fight is over.  The final irony is that the nihilists among the Libertarians and Conservatives who constantly warn us of an intrusive Federal Government are now telling us that we will not feel the effects of a government shut-down.  [Just go on the web site for Cato Institute or the Heritage Foundation and follow their messages.]

NOTE:  By the way, when the finance industry and investors want to do calculations and need to determine a risk-free investment return, what statistic do they use?...Federal Government bonds, notes, and treasuries.  Why?  Because there has never been a U.S. default in our history, and we have never failed to pay our debts, and we have the power to print our own money, and the U.S. debt  that is held by foreigners is held in U.S. dollars (and not a foreign currency like Euros, Yen, Chinese Yuan, etc – which is what happened to Argentina years ago when they had a huge foreign debt held not in the Argentine currency but in foreign currency like U.S. $ or the German DM.).

P.S.  In February 2014, when this issue came up again, Republicans and Right Wing organizations no longer made the Government debt ceiling an issue.  If it wasn't important enough to make it an issue in February 2014, why was it so important months before in 2013 to bring the Government to a close?