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Day 20: Dollar Values of the Shutdown in Iowa

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It is Monday morning. We are in the 20th day of the federal government shutdown. One of the things that most strikes me is the complete lack of information from politicians and officials on both sides of the aisle about how much money is at stake, and what the impacts of stopping those flows of money might be.

We hear who’s fault it is, but we don’t hear about what it really is. No one wants to talk about the problem. No one wants to talk about the repercussions. Everyone is obsessed with the blame.

Today, we are looking at the broad sweep of federal transfers to the Iowa economy. It is only one state, but it is instructive.

A Reasonable Minimum

Common Good Iowa maintains a compilation of federal funding transfers to Iowa governments and nonprofit organizations. In 2024, it totaled $8.58 BILLION, or $23.5 million per day. It is a big number, but given the complexity of intergovernmental finance, it is almost certainly incomplete. Let’s look at it as a reasonable minimum.

This Includes

This includes Medicaid funding, which was heavily cut prior to the shutdown. It includes about $2 million per day for education funding, which the president has directly targeted with layoffs and terminations since the shutdown started.

It also includes nearly a billion dollars for transportation. Most of this goes into highway construction and repair. How many of those barricades you have been detouring around will still be there next year because of the shutdown? A lot of them.

This Does Not Include

It does not include direct payments to individuals or farms or trust fund payments for Medicare. Social Security, farm payments, and Medicare payments to Iowa in 2024 were triple the total in the Common Good Iowa compilation, at $26.20 BILLION, or $67.4 million per day.

It does not include veterans’ benefits from the Veterans Administration or operating costs for Veterans Administration facilities. It also does not include several smaller federal pension funds’ distributions in Iowa. These total $2.73 BILLION per year.

This also does not include Department of Defense funding for military installations around Iowa and civilian and military employees of the department. Total defense contract, grant, and payroll spending in Iowa in 2023 was $3.4 BILLION.

It does not include Department of Energy direct contracts and grants to businesses and department operational costs of $80.26 million.

It does not include direct grants and loans to students of $1.35 BILLION from the Department of Education.

Finally, it does not include direct federal contract and grant expenditures to Iowa business entities by federal departments other than the Department of Defense, the Department of Energy, and the Veterans Administration. There are almost certainly several BILLION dollars more that we have not captured here. Every BILLION not accounted for would equate to another $2.74 million in federal inflows per day.

Summing Up the Whole Ball of Wax

So, between the direct infusions to state and local governments and nonprofit organizations, Medicare, defense expenditures, and direct payments to individuals and farms that we could account for, the federal government pours about $42.34 BILLION into Iowa per year. That averages $116 million per day. We are certain there are several more BILLIONS of dollars we have not been able to account for.

Most direct payments to governments, nonprofits, and farms will not be made during the federal shutdown. Most federal payroll will not be paid during the shutdown. Direct payments from the Social Security and Medicare trust funds, while they don’t directly affect the budget, will be available entirely at the discretion of the president, who has made no secret of wanting to shut both programs down.

The Larger Impact

In addition to the hardships that will be imposed upon the direct individual and business recipients when these funds are cut off, THIS WILL ALSO IMPACT OTHER IOWANS whose incomes depend on the direct recipients cutting payroll checks, ordering supplies, letting construction contracts, or buying groceries, utilizing health care, and purchasing other goods and services.

The most conservative way to model the impact of this is to assume these funds all go directly into household incomes, so that is what we will do here. Every time we remove $116 million in household income from the Iowa economy, we should expect a loss of 710 jobs and $32.9 million in lost business incomes (profits, rents, and interest). If we remove $116 million every day, we should expect to lose 710 jobs and $32.9 million in business income every day.

That is a conservative estimate of the average Iowa cost of every day of a total federal shutdown. It won’t happen all at once. The federal government has not stopped all transfers, but every day that the shutdown continues the remaining transfers will increasingly be subject to presidential whim. While private closures and layoffs tend to lag as businesses struggle to survive, eventually the loss of cash flows will be overwhelming.

The longer the shutdown goes on, the closer we will come to these daily average total impacts.

This is doubly true as the federal government continues to extract taxes from Iowans as it strangles the flow of funds back to Iowa.

Impact on the State Budget

There is also the state budget. In FY2024, Iowa collected about 5.8 cents in revenue for every dollar of personal income its residents received. The average potential loss of 710 jobs per day during the shutdown carries an expected average payroll loss of $33.23 million for every day the shutdown goes on. Losing that payroll will deprive the Iowa treasury of about $1.93 million in revenue for every day that the shutdown continues. This in a state that is already living with a budget deficit.

Finally, Iowa Is a Recipient State

Iowa is a recipient state. Iowa receives substantially more from the federal government than it contributes in federal taxes and fees. In 2023, Iowa received $1.28 in federal expenditures for every $1.00 Iowa contributed in federal taxes and fees. That is equivalent to Iowa making a 28% profit on its federal taxes!

