Government Shutdown

The Federal Government is supposed to approve a budget every year.  The budget is necessary as it is used to allocate funding among the various agencies.  September 30 was the last day of the government’s fiscal year.  At this point in time, the house and senate were unable to come to an agreement on the budget for the 2014 fiscal year.  This disagreement has caused the government to shutdown.

            A government shutdown seems scary to many people, however, there are lots of misconceptions regarding it.  All laws will still be enforced, social security will still be paid, and our military is still active.  What the shutdown does is reduce, or in some cases, eliminate funding to all non-essential agencies and services of the Federal Government.  The agencies affected by the shutdown include, but are not limited to the following: FCC, NIH, EPA, and the IRS.  The moment the shutdown ends, these agencies will receive full funding again.

            The primary cause of the most recent shutdown was a disagreement over the Affordable care act, a.k.a. Obamacare.  Obamacare is heavily supported by the Democratic Senate and White House.  The Republican led house strongly opposes the measure.  The budget passed by the Senate included funding for Obamacare, whereas the budget passed by the house did not.  It is important to note that Obamacare exchanges opened on October 1, the day the shutdown commenced. 

            The effects of the shutdown through two day have been minimal to non-existent. On the first day of the shutdown most markets and indexes were up. Those that were down decreased minimally.  On the second day most markets decreased minimally. 

            However, there is much debate on what will happen if the shutdown continues for more than a few days.  The economic impact of the shutdown is hotly debated with different sources claiming different numbers.  Goldman Sachs, for instance, believes that a three week shutdown could cost the economy 0.9% of its overall GDP, approximately $150 million.  This is significant because as of January 1 the economy’s GDP has only increased 2%.  A three week shutdown has the potential to reduce this year’s growth in half.

            It is also worth noting that the DC area will be affected more than other areas of the country because of the high concentration of government employees.  Of the 800,000 people who will be furloughed for the duration of the shutdown, nearly 700,000 of them live in the DC area.  The State of Maryland estimates that it will loose $5 million per day in tax revenue for the duration of the shutdown.

            Another important aspect is that the Federal Government is going to reach the debt ceiling in approximately two weeks. The ceiling is currently set at $16.999 trillion.  These negotiations could very well be complicated by the disagreement over the budget.  This is also a far more pressing issue, because if the House and Senate are unable to compromise the government will be forced to print more money or to default on its debt.  Neither one of these options is good, as printing money will cause inflation. However, the effects of that will be inconsequential compared to a credit default. In the event of a default, interest rates will skyrocket and US financial markets will be in a situation unlike anything we have seen before.  The effects of a default would also be international, as economies such as Japan, and China which own substantial portions of our debt will have severe issues in their financial markets.