"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.
A partial shutdown seems quite possible in 2011, as congressional leaders and White House negotiators continued to work Wednesday to bridge their disagreements over a spending plan for the remainder of this fiscal year. The current spending bill expires Friday.
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. 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.
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 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 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 this monrth would occur during one of the year’s peaks of tourists visiting Washington.
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 last week 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.