Uncertainty Might Be Biggest Shutdown Cost

"If they can't get their act together in Washington, it creates a psychology that could be very damaging to financial markets and to consumer confidence."

That could have been said any day this week, but in fact it’s a quote from 1996 — the last time the federal government halted operations because Congress and the president couldn't reach an agreement on spending.

Hope remained alive in efforts to avoid a shutdown Friday, as congressional leaders and White House negotiators continued to work on bridging their disagreements over a spending plan for the remainder of this fiscal year. But the high-stakes game of chicken is speeding toward an April 8 deadline.

The “damage to psychology” view, expressed in the 1996 shutdown by Robert Liberatore, then the head of the Chrysler Corporation's Washington office, is more often heard today in the context of Congress’s failure to agree on a long-term plan to control spending and reduce debt, which is now at the highest level since just after World War II. This theory holds that bond investors may suddenly sell off Treasury securities if Congress shows no sign of being able to get the debt under control.

But a short-term failure to agree on a spending plan for this fiscal year likely would be costly, even if the impact differs in some ways from the 1996 shutdown.

Why shutdown would differ from 1996 one
The topline estimate from forecasters at Goldman Sachs is that if a shutdown lasted more than a few days, it could shave 0.2 percent off the growth of Gross Domestic Product for every week it continued. GDP grew an annual rate of 3.1 percent in the fourth quarter of 2010.

Back in 1996, the Clinton Administration estimated that the five-day and 21-day government shutdowns slowed economic growth by one quarter of one percentage point in the fourth quarter of 1995.

But one can’t simply extrapolate from that experience. A shutdown next week would be more complicated because so many more federal functions are performed by contractors than there were 15 years ago.

Washington attorney John Cooney, who served as deputy general counsel at the Office of Management and Budget during the Reagan administration, said, “In an office at the Department of Homeland Security these days, you might have ten federal civil servants and 200 contractor employees doing more or less the same work and managed the same way.”

In contrast, “When the shutdown plans were first developed in the 1980s and updated in the 1990s, the model we had in mind was that services were delivered by federal civil servants. Contractors provided stuff, like tanks and airplanes and paper. That’s different now because there are so many more people who are basically working in place of federal civil servants.”

Compensation for contractors?
Even a shutdown of a week or two would cause ripples of uncertainty to go through the universe of employers and workers who've banked on the federal government as their reliable source of income, especially in the Washington, D.C. area.

According to Cooney, a contractor might well ask the federal contracting officer, “If you tell me I’m shutting down my contract, what do I do? Because we all anticipate this will be revived once appropriations start to flow again. What will I be compensated for, after the fact, if I close down my operation and then three days later have to start it again?”

Cooney said in every past shutdown Congress has passed a law providing that the federal civil servants who were furloughed would receive their salaries for the days of work they missed.

“There’s no guarantee that Congress will do that in this shutdown and there certainly is no precedent for Congress passing a law that said that contractors will be reimbursed for the work that their employees didn’t get to do, so that the contractor can pay the employees for the days that they missed,” Cooney said.

In a shutdown, he said, a contractor would need to decide whether to pay its workers during the hiatus, "but the contractor will have to make that decision with no assurance whatsoever that it will be compensated after the fact for those payments.”

Spring tourist season
He also noted that much of the 1995 and 1996 shutdowns occurred over the Christmas and New Year’s holidays “when demand for federal services was probably at one of the low points for the year.”

But a shutdown next week would occur during one of the year’s peaks of tourists visiting Washington in springtime.

The OMB has directed federal agencies to have orderly plans to continue essential operations and curtail non-essential ones. “If there were disorganization and breakdowns in the delivery of the services that do need to continue, the public might blame the president for that,” Cooney said.

But politically, and in terms of controlling news media perceptions, the president and his aides have the upper hand, he said. “The best way for the president to obtain public support for his policy priorities is to show the public he is carrying on and protecting the public interest.”

Presidents and their aides “do build on that capacity to try to gain the upper hand in the public relations battle with Congress. They understand that there will be film crew outside the Washington Monument and they will be looking for the high school class from Iowa who spent years saving to make this trip and now they’re here and everything is shut down.”

Some functions not affected
A shutdown does not mean that every federal function would come to a standstill.

