Hidden Consequences of a Government Shutdown

Other than high drama, does it make any long-term impact?

The U.S. government closed for the third time in 2018 on December 22– possibly for a “very long shutdown” according to President Donald Trump. How will it make a difference in your life? What does it mean for the country in the short run or the long run?

For most of us, it may mean a minor inconvenience but nothing more than that. Flights will leave on schedule, Social Security checks will arrive. Medicare benefits remain intact. Post Office will deliver letters and packages. Those who are responsible to keep us safe or protect our property will report to work. Christmas will still be on December 25 and New Year on January 1.

For the 800,000 government “not essential” employees, you will either be furloughed or forced to work without pay. However, when the standoff is resolved you will “most likely” get your back pay, as in the past. The lawmakers do not dare to not do that. It is an inconvenience, for sure, but recoverable for most people.

So, other than high drama for a while, does a shutdown make any long-term impact?

The losers are the contractors, mostly smaller companies, who sub-contract for the federal government or are dependent on federal employees at work. They will feel a direct, immediate and lasting impact. Since they are mostly smaller businesses, they and their employees are not well organized. Their plight is drowned.

The negative impact to this group is hidden and never fully recognized. It will cost the nation well beyond the euphoria when a deal is struck and the Government is open for business again. The impact is such that it should worry us all!

In the four decades since the current system for budgeting and spending tax dollars has been in effect, Congress has managed to pass all its required appropriations measures on time only four times: in fiscal 1977, 1989, 1995 and 1997. Each time of passing the appropriation measures becomes a time for gamesmanship to force their partisan perspectives. When Congress and the president fail to agree on and pass one or more of the regular appropriations bills, a “Continuing Resolution” is passed instead.

A continuing resolution (often abbreviated to CR) is a type of appropriations legislation that appropriates money to fund for operations, personnel, equipment, and activities. The funding they provide covers a set amount of time.

The problem is that even when the Government is reopened, after a shutdown, it is usually through a continuing resolution and not by doing the hard work of preparing a fully appropriated budget.

A major consequence of the continuing resolution is that it continues the pre-existing appropriations at the same levels as the previous fiscal year (or with minor modifications) for a set amount of time. For one, the high drama begins again at that end of that time. A bigger problem is that the CR typically provides funding at a rate or formula based on the previous year’s funding. It is interpreted as doing exactly what we did last year and no more and with no deviations.

I have actually seen innovative programs, at lower costs from creative subcontractors being canceled because the last year program was different, even if they were more expensive. If a creative sub-contractor could find a way of delivering a $700 hammer for $70, under the CR the agency was forced to continue to buy the $700 version. So many new, innovative and cheaper ways to solve existing problems were martyred under the rules of CR.

Consequently, these sub-contractors are forced to reduce staff and/or go under. In addition, the delayed payment of accounts receivable forces them to take emergency loans. Often, because of lack of time, they fall prey to loan-to-own predators.

Since most new ideas and innovations come from younger, more entrepreneurial companies and not the big 6 defense contractors, the result is devastating for the climate of innovation and entrepreneurship.

Kauffman Foundation, the Brookings Institution, and Gallup, based on data from the Census Bureau and the Bureau of Labor Statistics, have reported a steady decline in start-up rates in recent decades. It is an alarming trend for a nation dependent on innovation for its future prosperity. Entrepreneurial start-ups are the lifeblood of a nation’s vitality and Government contracts are a vital source of developing those companies with new ideas.

Is the decline in the nation’s entrepreneurial and innovation capacity a hidden consequence of the constant drama of numerous Government shutdowns? Our elected leaders should think about this before playing games and forcing the government to shut down.

See other opinion columns go to “Planting Seeds”.

Rajiv Tandon is executive director of the Institute for Innovators and Entrepreneurs and an advocate for the future of entrepreneurship in Minnesota. He facilitates peer groups of Minnesota CEOs. He can be reached at rajiv@mn-iie.org.