Trickle Down

10.04.13

Government Shuts Down and Private Sector Feels the Pain, Too

Define ‘nonessential.’ From mines to loans to oil fields, businesses across the country say they need federal employees back on the job to keep their work going. By Daniel Gross.

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.

Sikorsky will have to furlough about 2,000 people on Monday if the shutdown continues through the weekend and an additional 1,000 if it continues for another full week.

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 Journal reported 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 Bank charges 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.

New Mexico has a thriving oil and gas industry, largely in the southeastern part of the state, where the rich Permian Basin spills over from Texas. “We’re sixth among the states in terms of production, and about half of that production is on public [federal] land,” said Steve Henke, president of the New Mexico Oil and Gas Association in Santa Fe.  About half of the 70 drilling rigs at work in the state are on public land. (Each rig directly accounts for about 50 jobs.) But now the Bureau of Land Management, which processes drilling permits, has shut down. “This is kind of a double-whammy for us,” he said. “The sequester hurt the budget for BLM and has slowed down permitting.” So because of the shutdown, there’s no action on permits. Companies may have some backlog, but they have to start taking action. After all, they’ve signed up rigs to drill over long-term contracts. “There is some danger as this extends that some companies may not have viable non-federal options and will have to eat the cost of those contracts or look for alternatives out of state on non-federal,” Henke said. Again, the absence of a small number of BLM staffers means that a much larger multiple of private-sector oil and gas workers could be out of work.

In many instances, high-value-added manufacturing operations require the on-site presence of government workers. That’s the case with defense contractors like Sikorsky, the Connecticut-based unit of conglomerate United Technologies. Officers and civilian employees of the Defense Contract Management Agency (DCMA) function as watchdogs at defense plants. They monitor for contract compliance. They have to approve critical components before they’re assembled into complex machines like helicopters. And then they have to approve the completed helicopters before they’re delivered to the customer. “They are fully integrated into our production and delivery process,” said Paul Jackson, a spokesman at Sikorsky.

At an operation like Sikorsky, the DCMA crew might include several dozen military officers with on-site offices and civilian employees. Deemed nonessential, the civilian DCMA employees have been furloughed. “You can get to a certain point, but you can’t take the next step without the DCMA having signed off on the previous step,” said Jackson. At Sikorsky’s operations, production has slowed down and the company says it will have to furlough about 2,000 people on Monday if the shutdown continues through the weekend and an additional 1,000 if it continues for another full week.

For want of a few dozen government employees, a few thousand people may not have work in a couple of weeks.

And so on. This dynamic is playing out at factories and offices across the country. Here’s the ultimate irony: The House GOP has, by its own admission, no idea what policy outcomes it wants to get out of this crisis it manufactured. But it does tend to have a policy interest in having more trade, searching for more energy on federal lands, and maintaining an aggressive defense budget. By shutting the government down, Republicans have so far failed to defund Obamacare—while actively sabotaging some of their stated goals.