Implications Of A US Government Shutdown

Government Shutdown BoarFor the first time since 1995, the US Government has finally shut down thanks to no agreement between the Democratic controlled Senate and the Republican controlled House in passing any federal spending bills for 2014. The key point of contention was the Republican party’s desire to prevent the Affordable Care Act (Obamacare) from happening.

As a result of the 1995 shutdown, Republicans became public enemy #1 and President Bill Clinton got reelected in 1996. Newt Gingrich became a newt and America didn’t see a Republican president again until the Bush years. I’d like to share with everybody some brief thoughts about the implications of a partial US government shutdown that may be too sensitive to discuss elsewhere.

WHAT DOES THE US GOVERNMENT SHUTDOWN MEAN?

* A Democrat Will Win The 2016 Presidential Election Again. After seeing how homogenous Mitt Romney’s party was during his presidential campaign, it became a foregone conclusion that the Democrats would win again in 2016 if Republicans failed to be more representative of the US population. It’s pretty clear, rightly or wrongly, that the public will blame Republicans more for the government shutdown since the bill was in the House’s hands to pass. Americans are disappointed with President Obama’s lack of leadership, but he is the lesser of the two evils. If the economy continues to recover, the American public isn’t going to risk changing party leadership.

*  A Wakeup Call To Non-Essential People. Imagine being one of the 800,000 (45% of total) federal employees furloughed because you are deemed “non-essential.” How would you feel? I’d feel like a loser who would be looking for a new job during my time off. Such a large number of non-essential employees also calls into question government efficiency and how big of a government do we really need? All employees should seriously evaluate their importance in a company if they want to increase their chances for survival. A simple question to ask is: Will my company be better off with me or without me?

* Big Government Is Suboptimal. The markets rallied higher on the day of the government shutdown. Given the markets are always right, smaller government is preferred over larger, bureaucratic, wasteful, inefficient government. If the government was really so important to the economy, the stock market would have crashed. As long as Social Security, Medicare, Veterans Care and our military are funded, everything else can wait, including the Pandacam that was shutoff at one of the zoos. Democrats, the Big Government Party, need to take heed and be careful not to get too omnipotent too quickly if they want to remain in power. Obamacare is probably as far as you can push the American people. Democrats should not regulate more of what we can eat, drink, or watch unless they want a revolution.

* Nothing Really Changes. 800,000 people being furloughed sounds like a lot, but 800,000 is only about 0.5% of America’s 150 million person working population. For 99.5% of us, it’s business as usual. The cost of a shutdown is a mere $1.6 billion a week compared to our annual output of $16 trillion. Meanwhile, nobody expects the 800,000 to be furloughed for more than a month. There’s even a chance some of the furloughed employees can collect unemployment or receive backpay for work not performed! Just like how 99.5% of working Americans are not affected, 99.5% of facilities are not affected either. We can always go to Yellow Stone National Park next month. Furthermore, stocks performed +/-1% during and a month after the last 17 government shutdowns since 1976.

* We’ve Got To Look Out For Ourselves. Politicians love to talk about how they are working for the people they represent. I’m sure there is some truth to this. However, being a politician is all about power and ego. The reason why politicians flip flop on stances is because they need to be flexible to popular opinion in order to stay in power or get elected into power. The President and Congress will continue to receive their paychecks despite the government shutdown. The asymmetric treatment is astounding. What’s more astounding is that the average politician is a multi-millionaire and few or none of them are willing to reject their paychecks in solidarity to the 800,000 furloughed colleagues and perhaps millions others who are adversely affected.

* Now Is A Great Time To Apply For Government Jobs. There should be less people applying for government jobs given the all-time low approval ratings. Relative stability and fantastic pensions are hallmarks of government work, besides the ability to serve the country. The capitalized value of a pension for someone who retires at 62 making $80,000 his last year and dies at 85 is worth well over a million dollars if we assume a 70% of salary pension amount. How many people in the private sector can save over $1 million dollars making less than $80,000 a year by the time they turn 62? Hopefully every reader on Financial Samurai, but only a small minority of the American population.

* Now Is The Time To Be A Cash Buyer Of Property. After a week of shutdown, there is going to be an increasing delay for mortgage approvals as lenders are blocked from verifying Social Security numbers and accessing IRS tax transcripts. Federal Housing Administration loans will also be really slow going as only 67 of the usual 2,900 works are currently working. Cash buyers should be able to finagle even better deals given the biggest fear a seller has is not closing and having to go through the entire process again with a new buyer.

* One More Reason To Seek Financial Independence. The people who are most upset or worried about a government shutdown are the people who depend on the government the most. Eventually, everyone will be negatively effected if the shutdown lasts long enough because our sovereign credit rating will get downgraded, causing Treasuries to drop, interest rates to rise, and stocks to fall, however, if you are financially independent with a properly diversified net worth you’ll be able to withstand the hits. Also see The Proper Allocation Of Stocks And Bonds By Age. Depending on the government to survive is the polar opposite of financial independence.

