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Government Shutdown: What You Need to Know

Government Shutdown: What You Need to Know
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With the federal government now officially closed, and Congress deadlocked over what to do next, it's anyone's guess how long the shutdown will last.

House Republicans remain intent using an otherwise routine budget process to delay or kill the new health care law. Democrats and the White House refuse to negotiate as a condition for funding the government. Neither side appears to have a Plan B.

Barring a surprise reversal by holdout House Republicans, or an about face by the Senate and White House, some government functions will remain shut down while others continue. Though each agency manages the shutdown differently, it's not the first time they've had to curtail operations for lack of funds: this is the 18th such "shutdown" since 1976.

Even if a budget compromise is reached, House Republicans get an even bigger opportunity for mayhem in mid-October when the Treasury Department is expected to hit the limit of its borrowing authority.

Here's what lies ahead as the fiscal follies in Washington deepen:

So this is no big deal?
The result is far from a complete "shutdown," but the petty political bickering will inconvenience millions of constituents and inflict economic pain on thousands of businesses. The shortest "shutdowns" have lasted a day or less and the longest ran for three weeks. But the process wastes thousands of hours of time and untold dollars each time federal agencies and contractors have to go through it.

Why is this happening?
Congress is supposed to pass a budget every year—usually through multiple spending bills for various government agencies and functions—well before the end of the fiscal year, which ends Sept. 30. When the process breaks down—as it's done frequently in the past decade—the only way to keep the government funded is through what's called a Continuing Resolution.That measure is basically Congress' way of saying: "Just keep spending what you're spending for a few more weeks or months, and maybe we can pass a real budget by then."

The current CR—signed into law in March after to resolve the "fiscal cliff" debacle—runs out on at midnight Monday.

So why can't Congress just pass another one?
That question is better directed to the group of House Republicans who are insisting they won't go along with a fresh CR unless it includes key demands. In addition to delaying President Obama's health care law, the House-passed CR would remove a tax on medical devices included in the healthcare plan to help pay for extending coverage to tens of millions of Americans without insurance. The House has already balked at "clean" Senate bill without another House vote.

What happens now? Does the whole U.S. government come to a grinding halt?
No. Each department and agency responds differently, but "essential" workers stay on the job and "non-essential" workers go on furlough. (Departments now refer to these as "excepted" and "non-excepted" workers because if they're "non-essential," some people asked, why are we paying them?)

Each agency has made detailed contingency plans.

It's a long list, but generally speaking, it's business as usual for the most essential functions of government: Social Security checks go out, troops continue serving (though some may have to wait to get paid – the House bill has a provision to keep those checks flowing). NSA agents will keep snooping on phone calls,TSA screeners will keep screen bags at airports and air traffic controllers show up for work, along with food-safety inspectors, border patrol and federal prison guards, most FBI agents, doctors and nurses at VA and other federal hospitals, and any federalemergency and disaster relief workers. The Postal Service and Federal Reserve,which don't rely on Congress for funding, aren't affected.

On the other hand, the disruption—even if the shutdown lasts only a few days—would be painful and widespread. Some benefits, like unemployment insurance and veterans' benefits could be delayed or reduced. National parks, museums, and many passport offices would shut down; the SBA and FHA would stop guaranteeing new loan applications; farm subsidy checks stop flowing, IRS tax processing would slow down, among other headaches.

What a nightmare. Will the House protesters back down?
That question is better directed toward House Republican leaders—but it's not clear they're in charge of the process any more. Many Republicans are angry at their anti-Obamacare colleagues for digging in and ignoring the longer-term risk of political backlash against the party. During a similar standoff in 1995-96, the Republicans ultimately bore the brunt of the blame for a three week shutdown that started a week before Christmas.

What are the odds President Obama can negotiate a compromise to keep the government going?
If odds could be expressed in negative numbers, that still wouldn't come close.

The White House likens House Republican holdouts to fiscal terrorists—and says it won't negotiate under those circumstances.

"The Republicans have provided a laundry list of essentially ransom demands of things," White House senior advisor Dan Pfeiffer told CNN last week. "They say: 'Give us these things or we will blow up the economy.' … What we're not for is negotiating with people with a bomb strapped to their chest."

But if Congress can't control spending, isn't it time for extreme measures like this?
In a word, no. In fact, after several rounds of tax increases and spending cuts, Congress has done a decent job controlling spending in the short-term. The federal deficit (the gap between what it collects in taxes and spends on programs) has fallen by a third in the last year and is expected to continue falling for at least the next few years.

On the other hand, Congress has done nothing to control the longer-term deficits that are coming if no changes are made in big entitlements like Social Security and Medicare. Those deficits are still several years away so there's time to reform the tax code and fix Social Security. There's also evidence that the rapid rise in Medicare costs is slowing, one of the main goals of the new health law.

In any case, the disruptive impact of shutting down the government and eventually getting it started againactually costs more money. An analysis of the last two shutdowns in 1995 and 19 found they wound up costing $2 billion in today's dollars.

Also read: Why a government shutdown could be pricey

So if they compromise, this whole thing is over, right?
Au contraire. House GOP budget protesters will now shift to the next battlefront: the vote to raise the Treasury's debt ceiling. That standoff promises to be even worse – and could inflict much greater economic damage.

Unlike virtually every developed country on earth, the U.S.budget process requires a separate vote every time the Treasury Department reaches the limit of the borrowing authority authorized by Congress.

That provides the "fiscal terrorists" in the House with an even better opportunity for mayhem—because the spending freeze would be much more severe. The economic and financial damage also would be much worse if the Treasury is forced to stop paying investors and default on U.S. debt.

But isn't that a way to control government spending?
No. The debt issued by the Treasury is used to pay for spending that Congress has already authorized for goods and services the government has already provided. It would be like trying to control your household spending by not paying a credit card charge for a meal you've already eaten.

Freezing the debt ceiling does nothing to better manage future spending or make government do more with less money. To do that, Congress needs to agree on a budget for the fiscal year that starts Tuesday. But there's been little, if any, discussion about coming up with a real spending plan.

If anything, forcing the Treasury to default on its debt would only increase government spending because it would raise future borrowing costs. Just as deadbeat consumer who doesn't pay legitimate credit card charges has to pay higher interest rates, investors in U.S. Treasuries would demand higher returns to offset the risk of Congress pulling this stunt again.

—By CNBC's John W. Schoen. Follow him on Twitter@johnwschoen.

John W. Schoen is an award-winning online journalist, who has reported and written about economics, business and financial news for more than 30 years. He is economics reporter for CNBC.com, and was a founder of msnbc.com, CNBC and public radio's Marketplace.

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