The Economic Consequences of the Government Shutdown

By Matthew O'Brien
Republicans are shutting the government down again? Didn't they learn anything from me? (Reuters)

Deviancy can't be defined much further down.

Not when it's a semi-relief that House Republicans are "only" holding the budget, and not the debt ceiling, hostage in their bid to subvert the democratic process. (Though let's give the second one a few more weeks before we start celebrating). But any kind of relief over a government shutdown instead of a government debt default, while understandable, is a bit silly. It's true that the latter is much, much more damaging than the former, but that's like saying high blood pressure isn't as bad as a heart attack. Well, yes. But they're both still bad!

The economic consequences of the shutdown probably won't be large, but they might be larger than we think. Here's what we know, and what we don't know yet.

-- Furloughs. The shutdown's direct effect on the economy comes from the federal government's lost work-hours. Right now, about 800,000 of the 4.1 million federal workers have been sent home. These "non-essential" worker furloughs will reduce fourth quarter GDP by about 0.15 to 0.2 percentage points for every week the shutdown lasts, according to Morgan Stanley and Goldman Sachs economists. The economy should bounce back an equal amount the following quarter, but, as Macroeconomic Advisers points out, that partly depends on whether furloughed workers get back pay. That's what happened after the 1995 and 1996 shutdowns, but it's something Congress has to approve. And, well, House Republicans might not be so enthusiastic about retroactively paying federal workers for not working this time around. In that case, the shutdown's modest drag on overall household spending would persist a bit.

-- Confidence. The shutdown's indirect, and harder to quantify, effect on the economy comes from how much it scares households. It's particularly hard to quantify, because the shutdown fight is bleeding into the debt ceiling fight, so it isn't exactly clear what it is that's scaring households. But they are looking scared. As you can see in the chart below, Gallup's Economic Confidence Index took a dip just when a shutdown seemed possible. It will presumably dip even more next week now that the shutdown is a reality.

Frightened households, of course, are households that don't spend. At least not as much. So just like the debt ceiling crisis two years ago, the shutdown (and perhaps another debt ceiling crisis!) could dent consumer confidence enough to dent growth for months.

But what is this economic damage even for? (And, as my colleague Jordan Weissmann reminds us, moral damage too). House Republicans wish they hadn't lost the 2008 election, and Obamacare didn't exist. Or at least that the Supreme Court hadn't upheld Obamacare's constitutionality. And they wish that, failing that too, they hadn't lost the 2012 election, and could have repealed Obamacare. There is no election to be won or lost year, so the best they can do this month is threaten to blow up the world economy if they don't get their way. The shutdown isn't anywhere near as big a threat as the debt ceiling, but doesn't mean there isn't real harm from it. There is.

How about we end this pointless harm?

This article available online at:

http://www.theatlantic.com/business/archive/2013/10/the-economic-consequences-of-the-government-shutdown/280206/