Whenever the federal government starts cutting across-the-board, Iowa suffers disproportionately, because the net positive federal funding stream is incredibly favorable to Iowa.

In 2023, only 6 states contributed more to the federal government than they received. All 6 are blue states. Another 4 states came within a nickel of breaking even. Three of the 4 were blue states.

Sources

This information was generated using data available from Common Good Iowa, the Environmental Working Group, the Rockefeller Institute of Government, the Bureau of Economic Analysis, the Bureau of Labor Statistics, the Office of Local Defense Community Cooperation, the Department of Energy, the Department of Education, the Veterans Administration, and the Social Security Administration.

Terminating Federal Funding Flows – An Iowa Example

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Increasingly, we live in a world where the federal funding we have integrated into our local economies cannot be relied upon. At the same time, there are no guarantees that the lost funds will be returned to the economy in other forms if they are removed. There is substantial talk of deficit reduction and of selective tax cuts, but there is no sign that funds held at the federal level will be broadly distributed to the local economies which will bear the loss.

This is a simple analysis of what the Iowa economy would look like if four major flows of federal funding were cut off:

  • Agricultural Subsidies
  • Social Security
  • Medicare
  • Medicaid (the federal share only)

No assumptions are made of any alternative flows that would replace these losses. This is simply a look at general expectations assuming these funding flows simply disappear.

Data for this exercise were collected for 2023. This is the last year for which the full range of data could be obtained. All data except the level of agricultural subsidies was sourced from the United States Bureau of Economic Analysis (BEA). Agricultural subsidy totals were obtained from the Environmental Working Group, because the BEA has recently stopped publishing detailed agricultural industry statistics at the local level.

The effects of removing each of the four funding flows were analyzed using an impact model built with Iowa economic coefficients obtained from the BEA Regional Input-output Modeling System (RIMS II). Each of the four major funding sources was run separately, sums were taken, and a comparison was made to Iowa totals for actual 2023 gross domestic product and employment. The table below shows the results. Dollar values are in billions.

What all falls out is a loss in federal funding of almost $30 billion. As these losses percolate through the Iowa economy, they will result in

  • Lost economic transactions totaling $42 billion
  • Lost economic value added (GDP) totaling $24 billion
  • Lost business income, interest payments, rents, and direct production taxes of $10 billion
  • Lost labor income (payrolls) of nearly $14 billion
  • Over 268,000 jobs lost

At the end of the day, Iowa can expect to see its GDP drop by almost 12 percent and its employment totals to drop by 12.5 percent if these funding flows are terminated without replacement. Iowa is not unique among states with respect to the expected impacts if major federal funding streams dry up.

Additionally, we can use payrolls as a proxy for production and income to roughly estimate Iowa tax losses resulting from this. Iowa collects approximately 8.75 cents in general revenue for every dollar in statewide payroll. At this rate, the loss of payrolls resulting from losing federal flows of funds would result in a reduction of state general tax revenue by over $1.2 billion. This would further cut expenditures throughout the state and magnify the losses listed above.

Regardless of the pros and cons of government interventions in the economy, the economy has been built up over decades on the incentive systems driven by those interventions. It would behoove us all to be a patient and cautious in making changes.

SF 615: An Impact Model Based Policy Analysis

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The Iowa Legislature is currently working on a bill (SF 615) to impose work requirements on able bodied adult recipients of Medicaid. The bill passed the senate on Tuesday, March 27. It was passed with amendments by the house on Wednesday, March 28, and sent back to the senate. It will likely be passed and signed into law during the week of March 31, 2025.

On the face of it, it is kind of hard to figure out what this means. The governor apparently put forth the bill, but neither the governor’s office nor the departments of health & human services, public health, revenue, or management & budget provided any information to the Legislative Service Bureau on costs, savings, or fiscal implications of the bill.

Either they don’t know, don’t care to know, or don’t want anyone else to know the implications of SF 615. One can easily find estimates on the internet that 75 percent of Iowa adults on Medicaid already work, but it is hard to determine the potential exemption status of the other 25 percent.

To its credit, the Legislative Service Bureau did provide some important estimates to underpin the analysis presented here:

  • The bill will generate Medicaid savings of $3.1 million to the State of Iowa in the first year
  • The bill will generate savings of $17.5 million in the second and subsequent years
  • The funding percentage split between federal and state is 88.4 percent federal and 11.6 percent state

This means that when the state saves $3.1 million in the first year, the federal government will save $23.6 million, and when Iowa saves $17.5 million the second year, the federal government will save $133.4 million. Summing these up, during the first year while the State of Iowa is saving $3.1 million it will be cutting health care expenditures in the state by $26.7 million. During the second year the state will save $17.5 million by cutting statewide health care expenditures by $150.9 million.

