Government Shutdown Averted, for Now
Here we go again. Although Congress voted to keep the government open, averting a shutdown, it’s just for 45 days. We should be used to the dysfunction, as there have been 21 government shutdowns since 1976. Here are questions that I have fielded about these events:
How Will Most Americans Experience the Shutdown? Federal workers will bear the brunt of the stalemate: 500,000 or more Federal employees will be furloughed, with another 500,000 (maybe up to one million) being forced to work temporarily without pay. More than a million active-duty military personnel will be asked for yet another sacrifice: they will forego pay during a shutdown. Importantly all government and military worker’s wages will eventually have to be repaid when the government reopens.
For travelers, national parks and museums will either partially or totally shutter, and the process of getting through the airport could get tougher, TSA agents would be working without pay and some may not show up. The same is true of passport applications, which could slow down.
Will Social Security, Medicare and Medicaid continue? All three are authorized through separate laws, so the checks and benefits will continue to flow. Additionally, military pension benefits will be paid, and Veterans’ Hospital facilities are expected to remain open. BUT recipients of other benefits like the Special Supplemental Nutrition Program for Women, Infants, and Children, (“WIC”), would likely stop after a few days and Supplemental Nutritional Assistance Program (“SNAP”) benefits may be impacted if the closure lasts longer than 30 days.
Do I Get a Break on My Quarterly Tax Estimates? No dice, the IRS fully expects you to pay your taxes as their workers will not be furloughed. In case you are one of the dwindling few who rely on snail mail for those taxes, post offices are open and postal workers will deliver your mail!
What Is a Credit Rating Downgrade, and Should I Care About It? A credit rating measures the ability of a company or a government to repay its debt. Until 2011, the U.S. maintained the highest rating from all three of the big agencies, Standard & Poor’s, Fitch, and Moody’s. During the 2011 debt ceiling standoff, S&P cut its rating (and has never restored it), and then this past summer, Fitch did the same, mostly due to the political dysfunction that has led to these moments. Earlier this week Moody’s put the world on notice that it could also issue a downgrade.
How Does a Shutdown Impact Investors? A shutdown will not affect the government’s payments to bondholders, but the potential for a shutdown and a downgrade has added pain to a rough September, where there have been losses in both stocks and bonds. There is big concern that amid high interest rates, the trifecta of spiking energy prices (up by 34 percent since June production cuts by Saudi Arabia and Russia), restarting student loan payments, and a looming government shutdown could cause an economic slowdown and eat into the gains that stocks have made so far this year.
How Does All of This Affect the Federal Reserve? A shutdown could be an issue for the Fed because the collection of economic data would halt. That means that the October 6 employment report and the October 12th inflation report may not be released and without these and other data points, the central bank may be more cautious and do nothing at its next policy meeting on October 31-November 1. The Fed could also choose to delay their meeting if they cannot get timely data.
What Is the Overall Economic Impact of a Shutdown? The Congressional Budget Office analysis of the 2018-2019 shutdown found that economic growth (as measured by real GDP) was dented by 0.1 percent in Q4 of 2018 and by 0.2 percent in Q1 2019. Economists from Goldman Sachs are penciling in similar results this time around, with expectations that the trend would reverse in the subsequent quarter, when the government reopens.