Future Implications of the $24 Billion Government Shutdown

Now that the government shutdown and debt default threat are in the rearview mirror (for now), analysts have been taking time to survey the economic damage, in particular the more quantifiable effects of the shutdown on the economy and the budget deficit. The results, of course, are not good and highlight the need to avoid confrontations like this in the future and not wait until the eleventh hour to find a solution. Since we will be back in a similar position again at the beginning of next year, we will see soon if policymakers have learned their lesson.

Perhaps the most widely cited number on the economic cost of the shutdown is from Standard & Poor’s (S&P), who estimate that the shutdown reduced GDP growth by $24 billion, or 0.6 percent in the fourth quarter of 2013. Macroeconomic Advisers estimates an effect of about half that size. The economic hit comes from the lost demand as employees did not receive pay checks and certain government purchases and services were not completed. IHS Global Insight also estimated that lost wages alone knocked $3.1 billion off GDP, and they lowered their 4th quarter growth forecast by 0.6 percentage points. Granted, some of this may simply be consumption deferred until the first quarter of next year, but some of it is permanent output loss, particularly the effect on federal contractors who did not receive back pay.

And the hit did not stop when President Obama signed the law funding the government. In an interview in the Washington Post, Office of Management and Budget director Sylvia Mathews Burwell, who by now is as familiar as anyone with the technical messes of recent budget policy, noted that in addition to the backlog of work that awaited affected workers when they got back, there could definitely be an effect on employee morale and future recruitment. If there is significant uncertainty about how the federal government will operate — and consequently whether employees will have uneven paycheck schedules — fewer people will be willing to work for it.

Lawmakers shouldn’t be patting themselves just for narrowly avoiding default and getting out of the shutdown. The economic pain was unnecessary, and the shutdown will hurt the confidence of people in the government going forward, whether they are employed by it or not. Lawmakers should work well ahead of the deadlines next time to avoid these stand-offs.

This article was originally published by The Committee for a Responsible Federal Budget on October 21.