The Royal Purple sat down with Associate Professor and Economic Department Chairperson Jeffery Heinrich to talk about the economic impact of the current government shutdown.
Royal Purple: How does a government shut down effect the overall national economy? Why?
Jeffery Heinrich: A government shutdown results in less government spending for the duration of the shutdown. Government spending is a part of all of the spending that drives the economy, and less spending from any source will shrink the economy. Federal non-defense expenditure, which is the spending most affected, is about 2.6% of all spending. So, a direct effect of the shutdown is less spending and less growth. 2.6% of spending is pretty significant too…if that spending doesn’t happen for the entire quarter, it could wipe out any growth and create a small recession. Some communities are particularly dependent on this spending, and those communities will be hit that much harder.
When the shutdown is over, much of that spending will likely be restored. Federal employees will probably get back pay, for example. In that sense the shutdown is “temporary”, but there are also indirect effects which are not temporary. A drag on the economy like this will result in job losses elsewhere in the economy which may or may not come back. Losses in economic growth are never guaranteed to be made up with higher growth later and can be permanent. Even a change in sentiment driven by doubts about the function of the Federal government can drive economic activity down.
An indirect effect of the shutdown is that the Federal government is going to lose workers that will be difficult to replace. If you don’t pay employees, they look for other work because not many households can endure a cashflow interruption whether they get back pay or not. Once they find that other work, why come back to work for a government job which never paid particularly well and isn’t the secure job it once seemed to be?
Other indirect effects come from the fact that many important government services that the economy relies on simply aren’t being provided. Small business loans? Nope. Tax season? Hope you don’t need to talk to a body at the IRS. FAA safety inspectors? Hope your plane doesn’t get sick. The list goes on. The impact of these factors is quite mild for short shutdowns, but the longer it goes on the more serious they get.
RP: How does a US government shut down effect the rest of the world?
Heinrich: A slowdown in the U.S. economy will also slow down the world economy, but for the rest of the world the indirect effects of the shutdown aren’t very important, its more the spending of the U.S. economy. I would be surprised if they were worried about the economic impact. They are far more worried about what is another example of clown-car governance in the country which once upon a time built the world order which has delivered unprecedented peace and prosperity that the current administration is now trying to tear apart.
RP: How does it effect us? (On a state, regional, city basis).
Heinrich: Wisconsin is somewhat insulated from the direct impacts. Most of the federal dollars spent in the state are from Department of Defense and Veteran’s Affairs, both of which are fully-funded and not part of the shutdown. If it goes on long enough the Federal support that states and localities get will be missing and affect their spending.
RP: Why do some aspects of the government shut down, but not others?
JH: Congress and the president need to pass bills to fund the government. Each budget cycle, Congress can decide which parts of government get funded in a bill, leaving other parts of the government for other bills. In this case, Defense and Veterans Affairs were already funded before President Trump suddenly decided that the border wall is the most important thing ever.
RP: Do we have any government workers at UW-Whitewater? How is this effecting them?
JH: All employees of UW-Whitewater are government employees, but at the state level not the federal level. I continue to get paid. I am unsure if there are any Federal government employees at UWW.
RP: How does this effect business/economy students in the COBE as they are trying to enter the job market?
JH: If your career is going to be in Federal government, you are going to have trouble because agencies can’t recruit and you are going to have to wait until the shutdown is over. Otherwise, those students’ prospects mostly have to do with the business cycle. The economy is still doing relatively well and jobs are plentiful for now. However, my dirty broken crystal ball sees a small recession in the next year or two. If you start your career in a recession, your pay will be permanently lower relative to starting in an expansion, and the only way to fix that is change jobs (and hope your new employer doesn’t benchmark compensation on your salary history) or careers.
RP: Do you have anything else to add or think is important people know about the shutdown and its effects?
JH: The border wall is a bad idea in the first place and fighting over it is hurting ourselves, but our president is an ignorant spoiled child so the adults have to fight a stupid fight over a stupid wall.