04/07/2011 07:46 pm ET Updated Jun 07, 2011

What Actually Happens When the Government Shuts Down (And Other Things You Don't Know About the Budget Fight)

Bryce Covert sat down with Roosevelt Institute Senior Fellow Bo Cutter, who was Director of the National Economic Council and Deputy Assistant to the President from 1992-1996 during the Clinton Presidency and the last government shutdown. He explains why the current shutdown is small potatoes compared to the looming battle over the debt ceiling and other things you need to know.

Bryce Covert: What are the odds of a total government shutdown?

Bo Cutter: It looks like we'll have one but it isn't clear yet what kind it will be. It may be that we have one that's purely procedural in the following way: The House Republicans have put in a requirement that a piece of legislation be available for public view on the internet for 72 hours. So if they come to a deal say on Wednesday, they can't meet that commitment and they've made an avoidable showdown. And I think they said three working days, so weekends don't count. Let's say they came to a deal on Wednesday afternoon and the resolution has to be voted and in place, signed by the president, by close of business on Friday. They couldn't make it unless they waive that requirement, and they don't want to waive it. So you would in fact be shut down Saturday, Sunday and Monday. But it wouldn't have much effect because there would already be a deal in place. It looks to me like the highest odds are that's what it's going to be. So going down that track, the results wouldn't be particularly substantial.

But there's every possibility that it could be real. There are a whole series of riders attached to the resolution that Democrats and the president have said not only no but hell no, and the tea party has said they won't accept anything that doesn't have them. I don't believe the tea party, so we'll see. As I understand it and as friends at the White House have said to me, all of the discussions to date between the members of Congress have been about the numbers and they've kind of put the riders to the end. If the riders wind up being the sticking point, you could have a real shutdown.

Bryce Covert: If it shuts down over the weekend, what effects will we feel?

Bo Cutter: The obvious public things that aren't matters of life and death, if there's no money to run the government then you have to shut them down. One of the things that governs this is something called the Anti-Deficiency Act that says there are actually personal, criminal penalties to officials who consciously direct that work be done when there's no money to do it. So one of the things we found when I was there during the last shutdown was that in the absence of legal authorization to do work, people in the civil service are very reluctant to expose themselves and the people who work for them to penalties. And it's not that they're trying to avoid work. As I said previously, I think that one of the real strengths of the American system is our civil service. In both my times in government I've had lots of civil servants who worked with me and for me and I thought they were incredibly good. So I'm not saying civil servants are lazy or trying to avoid work, I'm simply saying that they face legal sanctions. Once the hammer goes down and there is officially no money, while it may sound like a funny formality, they can't work. So you begin to see some of the obvious things close down like the Washington Monument, the Air and Space Museum, the Smithsonian. Which, if you have the bad luck to have taking your three kids and your wife to Washington for that weekend, is not going to be a good thing.

Bryce Covert: What else happens in a real shutdown?

Bo Cutter: Let me take it the other way around and say what doesn't happen. There is an agreement, and it's legal, that life and death stuff continues. So the military continues to function, although there are functions of the military and the civilian side of the defense department that have to begin to stop. The veteran's hospitals continue. Walter Reed, that has the wounded from Afghanistan and Iraq and now maybe Libya, continues to function. Social Security checks do get mailed out. A lot of the stuff that is really immediate and involves immediate transfers of critical services like health or income will continue.

Every agency has a plan. Employees are distinguished between those who are critical and essential and those who are not, and there's a process that involves the legal counsel of each agency. The distinction is people who are required to keep the basic infrastructure of government going and people who aren't. The critical people work without pay. If I were running a part of the White House, which I was, and I had people that had officially been deemed critical and essential, I could then ask those people to come to work. Now, they could say no because they're not being paid. It's forced volunteerism. I was in that status. But I wouldn't be subject to legal sanctions for doing it. On the other hand, I would be for those people who aren't deemed critical and essential -- I can't ask them and they can't come. And the reason for that is the lawyers and court cases decided that it could be too easily a subterfuge -- you could tell somebody I know you're not critical but you better damn well volunteer or I'm going to be unhappy when the government's back in force.

Bryce Covert: How is it decided who is critical and who is not?

