A Costly Stalemate
For the first time in 17 years, the government began shutting down Tuesday after a Congress divided over President Barack Obama's health care initiative failed to reach an agreement to keep federal agencies and services funded.
The last government shutdown lasted three weeks, beginning in December 1995 and lasting into January 1996. It’s not clear how long this one will last — as of Tuesday afternoon, the House and Senate remained in a standoff — but it’s already having repercussions. Hundreds of thousands of government workers were told to stay off the job indefinitely, while a million more continued to work without pay.
“Today’s politicians seem more concerned about ideologies than about listening to Wall Street or Main Street,” says Joe Heider, Ohio regional managing principal at Rehmann Financial’s Westlake, Ohio, office. “The rancor in Washington is so severe that there are lots of unknowns. It’s very possible that a shutdown could last two or three weeks like the last one.”
While Washington politicians continue to spar, what does a shutdown mean for the rest of us? Keep reading to find out.
Essential Services Will Remain Available
Those of us who remember the 1995-1996 government shutdown know that, at least in the short term, such an action will have little immediate impact on the economy or the essential services delivered by the government, Heider says. That means services like air traffic control, the post office, food safety inspections, border patrol, Social Security and Medicare will continue. Because these programs have dedicated funding, the government will continue to have the authority to pay for those services.
In addition, the country will continue to be protected by the Department of Defense. While some staffers’ checks may be delayed, President Obama signed a bill Monday ensuring that active-duty military, as well as some civilians and Defense contractors, will get paid during the shutdown.
Nonessential Services Stopped
In a government shutdown, government services that are deemed “nonessential” are discontinued, and the workers who provide those services are furloughed until further notice. Those furloughed workers will represent about one-third of the federal workforce, or about 800,000 people.
Those so-called nonessentials include national parks and museums. Other government agencies will be partially shut down as well — from the Chemical Safety and Hazard Investigation Board to the Treasury Department to the Small Business Administration, even some services for the blind. Other services like federal courts and airports could also be affected, says John Piershale, wealth advisor at Piershale Financial Group in Crystal Lake, Ill.
The National Park Service is expected to close more than 350 national parks and museums, including New York’s Statue of Liberty and California’s Redwood National Park — decisions that could affect millions of Americans. During the shutdown of 1995-1996, the National Park Service says it had to turn away more than seven million visitors.
Passport and Visa Processing Delayed
One of the “nonessential” services that will seem essential to the citizens who need it now is passport and visa processing. “I hope everybody who’s planning to travel out of the country has already gotten their passports processed,” Heider says. Those who haven’t may face delays.
In the 1995-1996 shutdown, more than 200,000 passports languished unprocessed until the government was up and running again. At the same time, 20,000 to 30,000 visa applications from foreigners were unprocessed each day.
This time, the State Department says it will keep most consulates and embassies open, but passport and visa processing could still be interrupted. For instance, if a passport or visa office is located in a government building that must be closed due to the shutdown, that office would be required to close as well.
Slower Mortgage Approvals
The Federal Housing Administration (FHA) backs about 30 percent of mortgage loans, Piershale says. In a government shutdown, the FHA would either not make loans or make many fewer loans, which could have an impact on consumers.
Delaying or stopping government-backed loans won’t just inconvenience homebuyers and sellers. Stalling the housing industry could also represent a major slowdown in the economic recovery.
While the shutdown could certainly affect the housing market, Heider says that impact is more likely if the shutdown continues for several weeks. “Assuming this doesn’t drag on longer than two or three weeks, the mortgage loan process may not slow down too much,” he says.
Economic Effects Uncertain
Investors concerned about how a government shutdown will affect their stocks may be considering pulling out of the market, Heider says. But he doesn’t necessarily recommend it. “If you look at government shutdowns in the past, particularly the two in the 1990s, in both cases, the stock market went up during the shutdown,” he says.
If basic government services continue to function regularly, “the market could rebound and it would be a good buying opportunity,” Heider says. Because “the markets could rebound quickly, and it’s virtually impossible to determine when that might happen,” he recommends investors “hold tight” and avoid panicking.
If a government shutdown lasts longer than two or three weeks, however, it has the potential to negatively affect economic numbers for the fourth quarter, Piershale says. For instance, the productivity from delayed government services will not show up on the gross domestic product report for the fourth quarter of 2013. “A few days probably wouldn’t make much difference, while a month, which is unlikely, would have a measurable effect on fourth quarter GDP,” he says.
Mark Zandi, chief economist and co-founder of Moody's Analytics, has estimated that a shutdown of three to four weeks could reduce the GDP by as much as 1.4 percentage points for the quarter.
Taxpayers Foot the Bill
Along with government employees who must go without paychecks during a shutdown, taxpayers are the real losers when the government shuts down. For instance, the last government shutdown in 1995-1996 cost taxpayers $1.4 billion. Rather than saving the government money, a shutdown actually costs more because contingency plans must be developed and furloughed workers are typically paid back pay when the government is up and running again (in the past, Congress has approved retroactive back pay for furloughed workers).
As taxpayers lose patience with reduced services, Congressional leaders will likely feel more pressure to come to an agreement and get the government up and running again. “Leaders will start feeling the heat from their constituents and will have to negotiate,” Rehmann Financial’s Heider says. “As long as this doesn’t stretch out longer than two to three weeks, the average taxpayer will see little impact.”
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