THINGS JUST GET BETTER

The uncanny ability of the US Government to shoot themselves in the foot only helps to make it more difficult for the wrong people to enter office. The American people will scrutinize much harder during the next election. We’ve become a mockery on the global stage. But I’m not embarrassed because I only expect tax bills and anything else is a bonus. Maybe even those will stop coming if I relocate abroad.

America is still the greatest country on Earth. I’m very pleased that slowly Americans are waking up to the fact that we don’t need such a huge government to move forward. Perhaps I’ll no longer have to argue my case as to why contributing or converting to a ROTH IRA to fund the government before maxing out your 401(k) is not ideal. Perhaps more people will follow the absolutely logical 1/10th rule for car buying to minimize their chances of government dependency. Maybe the government shutdown might even persuade procrastinators to finally start building passive income streams to live free. Don’t depend on the government. They have a great way of letting us all down!

Readers, what other implications do you see from the government shutdown? Anybody optimistic that the debt ceiling will be raised on Oct 17 without a fight?

Other Points From Government Shutdown:

* Approximately 400 national parks, museums and historical sites are closed.

* The “Pay Our Military Act” ensures our men and women in uniform continue to get paid.

* 1,6000 Head Start programs affecting 1 million low-income children will begin gradually closing down.

* Food Stamps (SNAP) will continue to get paid.

* The CDC is halting its annual seasonal influenza program.

* The US Postal Service will continue to deliver.

* The IRS is closed, but you still owe taxes.

Photo: Boar shutdown in Mexico, 2013, FS.

Regards,

Sam

Sam started Financial Samurai in 2009 during the depths of the financial crisis as a way to make sense of chaos. After 13 years working on Wall Street, Sam decided to retire in 2012 to utilize everything he learned in business school to focus on online entrepreneurship.

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Comments

  1. Shaun says

    In the short term there are more local effects than national. Communities in northern va, hampton roads va area where I live are MAJORLY effected by this. In San Fran its probably easy not to see it but over here in a smaller area with many thousands of people no longer going to work or getting paid its very noticable to everybody.

    • Financial Samurai says

      I spoke to a friend of mine who said that NOVA employs about 460,000 Federal Workers alone, so he is seeing some major decline in activity out there. He also mentioned folks aren’t too happy. I’m trying to put myself in one of their shoes, and I think Id be hopeful of getting back pay since that’s what must of the furloughed got in 1995. I’d probably take a bus up to NYC and visit friends and family and work on my side business.

      You’re right. We don’t feel it as much in SF.

  2. Cash Rebel says

    There are so many interesting things these 800,000 could do with their time off if they knew how long it’d be. I wonder if we’ll see more people enjoying parks (the ones that are still open) and other free attractions. Sure a furlough sucks cause you’re not being paid, but maybe it will give those folks a little time to unwind. Though that’s probably just wishful thinking.

    • Financial Samurai says

      The majority of people complain about not liking their job, so I would think taking a month off would be a nice reprieve right? I’d be super focused on my side business. Seize the moment!

  3. FI Pilgrim says

    I think you’re right about Americans waking up more and more these days. Hopefully this drives even more people away from putting their trust in the government for their own futures.

  4. Austin says

    I’ve barely even followed the news on this. It’s all just noise.

    Next week it will be like nothing ever happened. The “non-essential” employees will ultimately be paid for their time off.

      • Irene says

        Many “non-essential” federal contractors who work on client site (and who work really hard, much more so than the employees who are protected by federal unions) will not be paid and have already had to apply for unemployment. And although the federal employees will most likely receive backpay, the contractors won’t. On top of that, the contractors are the ones who really need the money, bc they often make less than the federal employees to begin with (all studies show this for the vast majority of them, only those at the top are collecting the big bucks). But for those contractors who aren’t concerned about $, yes, this month is a great reprieve.

  5. My Financial Independence Journey says

    As a value investor, this kind of craziness is a Godsend. Several overvalued, but otherwise great, stocks are dropping in price. I’m watching hungrily. A bit more of a drop and I’m going to begin a flurry of put selling and stock buying. Yes it’s all transient noise, but noise creates mispricing in the market that can be taken advantage of.

    • Financial Samurai says

      Let’s see if “mispricing” occurs. I’m not sure it’s healthy to hope for a big correction mate. That means you don’t have enough invested to feel the pain of a correction!

  6. tom says

    I am really hoping for some major changes. This Congress and Senate, Democrats and Republicans, they just don’t get along. You see the old dogs in both the house and senate, they are all buddies, they disagree but will work together to compromise. The freshman all seem to hate each other and despise the other side’s ideals. Look at Ted Cruz, he’s a madman, refuses to accept anything but a complete dissolution of the ACA, no middle ground.

    Frankly, the only thing we can do is vote them all out at the next election cycle. They need to be replaced with moderates. The problem is, of course, our primary system. You have to be extremely right or left wing to win a primary nod. So will the choices be any better?

    I don’t know, Sam, I’ve completely lost all respect and trust in our government to solve any problem.

