The Implications of a Possible U.S. Government Shutdown

Bottom Line

• A government shutdown is looming after president-elect Donald Trump, with the repeated insistence of the world’s richest man Elon Musk, demanded that Republicans reject a stopgap spending bill.

• Beyond the near-term implications of a government shutdown, the episode is a potential harbinger of the scale and scope of influence that Musk could have during and throughout Trump’s presidency.

• A government shutdown will precipitate deleterious impacts on the economy as the year nears an end a new one begins, including but not limited to, reduced consumer spending, investor uncertainty (compounded by this week’s Fed decision), and several issues related to government contractors.

Background

A government shutdown is looming after president-elect Donald Trump, with the repeated insistence of the world’s richest man Elon Musk, demanded that Republicans reject a three-month stopgap spending bill that was a funding extension (also known as a continuing resolution). A deal had been reached earlier in the week between Republicans and Democrats to avoid such a scenario, but after a full day of Musk tweeting about how disastrous the bill would be if passed, it was torpedoed. Trump seemed to threaten Speaker of the House Mike Johnson, who ultimately capitulated. If a bill is not passed soon, the government will shut down.

The dizzying series of events is concerning on a number of levels. To begin with, a government shutdown, furloughs, and delayed paychecks the week before Christmas have obvious negative implications, including for government workers and U.S. military members and their families. Beyond the immediate human toll, there is a broader, and perhaps more insidious question of why someone like Musk has been allowed to accumulate so much influence on the workings of the U.S. government.

In addition to complaints that the bill was full of “pork” (pet projects of certain Congressional districts), one overarching issue was that of the debt ceiling as part of the current negotiations. Trump has called for the suspension (or even outright elimination) of the federal borrowing limit. Some of the President-elect’s other demands include disaster relief and assistance for farmers. A government shutdown is always a tenuous time, but it will have deeply felt impacts with specific sectors, including aerospace, defense, and technology. Shutdowns not only erode trust in the U.S. government, but also compound the challenges of strategic foresight and planning, necessary to keep pace in great power competition.

Corporate Risks

Beyond the near-term implications of a government shutdown, the episode is a potential harbinger of the scale and scope of influence that Musk could have during and throughout Trump’s presidency. Given his mandate to identify and eliminate government waste, fraud, and abuse, as part of his efforts representing the Department of Government Efficiency, alongside Vivek Ramaswamy, Musk’s priorities include limiting government spending. Depending on the scenario—for example, if the avian flu issues continue to develop and grow worse (the state of California just declared an emergency)—the onus for response will be shifted to the private sector.

Even as the market tumbled this week on the heels of the Federal Reserve cutting 25 basis points to the 4.25%-4.50% range, Tesla stock (Musk is the owner of Tesla) has skyrocketed, likely on the assumption that with such significant influence with the President-elect himself, Musk is going to seek, and will likely be granted, a number of competitive advantages for his companies’ operations. Of course, by default, this may disadvantage competitors to Musk’s companies, especially in the area of electric vehicle production.

Musk is now facing scrutiny over another of his companies, SpaceX, and whether Musk properly complied with disclosure protocols put in place to guard classified material. Continued concerns over SpaceX’s reporting practices have led to ongoing reviews by the Inspector General of the Pentagon, the United States Air Force, and the Undersecretary of Defense for Intelligence and Security.

Implications

A government shutdown will precipitate deleterious impacts on the economy as the year nears an end a new one begins. This includes, but is not limited to, reduced consumer spending, investor uncertainty (compounded by this week’s Fed decision), and a number of issues related to government contractors. There will likely be delays or disruptions in benefits, permits, and loans, although the national security-related functions of the government—deemed essential—will continue.

Contractors, which make up a substantial segment of the workforce in certain parts of the United States, especially Washington D.C., could see their operations negatively impacted, with payment delays, project freezes, and the inability to actively compete for new business. Even a cursory glimpse at the top U.S. government contractors reveals companies including General Dynamics, BAE Systems, Deloitte, Accenture, and many others.

A government shutdown could affect research and development, critical business operations, and long-term strategic planning efforts. For many companies reliant on government funding for research, there could be delays in hiring new personnel, with funding gaps leading to hiring freezes and work stoppages. Many expect a government shutdown to attenuate supply chain mobility, with delays related to transportation and infrastructure that will imperil logistics and other areas related to international trade.

Musk’s growing role in dictating which legislation gets passed and which gets quashed position him as a shadow president of sorts. In addition to being antithetical to American democracy (Musk was not elected), his ability to influence Trump makes Musk a potential counterintelligence nightmare, especially as he runs a global empire and regularly consults with leaders from different countries, including many American adversaries.