Economic Effects of Government Shutdown

The American government is in the middle of the largest shutdown in American history. This shutdown is happening because President Trump insists that he wants to build a wall across the Mexican border. Donald Trump is demanding $5 billion from the treasury for this purpose. However, the Democrats are refusing to provide this money since they claim that Trump had argued saying he will make Mexico pay for it. Since the border wall is one of the central promises that was made by Trump during the election campaign he seems to be hell-bent on building it. This has created an impasse where neither side is ready to budge causing a government shutdown.

Government shutdowns have happened on several occasions in the past. However, they have never gone on for so long. The smaller government shutdowns are insignificant from an economic point of view. It is this gigantic 28-day shutdown that may end up having a serious economic impact in the United States. The length of the ensuing shutdown has many observers concerned. Jamie Dimon, who is the CEO of JP Morgan Chase has also warned that the shutdown is likely to have catastrophic effects on the economy.

In this article, we will detail some of the effects of the government shutdown.

Government Employees and Contractors: The most obvious effect of the government shutdown is likely to be felt by the government employees and small contractors. At the present moment, more than 800,000 employees of the federal government have not been paid for an entire month! There is a lot of uncertainty about when these payments will be made. There is a law in America which mandates that all federal employees will receive this pay as back pay whenever the government shutdown ends. Hence, the workers are guaranteed to receive this pay. However, liquidity is becoming a grave issue as a lot of these workers are having to resort to payday loans and pawn shops to pay off their mortgages and other essential bills.

About 4 million small contractors will be the most hit by this month-long shutdown. This is because unlike government employees there is no law which mandates making payments to them. Since the government has been shut down for over a month, they are not receiving any contracts. As a result, they are losing income. Hence, the income that they lost has been lost forever.

Spillover Effect: The income loss that has been mentioned above is likely to have a spillover effect on the American economy in general. The contractors and federal workers spend their money on goods and services. Since they are not going to receive the income, these goods and services will also not be sold causing a huge spillover effect.

For instance, entrepreneurs who own cafés and restaurants near government offices are already feeling the heat as their sales have slowed down considerably.

Wall Street Effect

The effect of the government shutdown is not limited to government employees or contractors. Almost every person in the United States is affected by this shutdown. This includes the financial honchos on Wall-Street.

The Securities and Exchange Commission (SEC) is also an arm of the government. The SEC is the regulator which oversees Wall Street activities such as Initial Public Offers (IPOs) and Mergers and Acquisitions (M&A s). Since the SEC is not working, these activities have also been indefinitely stalled. Wall Street had a lot of big-ticket IPOs which had been lined up for the first quarter of 2019. High profile start-ups such as Uber and Lyft were scheduled to go public.

The government shutdown may force these companies to go public at a later date when the conditions may not be favourable, and the investors might be forced to take a loss.

Main Street Effect

Similar to SEC, there are a lot of government agencies which interact with other industries. Consider the case of the Food and Drug Administration (FDA). This government body regulates the behavior of many pharmaceutical companies and food companies. Since the FDA is not operational, the launch of many pharmaceutical and food products has been delayed. This will reflect in the form of poor earnings for the corporates since they will not be able to launch new products and increase their sales during the shutdown period.

Lack of Data

Lastly, one of the biggest impacts of the government shutdown will be the lack of proper data. That is because the government agencies themselves are responsible for collecting and processing the data. These agencies have not been working for the entire past month because a shutdown is going on. Hence, there is no data to publish. The problem is that this data is used by federal agencies to make decisions. For instance, data on job growth and inflation is used by the Federal Reserve to make decisions about interest rates. In the absence of such data, the Federal Reserve may be blindsided and may end up making incorrect decisions.

To sum it up, the shutdown of the United States government is no longer a minor event. It is likely to have a long term impact on the economic situation of the country and also the entire world.

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