  7. MH says

    I’m more worried about the debt ceiling fight which I think is the bigger issue. I really think congress might not approve an increase. What are the implications of going over that cliff?

  8. Maverick says

    Yep, the shutdown is a non-event to most people. I predict it lasts less than one month, probably less than 3 wks. Definitely more than one week. The more important issue to impact the financial markets will be the best ceiling later in the month. Sam I couldn’t agree more with your analysis as I last worked in the aerospace/defense industry. With the wars winding down, there just isn’t the same need for troops and supplies. This is true on both the private industry side (where I worked) AND the public side which includes many of the furloughs employees you referred to. People need to be cognizant on what drives their employment future. And right now I’d be concerned if I was employed in the aerospace, defense, mortgage, and some finance areas. Ok, maybe if you worked finance for drones, you’re good. The unfortunate part with the government shutdown…the public employees will most likely GET PAID for the furlough. This would NOT happen in private industry.

  9. Matt says

    The economic impact is much greater than 800,000. Think of the National Parks closing. It’s not just the park rangers affected. it’s also the hotels, restaurants, stores, and gas stations in the area. And, as private enterprises, they may not get back the money they are losing. (can you visit Yellowstone next month? Not if the roads are closed. (it’s snowing, even tonight!) Same thing with military bases–although active duty troops are on the job and paid, National Guard and civilian contractors are not. As major employers in their towns, a significant slowdown will impact a lot of people, much like the knock-on effects of the auto industry slowdown during the recession.

    I do balance this with a value investor’s mindset, like My Financial Independence Journey. This is not a permanent closure of the Federal Government–it’s temporary. Yet, for a variety of reasons people will act like it is the end of the world. This is an investing opportunity, if you have capital to allocate and a long-term view.

    And, just a nit: Clinton was already president in 1995. He wasfirst elected in 1992, and was re-elected in ’96.

  10. Kim@Eyesonthedollar says

    I am a government contractor. I work every Thursday at an Indian Health Service clinic, so I called today to see if I should show up tomorrow. I guess my position is “exempt” from the shut down. I’m not sure if that makes me happy or sad. I do think all those on furlough will get paid.

    I’ve never worked during a shutdown, but every October, when the IHS fiscal year starts over, there is usually a 2-3 month period where I don’t get paid. I don’t worry about it because I know I’ll eventually get a big check and it’s not money I need to buy groceries, but it is ridiculous that the government is so poorly run. Our area will probably feel some hurt because of the tourist industry driven by Mesa Verde National Park. Like one of the other comments said, the restaurants and hotels are going to get pinched the most there, and they will not get a make up check from Uncle Sam.

  11. Ricky says

    Speaking of the 1/10th rule… I currently have a car that is about 8/10th of my current income. Purchased it new and it is a 2012. But… It’s paid off. If I would have a car that was 1/10h to my income I would only be able to afford a $2500 car. I don’t think it’s feasible to find something that cheap that would also be reliable enough to warrant a trade of my vehicle for a cheaper vehicle. Of course if if was feasible I could pocket the difference

    What did you think?

  12. mysticaltyger says

    I like a lot of your thoughts, Sam, but you seem to contradict yourself a lot. If the Federal government is inefficient and is doing a lousy job (and I agree, it is), then why would we trust programs like Obamacare? If you go back in history, you’ll see the Federal government created the health care monster we have today during World War 2. Because of government imposed wage freezes, companies got around it by providing health insurance. Then in the early 1950s, they made it a tax deductible benefit for employers. This had the effect of hiding the true cost of health care. Over the next 50 years or so, health care costs far outpaced inflation in most years. Now, in the name of making health care more “affordable”, everyone has to have insurance. We’ll see if Obamacare makes health care more affordable in the long run. But IMO, we would all have been better off paying out of pocket and/or buying our own health insurance all along.

    • Financial Samurai says

      Because something is better than nothing for the 20-30 million who can’t afford health care for whatever reason. I believe the markets will smooth out pricing kinks and keep pricing honest as well. Call me an optimist.

      • mysticaltyger says

        Yes, I think you are unrealistically optimistic. Whether health care costs come down or not, I don’t know. The more important point is that the real goal of Obamacare and just about every other government program, is to centralize power and control in the hands of a few.

  13. krantcents says

    Many years ago (35 yrs.), I decided for different reasons that I wanted to achieve financial freedom. It was much more of a career plan than a reaction to outside circumstances. If the current government shutdown motivates some to be more proactive, it would be okay too. My concern is a lot of people tend to quit before they actually give their all or just take the easy route. Financial freedom or any other major goal requires a great deal of thought.

  14. Untemplater says

    Yeah it really must be a mental blow to be labeled as “non essential personnel.” I’d start looking for a job if I were one of those workers myself. I’m shocked too that the markets were up with the government shutdown!

  15. My Wealth Desire says

    I feel sad to the ordinary federal workers. I know many of them are not prepared on the impromptu government shutdown. How their family can survive. Both parties should work together in order to resolve the budget matter. They should focus on the common good for all Americans not for themselves. Not for their own political agenda or ego.

