The U. S. Government Shutdown Explained

 

(See "The Ramifications of the U.S. Government Shutdown" below for my perspective on this.) 

Congress failed to agree on a spending bill for the fiscal year starting October 1, 2013, resulting in the first government shutdown since 1995. According to the Congressional Research Service, this is the 18th time the federal government has shut down as a result of a failure to agree on an annual appropriations bill. Most shutdowns have lasted only a few hours or a few days. The most recent shutdown, in 1995, lasted three weeks.


What happens when the federal government shuts down? 

When the government shuts down, federal agencies must generally suspend operations and furlough their employees. However, there are significant exceptions for government functions that promote national security, or protect human life and property. As a result, a shutdown doesn't impact certain essential functions like the military, law enforcement, TSA, air traffic control, border patrol, emergency and disaster assistance, food safety, foreign embassies, prisons, and federal medical care (among others). 

A shutdown also doesn't impact federal entitlement programs (like Social Security and Medicare) that aren't funded by discretionary annual appropriations. Funding for these programs is considered mandatory, because the legislation creating the benefit obligates the government to make payment. So benefits under these programs continue uninterrupted, and the employees who administer those benefits are generally exempt from furlough. 

Finally, some agencies are funded by multiple year appropriations. Even though these agencies don't yet have any funds appropriated for the new fiscal year, they may still have funds remaining from prior appropriations, which they can use to continue operations until those funds run out.


So what does a government shutdown mean to you?

What you can do during the shutdown: 

  • Receive and send mail--the post office is an independent agency unaffected by the budget process
  • Buy insurance through one of the new health insurance Exchanges
  • Receive your Social Security and Medicare benefits, or apply for new benefits
  • Get a passport or visa--but only until the State Department's available funding runs out (during the 1995 shutdown, 200,000 U.S. applications for passports went unprocessed)
  • Conduct business with the United States Patent and Trademark Office--but only until the USPTO's available funding runs out
  • Receive unemployment benefits and food stamps
  • Get an FHA or VA mortgage
  • Receive medical care at a veterans hospital
  • Use the federal court system--but only for about 10 days 

 

What you can't do during the shutdown: 

  • Stop paying taxes--the IRS will continue to process electronically submitted tax returns, but if you're being audited, you'll get a temporary reprieve
  • Get taxpayer assistance from the IRS
  • Get a small business loan
  • Go to a national park, zoo, or museum--if you're already overnighting in a national park, you generally have two days to leave
  • Get a paycheck, if you're a federal employee--unless you're the president, a member of Congress, or in the military; however, in the past workers were paid retroactively after a new appropriations bill was passed. 

 

If you need more information, most government agencies have posted their shutdown contingency plans on their websites.


The shutdown is separate and distinct from another looming crisis--the debt ceiling. According to Treasury Secretary Jacob Lew, it's anticipated that the United States will run out of funds as soon as October 17th, unless Congress acts to raise the debt ceiling before then. More on that crisis to follow…

 

The ramifications of the U. S. Government Shutdown  

The long-term economic impact of the government shutdown is not noteworthy. As a matter of fact, it was reported in today's Wall Street Journal that transcripts from the Federal Reserve's meetings around the time of two prior shutdowns, late 1995 and early 1996, showed that policy makers weren't at all worried about harm to the economy from the budget standoff between then President Clinton and Republican House Speaker Newt Gingrich. Ironically, the S&P 500 gained 4% in the period spanning the shutdowns. 

I just don’t see this issue being a long-term impediment to the U.S. economy or stock market. Honestly, does anyone, who was over age 25 in 1995, remember any cataclysmic economic events surrounding the previously mentioned shutdowns.....NO.  Thus, either doing nothing and/or putting some cash to work may be the best course of action. 

I believe this is a temporary issue, and the much bigger elephant in the room is the debt ceiling battle facing the powers that be in D.C. later this month. As such, all this infighting and bickering may only result in hard feelings and vitriolic rhetoric in the near term, but some bargains for investors. 

Regarding the debt ceiling battle, per the United States Congressional Budget Office's May 2013 report, for the 2012 fiscal year for every dollar the U.S. Government collected in fees and taxes, approximately an additional forty cents was spent from borrowed funds. Just think about how your personal budget would be if your total monthly living expenses were $5,000/month, but you paid $1,428 of them via credit cards, or a home equity loan, and had no realistic, strategic or long-term plan to fix this. Basically, your only solutions are to win the lottery, find a much, much better paying job that allows you to get caught up, or face bankruptcy at some point. 

For instance, if you have a five gallon bucket which represents government spending, and a three gallon bucket representing tax receipts and income to the government, then you have a two gallon shortage, which is made up from debt (i.e., borrowed money). Say we increase taxes by 40%, resulting in the government having a new 4.2 gallon tax bucket to pour from. However, if it didn't reduce the size of spending bucket you’re pouring into accordingly, then it won't make any difference. The government would have to continue borrowing to fill the spending bucket. Basically, the spending bucket has a hole in it, and there is not a consensus about what to do about this. In addition, the extra taxes imposed on individuals and businesses would negatively impact the economy and stock market. Until there is a consensus on a plan of action, the government will continue to borrow to make up difference until the borrowers no longer will lend to it. At that point you've got a huge problem....can anyone say Greece!    

That being said, the best solution for the U.S. Government is for the U.S. economy to experience much more robust economic growth, which results in greater tax receipts. The other crucial half of this equation is sensible government spending going forward, and for some areas of the government - cuts. This is no different than what you and I would do if our personal finances were out of whack. Can anyone hear Dave Ramsey screaming in the background? 

Look, my intent is not to get into a big political dialogue. In essence, the events taking place in D.C. are non-eventful in the short-term. The real issue, which near term we won’t see any stock market or economic impact, is what corrective long-term action the government is going to take to address its budget issues. Based upon history, for the mean time, a patient or non-reactive investment approach may be the best course of action.

 

Quotes 

"Happiness is an attitude. We either make ourselves miserable or happy and strong. The amount of work is the same."

                   Francesca Reigler 

"Doing what you love means dealing with things you don't."

                   David Shore 

"Just as we dig a channel to control the direction of a stream, we can control our children's activities through praise and recognition."

                   Natalie Cole

 

Tony Moeller, CPA

 

The information listed in this commentary is a compilation of various publicly available sources and is for informational purposes only. It is not a recommendation or solicitation of any particular investment or strategy. A risk of loss is involved with investments in the stock and bond markets.  

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