What did the most recent federal shutdown cost the economy? The shutdown lasted 16 days, or 4.4% of the calendar year. The federal government represents about 19% of the economy, but only 40% of the federal government was actually shutdown. The remaining 60% was either specifically exempted from the shutdown, or was already categorized as a mandatory expenditure and therefore also was not impacted. If you use a consensus rate of 2.50% for the annualized growth rate of the economy, the cost is calculated as 2.50% times 19% times 40% times 4.4%, or about a basis point. Absent any multiplier effects, the back-of-the envelope guesstimate is that annualized GDP growth will be 2.49% rather than 2.50% as a result of the shutdown. The federal shutdown was probably not a big deal as an economic event.
The calculation of the damage, however, does not do justice to the adverse impact on the general psyche of all of us participating in the economy--the consumers, the businesses, the financial institutions, the non-profits, and anyone and anything else. The self-destructive, ill-conceived, political gambit that promoted the shutdown as a solution to a simple difference in political opinion will continue to perniciously sap the strength of the economy in ways that appear small at first, but will accumulate over time as this pointless psychodrama gets repeated again and again and again. Who can tally the investment dollars that have been postponed, or entirely eliminated, as a result? How much consumer spending was delayed, or permanently foregone, as a result? How does the continuation of this tired ritual contribute to an accumulation of entrepreneurial ennui that drains the vitality out of the economy?
The sad and pathetic fact is that we all get to go through it all again in a couple of months. If this Congressional War on the American economy is an expression of democracy, it is a democracy that has the US economy in its cross hairs. Wouldn't a better solution be to take these fiscal disagreements to US citizens directly through the political process? We have a mid-term election coming up in a year, isn't that the appropriate arena for arbitrating disputes over fiscal policy?
The major reason the US can escape serious damage from federal shutdowns, debt ceiling follies, and rating agency threats, is that in the current global environment, the US is the best game in town. Our economy is the biggest, our treasury securities the most secure, our financial markets the deepest, and our currency the reserve currency of the world. As these advantages inevitably erode with the emergence of other economic powers and a greater array of economic opportunity spread across the globe; the impact from future Congressional fiscal policy spats will begin to accumulate very quickly. While there is plenty of room for disagreement on what constitutes the best fiscal policy, there ought to be agreement that gambling with the credibility of US commitment to pay all our obligations in full and on time should kept out of bounds during political battles. This time, the shutdown was not a big deal. Repeating this exercise in fiscal nihilism every two months, however, will rapidly become a costly indulgence our economy and our financial system can ill afford.