    • Financial Samurai says

      Are we so sure they are not prepared for the impromptu shutdown? They went through the sequester earlier this year and know more than any the government is in shambles. Hence, with this knowledge, I’m sure most rationally saved for occasions such as this. Or am I giving them too much credit?

      • David m says

        You are giving them to much credit!

        Not really, those that have always saved continued to save.

        Those that were living paycheck to paycheck at the time of the sequester – they were spending all there money on essentials – thus they do not have the ability to save.

        • Financial Samurai says

          It doesn’t take reading my site to develop common sense. I’m sure federal gov’t workers saved for rainy days just like now. And if not, then they expect backpay, which many of them received.

      • mysticaltyger says

        Sam, you should know by now most people don’t have common sense. The people who do have it don’t need to be told and the people who need to be told won’t listen or make excuses as to why saving is impossible or not worth the effort.

  16. Bunny says

    I’m pretty much with you but there’s nothing actually “non-essential” about many of the non-essential workers. Most of the CDC, the FDA, and the IRS are highly essential and they are needed to process all the claims, projects, and people who use and need those services but they’re all home and unpaid during this time because the country won’t be destroyed by them taking a week off.

    The phrase “non-essential” most just means that not doing your job for a few days or a week doesn’t cause the country to explode right away and honestly – that’s almost all of us. The lasting implication of not having the CDC for a month (especially on the ramp up to flu season) could be really detrimental to the public. I don’t think people who work to issue passports or work at the CDC really have to worry about it nor do I think they make the government “bloated” by doing their jobs everyday.

    • Roger the Amateur Financier says

      I’m glad I’m not the only one who realizes that ‘non-essential’ in this situation doesn’t mean “we could get rid of your job with no consequences to government function and/or the economy, beyond you getting your paycheck”. Instead, it’s more “assuming we can get these issues resolved within the next week or two, the country probably won’t go to hell if you aren’t at your post…probably.” With WIC, OSHA, and the VA no longer getting funding, among other agencies, I think we’ll start to see some serious trouble in a few weeks if these ‘non-essential’ employees don’t get back to work.

  17. Mike says

    The way I look at it-public option healthcare is better than Obamacare. That way those that aren’t covered can get access to healthcare and those of us that can afford private insurance can go get that instead of having to pay into universal healthcare. I like that idea better than the monstrosity known as ACA/Obamacare. I don’t like the idea of paying into a system where there are going to be people that aren’t willing to take care of their bodies as well as they should-I know those people exist who simply create their own medical conditions because they refuse to get off of the couch and exercise like they should.

    I think all the social programs are bankrupting us. I propose that we find a way to fund our country WITHOUT taking things in credit, or over paying our government. Let’s suspend the pay of our officials and then we can true progress. Let us get back to being small business oriented as well (make it easy for smaller business owners rather than trying bailout the corporations that are well past their prime)-this can be something that can help us create new jobs.

    • Ace says

      The social programs in the USA are really very small versus Northern Europe (example Germany. And Germany is doing very well, with a very high standard of living).

      The government spending which is killing us, is the military! And all these unnecessary wars!

      There is nothing more socialist than the military (GI Joe = Government Issued).

      • Mike says

        Ace, please don’t take offense at what I am about to say. My reply to you isn’t meant to attack but to promote a healthy discussion. This isn’t Europe last time I checked. And last time I checked, you are free to move Europe as you please (if you love the governmental programs there so much. Hell I even pay for your one-way ticket over there to start your new life if that is what you want to do). I agree with you on the unnecessary wars being a burden, but I much rather have a strong military than more social programs that I have to pay for. To me, government is only supposed to provide the following services: trade, money, and a military. There is nothing that I have read that states that we need social programs to bail out people. Some countries may elect to do that for their own people, which is their right to do. But the core problem I see is the lack of small-business-favored policies that are desperately needed to get people back to work.

        • Ace says

          Mike,

          I’m not offended… I’m just trying to point out some ideas/concepts/observations
          which just might not be typically noticed.

          In regards to Europe….. Things are not so bad there. If you look at Germany or
          a Sweden, perhaps….. Life is really good! The population is healthy and happy.

          You don’t always have to reinvent the wheel! LOL!

          FYI: I’m a vet.

        • Mike says

          Here’s the things that I notice about N. Europe (most notably in my example, Sweden, since you did mention it in your reply-I have provided sources where I have gotten my information from, I hope you don’t mind me referring to other sources-if you want, send me your email id so we can continue this conversation):

          1. Sweden managed to find ways to primarily manage it’s economy through economic stabilizers and avoiding a lot of unnecessary bail outs a lot of companies-they did bailout some banks in the Telegraph source but I think the reason why it worked there was due to good fiscal policy on the deficit that they had. We, in the USA, chose the bailouts and it doesn’t seem that we have a good monetary policy here. You can’t just blame Republicans because Obama did it as well (See GM and Chrysler, as well as Wall Street) As a result, Sweden’s debt according to one of the sources I have listed is at 40%, one of the lowest of the richest countries. I wish American politicians can grasp that concept of fiscal policy. Before we add social programs, let’s get good fiscal policy FIRST, then worry about social programs second. I think that needs to take place before we add any more programs to our roster.