For example, Joint Chiefs of Staff chairman Adm. Mike Mullen told the House Armed Services Committee Thursday that U.S. military operations in Libya wouldn't be affected by a shutdown.

According to a 1990 federal law, government functions “involving the safety of human life or the protection of property” are exempt from a shutdown.

And a legal opinion from Attorney General Benjamin Civiletti in 1981 specifically said the payment of entitlement benefits such as Social Security could continue during a shutdown.

Two Republican House members, Rep. Jack Kingston of Georgia, and Rep. Louie Gohmert of Texas, have also offered legislation that would prevent any interruption of military salaries during a governmentshutdown.

“As the representative of more than 80,000 troops who are in and out of war zones, I know they and their families cannot afford a missed or late paycheck,” Kingston said.

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  • by to osoc on Apr 7, 2011 at 01:44 AM
    Shut it Down? "Politics" over Country/American families? You and your kind will say and do anything to destroy this country. Whats good about causing people lives to be disrupted just for your own personal satisfaction?
  • by Obama Snake Oil Co Location: Washington on Apr 4, 2011 at 05:40 AM
    I say let em shut down. This shouldn't be about spending, it should be about saving. That is the problem. Either way, if Congress and the president don't get it, they will in 2012....
  • by Business Student Location: NC on Apr 2, 2011 at 08:51 PM
    I bet most of these posters here have no idea about the financial markets , or know how to buy and sell a stock!
  • by 250 Location: Jax on Apr 2, 2011 at 06:28 PM
    We can't have ethics, morals or common sense. So no the average Joe can't be elected. Go Figure
  • by ralph Location: ahoskie on Apr 2, 2011 at 07:20 AM
    the uncertainty of how long until the nation is totally destroyed DELIBERATELY by the crazy traitor pig democrats is the worst uncertainty. The next worst, is the not knowing if the republicans sent there to fix the mess made can remember to ignore the hysterical screaming media diverting and obfuscating what is important and needs most to be done. SHUT the government down and cut the budget. Then arrange for the thieves who stole the money to repay the money with penalties and jail time. Then protect the border and get the invaders OUT. Then on the second day.....
  • by Chuck WireWiggler Location: ChazWorld, Hyde Branch on Apr 2, 2011 at 06:39 AM
    Term LIMITS for the fools is the only way to fix this. They all go in with the best of intentions, (I'll give them the benefit of the doubt). But once they taste the "power" that comes with title they will do anything and I mean anything to keep that power, even if it means selling thier soul, or the country down the drain. And, the politician will never vote to pass term limits becuase of the above reason, Sooo with that said, we must impose voter term limits. DO NOT put ANY currently setting politician back in office. We have to get envolved to find good replacements. Ehen we replace them. But with that said there are certain legislators that will never be unseated, becuase the keep throwing out bacon, just enough to the constituants to keep them fooled.
  • by Annoyed is RIGHT Location: USA on Apr 2, 2011 at 05:21 AM
    It's not the Dems fault NOR the Repubs, it's BOTH party's fault!! They do NOT represent the avg joe. They represent Lobbyists & PACs. It's time for election reform, so that a working class person can run and WIN office. Over 60% of congress has a net worth of a mil. or more? Special interests with big money call the shots, PERIOD. Unfortuneately the Tea Party missed the boat, in that while it's true that we're being taxed without representation, it's being done by BOTH partys!! We've even allowed them to take our vote away i.e. Gerrymanderd districts. For every instance you can show of one party selling out, you can find one of the other doing the same! e.g. NAFTA started under Clinton, re-ratified under Bush. Regs put in place during last depression, stripped away during Clinton & Bush, on and on. Take a look on Bloomberg site to see how our money was loaned to foreign countries by the Fed!! ELECTION REFORM NOW!!!
  • by Anonymous on Apr 2, 2011 at 04:00 AM
    In 2012, vote for a president with strong leadership qualities.
  • by Clifton Location: Washington on Apr 2, 2011 at 03:16 AM
    I wonder if this kind of massive stupidity is why other places are trying to over throw their own government?
  • by Annoyed on Apr 1, 2011 at 11:14 PM
    If you have faith in this country's government, then you truly are a fool. The reality is simple, until the apathetic sheep of America change this joke of a society, this country is on a one-way trip straight to sewers.

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