So far, this has all been derived directly from the estimates made by the Legislative Service Bureau.

The United States Bureau of Economic Analysis (BEA) generates estimates of expenditures for each state. Assuming the healthcare expenditures eliminated by SF 615 are spread through the system on an equivalent basis to Iowa’s overall health expenditures, they can be run through an input-output model to see how they will affect the entire Iowa economy. The model was set up using coefficients available from the BEA.

Four scenarios were set up – two each for first year and for second year reductions in health care expenditures. In the first scenario for each year, health care expenditures were cut, and no other changes were made. In the second scenario for each year, it was assumed that the State of Iowa’s estimated savings were concurrently returned to taxpayers as household income (equivalent tax cut scenarios spread proportionately to income distributions).

Scenario One: First year health care expenditure cuts without equivalent tax reductions

  • State of Iowa savings – $3.1 million
  • Health care expenditure cuts – $26.7 million
  • Statewide payroll reductions – $17.3 million
  • Statewide jobs reduction – 307 jobs
  • Reduction in statewide returns to capital (profits, interest, rents, etc.) – $10.9 million

Job losses will fall predominantly in these sectors:

  • Health care – 189
  • Finance & real estate – 28
  • Professional, management, & administrative – 23
  • Wholesale & retail trade – 21

Additionally, a very rough estimate of state general revenue fund tax loss can be made by dividing state net tax deposits (Iowa Department of Revenue) by earnings by place of work (BEA) for Iowa. That calculation results in 8.75 cents in general fund tax deposits per dollar of payroll in the state.

This estimated tax loss would be $1.5 million. It would not include losses in non-general state income, such as the lottery or liquor, and it does not include local government receipts, but it would still amount to approximately half of the state’s anticipated savings from restricting access to Medicaid.

Scenario Two: First year health expenditure cuts with equivalent general tax reductions

  • State of Iowa savings – $0 (all savings are distributed in an equivalent tax cut)
  • Health care expenditure cuts – $26.7 million
  • Statewide payroll reductions – $16.4 million
  • Statewide jobs reduction – 287 jobs
  • Reduction in statewide returns to capital (profits, interest, rents, etc.) – $10.0 million
  • Estimated general revenue tax losses – $1.4 million

Job losses will fall predominantly in these sectors:

  • Health care – 185
  • Finance & real estate – 24
  • Professional, management, & administrative – 21
  • Wholesale & retail trade – 17

Scenario Three: Second year health expenditure cuts without equivalent tax reductions

  • State of Iowa savings – $17.5 million
  • Health care expenditure cuts – $150.9 million
  • Statewide payroll reductions – $97.7 million
  • Statewide jobs reduction – 1735 jobs
  • Reduction in statewide returns to capital (profits, interest, rents, etc.) – $61.5 million
  • Estimated general revenue tax losses – $8.5 million

Job losses will fall predominantly in these sectors:

  • Health care – 1068
  • Finance & real estate – 155
  • Professional, management, & administrative – 128
  • Wholesale & retail trade – 119
  • Manufacturing – 38

Scenario Four: Second year health expenditure cuts with equivalent general tax reductions

  • State of Iowa savings – $0 (all savings are distributed in an equivalent tax cut)
  • Health care expenditure cuts – $150.9 million
  • Statewide payroll reductions – $92.9 million
  • Statewide jobs reduction – 1620 jobs
  • Reduction in statewide returns to capital (profits, interest, rents, etc.) – $56.7 million
  • Estimated general revenue tax losses – $8.1 million

Job losses will fall predominantly in these sectors:

  • Health care – 1047
  • Finance & real estate – 134
  • Professional, management, & administrative – 121
  • Wholesale & retail trade – 95
  • Manufacturing – 33

Some thoughts

Regardless of the merits of imposing work requirements where the great majority are already working (recall that the governor and affected state departments declined to provide details regarding those merits), this is not simply a state budget reduction effort. It will significantly affect payrolls, employment, profits, and tax receipts across the state.

These effects are magnified by the fact that the federal government multiplies Iowa’s investment. For every dollar the state puts into these benefits the federal government contributes $7.62. That means that for every dollar the state saves with SF 615, the state forgoes $8.62 in economic activity that generates payrolls, employment, profits, and tax revenue. The state savings of $17.5 million per year will cost the state’s economy almost $151 million in expenditures (economic activity) per year.

The magnitude of these losses, particularly in the health care industry, will force providers to abandon billions of dollars worth of investments in facilities and infrastructure. These abandonments will not magically reappear if SF 615 is subsequently modified or repealed.

It should also be noted that, as expenditures fall, payrolls are cut, profits disappear, and jobs are axed it will be harder for Medicaid recipients to find the required jobs. This will remove more of them from Medicaid. This will save the state more money. For every dollar saved in this manner, another $8.62 in health care expenditures will be removed from the economy and the cycle of disruption to the state’s economy will continue to expand.