          2. Sweden changed parties to Centre-Right after ousting their Democrat party, which in turn reduced taxes for lower wage earners, and also started enacting policies to make it attractive to go back to work (such as reducing benefits of unemployment, source also listed below). I think the source also stated that they made it harder to get unemployment benefits. I wish American politicians could grasp this as well. There is nothing wrong with unemployment, but rather the people that continue to stay on the program indefinitely without doing something for society at large. I would have no problem with someone staying on unemployment if I saw them getting out there helping to fix the roads.

          3. Additionally, according to the Telegraph (source listed), it looks like Sweden is able to work not only with the other political parties, but also the other forces of the economy as well. I have YET to see this from both Democrats and Republicans (my stand point both parties have failed in different ways, so BOTH are at fault in my book). Right now, all I see the US government doing is bicker with each other and point fingers like little kids.

          4. Also it interesting to note that the stimulus (as well as continuing to provide tax cuts) that was provided to some of the companies was due to setting money aside for it. See the Spectator source. He did this will adjusting the tax brackets as well. Apparently, in Sweden, doing this worked well for them (preparing in advance by setting money aside then being able to the necessary adjustments).

          Essentially, when you try to examine Sweden, it can be summed up via: practice good fiscal policy first and make the adjustments to taxes as necessary to encourage job growth, then gradually start encouraging people to get back to work (while keeping social programs in tack and reducing the number of people using some of these programs). I really don’t see that with either of the parties in the USA. The suggestion I make is to focus first on good fiscal policies rather than social programs so there are funds necessary to be able to afford programs (and keep a good military).

          I love the USA, and I would love to see social programs help those that are in need, but I think there are better ways to be able to implement them than what’s going on in the US right now. Like I said, I support a public option for those that can’t get healthcare, but people like me have the option to get private healthcare and we can leave the medical system alone outside of that.

          Sorry for the longer reply this time as I wanted to try to do some research and provide you the sources I have used to write my points above. I feel providing sources may not be 100% credible but to also help further promote a healthy discussion.

          Sources:

          http://www.csmonitor.com/Business/Stefan-Karlsson/2010/0320/In-long-cold-recession-Sweden-kept-workers-on-the-job.-Its-secret

          http://www.bloomberg.com/news/2012-01-05/view-sweden-shows-europe-how-to-cut-debt.html

          http://www.telegraph.co.uk/finance/economics/8046711/How-Japan-Canada-and-Sweden-coped-with-recession.html

          http://www.spectator.co.uk/the-week/6296398/swedish-conservatives-bucked-the-recession-by-lowering-taxes-and-won-reelection/

        • Ace says

          Mike,

          Thanks for the extensive response…. I’ll take the time to review these sources.

          Also, I too would have preferred some kind of public option. That was originally
          going to be part of the bill, but was politically impossible.

          And thanks, Sam, for your link.

        • mysticaltyger says

          Mike, I think you made some good points about Sweden. Here is the bottom line about countries like Sweden: They are less corrupt than most other countries, including the U.S. That is why things work better there. When you have layers and layers of corruption like you do in the U.S. (and most countries), nothing works. You have to have citizens who are willing to get off their butts and inconvenience themselves to demand more accountable government. And that is not what we have, unfortunately.

      • mysticaltyger says

        ACE & Mike,

        It’s not an either/or here. Both the military and social programs are wasteful and bloated. Government medial programs like Medicare/Medicaid have outstripped their cost projections for decades. Most people don’t care because most of the cost is hidden. The military is also bloated, no doubt.

        • Mike says

          @Ace, I might not be correct, but I am willing to try to provide sources. I think it is a good lively discussion about what might be good for the US to take. Honestly, I can’t say Republicans are solely to blame (however, the current batch of Republicans I am disappointed with due to how they act-so I’ll admit that. Most of these Republicans have lost touch with their roots and principles. I also admit that these Republicans should be acting more like adults rather than kids).

          Also, if you note, the article explicitly states “pro-big-business” (see this page- http://www.thestreet.com/story/11378728/2/obama-outdoes-pro-business-republicans.html). Additionally, I noticed that there was the statement by the American Small Business League stating that Obama was gearing towards moving federal contracting dollars to larger corporations rather than the smaller ones (I think it also on the same page as the link that I provided). I might be wrong in my interpretation on those two points, but it almost sounds a lot more like business corporatism rather than true small business in my book. Those two points stood at the most to me in that article. Ace, I do enjoy your opinions and insights-even if I disagree with what you have to say (on most of it-sorry if I play devil’s advocate on a lot of the issues).

          @Mysticaltiger-I agree with your posts. There have to be citizens that are interested in actually wanting to go back to work and also willing to invest in a more accountable government. The major thing I got from referring to those sources on Sweden were that fiscal policy is important first (essentially learning how to manage money well-which we need to do as individuals as well), then we can focus on providing a good standard of living for the average person. I agree with you that both programs here are overbloated and could be streamlined a lot better.

