Besides this newspaper account of negative multipliers in action, you’re probably hungering for more information on the economic impact of the shutdown.
–In terms of direct costs, which are lower than total costs (as you’ll see below), that of course depends on how long it lasts, but we’re likely talking single-digit billions. The three-week shutdown in 1995-96 is thought to have cost around $2 billion in today’s dollars, and while no one knows how long the current episode of dysfunction lasts, I’d guess it’s less than three weeks.
–Part of the cost comes from retroactive pay for furloughed workers (i.e., paying for work that wasn’t done, and then had to be completed once folks were back on the job). There are about 800,000 of such workers in this round, and here’s an important wrinkle: they cannot know for sure whether Congress will decide to pay them until the shutdown is over, i.e., until there’s a continuing resolution funding the agencies.
That means affected households are likely to rein in their spending, and while that number represents only 0.5% of the workforce, their reduced economic activity could be felt in communities where they are over-represented, like DC, or in small towns that host a popular national park (all such parks are closed).
BTW, non-furloughed government workers are also working for no pay while their agencies remain unfunded but they must be compensated once the shutdown ends.
–On that point about the parks, tourism takes a hit, as folks cancel trips to national parks or DC.
–Another less well-known impact comes through the lack of data. For example, it looks like they’ll be no jobs report this Friday, despite the fact that the Bureau of Labor Statistics has already collected the data on jobs, unemployment, and earnings for last month. That’s not an obvious first-order cost to the near-term economy, but it means market analysts and, importantly, the Federal Reserve, lacks an important input into their work.
–But the most important economic impact of the shutdown is one that could go either way: does the shutdown make default on the national debt more likely or less likely? Because the economic impact of a default would be way, way, way worse than the shutdown.
If you think that the extremist wing of the Republican party will have been sated by shutting down the government, or, more realistically, if you believe that the moderate R’s will decide that it’s time to turn off the Cruz control and regain control of the vehicle, then you believe that the shutdown lowers the odds of default.
But if you think this just heightens their blood lust, and the moderates have lost, or ceded, control, then you believe the shutdown heightens the odds of default.
I’m in the former camp—I don’t think we’ll default. But I’m not sure, and you simply can’t over-estimate the recklessness of the House R’s and the dyfunctionality of the current governing process.
Just for fun, and admittedly using made up numbers, let’s say there’s a 15% chance of default, and that this would raise the risk premium on government bonds of the average maturity by 75 basis points (0.75%). The debt held by the public is now $12 trillion (that number is not made up). That means my expected increase in debt service as a result of this dysfunction is $14 billion. If you think there’s a 40% chance of default, you’re at $36 billion.
That’s real money.
–Finally, some private forecasters think a one-week shutdown would shave a few tenths of a percent of off real GDP growth in the current quarter. Mark Zandi predicts that a long shutdown—3 to 4 weeks—could reduce growth by 1.4 percentage points in the quarter. That sounds a little high to me, but who knows?
What we definitely do know beyond the shadow of a doubt is that any of these costs are way too high for a recovery that’s already fragile and a job market that’s already too weak.
I also haven’t even gotten into the human discomfort of cancelled Head Start slots, diminished senior and veteran services, and much more that would also start to become prevalent if this goes on for too long. And that’s on top of the sequester. This morning someone told me about a Head Start center that, because of sequester cuts, had to open late in the school year, i.e., yesterday. Then, because of the intersection of that center’s funding cycle and the shutdown, it had to close today.
Our government at work, folks. We very much need to get this shutdown and the debt ceiling behind us ASAP and do everything we can to get back to solving problems as opposed to creating them.