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What a Government Shutdown Would Mean for You

As of Saturday night, it looked increasingly likely that Congress would be unable to come to an agreement authorizing an emergency spending bill. With the House and Senate deadlocked over whether to include provisions concerning the implementation of Obamacare, failure to pass a bill would lead to the first government shutdown since a three-week closure in late 1995 and early 1996.

U.S. Capitol. Source: Wikimedia Commons.

The very idea of a government shutdown sounds scary. It's easy to envision everything connected to the federal government coming to a screeching halt. But the reality of a government shutdown isn't as bad as those worst-case speculations. Here's what a shutdown could mean to you.

1. Dozens of government agencies have contingency plans for operations.
As disruptive as a government shutdown would be, federal government agencies have plans in place for how they'll deal with them. You can see a complete list at the Office of Management and Budget website, but some of the highlights include the following:

  • Social Security will continue accepting applications for benefits and making payments. But it will halt issuing new and replacement Social Security cards.
  • The U.S. Postal Service will continue delivering mail. But its Inspector General's office will cut back on its number of employees, issuing furlough letters to all but 19 of its 1,136 employees.
  • The U.S. Treasury will continue to manage the government's borrowing and spending, avoiding any risk of default. But the Internal Revenue Service would halt its collections process, and those with audits would have their meetings rescheduled to a later date.
  • The Transportation Security Administration would retain more than 90% of its employees as essential. Many other agencies under the Department of Homeland Security, including Customs and Immigration, would keep similar percentages of their workers on the job.

You shouldn't therefore assume that the federal government will actually shut down. In many cases, you won't be able to tell anything has changed.

2. Government employees will lose their income, at least temporarily.
The economic impact from a shutdown will be substantial. Hundreds of thousands of federal employees will be furloughed, potentially losing their income. In past shutdowns, Congress approved back pay for federal workers, but it's uncertain whether lawmakers will approve a similar measure this time around in the event of a shutdown.

Even those government employees who are essential and keep working won't get paid on time. Paychecks will be held up until the shutdown is over.

3. The District of Columbia could see big changes.
State government largely won't be affected by a federal shutdown, but the District of Columbia is a different story. In past shutdowns, the District did the same thing that federal agencies did, closing down all nonessential services and keeping only employees such as police and firefighters to preserve safety.

This time around, some D.C. officials have suggested that they would seek to keep the District open during a shutdown. One possible way would be to use its $144 million Contingency Cash Reserve Fund to fund the District's government services. Another option would be to seek to name all D.C. workers as being exempt from a furlough, although that could raise political issues by drawing a distinction between District and federal workers.

4. Economic impacts could affect markets.
Given the number of people affected, even a short shutdown could have a detectable impact on the economy. Some analysts believe that any shutdown at all could reduce GDP growth, with an extended month-long shutdown reducing the economy's growth rate by more than half.

Of course, with so many other issues affecting the markets, it would be hard to isolate a shutdown's impact. In the 1995-96 shutdown, the S&P 500 (SNPINDEX: ^GSPC  ) actually rose and interest rates fell. But at the time, the economy was expanding more strongly, and this time around, other factors could make a shutdown an exacerbating factor in sending stocks downward.

Prepare for whatever comes
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Read/Post Comments (3) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 30, 2013, at 10:53 AM, CraigWPowell wrote:

    Learn from market lessons in the past government crises, buy the dips, see:

    "S&P500 Forecast Based On Algorithm: Chart Of Last 10 Months Predictions"

    A government shutdown might not be that bad for U.S. stocks, according to a note put out during the past week by Sam Stovall, chief equity strategist at S&P Capital IQ. “History says (but does not guarantee) that while Congress may force the S&P 500 to endure another 5% drop, it may end up as a gift to investors,” he wrote.

    He points out that the peak-to-trough decline associated with the shutdown of the U.S. government between Dec. 16, 1995, and Jan. 6, 1996, involved an S&P 500 drop of 3.7%, followed by an advance of 10.5% in the subsequent month

  • Report this Comment On September 30, 2013, at 9:22 PM, RedScourge wrote:

    What will not be cut, no matter what:

    - Anything which might put political elite's own jobs in jeopardy if the funds stop flowing, whether via drop in polls, insurrection, or military coup

    What will actually be cut, if necessary:

    - Everything that will annoy and/or piss off the middle class to the point that they beg to have the spending reinstated or their taxes raised

    - That is all

  • Report this Comment On September 30, 2013, at 9:38 PM, RedScourge wrote:

    Addendum:

    Things which might do the opposite of annoy the middle class if cut might still be cut, but only if there's a way to cut it and still have it be annoying. For example, if they cut the TSA, they will keep it the same just cut down the number of lines in the airports so that the wait times are way longer or something like that.

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Dan Caplinger
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Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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