As negotiations stall and the federal government veers toward a shutdown, both politicians and the public have begun to fret over the possible economic effects of a government suspension, with some even opining that it could derail the recovery.
The Business Roundtable released a sober statement cautioning that “a shutdown would have negative and unforeseen consequences, including heightening uncertainty and disrupting basic business services to government agencies.”
But in some ways, a shutdown is more comparable to a snowstorm than an economic shock: It’s disruptive, but it’s temporary and it affects only a small part of the total economy.
The main factor is the duration of the impasse: If the government shuts downs for just a few days—the most likely scenario if the current negotiations fail—the economy would not take a hit. But if federal wages and purchases are stalled for a significant period of time, consumption and investment could be hurt.
“In general, we don’t think that a very short shutdown would have much of an effect,” said Alec Phillips, Washington policy analyst for Goldman Sachs. “If it gets longer, into the more-than-a-week duration, obviously then it potentially has a greater effect.”
Senate Majority Leader Harry Reid, D-Nev., and Majority Whip Dick Durbin, D-Ill., said on Thursday that a weeklong shutdown could shave 0.2 percent off the growth of gross domestic product, citing a Goldman Sachs estimate.
But Phillips dismissed that interpretation, stressing that the research Goldman did in the days leading up to the last continuing resolution’s passage—near the end of the 1st quarter—had more to do with the effects of pushing economic activity from one quarter into another.
“We never said that,” Phillips said in response to Durbin’s comment. “There was one kind of back-of-the-envelope estimate of a couple months ago that a week of shutdown would [cost] as much as eight-tenths of a percent, so maybe that’s where it came from, but I would not use that estimate.”
The estimate, he explained, “was relative to the 1st quarter; the issue was if you push stuff from March into April, you can [affect GDP numbers] for the quarter.”
By contrast, a potential shutdown now, at the beginning of the 2nd quarter, would long be settled before this quarter ends in June.
Even if a shutdown were to last several weeks, Phillips said, it would likely have little long-term effect, as long as retroactive wages and payments were sorted out once the government resumed business. That’s what happened after the last shutdown in 1996, and it’s likely to be the case if the government shuts down this year.
“Theoretically, even if things got delayed for a couple of weeks—let’s say every nonessential order of federal equipment gets delayed—as long as it gets made up in a week or two, it would be hard to discern an impact from that when they’re putting together the numbers on GDP growth.”
IHS Global Insight also found that a shutdown could cost about 0.2 percent of GDP growth per week, but senior economist Greg Daco was careful to hedge that estimate as well.
“These calculations are a bit of an accounting trick,” he said, “because nominal GDP—the value of wages and compensation—would not change, due to the fact that federal employees would be paid retroactively.”
To be sure, it’s not a given that furloughed employees—some 800,000 of them, the White House estimated this week—would receive back pay. When the government resumed operations in 1996, employees were paid retroactively.
But if Congress doesn’t include the retroactive wages in a post-shutdown spending bill, government workers could lose some of their pay.
That’s a remote possibility at this point, given the efforts of both sides to try to shirk responsibility for the shutdown: No one wants to be seen as the reason military families go without.
This article appears in the April 8, 2011 edition of NJ Daily.