Ask The Experts: What The Government Shutdown Means For Your Wallet

When the U.S, government shut down Oct. 1, many consumers outside the Beltway watched with only passing interest. After all, if you aren’t a federal worker or a government contractor, you aren’t really affected, right?

Not so fast. The shutdown could have far-reaching economic implications, according to the experts we consulted. So far, consumers have only been inconvenienced by closed museums and national parks. But the real impact could eventually hit consumers in the wallet.

While some estimates for the cost to the economy are as high as $300 million a day, Arthur Wheaton, Dir., Western N.Y. Labor and Environmental Programs at Cornell University, thinks that estimate is too low.

“I think the actual costs will be much higher and affect more people as the shutdown extends,” Wheaton said. “The National Parks system only impacts a relatively small number of employees. They do however impact many thousands of jobs that depend on the visitors for their income. That would include hotels, restaurants, souvenir vendors, gas stations, other area attractions, airlines and rental cars. If the shutdown lasts a week the effects will be minor to moderate. If the shutdown lasts weeks to months that will directly affect many thousands of people and millions, if not billions, of dollars.”

The Longer It Goes, the Worse It'll Be

The longer the shutdown goes on, the more far-reaching the impact will be, experts say. Small business owners, in particular, should expect to feel the heat.

“Small businesses -- particularly firms that rely on government contracting --will encounter a substantial crisis in their cash flow,” predicts Ted D. Zoller, an associate business professor at the University of North Carolina. “Small business owners should seek to reduce their cash burn and increase revenue from non-government sources as soon as possible. They should renegotiate payment terms to be more favorable and seek to collect any outstanding accounts receivable from non-government sources. In general, small business should attempt to insulate themselves from the risk of being too heavily reliant on government related revenue and diversify their revenue streams accordingly.”

Meanwhile, another potential fiscal crisis is looming in Washington. Congress must act by Oct. 17 to raise the debt ceiling or the U.S. could default on its debt. “Uncharted territory,” warns Silvia Allegretto, an economist at the University of California Berkeley. Steven Charles Kyle, associate professor of economics at Cornell, agrees.

‘Mother of All Credit Crunches’

“It would be hard to overestimate what an absolutely awful idea it is to use the threat of defaulting on Treasury bonds as a bargaining chip in any Congressional dispute,” Kyle said.  “Never in history has the country, which is the anchor of the world financial system, voluntarily reneged on debts that were contracted in good faith.  Nobody really knows what would happen because it is entirely unprecedented but it is a good bet that we would see the mother of all credit crunches.”

That, of course, would send the federal government’s borrowing costs soaring, making the debt even higher. It would also sock credit card users because higher rates on bonds would translate into higher credit card rates.

Welcome to Partisan Economics

The good news is House Speaker John Boehner has said he will not allow the U.S. government to default. But in the hyper-partisan world of Washington there is still worry that the unthinkable could somehow happen.

“Right now, the ideological gap between the President and the majority party in the House of Representatives is about as large as it has ever been. That makes it difficult to find a range of policies that are acceptable to both the President and the House majority,” says Justin Buchler, associate professor of political science at Case Western Reserve University. “What would it take for that to change? Possibility 1: a return to unified control of government. That way, the only party in power doesn't have to negotiate. Possibility 2: a total disaster that gets blamed on one party, forcing that party to adopt a new approach. Short of that, we're pretty much stuck with this.”

We can’t expect much change from the midterm elections either. “In order for the President's party to gain seats, something very unusual is required,” Buchler says. “In principle, a total economic collapse brought on by breaching the debt ceiling might do that, but it is unlikely that control of the House will change hands in 2014.”

Consumers should therefore be prepared. If you lack significant cash reserves and your job has been, or will be affected by the shutdown, it would be wise to act quickly to secure credit or a short-term loan.

Stocks Could Take a Hit

Finally, your stock portfolio could take a hit – at least on a short term basis – because of the shutdown. Stocks lost about 4% of their value during the 1995-96 shutdown, yet rose more than 10% the month after it ended. But as Kyle points out, during the last shutdown the economy was roaring.

“The shutdown then proved to be merely a hiccup while now the economy is in a much more fragile state,” he said.

It might not throw us back into recession but it could certainly bring the economy to a near standstill. So the bottom line – the government shutdown affects you and your wallet more than you think.

5 Tips for Shutdown-Proofing Your Wallet

The shutdown is expected to have a far-reaching economic impact, especially if it lasts for weeks rather than days.  Here are some strategies for preventing its many economic tentacles from stinging your wallet too badly:

1. Maximize Your Emergency Fund:  The Great Recession taught us how important it is to have a financial safety net, even in times of prosperity, and the government shutdown will test how much we’ve really learned.  In other words, it’s a good idea for those of us who are not currently affected to cut back on spending and contribute as much as possible to a rainy day fund in order to better withstand market volatility and potentially rising costs moving forward.  You may not end up needing it, but if you ultimately do, you’ll be glad that you acted proactively.
2. Apply for Additional Credit:  It takes a while to get a new credit card, so if you’re worried about your cash flow during the government shutdown, now is the time to apply.  The beauty of a line of credit is that it doesn’t cost you anything unless you use it.
3. Open a Dialogue with Monthly Billers:  The government shutdown obviously isn’t business as usual, and much like financial institutions were willing to work with customers affected by Hurricane Sandy, many have already announced intentions to be flexible about due dates and finance charges during the unique circumstances we’re currently embroiled in.  At the very least, it can’t hurt to ask.
4. Offset Investment Risk:  If you’re worried about the fate of your investment portfolio during the shutdown, keep in mind that there are ways to hedge your bets and not only retain your wealth, but perhaps even profit from the turmoil as well.  They may include further diversifying your assets, increasing your cash position, or buying stock on weakness in order to garner significant returns if and when depressed sectors ultimately bounce back.  But make sure to consult a financial advisor if you have any questions about the best approach for your needs.
5. Fix Variable Rates:  It’s possible that credit card and loan rates will rise as we near Oct. 17 – the date by which the government must either extend the debt ceiling or default on its loans.  As a result, if you have a lot of debt tied up in variable rate loans and lines of credit, it’s worth looking into the possibility of consolidating as much of it as possible into fixed rate loans in order to garner debt stability amidst market turmoil.

Ask The Experts

• Many people seem to believe that if they don't work for the government, they won't be affected by the shutdown. What do you think the ultimate impact on the average person's wallet will be?
• How are things different for small business owners? Are there any steps they can take to prevent the shutdown from putting their companies in jeopardy?
• Is there reason to believe that credit card and loan rates will rise as Oct. 17 approaches? Would this affect new loans and lines of credit, or also increase the cost of existing debt? How would higher interest rates impact borrowing and the economy in general?
• Is it too late for people to adjust their investment portfolios in the interest of mitigating the shutdown's effect on their wealth?
• What impact will the government shutdown have on student aid - both from a student and university perspective? Is there any concern that federal student aid funding could be cut in whatever debt resolution Congress ends up striking?
• Do you have any sense of whether the government shut-down will resolve to any significant kind of consumer protection issues like could people conceivably bring suit against the Federal government?
• What is your take-away from the drama that is unfolding in Washington?
• Is there a long term impact from the shutdown and default threat?