The budget paralysis affecting the US government has created a regulatory and economic void which in the short term threatens to affect technology innovation and to put the brakes on growth in the digital sector.

US Government shutdown threatens Silicon Valley

The failure of the United States Congress – the Republican-dominated House of Representatives and the Democrat-controlled Senate – to agree a budget before the start of the financial year on 1 October has plunged the country into chaos. As the federal government no longer has any spending powers, a number of key federal agencies are now obliged to temporarily lay off staff, which means sending home close to a million civil servants on temporary furlough. In the longer term this crisis, which has already forced US Space Agency NASA to lay off a large percentage of its workforce, could also jeopardize the dynamic ecosystem of Silicon Valley, which is highly dependent on federal investment, contracts and stable and efficient regulation.

Budget gridlock likely to affect tech industry players

An immediate direct consequence of the budget gridlock will be a reduction in direct financing of the Silicon Valley economy in the form of sub-contracts, as federal payments are frozen and federal loans suspended. All US government sub-contractors will see their contracts terminated and outstanding payments are likely to be delayed. Both major companies such as Google and Microsoft and staff who provide access to online administration services for smaller companiesmight also be affected. Last but not least, the forced temporary shutdown of the US Small Business Administration may well delay granting of loans at competitive rates, which could substantially impair the creative energy of companies in the San Francisco Bay area.

Regulatory black hole may entail long-term consequences

In addition to these direct financial impacts, the inevitable shortage of staff at several federal regulatory agencies whose work has a bearing on innovation and markets is also likely to affect Silicon Valley. The Federal Communications Commission will be keeping only 2% of its workforce in place. With the FCC in virtual shutdown, consumer protection and monitoring of compliance with competition rules will also fall into abeyance until 17 October, when the term of the spending ceiling runs out. Meanwhile all IPO procedures on the Stock Exchange are set to slow down, and some listing requests may even be refused due to staff shortages at the Securities and Exchange Commission (SEC).This comes at a time when sources close to the action were predicting that Twitter would come to market soon, with shares being offered to the public by November.  However, if the budget gridlock were to be prolonged, the Wall Street ‘policeman’ might insist the company delay its IPO. Last but not least, another essential role played by federal agencies in the life of the Silicon Valley ecosystem – the granting of work visas and passports– may also be held up. Federal agency shutdowns on this sort of scale might well throw a spanner in the works of the US innovation process, with serious knock-on effects for job creation. The last budget crisis in 1995 cost the US 0.5% of its GDP and this time around we can expect a similar financial impact if the crisis continues. This would be all the more damaging given that the US economy was just gradually getting back on its feet again following the crisis which broke out in 2007.

By Thomas Meyer
Journalist, Business Analyst