I remember one of the big fusses, and it is a very awkward problem, is how do you draw the line between who is and who isn't critical. We have about 1,300,000 civilian employees. Let's say 60,000 to 70,000 of them are critical. You have around 1,200,000 people who suddenly aren't working. And the people who aren't considered critical, how is it you explain to them they aren't critical? The State Department had a terrible problem. Let's say it has 160, 170 ambassadors. They're not all critical, and they had to determine which were the 50 or 60 where you absolutely had to keep country operations going and which were the ones that weren't. People had hurt feelings and were angry and friendships were disrupted because there were ambassadors who were told they weren't critical. In a much smaller way I had the exact same problem. Everybody kind of does.

On the civilian side of the government, domestic side, a skeleton force is immediately put in place in the forests and the parks. You can't visit. But maintenance also stops. In the granting operations of the government, whether it's HUD or HHS, their grants all stop. The part of HHS that oversees Social Security checks will continue, but that's all it'll do. There isn't going to be anybody there to answer questions. If you have a question you're not going to get an answer while the government's shut down. Places like the Department of Education basically shut down entirely because it's hard to argue that it's critical in the sense that I mean the word. The Department of Commerce, which has the National Oceanic and Atmospheric Administration, shuts down, so you're not getting the temperature of the ocean monitored. On the other hand, the Coast Guard will stay in operation. Almost all regulation will shut down, so there isn't anybody doing meat inspection during those periods. Ultimately most of the EPA would shut down. I was in the discussions that were occurring in the White House every night with the members of Congress, and every day there are pleas coming in saying, "Well you couldn't possibly mean we have to close down this," and the thing is legally yeah we do mean it. If you're having a trade negotiation, the negotiators have to go home because it's not crucial immediately. Congress shuts down. I don't know what they do but they can't come, and they can't get paid and their staffs can't get paid and they go through the same thing about who's critical and who's not.

If you think of the things I've been talking about, time matters. Yeah you can close down inspection for a day, but do you really want to close down mine safety inspection for a month? No. And you wouldn't, you'd still have a critical infrastructure. But most of the mine inspectors would be told they're not critical, not for this moment.

Bryce Covert: Are shutdowns just political theater?

The shutdowns are real. People think that this is all a subterfuge sometimes. And particularly I always thought that the Republican Congress basically thought none of this was real and therefore they could have it both ways. They could politically posture by saying that by god they were going to shut the government down and they were rough and tough and all of that, but in their hearts they kind of knew nothing would happen. So some of them were the most surprised people of all when actual things actually happened and when their constituents suddenly didn't get services because the government was shut down. It is quite real.

When we were there during the shut down, President Clinton had done a superb job of positioning before the fact, of saying to people, "I'm not going to give in to outrageous requests just because people think that I'm unwilling to go through this. But I will warn you in advance that it has effects and you won't like them. And this is not the way adults should negotiate." So by midway through the shutdown, the polling had shifted to being very, very substantially in the favor of Clinton, and I think the same thing would happen here.

Bryce Covert: What does the average American feel when the government shuts down?

Bo Cutter: First of all, there's the disappearance of all of the things that are really visible like forests and parks. I don't mean the forests disappear, obviously. But people who'd planned trips are the ones who get hit first. The TSA will be there, but that proverbial family that is in Washington really can't go to the Air and Space Museum and they don't believe it. They think this is crazy, why would anybody close down the Air and Space Museum? So they yell and scream, and they're right, they should be mad.

The second thing you notice is a real slowdown in everything. There's no place to call and find out what's happening to a particular grant. If you're Caterpillar and you sell heavy earth moving equipment and you had a contract in competition with others being considered by the Department of Transportation, your contract isn't going to get looked at. So the people whose jobs depended on that work lose their jobs.

So the first effect is on the people who were planning to do something that depended quite directly on the provision of government services.

Bryce Covert: Will there be job losses?

Yes, the second effect is people beginning to lose their jobs. And that surprises people. It happens in two ways. One is the federal employees. People are very funny about that. The vast majority of federal employees don't work in Washington. They work out in the real world. When people yell and scream about government in Washington, they don't really think that about Joe who lives next door and works for the Department of Transportation's regional office. What Joe is frequently in the business of doing is providing services to his neighbors, providing information about grants and contracts and all of that. They don't really think that Joe's one of those people in Washington that they don't like, Joe's a neighbor who's got a job like everybody else and suddenly he's out of work. Then all the people whose contracts, grants, etc. suddenly can't get done, they feel it. It's a progressive thing that you first feel the direct absence of things, then you see people aren't working, then everything starts to slow down and stop.

