Daniel Rico – As the partial government shutdown approaches the three-week mark, much work has grounded to a halt and about 800,000 federal employees are feeling the effects. Because consumer spending makes up nearly 70% of economic activity in the United States, a primary channel in which the shutdown effects Americans is through the withheld or foregone pay from federal employees who do not receive their paychecks.
The shutdown, which began on Dec. 22 after Congress and President Trump failed to reach a deal on a remaining set of appropriations bills, affects nine of 15 agencies, including the departments of Homeland Security, Agriculture, Commerce, Justice, and Transportation. Such effects bring a significant financial burden upon federal employees, as roughly 380,000 individuals are being furloughed or placed on unpaid leave. Moreover, an additional 480,000 federal employees deemed “essential” by the government are currently being forced to work without pay.
President Trump recently claimed that many federal workers— even those who aren’t being paid — “are the biggest fans of what [they’re] doing.” Nevertheless, experts who communicate with federal employees beg to differ. For starters, the American Federation of Government Employees has sued the U.S. government in federal claims court, arguing that requiring “essential” employees to work without pay is a violation of the Fair Labor Standards Act. Furthermore, without the promise of a next paycheck, federal employees are bracing for the worst, filing unemployment claims and notifying creditors and banks that they will likely miss this month’s credit-card payments and mortgage bills. To help assist in this process, the U.S. Office of Personnel Management has tweeted out several sample letters for federal employers to send their creditors, landlords, and mortgage companies. These letters suggest that federal employees ask their creditors to pay reduced amounts of their bills or create payment plans in the coming months until the shutdown ceases.
Moreover, with no end in sight, federal employers are left to decide whether to take matters into their own hands and look elsewhere for employment. Amongst these “essential” employees working without pay are Transportation Security Administration (TSA) agents, who are some of the lowest paid workers and have been working without pay during some of the busiest travel periods of the year. Like many other Americans, these employees have families to feed, bills to pay, and expenses to cover. Many of these agents live paycheck to paycheck and cannot afford to work without pay. As a result, hundreds of TSA agents across the country working for free are calling in sick so they can find work at jobs that pay. On the other hand, such mass call outs by TSA agents could inevitably mean air travel is less secure. With worker frustration growing by the day, there is an increased risk that the TSA situation could adversely effect airport screenings and impact passenger safety as those remaining agents are forced to take on more work.
Furthermore, regional economies with a high proportion of federal employees—Maryland, Washington D.C., Virginia—suffer disproportionate economic losses during the government shutdown. For instance, Washington DC has already closed the Marriage Bureau, stopped bar admissions, closed down its judicial library, and stopped providing child care for employees.
What else is affected by the shutdown?
If the partial government shutdown exceeds 21 days, it will become the longest government shutdown in American History. The previous record was set in December 1995, during President Clinton’s time in office. Economists estimate that a shutdown lasting until the end of January will knock $8.7 billion off gross domestic product, cutting first-quarter economic growth by about two-tenths of a percentage point.
Benefits such as Social Security, disability checks, and Medicare are unaffected by the shutdown. In addition, according to the U.S. Agriculture Department, nearly 38 million people who receive food stamps will also be unaffected by the shutdown. However, Congress has appropriated funding for its Supplemental Nutrition Assistance Program (SNAP) only through the month of January. After that, the department must tap into a $3 billion emergency fund, which will not be able to cover even two-thirds of the program in the month of February. Meanwhile, the effects of the shutdown on smaller assistance programs are already becoming apparent. For instance, staffing cuts, due to the shutdown, have reduced the size of resources allocated to food aid programs by 95 percent.
On another note, with tax season right around the corner, the Internal Revenue Service (IRS) will undoubtedly face plenty of questions from taxpayers over the recent changes to tax law. Since the shutdown first began on December 22, the IRS has been forced to operate on a staff consisting of 12 percent of the agency’s nearly 80,000 employees, which has mostly focused on maintaining computer systems and investigating crimes. In addition, audits have ceased and the IRS is not answering any taxpayer questions. The biggest question at the center of the government shutdown revolves around the fate of American tax refunds. Initially, the Trump administration and its predecessors had followed the legal determination that tax refunds would not be paid out during the government shutdown because such payments are not necessary to protect life or government property. Nevertheless, after the Trump administration reversed a longstanding policy, the White House has assured that the IRS will pay tax refunds this year, even though the agency is subject to the federal government shutdown. This administrative move allows hundreds of billions of dollars to flow to households and removes one of the biggest potential impacts on American’s income.
This change of plan by the Trump administration does not come as a surprise. Given the fact that this is the first filing season under the new tax law that President Trump and Republicans enacted in December 2017, failure to pay tax refunds could have steep political consequences. Not to mention, failing to administer tax refunds could have economic ripple effects because many early recipients use these funds on discretionary spending items, pay down debt or make other principal payments. Switching to a position where tax refunds are paid out regardless of a shutdown removes the distraction of Americans clamoring for their money during the shutdown and makes for an easier focus on the political fight for the wall.
Unfortunately, each day the government shutdown continues the confidence in our politicians to run our government is at jeopardy and the stability and future of our economy and financial markets becomes more volatile. The impact of a prolonged government shutdown could have a far more reaching effect on our future than one can predict or ever imagine.
