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How Much Would A Government Shutdown Cost In Lost Economic Growth?

By Alan Pyke  

"How Much Would A Government Shutdown Cost In Lost Economic Growth?"

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gop-leadership-3x2With congressional conservatives poised to force a government shutdown at the end of the month over the three-year-old Affordable Care Act, economists are trying to tally up what shuttering the government would cost the country. Estimates vary widely, and the totals would depend on how long a shutdown would last, but any shutdown would undermine already slack economic growth.

Some firm numbers come from the last shutdown in the late 1990s, which cost the country 0.5 percentage points of gross domestic product (GDP) growth and more than $2 billion in unnecessary expenses. Those shutdowns lasted less than a month combined, and Congressional Budget Office (CBO) Director Doug Elmendorf said last week that while any shutdown would be costly, the damage would “scale up” the longer the government remains shut. Moody’s Analytics founder Mark Zandi testified last Wednesday that the timing of this budget fight means it would be more damaging than the Clinton-era shutdown. A three- to four-week shutdown “would do significant economic damage, reducing real GDP by 1.4 percentage points,” Zandi told the Joint Economic Committee last week, and a two-month shutdown “would likely precipitate another recession.” With growth already far below the level needed for the economy to return to pre-recession employment levels, that’s a hit the country can ill afford.

Most of the costs of a shutdown are hard to tabulate because they involve damage to consumer, investor, and business confidence coming out of a shutdown, and lost time spent preparing for the worst in the weeks before a shutdown. The White House has already instructed agencies to begin preparing for the possibility that House leaders will force a shutdown rather than accept that they will not be able to defund Obamacare. As Ezra Klein put it, “that means a lot of hours spent on nothing useful,” like preparing website notifications and new security measures and various other forms of logistical busywork necessary to be ready to shut down public services and facilities.

The brinkmanship doesn’t just waste government employees’ time, either, since companies that do business with the government don’t know whether or not they’ll be able or expected to fill contracts that come due in October. Just coming close to a shutdown harms business confidence, which in turn places a drag on economic growth that is tough to calculate with precision. Analysts blamed Monday’s slumping stock prices in part on the perception that the current fiscal fight could produce a shutdown.

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