Economic Commentary – Government Shutdowns

As we write this commentary, we are faced with the very high likelihood that we will see a federal government shutdown on October 1st since the last budget negotiation between Congress and the President only secured funding through September 30th. In the days leading up to this deadline and, if there is a shutdown, in the days immediately afterward, we can expect to see and read commentaries across the political spectrum.

Such commentaries by their nature tend to slant the analysis in favor of one political side or the other. Our goal is to provide objective commentary on the causes behind the potential shutdown and the realistic consequences if a shutdown were to occur.

Why Is A Shutdown Even On The Table?

The reality behind all of this is a failure on both sides of the political aisle in D.C. to actually pass a full budget on time. Various Congresses and administrations have failed on numerous occasions. When a budget is not passed, the government loses the ability to tax and spend on an ongoing basis. In those cases, it must spend down whatever reserves it has in place (just like any regular citizen has to rely on their emergency savings if they lose a job) until the situation is rectified.

In many instances, Congress and the President find a temporary solution to kick the can down the road for a while. These are known as “continuing resolutions.” As the name implies, the politicians agree on a resolution to continue for a temporary period of time while they seek a longer-term budget solution.

Our current fiscal year started on October 1, 2024, but Congress and the President failed to enact any of the various budget appropriation bills necessary to fund the government for the 2025 fiscal year.

We won’t take sides in the political debate, but it is important to understand the basis of that debate. What is undeniable is that the U.S. has been running budget deficits for many years, and both sides can objectively agree that this is an unsustainable pattern. We cannot simply continue to spend more than is collected in taxes. Such deficits are financed by borrowing; the U.S. issues bonds to various investors who agree to lend money to cover the deficit. At some point, deficits and the outstanding debt become too large to be sustained by the economy.

The solution is conceptually simple: A) spend less, B) tax more, or C) use some combination of reduced spending and increased taxes. Simple in concept is not the same as simple in practice. Each side in this debate feels strongly about its position – hence the impasse that could lead to a potential shutdown.

What Does A Shutdown Mean?

The word “shutdown” implies that the entire government – all agencies and offices – shut down, that someone turns off the lights, shuts the doors, and nothing gets done. Such imagery has led to many a political ad picturing just such a dire consequence. If that were to occur, key infrastructure, such as air traffic controllers (to name just one), our military, and Social Security payments, would cease. It is important to realize that nobody reading this article has ever witnessed, nor even read about, such a complete and total shutdown in our country’s history.

The reality is that the “shutdown” only affects some offices and some payments, and even those effects are temporary. In past shutdowns, government workers have been furloughed, and national parks were closed to all visitors. However, this was never done uniformly. Most agencies were kept minimally staffed; the work they did continued, but at a slower pace. Some payments were delayed, but typically these were to government contractors and vendors, not payments for Social Security benefits.

The reality for most citizens was inconvenience to the extent that service times were lengthened, decisions were delayed, and travel time was increased because a “local” office was closed while the one across town remained open.

The reality for most government employees was a delay in receiving wages. They were “furloughed,” but this meant they still kept their jobs and accrued their wages. When the shutdown ended, furloughed employees returned to their jobs, and the missed payments were paid in full. Interestingly, in years past, several major banks put together loan programs to lend government employees the amount of these furloughed wages until they could repay the loan once missed paychecks were reimbursed.

Will A Shutdown Be Different This Time Around?

It’s always difficult to predict what politicians will do. Churchill is famously quoted as saying, “politicians are asked to stand; they want to sit; they are expected to lie.” It’s a good line reflecting an inherent and all-too-true reality that, in many instances, politicians don’t always do what they say they will do. With that caveat in mind, our assessment is based on what the administration has stated it will do.

Whether one agrees with the administration’s goal or not, President Trump campaigned on reducing the size of the U.S. Government. His term thus far has been marked by several efforts and even more attempts to honor campaign promises. In accordance with that philosophy, the administration has indicated to Congress that a government shutdown would give the administration the legal authority to fire, rather than simply furlough, workers. In short, a shutdown would provide the President with an opportunity to further one of his campaign promises.

Again, we’re not trying to debate the merits of either side’s position on how best to solve the country’s long-term fiscal problem. But we do want to comment specifically on what might actually be done and how that would be significantly different than past “shutdowns.”

The administration has published its hierarchy in various forms, outlining where it will fire employees to reduce the size of the government and, more importantly, its hierarchy of where it will not reduce programs. Among those that will continue are Social Security, Medicare, military operations, veteran benefits, border security, and air-traffic control. Assuming these hierarchies are implemented as indicated, the effects for most citizens from this shutdown will be almost identical to those in past shutdowns. In other words, there should be very little, if any, direct economic pain.

The effect for specific government employees and specific programs will be quite different. Firings and closures are purposefully more permanent. Money will not be spent in the form of wages to these fired employees, nor will it be spent on the terminated programs.

We can all have, and should have, sympathy for individuals who lose their jobs, and this civil rule of life is true regardless of the job someone lost. This article is not intended to belittle the difficulties a job loss poses for the individual.

From a broader economic perspective, though, the economy is not necessarily harmed. Money that is not spent on one program or for one person’s wages is money that can be spent on another program where other employees benefit, or where contractors to those other programs benefit. This can be a difficult economic truth to absorb; let’s examine a classic historical example. The picture below shows the row upon row of typists needed in a government office in the 1930s/1940s.