There’s No Reason to Fear a Shutdown
The U.S. economy will barely notice if the federal government needs to shut down because funding authorization runs out at 12:01 a.m. on Saturday, December 21.
The five-week shutdown that began in late 2018 and stretched into January of 2019 is thought to be the costliest government shutdown in U.S. history. It lasted 35 days from December 22, 2018, through January 25, 2019, as Democrats fought against Donald Trump’s attempts to secure $5.7 billion of funding for a border wall.
Approximately 800,000 federal workers were furloughed or required to work without pay. Around $18 billion in federal discretionary spending for compensation and purchases of services and goods was delayed.
The Congressional Budget Office (CBO) estimated that this shutdown cost the economy around $11 billion in lost output, comprised of $3 billion in the fourth quarter of 2018 and $8 billion in the first quarter of 2019. But most of that lost output was recovered because the economy grew faster after the shutdown, much as a recession is usually followed by a faster-than-normal expansion. The CBO estimated that only $3 billion of gross domestic product was permanently lost.
While $3 billion sounds like a lot of money, it needs to be considered in the context of the total economic output of the United States. In 2019, GDP was $21.4 trillion. Three billion dollars in lost output means the economy was 0.014 percent smaller than it would have been, not even amounting to a rounding error away from zero. Which means that we lost not even the equivalent of one day’s economic output during the five weeks of the shutdown. We lost a little less than one hour and fifteen minutes of economic output.
Even that may be an overestimate of the cost of a shutdown. If a shutdown results in slower growth of government spending and more efficient use of government resources, it could lead to higher output. Businesses and individuals may find alternative ways to meet their needs during a shutdown, potentially fostering innovation and new efficiencies. Since the cost is so small, it would not take very large efficiency gains to tilt the balance into positive territory.
A Shutdown Until the Next Congress Would Be Short and Costless
It’s very likely that any government shutdown stemming from the collapse of support for a continuing funding legislation will be short-lived. The incoming Congress could adopt a different approach in early January. The new Congress will begin on January 3, 2025, with a Republican majority in both the House and the Senate. A shutdown that lasted until then would likely have no measurable effect on the economy at all.
What if the shutdown continued until Trump is sworn in on January 20? In that case, the size of the blow to the economy might be similar to what we saw in the last shutdown. Actually, the cost could be a bit steeper this time around simply because the government now makes up a larger portion of gross domestic product. Back in 2019, government spending was about 21 percent of GDP. This year, it will be around 23.4 percent.
The decline in demand due to government paychecks not going out, even if temporary, could have the beneficial effect of slowing down inflation, which has been stubborn and is expected by the Federal Reserve to rise a bit next year. Although this would only be temporary—demand would return when the shutdown ends and the government sends its people big checks for back pay—it might give the economy a breather, allowing supply to expand to make up for the anticipated resurgence. Trump’s pro-growth policies would have more time to work their way to expanded output.
A political cynic might even take note of the fact that the economic drag would occur almost exclusively during the lame-duck period of Joe Biden’s presidency; and the resurgence, faster-than-normal growth would occur during the early months of Trump’s presidency. It would be the whimpering end of Bidenomics.
The 2018-19 shutdown was certainly not bad for investors. The S&P gained 10.3 percent during the last shutdown. During the 16-day shutdown in 2013, the S&P 500 experienced a gain of about 3.1 percent. If anything, the market seems to like shutdowns.
The effects on the economy, in any case, are likely to be so slight as to not matter. Certainly, lawmakers considering whether to vote for legislation or shut down the government should not worry about how this will impact jobs, wages, or growth. We will be just fine economically even if the government shuts down until Trump is sworn in to his second term.