How bad would a government shutdown really be?

There are lots of reasons why its bad when politicians fail to appropriate money to keep the government going at the end of a fiscal year. This year's shutdown ...

There are lots of reasons why its bad when politicians fail to appropriate money to keep the government going at the end of a fiscal year. This year’s shutdown brinksmanship is sharper than ever. So what’s so bad if the government shuts down for a few days or a month? Federal Drive with Tom Temin talked about a list of reasons with Vice President of Research for the Peter G. Peterson Foundation, Jeff Holland.

Interview Transcript: 

Tom Temin And let’s go through your list, because the very first item on the list is that it is costly to the government, which is a little counterintuitive. When nothing’s operating, the money’s not flowing out. How can it be costly for the government?

Jeff Holland Yeah. So you might think that actually saves money, but there are a number of things that are costly. One is just the lost work output. People won’t be working during that time and they will eventually get paid. So that’s just work that’s not getting done. The second thing is the contingency plans that agencies have to implement in the face of a continuing resolution or a shutdown cost money. So it means that people are spending time figuring out what those contingency plans are rather than working on other things. It’s also possible that contractors could include premiums to cover the risk of the late payment. So things like that could also be happening. It could be costly. OMB estimated that the cost of lost productivity in the 2013 shutdown was around $2 billion. Subsequently, the Senate Permanent Committee Subcommittee on Investigations found that the previous three shutdowns that cost at least $4 billion and that didn’t even include the cost to the DoD and some other agencies who could not fully report. So there are definitely costs involved with shutting down the government.

Tom Temin And as you point out, eventually the back pay does flow. So you’re paying for work that essentially did not take place, not through the fault of the federal employees, but simply for the fact that they could not work. They’re proscribed from working unless they were the excepted employees. But people in policy, procurement, budget planning, all of those things cannot work. In fact, they’re not even allowed to access email at home.

Jeff Holland That’s right. But they will eventually get paid. The Government Employee Fair Treatment Act of 2019 provides for retroactive pay. So they will get paid even if they’re not allowed to come into the office for a period.

Tom Temin All right. And then you are also stating that the government shutdowns can be bad for the economy. We’ve got a pretty big economy. And so, you know, a few hundred thousand people laid off for a couple of days. Is it really that costly?

Jeff Holland So it’s not necessarily that costly, but there is some effect, especially if the shutdown goes on for a while. There have been various estimates, this by analysts. In 2013, the Bureau of Economic Analysis calculated that the shutdown reduced GDP in the fourth quarter by 3/10 of a percentage point. S&P Global had done a similar estimate in 2017. They estimated that reduced GDP by around six and a half billion dollars a week. CBO came up with an estimate that the partial government shutdown in 2018 reduced real GDP by $11 billion, although most of that was recovered. So, again, you know, we have a $25 trillion economy. These are relatively small numbers, but they’re unnecessary ones, you know, the shutdown just does have some effect.

Tom Temin And this isn’t on your list, but there is this effect. And, you know, the founder of the foundation, you know, was someone that knew pretty much how government works and maybe how it should work is the perception, you know, around the world. I wonder what people think of a government that is such a long, stable, democratic type of operation, maybe the longest in history works on this manner. There must be some international non quantifiable effect. People are saying, what the heck is wrong with those people?

Jeff Holland Yeah, I’ve worked abroad before and it’s hard to explain how the federal government could shut down. This doesn’t happen in other countries. I mean, parliamentary democracies, even if lack of a budget causes them to default, the government operations still continue. So, yeah, it’s an anomaly for sure.

Tom Temin We’re speaking with Jeff Holland. He’s vice president of research for the Peter G. Peterson Foundation, which I guess it’s fair to say is in favor of fiscal restraint and returning to some kind of a semblance of less deficits and less debt accumulation. Fair way to put it.

Jeff Holland Yeah, we use the term fiscal responsibility. So we’re concerned about the trajectory of the debt. We’re certainly concerned which ties a little bit into what we’re talking about here in terms of operating under normal order and things like that. The trajectory of the debt, by all estimates, is upward and rising quickly. And that yeah, that concerns us for the future of upcoming generations.

Tom Temin All right. So getting back to your list, you know, the costs of a government shutdown and there is the shutdown itself, which is an interruption of federal programs and services, although it seems like in recent years, more and more of the government operations have been accepted so that they do keep on going and the public feels it less than maybe the shutdowns of the Clinton era.

Jeff Holland Yeah. You know, the shutdown affects or essentially affects appropriations only so which we often call discretionary spending. That type of spending in 2022 accounted for about a little over a quarter of the budget. So the shutdown doesn’t affect programs that are governed by permanent law so it doesn’t affect Social Security benefits. It doesn’t affect Medicare payments. It doesn’t affect most income security programs, veterans programs and other elements of federal activities that are mandatory that are governed by permanent law. Appropriations do affect a lot of the daily operations of the federal government. Things like scientific research, safety inspections, or part service from transportation activities, passport services, citizenship, things like that. It could affect programs like the Supplemental Nutrition Assistance Program if it goes on too long. That’s a mandatory program. But usually the authorization for benefits is done like every 30 days or so. So disruptions will occur even if a lot of elements of federal government activities will continue to be carried out.

