The US government will, after a congressional vote last night, almost certainly shut down when the new fiscal year begins on October 1.
But “shut down” doesn’t really capture the impact of what’s more like a spending freeze that will gradually spread through the government like ice forming in water. That means its effects may creep up on citizens who don’t interact with the bureaucracy daily. Initially, a shutdown will be little more than a symbol of US dysfunction, but each passing day will make its economic impact more tangible, especially if prolonged squabbling spooks consumer and business confidence.
The shutdown is essentially a legal problem: Republicans in Congress refused to endorse a spending bill unless it delayed the Affordable Care Act, the law delivering health insurance to poorer Americans, which starts to take effect on Oct. 1. Now, when the new fiscal year starts, government officials won’t have the authority to spend new money.
The government doesn’t shut down “essential” services that protect life or would be more costly to suspend than keep going. That means soldiers stay on duty (though their pay is delayed) and nuclear reactors stay open, but most financial regulators and trade negotiators are sent home without pay. Medicare and Social Security will keep paying out, since they are paid for out of trust funds, though the checks may be late arriving. Many departments and contracts will be able to continue using money that is already appropriated before that, too runs out.
Here are the first people who will notice the shutdown:
- The first people to notice will be federal employees, when some 800,000 will be sent home without pay. This will be felt in the regular economy—imagine the market reaction if the jobs report showed 800,000 lay-offs in a month—to the tune of about 0.32 percentage points of growth in the fourth quarter, per economist Mark Zandi, who expected the economy to expand at 2.5% annualized pace if there were no interruption. That assumes only a two week shut-down: If it drags into a month, fourth-quarter growth could be reduced by as much as 1.4 percentage points.
- Eggheads are going to notice the shutdown. A significant portion of the spending freeze will affect the long-term investments the government makes in science and technology. NASA will be mostly closed, and government-funded medical researchers won’t accept new cases. Climate and weather scientists will take a break. Statisticians and economists will stop producing public data that many markets rely on. The Centers for Disease Control and Surveillance will stop tracking epidemics—just as flu season is approaching!
- US trading partners will notice. The representatives negotiating trade deals with the European Union and the Trans-Pacific Partnership countries will have to take a break, which could throw a wrench in plans to have a Pacific trade deal for president Obama to present at an October meeting of Asian leaders. There will likely be delays in the approval of visas to enter the United States—the last time the government shut down, some 20,000-30,000 applications went unprocessed each day—or to obtain trade licenses. US lawyers contesting disputes at the World Trade Organization will have to ask for a time-out.
- Home-buyers and small businesses will notice. The government programs that guarantee about 30% of new home loans (remember, housing is driving the economy!) and provide capital to small businesses will be shut down. Many workplace health and safety inspections will also be put on hold.
The longest shutdown ever lasted 21 days. Let’s hope US lawmakers don’t try to beat the record.