These are a costs that deserve more analysis than the governor or the statehouse has given.

Attempting to Offset Program Cuts with Equivalent Reductions in Taxes

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I have recently posted three analyses of the Iowa economic impacts of breaking Social Security, Medicare, and Medicaid (Privatizing Social Security, Social Security – a Local (Iowa) Perspective, and Breaking Medicare and Medicaid – An Economic Perspective from Iowa).

None of these dealt directly with the typical small-government argument that an offsetting reduction in taxes will eliminate the adverse effects of eliminating programs.

This argument is not actually true in most cases. The reason is that markets are not neutral. They are created within the context of government intervention, and government intervention is required for efficient markets to function over time. Government defines and enforces property rights. Government oversees the accessibility and stability of the money supply. Government regulates financial transactions. Government influences marginal propensities to spend resources on and between categories of goods and services through taxation, investment, and program regulations and expenditures.

For better or for worse (I am not arguing one way or another), these influences shape markets, private investments, employment, and income. Making substantial changes to the way government influences the shape of markets and the economy will generally cause significant disruptions in the system. Those disruptions generally do not even out among all participants.

This analysis looks at the effects of eliminating federal Medicare and Medicaid benefits in Iowa and replacing them with equivalent increases in household income through tax reductions (see, in particular, Breaking Medicare and Medicaid – An Economic Perspective from Iowa). To develop this perspective, I

  • Set up a model of the Iowa economy
  • Removed $14.3 billion from the specific industry groups Medicare and Medicaid funding flow into
  • Added $14.3 billion to general household income

By both removing and adding $14.3 billion from/to the Iowa economy, the net initial impact on available resources is zero. The difference between where resources are removed and where resources are added, however, still results in devastating impacts upon the Iowa economy.

The change in how this $14.3 billion is allocated in the existing economic structure will result in a statewide payroll reduction of $5.6 billion reflected in the loss of over 70,000 jobs. Not all industries would lose jobs however:

  • Finance and real estate would see an increase of over 2,000 jobs
  • Wholesale and retail trade would see an increase of over 7,000 jobs
  • Education and the arts would see an increase of over 3,000 jobs
  • Accommodation and food service would see an increase in almost 2,000 jobs

On the other side of the coin

  • Health care would lose over 80,000 jobs
  • Professional services, management, and administration would lose over 7,000 jobs

These consequences would occur because markets are not neutral. They have been shaped for over 200 years by government interventions is property rights, taxation, expenditure, and regulation. An immediate and substantial change to the rules of the game can be expected to break down large segments of the economy that those rules have helped build up.

Regardless of philosophies regarding the long-term merits of one government-influenced market regime over another (and make no mistake, changes in government intervention only change the shape of government influence on the market – they do not eliminate that influence), it is important for the health of the economy that substantial changes be made slowly.

Furthermore, it is almost certain that the negative economic effects outlined above are understated. It will be worse than the results of the model shown above. It will be worse across all categories. Worse for the modeled winners as well as for the modeled losers. The reason is simple. The increases in household income (reductions in taxes) will not accrue to the same people who suffer losses of benefits.

In the model, the tax reductions were treated as increases to general personal income across Iowa. This assumes that tax reductions were proportional to incomes across the economy. That means that the people that lost Medicare and Medicaid benefits would be net losers in the transaction and everyone else would receive an unearned windfall.

A large proportion of this unearned windfall would go to high-income households with lower propensities to consume. This will result in a significant portion of the offsetting increases in income being removed from the economy as savings or financial investments. This would result in significantly lower offsetting economic activity than the model assumes. That, in turn, means the model results presented above are unrealistically optimistic.

In reality, however, this unearned windfall, these tax reductions, would not be spread proportionately across incomes within the economy. The current tax system and current proposed tax reforms heavily favor upper income households over lower income households (taxation policies are a major avenue through which government shapes the economy – see Why We Can’t Make Nice Things….). As a result, a predominant share (rather than the proportional share discussed in the previous two paragraphs) of offsetting personal income will accrue to upper income households. This will magnify the effect of lower marginal propensities to consume discussed in the paragraphs immediately above and further reduce the effect of offsetting income on benefit losses depicted in the model. For this reason, again, the economy-wide results modeled above are unrealistically over optimistic.

Regardless of the philosophical merits of any one form of government intervention over any other in shaping the economy, significant changes in these forms of intervention should not be made abruptly or haphazardly. The analysis above is clear that eliminating Medicare and Medicaid benefits in Iowa and replacing them with equivalent increases in household income through tax reductions will have a large negative impact on the Iowa economy. Markets are not neutral. They are shaped by the government. As a result, government has a responsibility to be responsible in changing the rules.

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