From Working Economics, the EPI Blog How Big a (Macroeconomic) Deal is the Government Shutdown?
By Mel Fabrikant Tuesday, October 01, 2013, 06:02 PM EDT
by Josh Bivens
I have been getting versions of this question a lot. It is very hard to answer with any precision, so, below are some very imprecise thoughts.
First, the shutdown would have to go on for quite a long-time (say at least a month) to affect the trajectory of aggregate macroeconomic statistics like gross domestic product (GDP) or employment growth. For one, the majority of what the federal government spends money on (including the health insurance coverage expansions contained in the ACA!) will not be affected by the shutdown. Transfers payments like Social Security, Medicare, Medicaid, Food Stamps, etc…will continue to flow, as will essential discretionary spending.
Given the relatively restricted scope of the shutdown in terms of government spending, it stands to reason that it would have to go on for a a month or so before there would be enough of a mechanical fiscal drag to start significantly affecting the path of macroeconomic aggregates. A very, very rough back-of-the-envelope estimate would be that the strictly mechanical impact of a month of the shutdown would subtract 0.1-0.2 percentage points off of GDP growth for (fiscal) 2014.* So, if the government shutdown lasts a month and the economy was set to grow 3 percent in 2014 without the shutdown, the mechanical drag from the shutdown would result in actual growth of 2.8-2.9 percent. Of course, if one focused on the effect of the shutdown only in the fourth quarter of (calendar) 2013, it will matter quite a bit more (multiply that 0.1-0.2 by 4, so, a one-month shutdown would reduce fourth quarter GDP growth by about 0.4-0.8 percent, which is not peanuts for a quarterly growth number).
But, this talk about measuring the effect on growth quarter-by-quarter leads to a key unknown in just how damaging it will eventually be to the overall trajectory of the recovery: whether or not federal employees receive back-pay and what the funding levels are going forward from the resolution. If employees receive back-pay (which seems like the only morally acceptable thing to do—for whatever that is worth in this debate) and if funding levels for the year are unaffected by the shutdown, the macroeconomic effects will be much smaller than if employees do not receive pay and/or annual funding levels are reduced.
Before I move on, let me make one thing clear—this assessment does absolutely not mean that the shutdown is no big deal. It’s a very big deal—it will harm people who need help from public employees and won’t get it. It will make government less efficient even before and after the shutdown, as now resources will flow to managing this and future potential shutdowns rather than focusing on the core business of government. Further, in the D.C. metropolitan economy, it needn’t be that long a shutdown at all to make a real difference and cause suffering—not just among federal employees but among the shopkeepers and restaurant owners that cater to them. In short, not everything in the world needs to show up clearly in GDP statistics to matter a lot and cause real distress.
The Economic Policy Institute (EPI) is an independent, nonprofit think tank that researches the impact of economic trends and policies on working people in the United States.
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