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Government Shutdown: An Overview

The longest government shutdown in U.S. history has magnified a bitter political debate in Congress over border-security protection. But it has also shined the spotlight on a much-needed debate: How much government is really needed for society to function properly?

The phrase ‘government shutdown’ refers to a permanent or temporary gap in funding for federal agencies, programs and departments. These agencies rely on annual funding appropriations made by Congress. This means their annual budgets must be passed by Congress and the President. A total of 12 appropriation bills are needed to ensure no government agency goes without funding. As such, government shutdowns can be avoided either by passing appropriations or by enacting a continuing resolution (CR). In the absence of full appropriations, a CR extends funding levels from the previous year.

Government agencies get shut down when their full-year or interim funding expires and their appropriation bills are not signed by Congress. Whereas the current shutdown is tied to border-security funding, previous closures stemmed from disagreements over deficit reduction (1990, 1995), Medicare premiums (1995), abortion (1977) and other critical issues. In the United States, government operations that are not funded in time must cease operations under the Antideficiency Act. Only operations that are authorized by law continue to function during this period. In other words, federal agencies must continue all non-essential functions until new funding legislation is passed. Essential services and mandatory spending programs continue to function during this time.

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Since the modern budget process began in 1976, there have been 20 ‘funding gaps,’ or partial government shutdowns. They’ve varied from as short as a few hours to five weeks and counting.

Government Shutdown and the Economy

Although government shutdowns have become fairly common under current President Donald Trump, the latest budget impasse has stretched on for over five weeks, shattering the previous record. An estimated 800,000 federal employees are without pay as a result of the partial shutdown. On January 25, they will have missed their second full paycheck since the impasse began.

Of course, nearly one million federal employees and contractors offering non-essential services bring up important philosophical questions about taxation and the role of government in the economy. This debate is outside the scope of our current discussion but will likely be re-visited by taxpayers and politicians in the future. Presently, however, the government has a significant impact on the economy.

For starters, federal spending alone accounts for a whopping 21% of U.S. gross domestic product (GDP). Wages paid to employees feed directly into consumption, which impacts more than two-thirds of the U.S. economy. (America, like many of its advanced-industrialized peers, is a consumer-driven economy.)

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The U.S. Chamber of Commerce has warned that a prolonged shutdown will have adverse effects on American businesses and has urged Democrats and Republicans to seek out new budget arrangements as soon as possible.

“The shutdown is harming the American people, the business community, and the economy,” Chamber executive vice president Neil Bradley told Congress in a letter earlier this month. “The adverse consequences of the shutdown are wide and growing.”

According to the Committee for a Responsible Federal Budget, government shutdowns tend to cost, rather than save, money. Costly contingency plans, the loss of user fees and employee pay gaps can end up costing more in the short run. The 16-day shutdown of 2013 cost the government $2.5 billion in lost productivity, weaker GDP growth and declining investor confidence. According to Barron’s, every $1 of reduced federal spending can lower GDP by up to $1.90 if multiplier and indirect effects are factored. Of course, this analysis does not consider the potential long-term benefits of a smaller public sector and the lower taxes that would likely result from that shift.

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The Bottom Line

As the partial government shutdown continues, Congress and the President will be under renewed pressure to get a new funding deal in place. It remains to be seen whether a compromise on border-security funding can be reached anytime soon. In the meantime, President Trump can still declare a national emergency, which would allow him to divert funds from the Department of Defense into building a new border wall.

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