Bryce Covert: Given the unemployment crisis, do you think that people losing their jobs from a shutdown will have greater reverberations this time around?

Bo Cutter: A bit. There are a couple of ways of answering the question. One is just numerically. People will be out of work and they will be counted as such, so the unemployment rate will bump up. But it's presumably pretty short. The labor force as a whole is 142 million people, and at 9% unemployment that means that we have 128/129 million Americans working. Having 1 million and a couple hundred thousand not working is less than 1% of that. So you don't see it big in the numbers because by the time you look at its year effect it's less than that. But there is some effect there. I don't think there is a lost GDP effect, therefore a bigger unemployment effect, if the shutdown is relatively short, because then you have a down month and then that just means you have a catch up.

But I do think the politics of the unemployment rate will be sharper because it feels different at 9% unemployment. When we did it, when we had to go through it, the unemployment rate was at around 4.5% so the world was in a different place. Maybe slightly higher, but it was lots less.

Bryce Covert: Which Americans are the biggest losers of a government shutdown?

Bo Cutter: Well obviously the biggest losers are people who actually lose jobs, whether it's short or long, because of it. And probably the biggest losers in terms of actual money at least at the start are all the federal employees who are furloughed. But much more broadly than that, the losers are going to tend to be the American middle class because Social Security checks get continued, so the elderly don't see as much of an immediate problem, the defense operations keep working, so it's really people outside of Washington who in their daily life depend on the government functioning. And that's contracts and grants. A second big area to feel it is probably cities because there's a lot of granting that goes directly and indirectly to cities and that stuff stops.

Bryce Covert: Does the government take a monetary hit because of a shutdown?

Bo Cutter: It does and I don't know what it is. We made an effort to figure it out but you had to make so many assumptions that your range of error was going to be so great that if you said a number you were certainly going to be wrong. The people who would argue you've way overestimated this or the people who said you way underestimated this were all going to beat on you and you wouldn't have a number you could defend. So we didn't do it.

But there are certainly real costs, not just deferred costs. We were trying to look at a couple of different sorts of things. Whenever you start something and then start it again, there is a cost of the wind down and a cost of the start up. If you think of it in terms of a factory, to bring a factory line down to a close and ensure that the equipment will stay in shape and is maintainable so that you can in fact then walk away from it involves costs you wouldn't be incurring if you didn't have to shut it down. So they're lost costs. Exactly the same is in reverse when you have to start something that you shut down. You have to go through all kinds of procedures, both safety and operational, to get to start it up again. Now the world isn't a factory, but the same kinds of things occur. If you tell people to shut down a grant making organization you have to make certain that you can start back up again at some point. You can't just walk away with a memorandum half written in Word and come back three weeks later. You have to close it down. It's hard, as you can see, to figure out what those costs are, but you know they're there. It is a vast loss of efficiency.

And then there's also the effort to figure out the real GDP loss. You know there is one, it's just kind of very hard to figure out how you go about counting it.

Bryce Covert: Are there other differences between the last shutdown and now that you foresee making this one better, worse, or different?

Bo Cutter: It's more the politics of controlling it. When we went through it, Newt Gingrich had come in with the Contract with America. The new Republicans believed, and the evidence was pretty good, that the reason they were elected was that Gingrich had managed to nationalize a whole set of local elections and it was sort of the power of his thinking that created their election opportunity. So they were with him lock stock and barrel and he had real control over his caucus. No one ever has complete control over everything and the control began to ebb, but he had it. Today the circumstances are really different in that Boehner does not have control over the Republican caucus. Large numbers of the tea party members don't have any interest whatsoever in figuring out the rational answer to all of this. So you have a really fundamentally different condition of political management. Clinton was reasonably certain, and at our lower levels in the conversations we were reasonably certain, that if the Republicans committed to do something when we finally began negotiations about how to end it, they could follow through on whatever it was they committed to. It's not clear here.

If it happens, this phenomenon could extend the shutdown. The problem is that when you get into a shutdown, like everything else you better have thought through your way out of something difficult before you kind of jump into something difficult. They rarely do. Once you're in a shutdown all kinds of motivations come into play. There is the "by god we're not going to lose to President Obama, whom we don't like anyway, so we're going to stick" thinking. On the other hand, the members who weren't terribly enthusiastic to begin with are beginning to hear from their constituents, and that happens pretty fast. There were a lot of frank conversations when I was part of it last time and Republican members were saying, you know the people back home don't really like this. And the members who weren't enthusiastic about doing it to begin with and are also being whacked by their own voters get madder and madder. So the internal dynamics of the Republican side get more and more complicated. Meanwhile, if as I suspect the polls begin to swing in President Obama's direction, his position is even harder because he doesn't want to have presided over a loss, he doesn't control the votes of the diehard tea party members, but he's got to get himself out of an untenable situation or he could easily lose the House again. So he's feeling (this is all surmise) that he's got big problems.