          To rehash:

          1. As citizens, let’s get off of our asses and demand a more accountable government. It doesn’t matter what party you support-both parties need to be held accountable for their actions. The problem is that we have a population that isn’t willing to work and this creates a lot of other problems for us long term. Honestly, I think that is preventing a lot of the changes that we want to see here in the USA. Once we can demand the government change and reduce it’s corruption, then we can see some progress. It’s not simply about one thing or another, but everything that has built up over time.
          2. Let’s start enacting better fiscal policies-basically setting aside a few of the tax dollars even though are deficit is large at the moment. I’d rather see us come out of the deficit with some reserves than no reserves at all. That way, when the deficit is gone and paid off, we are in a position where we actually have money set aside in the event of another recession (so we are not taking as much credit to fund our way out of it).
          3. Then let us find ways to be able to make the most of what we already have in place and also tweak the programs that are in place so they are not so costly for us to run. I would have to do more research than this comment would provide space for right now. Additionally, let’s stop printing the massive amounts of money (see these sources http://www.theoaklandpress.com/general-news/20130210/guest-opinion-printing-more-money-and-expanding-government-wont-work, http://www.washingtontimes.com/news/2012/sep/26/the-fed-keeps-on-printing-money/; essentially we are screwing ourselves over here. You know it is bad when the Chinese are dumping our bonds to buy other assets that we have. I don’t like where that is headed btw). We are pricing ourselves out of a future by doing this. It works short term, but eventually we have to stop printing money sometime.
          4. As for the social programs, let’s gradually make it attractive to go back to work. Sweden did this and they look like they are still able to maintain the programs that are in place (I think the article also stated that the implementations were actually well received by everyone). Lower taxes on the poor and the middle class (those that earn roughly up to $200,000-$300,000) so that they are encouraged to go out and spend more money. I like what Singapore has done-make it incredibly fast to get your incorporation documents when you pay your fee. I think that is a good idea-and we need to reduce some of the documentation to maintain business operations here in the US. Something I haven’t seen EITHER PARTY be willing to do.

          But those are things I want to see implemented if possible. Again, I tend to favor more the centre-right policies that have been enacted in Sweden (and while maintaining the social programs). Basically-good fiscal policy first, a better government, reduce the amount of printing into the economy, and start finding ways to cater to not only the poor but the middle class as well (I am in favor of spending our way out of debt, just not the government doing the spending but rather the middle class being the one that spends the money to get the economy going.)

          Sam, sorry for the long comments. It’s interesting to discuss these things. Ace-again, you make a lot of good points and I hope you don’t mind me providing insights to the articles you have provided here (and I hope you enjoy the sources I reference for your information). Mysticaltiger-thank you for your insights as well. I think you are onto something with what you have said.

        • Ace says

          Alright…. We all agree that changes are needed (especially in Congress).

          I think shutting down the government and/or threatening to default on your
          bond payments is a rather boneheaded way to go about things.

          I really prefer rational, pragmatic, problem solvers for politicians.

        • Ace says

          Also, folks, let’s take a look at this link:

          http://www.bloomberg.com/markets/rates-bonds/government-bonds/us/

          See those very remarkable low coupon rates for US treasuries? That is an
          indication of no inflation. We just went through a severe real estate crash
          and unemployment is still high. We have excess capacity and a lack of
          inflation.

          You need to think about this. The money supply is still too tight! The Federal
          Reserve has done excellent work, but it cannot go below zero percent interest
          rates. In order to get the economy back on track, you actually need inflation
          at about 2 to 3 percent.

          The only tool left is the government doing deficit spending. Do you know what
          actually ended the Great Depression? The vast amount of deficit spending due
          to World War II!

          The point is: Now is not the time to do crazy things with the Federal Budget,
          and frankly, many of these anti-spending schemes are pointless political
          propaganda when you have a $16 trillion economy.

        • Ace says

          Here is another interesting site with data about debt & deficits:

          usgovernmentspending.com/debt_deficit_history

        • Ace says

          A negative 0.58 % yield on a five year TIP:

          bloomberg.com/markets/rates-bonds/government-bonds/us/

          0.43 % on a 10 year TIP. 10 year treasury trading at a 2.64% yield, so,
          investors are factoring in about 2% inflation for the next 10 years.

          This just doesn’t look like a country printing excessive currency.

        • Mike says

          Ace-thank you for the links! I’ll be checking them out as well. Your insights are good and I appreciate you expressing them even though I played devil’s advocate! :P

  18. Tortoise Banker says

    “How many people in the private sector can save over $1 million dollars making less than $80,000 a year by the time they turn 62? Hopefully every reader on Financial Samurai, but only a small minority of the American population.”

    With the right approach, a 30 year old making 80k/year could reach 1 million dollars well before their 50th birthday! Well said.

