How Badly Will the Shutdown Hurt the U.S. Economy?

It'll hurt. But the debt ceiling could be the real disaster

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Chip Somodevilla / Getty Images

Correction appended: Oct. 1, 2013

Without a deal between Congress and President to fund the federal government, dozens of federal agencies have shuttered their doors and hundreds of thousands of federal workers have been sent home or are being asked to work without pay.

But what are the overall economic effects of a government shutdown? After all, government spending makes up roughly one-fifth of GDP, so a shutdown of the federal government would presumably deal a big blow to the economy as a whole. Many economists are studying previous shutdowns to predict how the current standoff will influence the economy going forward.

“Government shutdowns have been surprisingly common since 1976,” writes Guy LeBas, chief fixed-income strategist for Janney Capital Markets, in a note to clients. He points out that the current shutdown is actually the 18th such occurrence since 1976. The vast majority of standoffs, however, have lasted just a few days. Given the apparent distance between Democrats’ and Republicans’ positions, analysts have been using the most recent 1995–96 shutdown (which lasted a total of 26 days) as a yardstick against which to analyze the current situation.

(MORE: Obamacare Exchanges Riddled With Glitches)

LeBas estimates that if the 2013 shutdown lasts a similarly long time, it could shave 0.8% from economic growth in the current quarter. The effects would become more severe the longer the shutdown lasts. This reduction in economic growth would come primarily from roughly 800,000 federal workers being put on furlough and left without paychecks to spend. But as analysts at Macroeconomic Advisers point out, the long-term effect on the economy will have as much to do with how the budget impasse is resolved as how long it lasts. They predict that a two-week government shutdown will shave 0.3% from economic growth, but that the effect will be reversed in the following quarter if the government ends up instituting back pay for workers who were furloughed, as it did in last time.

In other words, the overall impact of a government shutdown on the economy will be muted, as long as Democrats and Republicans are able to come to an agreement relatively quickly. But that doesn’t mean that the economy will walk away from this showdown unscathed. “The real economic cost, which is extremely hard to measure, comes from heightened uncertainty,” writes LeBas. “Greater uncertainty will create hesitancy on the part of businesses to embark on new projects, and encourage consumers … to save rather than spend.”

Economists believe that the greater threat to the U.S. going forward would be Congress’ failure to raise the debt ceiling, an impasse the Treasury Department predicts the government will reach sometime in the middle of October. Congress has both the ability to decide upon the total amount of federal spending as well as the total amount of debt the government can incur. Every so often, however, a current Congress disagrees with the amount of spending approved by previous Congresses, setting the stage for U.S. to owe more money than a current Congress is willing to issue debt for.

(MORE: Foroohar: The Government Is Down, but Why Aren’t Stocks?)

If Congress does not approve the issuance of new Treasury debt, that would put into question whether Congress is able to issue Social Security payments in full, make full-interest payments on its outstanding debt, or honor any number of other financial commitments the federal government is responsible for. LeBas writes that “if the debt ceiling is not raised by that point the consequences are admittedly hard to envision.”

Much of the global financial system relies on Treasury Debt and the U.S. dollar as the currency with which it does business, and any event that could put the trustworthiness of that debt into question could have broadly destabilizing effects. And unlike government shutdowns, there is no recent history from which to draw conclusions. The U.S. has never defaulted on its debt before, and therefore it’s difficult for economists and market watchers to predict what would happen if it does later this month.

Because of an editing error, an earlier version of this article misattributed a statement about the shutdown’s effects on the economy. It was analysts at Macroeconomic Advisers who made the assessment, not Mark Zandi, who is chief economist at Moody’s Analytics.

27 comments
GaryAndrews
GaryAndrews

Day 1 ... I find our that our SBA Export Line of Credit renewal is on hold as the SBA is closed. Without the credit facility we will have to decline to accept a new $3M radar order. As a result, we decide to delay singing the new on the additional 5,000 sf office space we need and cancel all October conferences and trade shows in the US, Canada, and Belgium. Day 2 ... We find out that our government contract payments in process will be delayed by a week for so due to staffing shortages. I can't wait to see what Day 3 brings!

j45ashton
j45ashton

Does anybody mind if I comment on Sean Hannity.  He's on tonight repeatedly referring to the "Obama-Reid" shutdown.  Either this guy is an idiot or he thinks all of us are idiots or both.  The House in in the middle of usual budgetary voting & out of nowhere the GOP says we're defunding Obamacare...using the budget as a way of eliminating legislative content.  That's unprecedented.  How stupid does Fox News think we are...to buy that this is a Democratic shutdown?  O'Reilly is a study.  That guy is a merchandising machine who strikes reasonable positions about 30% of the time.  He knows how to play the game.  Rush Limbaugh is toxic.  So Murdoch doesn't have him on Fox.  Glen Beck was toxic.  He had to go.  Hannity falls short of toxic so he's still on, but what a bullet-head.  The guy basically looks like a third-string guard on a college football team.  Ever see him make goo-goo eyes when he was interviewing Geo W Bush?  This guy is so one-dimensional he can repeat the Republican talking points over & over and each time he does, they all must seem brand new to him.  The perfect puppet for the radical right.  Let's see if he keeps on referring to the Obama-Reid shutdown over & over just like Frank Luntz & Karl Rove tells them to do.  Any normal mentality would get bored with the repetition.  Also might get tired of being a hollow front man telling bald-faced lies.

vstillwell
vstillwell

More bad news brought to us by our southern and midwestern countrymen. I know they are proud of being uneducated and like living hand to mouth, but the rest of us, not so much. 