And all of this is occurring in real time. It's not as if it's occurring in a calm, deliberate atmosphere. It's all occurring with people shouting at each other. Exactly how you begin to move to the end game is much harder for the Congress than it is for the executive. We could meet around a table and we had a boss, the president. So our messaging was better, and Obama's messaging is and will be better than Congress', and when you have the cacophony that occurs during the shutdown it's even more so. We could think through what's the nature of the negotiations we want to have, what do we think will happen, we could role play. They can't because they have 200 plus people around the table. It's much more helter skelter for the Congress.

Bryce Covert: What's the longer term outcome of all of this?

Bo Cutter: I think for a political situation to get to the point where you shut the government down is a failure of governance and it's absolutely wrong as an outcome. I also think somewhat paradoxically that from the politics of it, shutdown would help Obama enormously. Obama does not have anything to fear from this. They have a competent White House. I think they will manage this well and will manage it with a single message. The polling already says that the public thinks the Congress looks like squabbling children. The president looks pretty good and I don't think he has any reason to give in very much. So if I were the president and I had to have one, I'd want one.

I also think that from the point of view of the management of the next fights, both the country and President Obama will be better off if there's one now. This is small potatoes. But we are about to see the debt limit debate. And there are people on the Republican side who actually believe that risking a default isn't a bad thing. I think it's an awful thing. I think it's really, really reckless. And I don't have any confidence that the Republican tea party members are going to come to that realization soon enough and they could play a real game of chicken. That's different than the shutdown stuff. The shutdown occurs gradually and it would have to last quite a while before the results really, really hit.

If you are running a deficit, and we're running a 1.6 trillion dollar deficit, and you refuse to extend the debt limit today, tomorrow you can't issue any more debt and you can't even roll over your debt. The next morning at 9:01, if you're running a deficit, in theory and in fact the deficit increases somewhat in that first minute. So you can't do anything. In that case you can't send out the Social Security checks. Since you are instantly above the debt limit and you have no money if it isn't extended, everything else about a shutdown comes into place. Instantly all of those workers can't be paid because it's against the law to pay them. They have to go home. So it's a shutdown raised to the nth degree. Now there are a couple of things a Secretary of Treasury can do that give you a little room, but it's like a week. I remember when Robert Rubin was Secretary of the Treasury, I knew him very well and I had worked for him and he and I talked about it, he said I've had all the experts, I've had everybody in on debt management, I've had all the lawyers in and we've looked at it every way around, there is some legal room but there isn't very much.

If your debt limit is 1.6 trillion, people think, okay, well as long as that's occurring it's kind of beyond that in some way. But anything above zero you've broken the debt limit if they won't raise it. It hits you broadly and it hits you fast. The other thing is the Treasury is involved in debt management all the time that is in concept unrelated to an increasing deficit. You may not like the term structure of the debt, you may want to make it a little longer or a little shorter. In the bowels of the Treasury there are constant operations that are occurring by financial technicians who aren't trying to do anything with the deficit. But you can't separate that from the deficit, so you can't do those things either. In terms of the operation of the debt it begins to hit you right away.

Bryce Covert: What does it mean to the markets?

It has big money market consequences. If people begin to think that the governance of this country is so irresponsible and reckless that we would actually risk the credit standing of the country, they're going to have a little less faith in our money. Let's say it's just trivial, it's only 10-15 basis points, you multiply 10-15 basis points all across government debt and you've paid one hell of a lot of money for a symbolic act.

That's coming up right down the road pretty soon. My theory is that it's always better if you think a hit's going to come to take it early rather than late. My own view is that the president will win a shutdown hands over, the Republican tea party will look awful, and they aren't going to have the appetite to really be reckless. But on the other hand if we don't, and this is one of the reasons I think we should have one, their view is going to be that they didn't get all they wanted but by their tactics they forced something out of the administration. So why not try again? And the next time you try is the debt limit.

This post originally appeared on New Deal 2.0.