Tom Temin And by the way, another aside question about you personally, having spent a quarter of a century at the Congressional Budget Office where you were churning out all of those reports that I wish more people would read because they’re really good. And if you want to know what’s really going on, you know, read the CBO. I quote it to people at cocktail parties all the time and their eyes glaze over. They dig into their olives. But how does it look? Brinkmanship in this horrible lack of regular order year after year after year, now generation after generation? How did it look from the poor people inside the CBO who are just the drones of Congress that officially have no political stake in the game?

Jeff Holland Yeah, well, you know, CBO was there to serve the Congress during the shutdown of 1995, 96. Many CBO employees was declared essential because they were supporting the Congress and helping get through the shutdown period. So, you know, CBO people have to do their jobs and getting the government up and running and getting appropriations passed is something that, you know, they play an integral role, in terms of scoring the appropriations and things like that. So it’s just another element of the work there. But thanks for the shout out for CBO’s work. I mean, we’re not there anymore, but appreciate that kind of shout out.

Tom Temin And I guess it must feel good. In the old days, they called them essential employees versus nonessential. I think now the word is excepted activity or something.

Jeff Holland So, yeah, so old fashioned. So using some of the old terminology. It is a misnomer, but people had to come to work.

Tom Temin But it must be cool to say, hey, well, you stay home if your neighbor’s a fed. I’m essential, so I’m heading in and you can stay home and play Pinnacle.

Jeff Holland Perhaps. I think the main thing that most people at CBO want is just, you know, a smooth functioning of the government.

Tom Temin Sure. All right.

Jeff Holland Good economic policy.

Tom Temin And getting back to your list. Number four, I guess, is government shutdowns may harm the federal workforce. And that’s a real concern because people generally have a favorable idea of public service of being a civil servant. The situation can kind of get frustrating for employees.

Tom Temin Yeah, I mean, there’s certainly a human element to this. I mean, in terms of people’s job security or their ability to make the payments and so on. Yeah, the last shutdown, around 800,000 workers were furloughed or went without pay for a period. That’s a lot of people. And, you know, even if you look at the population in general, a survey by the very thing found that among all U.S. workers, around 40% were unable to pay an emergency expense of $400 or more. You know, so I mean, to the extent that that’s affecting some of these 800,000 people, that, you know, it’s a real concern. You also wonder if it might harm retention and recruitment in the federal government being shut down. Being excluded from your job for a while may alter the perception of federal jobs. It might reduce the attractiveness of such jobs for younger workers and are already underrepresented in the federal workforce. Right now, just about 7% of permanent full time employees in the federal government are under the age of 30, even though within the broader labor market they account for 20%. So you don’t want to dissuade your potential workforce from coming to work for you.

Tom Temin And increasingly, it must look difficult because the arguments over the budget are, yes, the dollar levels for different programs, but you’re only talking about a quarter of the spending anyway. And then it gets down to 10 billion plus or minus out of 1.3 or 4 trillion. So the budgetary matters are there. But more important and more intractable, it seems, are the philosophical and policy types or social issue types of issues that are getting pulled into the budget debate that must make it look tougher and tougher for you.

Jeff Holland Well, yeah, I mean, I think in terms of getting to a political resolution, there’s. . . It becomes harder when other elements become added to it. I mean, I think the gap in dollars, right. Now seems to be larger, like tens of billions or $100 billion or so. But yeah, when you layer on the other riders and so it can become more difficult. I’m a terrible political prognosticator.

Jeff Holland Well, you could take the boy out of CBO, but you can’t take the CBO out of the boy. And I guess a final question would be, what about the infrastructure money, Chips Act money, inflation reduction Act money? There was a few trillion thrown around there, and a lot of that money is still left over. I wonder to what extent agencies could repurpose some of that money, which is not part of these appropriations talks, but it’s there for operations?

Jeff Holland Well, it’s there, but it’s designated. A lot of that money is mandatory nature again. So the law says what you can use it for. Yeah. Moving money around within the federal government usually involves some sort of legislative action as well. So while lawmakers might be tempted to move it, rescind it, change it in some way that requires legislation and that, you know, that we’re in a situation now where the legislation is already difficult to achieve. One other issue that we always sort of touched down a bit. We were talking to our governments. You know, Fitch Ratings recently downgraded the U.S. credit rating. And one of the issues they cited was governance, in fact, particularly erosion of governance, as a rationale for that downgrade. You know, and I think that the shutdown in some sense might contribute to that sort of perception. And to the extent that it has some sort of long lasting effect or has some sort of future effect on credit ratings, you know, that may make it difficult for us to borrow and might lead to higher rates on the U.S. debt and so on. Interest is something we have to continue paying. Also will be continued to be paid, you know, during the shutdown. But the higher the interest rates go, the more expensive that is and so on. So anything that affects that, even if it’s tangentially, you know, is also a concern.

Tom Temin Well, I guess if you can have a hoodie on the Senate floor, then governance can’t be far behind.

Jeff Holland Interesting connection, but perhaps.

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