  19. getagrip says

    Some points
    1. Being non-essential does not mean unnecessary. You can have a contracting office that may normally process dozens of contracts and address hundreds of inquiries a month go from a large staff of ten or more to the manager who is “essential” to only address critical problems on existing contracts. All other work stops. Similarly the administrative assistant servicing an office of a dozen food inspectors still working may not be essential to conducting actual inspections, but long term is necessary for the office to function. Often essential just means an upper level manager with the ability to call people in if something critical comes up. The Government is not in operation mode, it is in limp along mode.

    2. All you are hearing about is the immediate effects the media is pointing to, like parks and local businesses around national parks, because they have to use something they can put on camera or that people can easily relate to. But what you are not seeing is the contract delays, the construction delays, the research delays, and all the costs associated with schedule impacts and slips that will be coming. Additionally, there are 0 cost savings associated with a shutdown (won’t even mention all the admin costs in getting prepared to shut down), and the costs keep rising because mandated functions required by law (whether we or you like them or not) must be accomplished, often by certain times (e.g. end of quarter, end of calendar year, etc.), and if this goes on too long all of us taxpayers will be paying additional overtime and contractor fees to get it done. This is no “slimdown”, unless you think multimillions a day in costs and eventual catch up equates to “slimming”.

    3. Never be fooled by the terms like Smaller Government because unless they eliminate the requirements (NOT just rename the offices or move the work to another agency), the work has to be done. The only question is who does the work, Government or Contractors employees. Now before you claim how “efficient” contractors are, keep in mind what business is efficient at. Business is very efficient at making a profit. Now consider that Government contractors do not make a profit from customers in an open marketplace, they make their profit from the Government. Hence they become expert at efficently finding ways to profit off the Government. Sometimes that means being efficient at task. Most times it means seeing where they can get more pay under the contract conditions that have been specified. They pay their lawyers and contract negotiators a boatload more money than the Government pays theirs. Draw your own conclusion.

    3. As most anyone who has been laid off will likely tell you, it isn’t a vacation. You are checking every day if you have to go in because even if the shutdown continues you can get called. You don’t know if it’s worth the hassle to apply for unemployment because you don’t know how long it’s going to last, and you’re worried about your family and situation even if you have financial reserves because you don’t know the time frame. Additionally, even if you are working, all you are getting is an IOU. If the shutdown lasts to the 17th, no one will get a paycheck. I’d also like to point out that there is no guarantee of backpay if you aren’t working, and given the current anti-government worker sentiment built up politically and that unlike the last time this isn’t occurring over Christmas and New Year’s where most folks either don’t care or are feeling generous, I wouldn’t count on it.

    4. Sadly your estimate of a Government pension shows exactly why most people are biased toward civilian employees based on faulty data and faulty assumptions, often mixing county, state, and federal systems together based on hearsay rather than taking ten minutes to check the public information. First off to be clear NO ONE hired since the mid 1980’s in the Federal Government is under the old system as you describe it, though there are still people under the old system currently working and retiring (hired late seventies and early eighties). So getting hired by the Federal Government would not net you what you claim.
    That said, to earn 70% of your high three years average salary under the old system would generally require 37 years of active civilian service, which would mean you were hired at age 25 and spent your entire career in the Federal Government if you retired at 62. The pension caps at 80% with 42 years and some odd months no matter how many more years you work. It’s often not mentioned that under the old system you get ZERO social security (you don’t pay in), and any you may earn later typically lowers your Federal Pension to a wash (the benefit of working post formal retirement is salary+pension). Also under the old system you have no choice but to put in a minimum of 7% of your salary toward your pension all the years you work (7% of $50K @ 8% over 37 years is $710K (poor example just to show a good chunk of the pension can come from the employee)). Now I’ll agree even with those caveats, if you were willing to stay in the Government long term, the old system was nice. But also keep in mind most large employers (which is the appropriate comparison) had benefit packages that were better (pensions, stock options, etc.) and used the Government system as a baseline comparison that was often treated as bottom of the barrel.
    Since the mid 1980′s the system is a smaller pension (1% per year worked) with new hires paying 3.1% into it, Social Security (paying into it like everyone else), and an equivalent match into the TSP (Government 401K type plan) of up to 5% max. Until 2008 most large companies were matching 6% or better, had stock options, greater than 1-2% bonuses, greater than 2-4% raises a year, and 401K plans with more than 5 index fund choices and a couple of target funds. I expect most have gone back to this given the average raise since 2010 is 3-5% and bonus of 4-6% while the Government has had frozen payscales for three years and 1% or less bonuses for top performers, and no bonus this year.
    So there are reasons you may want to work for the Federal Government, but high salary (particularly compared to other degreed professionals) and the idea of eventually getting a pension in 30+ years of work shouldn’t be one of them.

    • Financial Samurai says

      Love this comment! You make some great points and your last paragraph on the old and new pension system is excellent. Yes, we have to pay our dues to get our pensions. That is undisputed. So are you saying under the new system, after 30 years of work you only get 30% of the average of your last three years pay? If so, that sucks.

      Can you please write a post entitled, “Clearing Up The Misconceptions Of Government Pensions?” Your knowledge is fantastic.