HazeAndDrizzle
HazeAndDrizzle

The Tea Party Totalitarians have now shut down the North's government. Next they plan to destroy the North's economic system with the debt limit. The Tea Party Traitors will not rest until the Confederacy and its economic policies have been fully restored.

jhoughton1
jhoughton1

This shutdown is good news.  The Republicans are going to lose this first battle and irritate the public so badly for wasting time and money that they'll be out of political gunpowder for the debt-limit issue.

j45ashton
j45ashton

Basically what the GOP is doing in sending over these mini-CRs is seeing how this is playing with the public.  It comes down to a simple question.  They're testing...is this fooling the public?  This is like an extension of Frank Luntz style politics.  Like call the estate tax the death tax or call global warming climate change.  Just a sucker's game but there are plenty of suckers.  So in this case, the GOP will say...hey, we're good guys.  We want to fund this, we want to fund that.  In essence, given their way, they'd wind up funding everything except...Obamacare.  And what the president is saying to them is F-U.  Which is exactly the right response.  So the GOP is waiting to see...is the public suckered in or not.  Actually, the question is...are the independents suckered in.  The simple facts are there are enough moderate Republican in the House such that if Boehner allowed a vote on a clean CR, it would pass with Democrat & moderate Republican support.  Boehner = weenie.  Want to blame someone for not heeding the will of the people...blame John Boehner for collapsing & giving in to Fox News & Ted Cruz.

mickrussom
mickrussom

@GaryAndrewsGood. You never asked to burn MY MONEY on radars and conferences.  I cant wait till you have to get a real job working for real money from real customers like most of us.

mary.waterton
mary.waterton

@j45ashton

This is the Obama-Reid Shutdown.

No federal employees have been furloughed at the Obamacare Exchanges. It seems that Obama and Reid can find and abundance of taxpayer money when they want to.

Openminded1
Openminded1

@j45ashton What you do not realize dummy, you are him on a different side of the isle. saying the same crap over and over, and sucking up to the party right down the line and if Obama was in front of you , You would drop to your knees. Typical liberal moron.

DavidStrayer
DavidStrayer

@j45ashton 

These people are essentially Republican PR people.  They are little more than shills for the most nihilistic and destructive elements in the Republican party.

ABulletForCinde
ABulletForCinde

@j45ashton Reagan actually started these team-ups with "Carter-Mondale" to mock Carter. Later, the Dems weighed in with "Bush-Cheney," to describe Bush's Iraq war program.

Openminded1
Openminded1

@vstillwell So people from the south and mid west are dummys? Your love of the liberal party went to school and lived in the Midwest ass wipe. You ever here of Chicago. dumb ass.

Openminded1
Openminded1

@HazeAndDrizzle You and swagger need to get a room and play pocket pool together, this love affair of stupidity  is unreal and unhealthy.

vstillwell
vstillwell

@jhoughton1 You're forgetting about the stupidity of the Republican base and the regionalism that's taken hold in this union. The plantation mentality is in full affect. 

HazeAndDrizzle
HazeAndDrizzle

@jhoughton1  Do not under estimate them. The Right has infinite capacity to play at victimization. They want to destroy this country as a functioning nation. That way their ideology of governing cynicism and learned helplessness, geographic and economic, prevails amongst the ruins. They overtly hope for this and its consequences as beneficial to their twisted point of view. So they disparately want this. The shut down is only the first step of the plan.

HazeAndDrizzle
HazeAndDrizzle

@j45ashton   It is noise while they stall for time to do in the financial system. They are going for the big one this time.Bring it all down and take over.

j45ashton
j45ashton

@mary.waterton @j45ashton Sure.  Obama & Reid started this different path to the budget.  And your idea is if Dems don't give in, then it's all on them.  None so blind as those who will not see.  Keep watching Fox Mary.  They'll tell you want you want to hear.

j45ashton
j45ashton

@Openminded1 @j45ashton Look, I know you idolize Sean Hannity & admire him as a genius.  That's ok.  In your case I can understand that.  But you need to stop leading by calling people dummy, moron etc.  People will think you're a nitwit who has nothing more to offer.  They may even start thinking you're a dummy or a moron.  And once that happens, they won't take you seriously anymore, and you don't want that to happen, do you?  

Openminded1
Openminded1

@DavidStrayer @j45ashton and you think the other more to left guys on tv and in the media are not shills for the liberal party  and main stream media. It goes both ways Mr, kotter.

Openminded1
Openminded1

@HazeAndDrizzle @jhoughton1 You talk about nut cases, you most assuredly needs mental help and take swagger with you since he likes what every liberal  has to say and never voices is own opinion.

jhoughton1
jhoughton1

@HazeAndDrizzle It's crazier than that.The "Right" that wants to destroy the place is a very small minority of one-percenters.Deflation is their friend, it makes everything cheap so they can buy it up and put us back where England was in 1500: a few people owning everything and the rest slaves and serfs.What's crazy is that they've convinced -- using cultural issues alone -- the people most likely to end up at the bottom on that merde pile, that they should vote Republican!That, sir, is one hell of a trick!

Openminded1
Openminded1

@HazeAndDrizzle @j45ashton take over what dummy, now you are sounding like a muslim, they are the ones that want to take over the world. The Gop is just like any other american bs rhetoric  political type all with big mouths and do not do much of anything but line there pockets and do just enough to get reelected .

Openminded1
Openminded1

@j45ashton @Openminded1 Do you think I am 12 moron, I do not give a rats ass about what people think of me on here, I do not see checks with any of you dummys names on it. And as for sean i have not watched him for more the 5 minutes in my life i do not care about his ass either. As for people thinking what ever I do not care I think you libs are nut and cry babies, what i think does stop you from eating and going to the bathroom does it.? So in closing Dummy I say what i want to say and will always say it like it is. Your boy in the white house is a mulsim and a racist. You do not want to believe that that is fine time and history will tell.