On Friday 800,000 US federal employees missed their pay for the first time. At 22 days this is now the longest US government shutdown yet. The politics are unclear. Both sides blame each other, and we will have to see how the public sides in the next few days. That will determine the president’s next move – declare an emergency, perhaps? But I’m not sure it is helpful to speculate.
Meanwhile there are some things that can be said about the economic impact of the shutdown, for strains are starting to show. There is obviously the plight of the federal workers, some of whom are obliged to continue in their posts without pay. These include TSA staff at airports, jobs classified as essential. Others are simply laid off, the most visible perhaps being the staff in some of the national parks and museums. For example, in Washington DC the Smithsonian museums and the National Zoo are now closed, though I was relieved to learn that the inhabitants of the latter are still getting fed.
Standard & Poor’s, the ratings agency, has done some useful analysis of the impact, the basic message being that the longer this thing lasts, the worse it is. In the short term the hit is small. S&P calculates that the cost is about $1.2bn a week. The US economy’s GDP is some $19,000bn, so while there is inconvenience and hardship for some people, the overall hit is small in relation to the total. But the costs are cumulative so ironically in another couple of weeks the costs will be greater than the $5.7bn that the administration is seeking for the wall on the Mexican border.
But these costs will mount further for a number of reasons. One will be a knock-on effect on businesses that rely on public services: for example hotels near national parks. Another is that revenue collecting will start to be hampered. S&P points out that while Americans still have to file their income tax returns by 15 April, the Internal Revenue Service will not be collecting back taxes, as the people doing that have been laid off.
A further impact will be felt at the Securities and Exchange Commission. Companies wanting to float on the public markets may have to delay until the SEC is functioning fully again.
A key point is that economic activity that does not happen is lost forever. S&P looked back at some earlier shutdowns. The Bureau of Economic Analysis looked at the effect of the 16-day shutdown in October 2013 and concluded that the direct effect was the loss of 0.3 per cent of GDP in the fourth quarter of the year.
To sum up, S&P reported: “Based on estimates adjusted for inflation, the three earlier government shutdowns (in 1995, 1996, and 2013) cost the federal government a chunk of cash well into the billions. This doesn’t begin to account for lost federal-worker productivity and lost trust in the federal government, not to mention lost economic activity (and lost taxes) on money never spent by businesses and households while the government was closed.”
You would think, given that this real loss to the economy is vastly greater than the cost of this particular project, that whatever your views on the wisdom of building the wall, it makes no financial sense to shut down the government.
But of course this is not really about money, is it?