      Newer government employees must be jealous of older government employee’s pensions!

    • mysticaltyger says

      Thank you for clearing up those misconceptions about Federal Government pensions. I thought Sam was exaggerating, but I didn’t have the proof and I didn’t feel like researching it.

      I think most of the generous government pension plans are in state and local government. As a public sector worker in local government in California, I can tell you we are paying a higher percentage toward our pensions (14.73% as of January 1) and we had our pay cut about 2 years ago. Our pension is based on our highest year’s pay, but it will be a looong time before we get back to what we were being paid a couple of years ago, and when we do, it will be in less valuable dollars.

    • Eric Shun says

      Right, the old federal employee pension system (Civil Service Retirement System) was changed to the less generous Federal Employees Retirement System (FERS) in 1983. ANyone hired after 1/1/83 is in FERS. The youngest of the old-timers under CSRS now have thirty years of service and are retiring every day.

      Before I saw your post, I had added more discussion below about federal pensions.

  20. Mr. 1500 says

    I’m a contractor for the federal government and it’s all very interesting to watch. I’ll of the employees I work with are officially being furloughed on Monday. The contractor bill has already been paid, so we get to keep working. There is some harsh resentment towards us which I think is unfounded for a couple reasons.
    1) We have no control over it. Blame DC, not us.
    2) When this has happened in the past, the employees were always given back pay, which you mentioned. From what I’ve heard, I’d be very, very surprised if it doesn’t happen this time.

    On another note, the employees I work with are excellent, but I do see a lot not so excellent people too. Unlike private industry in which I’ve also worked, it is pretty hard to fire an employee. That is actually the reason they hire so many contractors; they want a disposable workforce. However, when all the software knowledge resides with the contractors, we become less disposable.

    • Financial Samurai says

      I’d be surprised if there is no back pay either. Which means we really ended up wasting even more money on the shutdown since we didn’t get output from hundreds of thousands of people.

  21. Ace says

    In my opinion, shutting down the government, by refusing to fund it, is a strange strategy for the
    GOP. The GOP is/has become primarily a political party of the southern states.

    It is the southern states which have greater dependence on Federal aid. Most military bases are in the south; most defense contractor manufacturers produce there products in the south.

    You could even look it this way: More Federal tax dollars flow out of northern, northeastern, and west coast states, to the American south then other way.

    In short….. Shutting down the Federal government mostly hurts people whom vote GOP!

    This is very irrational….. Then again, people are never really rational! What we have is really a culture clash. Maybe this link will help explain this behavior:

    http://www.bloomberg.com/news/2013-10-04/why-republicans-shut-down-the-government.html

  22. Ace says

    The quote was lost from the previous post. Anyway this is from Representative Yoho:

    “I think we need to have that moment where we realize [we’re] going broke,” Yoho said. If the debt ceiling isn’t raised, that will sure as heck be a moment. “I think, personally, it would bring stability to the world markets,” since they would be assured that the United States had moved decisively to curb its debt.”

  23. Roger the Amateur Financier says

    I don’t know, Sam, I think it’s a bit too early to draw any conclusions about what this shutdown means. Things could be much different on Day 5 (which we’re on now) than, say, Day 15 (which hopefully we won’t get to). Let’s wait until government organizations like WIC and the VA run out of money and can’t keep providing their services before we call it ‘nothing really changes’. It’s a bit like a siege; life continues, but gets slowly worse over time. How much worse still isn’t completely clear (and with that whole ‘debt ceiling’ issue nearly upon us, this shutdown might end up being the least of our troubles for October…)

  24. Eric Shun says

    “As a result of the 1995 shutdown, Republicans became public enemy #1 and President Bill Clinton got reelected in 1996.”

    I don’t think the 5-day Federal government shut down in 1995 had anything to do w/ Clinton winning the election over incumbent GHW Bush. I think Bush was seen as somewhat ineffectual and Clinton was very charismatic. Moreover, in 1996, Republicans were elected as a majority in the US Senate and the US House of Representatives for the first time in something like fifty years. The shutdown had no effect at the ballot box.

    “…assume a 70% of salary pension amount…”

    That’s a mighty high assumption and does not apply to Federal workers. For a non-public safety federal worker to reach a 70% pension, he would need to have 70 years of service! (i.e. 1% per year of service.) For a public safety Federal worker (i.e. federal law enforcement) to reach 70%, he would need to have 46 years of service (i.e. 1.5% per year of service).

    Non-public safety Federal workers can retire and collect their pension at age 62 (or at age 55 w/ 30 years of service). Public safety Federal workers are forced to retire at age 57.

    Pension calculations and rules for city, county, and state workers are often more generous than those of federal workers, and can lead to pensions that are 70% or higher of the retiree’s working salary (especially for public-safety workers).

    By the way, I was an essential federal worker during the 1995 shutdown and simply received a 5-day paid vacation.

    • Financial Samurai says

      Got to love 5 days of paid vacation!

      Long live the old federal government pension system. Things sounded so good back then.

      Thanks for highlighting the new pension system as another commenter highlighted as well.

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