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The Economic Impact of a Near-Shutdown The Economic Impact of a Near-Shutdown

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Economy / ECONOMY

The Economic Impact of a Near-Shutdown

Some experts say budget brinkmanship will stir less fear as it grows more routine and yields long-term improvements.

Traders work on the floor of the New York Stock Exchange during morning trading on September 23, 2011 in New York City. U.S. markets faced another volatile day amidst fears about economic growth in Europe.(Daniel Berehulak/Getty Images)

photo of Catherine Hollander
September 28, 2011

Senate Democrats and Republicans have narrowly averted a government shutdown for the third time this year. But the stop-gap funding measure only lasts through Nov. 18, at which point Congress will probably again inch toward the same precipice as it negotiates the 2012 budget.

The bad news for the economy is obvious. Shutdown brinkmanship will divert employees’ time, make planning difficult for businesses that contract with the government, and call into question lawmakers' ability to create credible policy.

The good news is that not everyone thinks it will have all that much economic impact, because we've been there before and the next rounds are likely to be no worse.

 

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Washington Post columnist Ezra Klein pointed out this week after the Senate's agreement on Monday that the shutdown brinkmanship itself damages the economy. Klein asserted that, in fact, the immediate effects are probably somewhat worse than you think.

One cost is straightforward: Preparing for a potential shutdown takes employees’ time away from performing other, more vital functions. But there are also knock-on costs tied to the rise in uncertainty and loss of confidence that accompany such talks.

About one-quarter of workers in the United States are federal employees or work for a company that contracts with the government, said Heather Boushey, senior economist at the liberal Center for American Progress. Contractors who don’t know if their services will be needed may postpone any new hiring, even if their current employees are stretched thin.

“One would have to infer that this is certainly affecting their business plans and how they’re thinking about what sorts of investments they’re going to make,” she said.

It’s not just employers whose plans are changed by discussion of a shutdown. If you’re an investor and you think the U.S. won’t update its power grid, improve its schools, or guarantee health care for its sick, you’re probably less inclined to invest there, Boushey said.

“I’m not saying that this is devastating to the economy,” she added. “But in no way, shape, or form is this actually spurring economic recovery.”

Shutdown talks also call into question the government’s ability to create credible future policy, according to Alec Phillips, Washington policy analyst for Goldman Sachs.

“The concern is not so much about whether the government will be open for one or two days--or closed for one or two days--as a result of a shutdown,” Phillips said. Lawmakers’ ability to agree on the basic functioning of government signals whether they’ll be able to agree on more significant reforms, such as the savings the joint committee on deficit reduction has been charged with finding by November.

But one silver lining is that not every economist thinks the recent standoffs had much of a negative effect on the economy. Ian Shepherdson, chief U.S. economist at High Frequency Economics, in an e-mail called the impact “negligible,” saying it failed to grip the nation like the summer’s debt-ceiling debate.

That’s because we’ve already experienced this, Goldman’s Phillips said. The government has shut down 17 times in U.S. history. So while brinkmanship “clearly doesn’t help” confidence, it lacks the clear negative impact of the debt-limit negotiations.

Future budget negotiations may have an even more slight impact.

The first time the government came close to a shutdown was probably the scariest, said Alex Brill, a research fellow at the American Enterprise Institute and a former senior adviser and chief economist to the House Ways and Means Committee. The more often Congress reaches the brink and comes to an agreement before shutting down, the less damaging the process becomes, he said. People may have less confidence in the political process, but, over time, shutdown talks will have a more limited impact on their confidence in the economy itself.

So long as the process marches toward a better budget, the cost of the brinkmanship is worth it, Brill contends. He draws the analogy of a two companies merging. The acquiring company incurs a significant one-time charge. But that charge is ultimately made up for in the improved business.

Although this week’s shutdown confrontation received little media attention compared to the previous two, it is a harbinger of the confrontations that will take place in November when the entire 2012 budget is up for negotiation.

But there is some, if not much, comfort in the fact that while the upcoming negotiations may be charged, their economic impact will likely be no worse than the three to-the-brink-of-shutdown talks this year.

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