Primer on US Government Shutdown

The American government shutdown will probably cover the next few news cycles unless something very big happens, or it gets resolved very quickly, and in this post I’m going to give a quick primer on what this shutdown actually means.

What does the government shut down Mean?

The US federal government employs more than 2 million people, and out of these 2 million people, 800,000 are deemed to be non – essential, and they will be asked to take a temporary unpaid leave which is called a furlough. The other 1 million plus employees who continue to work will get paid late.

The federal government has departments and employees who take care of airport traffic control, national parks, food safety, border security, zoos, post office and several others like this, and each department has their own list of who is essential and who is non – essential and based on this classification, it is has been decided who takes a temporary leave and who shows up for work.

Why is the US government shutting down?

The United States Congress has two houses – House of Representatives and the Senate. The US government runs from a fiscal year of October 1st to September 30th. The Congress passes the budget that allows appropriation of funds for the government to function, and this budget should pass both the houses.

Currently, the House is controlled by the Republicans and the Senate is controlled by the Democrats, and while the spending bill passes one house, the other house rejects it and sends it back with their conditions.

Since the spending bill couldn’t pass, the government couldn’t authorize payments, and had to partially shut down.

What is causing the impasse?

In simple words, the Democrat led Senate passes the spending bill and sends it to the Republican led House. The House attaches some provisions related to what is commonly known as Obamacare, and sends it back to the Senate for their approval. These are unacceptable to the Senate who then remove these provisions, and send the bill back to the Senate who add back the provisions. This back and forth happened seven times before they ran out of time, and the NYT has a good graphic to explain this easily and quickly. 

Obamacare is the Patient Protection and Affordable Care Act  and has perhaps been the biggest fighting point between the Republicans and the Democrats. It was signed into law about three years ago but its legality was challenged, and the Supreme Court passed a ruling saying that it was constitutionally valid in June of last year. Its provisions are going to come into effect only now and that’s where the negotiations (or lack thereof) have been.

Is this the same as the debt ceiling?

Sadly, no. I say sadly because that drama is also coming upon us very soon. So first Congress needs to pass the budget so that it can appropriate funds, and then it needs to raise the government’s borrowing limit so it can borrow the money it needs to spend.

What are the effects of the government shut down?

This is not the first time the government is partially shutting down and there have been a total of 17 times that this has happened. But this is still significant enough to affect people’s lives and that’s why it is frustrating for all Americans that the two parties could not reach a compromise.

The big problem is of course the very huge number of people who will not get paid for what is petty politics. Two parties mandated with running a country should be able to work out a compromise when it affects the livelihood of close to a million people. Sadly, politics seems to the same every where.

For the larger economy, the problem that the government employees who are not getting paid will not spend, and then there is a possibility that some of them are forced to default on their mortgage payments, and either of these of course is not good for an economy.

In my opinion, this isn’t good news for the international economy either, and money will not flow into other markets of the world because of the antics of the US Congress. I say this because it is expected that a resolution on this is reached soon, and both parties reach a compromise quickly, and also because no other country presents a good investing alternative anyway, which is what we saw during the 2008 crisis.

Please leave a comment if you have any questions, and I’ll try to answer them to the best of my knowledge.


16 thoughts on “Primer on US Government Shutdown”

  1. Hi Mansu,

    What will be the impact to Indian Rupee if the shutdown prolongs and Debt Ceiling is not raised.

    Thanks & Regards

  2. Think its petty politics by just one party on resolutions already passed.US is lucky to have such a good President in current economic environment but the worst opposition which wont let him do any good. For once he needs to put his foot down and not submit to this blackmail. I understand he can pass this through an amendment(dont remember details) allowed in the constitution without the House support.Hope he does.
    Unlike Ordinances passed by our PM for the wrong reasons President Obama should do same for the right reasons.

    1. I don’t know about the amendment, if he had an option, I think he would have already taken it. I don’t think there is one. I’ll see if I can find info on it.

  3. Thanks a lot Manshu for writing on this topic. I too tried to search a lot on this topic and hence finally put a comment on the post on tuesday and you did a splendid job.
    Appreciate it !


  4. Summary of whatever is happening in US is that its living beyond their means on high debt which is the root cause of problem.If US govt. decides to clear all debt whole country will be sold out but debt will still remain.

    1. A key difference when looking at the debt of a country versus an individual is that realistically an individual will be required to repay all his debt during his lifetime, whereas a country is only required to keep debt at a serviceable level.

  5. Thanks Manshu for the simple explanation.

    I tried searching a lot about this on google but it was all too complicated. After reading your article, I have understood a lot about the US Shutdown…

    1. Thanks Karan. When this topic was first suggested I thought I would give a link to an article such as the one that I wrote but I was surprised to see there was nothing like that. You needed to have a lot of background to the situation to understand what’s going on. So my goal was to write something which would give a simple explanation without needing a background.

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