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Government Shuts Down and Private Sector Feels the Pain, Too

Government Shuts Down and Private Sector Feels the Pain, Too

You know the adage. For want of a nail, the shoe was lost, triggering a chain of events that leads to much greater debacles. For want of a nail, ultimately, the kingdom was lost.

That’s a great lesson in leverage—how the removal of one small, seemingly insignificant item can trigger much larger consequences. It’s also a great metaphor for the way in which the government shutdown is affecting the economy.

Fox News may tell its audience that the shutdown is in fact a “slimdown.” Talking points may hold that the only federal employees furloughed are nonessential—useless, unproductive bureaucrats—so the effect on the private sector will be minimal. If you see the private sector as something that operates largely independent of government—a bunch of heroic entrepreneurs running around and getting things done as bureaucrats, politicians, and regulators try to hold them down—this view makes complete sense.

Of course, the reality is far more complicated. U.S. government spending is equal to 22 percent of gross domestic product. The federal government accounts for a very significant chunk of direct employment and consumption—unemployment benefits, payments to doctors, purchases of vehicles and ammunition for the military, salaries of federal marshals. Which is why analysts say that every week the shutdown lasts reduces quarterly growth in GDP by 0.15 percent.

But that’s really just the beginning. As with the nail in the shoe, the government has a huge amount of leverage. Many parts of the economy are, in fact, highly dependent on the government. The presence of a relatively small group of people allows an awful lot of economic activity to happen; their absence can shut down a great deal of it. This goes way beyond the employees who operate national parks, airports, and ports. Whether they are providing information, credit, licenses, or oversight, small numbers of federal employees have a huge effect on business.

First, information. Economics and stock-market writers have been joking about not knowing what to do with ourselves because the Bureau of Labor Statistics won’t be publishing its much-awaited monthly jobs report Friday morning. But the government controls other vital information necessary for commerce. Fannie Mae and Freddie Mac, which buy almost every mortgage originated in the U.S., are still functioning. They don’t get funding as part of the appropriations process. In fact, they are helping to fund the government. Fannie Mae in September paid a $10.2 billion dividend and Freddie Mac paid a $4.4 billion dividend. But let’s say you’re applying for a loan, and you need a document from the IRS to verify income—you (and your mortgage broker, and your real-estate agent) could be out of luck.

Second, think about credit. Credit is the lubricant that moves the machinery of global commerce. And the government provides a great deal of it—through loans, guarantees, and other programs.

Last fiscal year, the Small Business Administration made made 45,464 loans, valued at $17.24 billion. It’s not in business. On Thursday, The Wall Street Journalreported that Biz2Credit, an online marketplace that brokers loans for the SBA, was seeing as much as 40 percent of its loan-seekers affected by the shutdown. The loans and guarantees provided by thet he Export-Import Bank—to giant companies like Boeing, or to small companies like a wallpaper company outside of Philadelphia—allow companies to close significant transactions. The Ex-Im Bankcharges fees and turns a profit while doing so. It’s temporarily out of business.

The federal government also provides vital licensing and oversight for businesses that operate on federal land, or on federal contracts, or under federal regulation. And that encompasses a lot of businesses. Half of the country’s mine inspectors are off the job. Which means safety problems or concerns that lead to closures will keep mines closed longer. For lack of several hundred mine inspectors, thousands of coal miners could be idled.

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