Goldman Weighs In on Government Shutdown Consequences

By Daniel Indiviglio

The threat of a federal government shutdown grows graver with each day Republicans and Democrats remain at odds over spending. How would a shutdown affect the U.S. economy? Why not ask the company that controls Washington a sizable chunk of the financial industry? Goldman Sachs weighs in, via James Politi at the Financial Times Money Supply blog:

Based on the experience of the shutdowns in 1995 and 1996, only about 40 per cent of federal employees would be affected, since the government can maintain a relatively large chunk of essential and mandatory services.

This, would equate to about $8bn in missed federal spending per week. "Pulling this spending out of Q2 would reduce the contribution to quarterly GDP growth from federal activity by a little more than 0.8 percentage points at an annualised rate for each week the shutdown lasted," says Goldman. There is a caveat however: once the shutdown ends, and adverse effect on GDP growth would be reserved as the government cranks up again, so the net effect on a quarter, or indeed a year, may not be very significant at all.

So any harm to the U.S. economy from a federal government shutdown would be temporary, according to Goldman. Let's hope the firm's right, because at this point, that outcome is looking more and more likely. The bank also estimates the impact to U.S. GDP of the Republican spending plan and a likely compromise.

Read the full story at the Financial Times Money Supply blog.

This article available online at:

http://www.theatlantic.com/business/archive/2011/02/goldman-weighs-in-on-government-shutdown-consequences/71643/