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Federal shutdown not an economic calamity but an avoidable nuisance

Federal shutdown not an economic calamity but an avoidable nuisance
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As the rollercoaster negotiations over funding the federal government get closer to the wire, a shutdown does seem possible. Undoubtedly, another shutdown would be a stunning display of continued political polarization and dysfunction. In other words, not good. But would a shutdown have major economic impacts as well?

The one thing we can say for sure is that a shutdown would have a dramatic effect on federal government workers and contractors, as well as the District of Columbia and surrounding areas in Maryland and Virginia.

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In the previous shutdown, about 40 percent of federal workers were sent home. These workers would not receive their pay, leading them to most likely decrease spending on everyday items such as restaurant meals. For some, there could be trouble meeting mortgage payments or other obligations, and there could be cutbacks on any spending that can be postponed.

 

The ripple effect of declining spending would combine with decreased tourism revenues as federal parks and museums would be shut. Washington, D.C. would suffer the brunt of this blow, but other areas reliant on income from large national parks, for example, would also be hit.

Previous estimates by the Office of Management and Budget in 2013 suggested that a shutdown could reduce GDP by between 0.2 and 0.6 percent. Last December, the credit rating agency Standard & Poor’s estimated the cost of a shutdown at $6.5 billion per week for the whole economy.

However, once a shutdown ends, federal workers get back pay. Contractors may be able to catch up as well. The economy generally bounces back. The Council of Economic Advisors estimated that 120,000 private sector jobs were lost due to the 2013 shutdown, a pretty small figure in the context of the over 62 million Americans in the labor force.

Still, however small, a self-inflicted wound is still an unnecessary hardship. And the consequences for a federal workforce whose morale has been dented by this administration’s hostility are not to be ignored.

Economists point out two more subtle dangers of a shutdown. First, political dysfunction can lead investors to lose confidence in the willingness and ability of the United States to honor its obligations.

The 2011 budget conflict led S&P, one of the three main credit rating agencies, to downgrade the federal government’s credit rating. This unprecedented event shook financial markets.

Fortunately, the other two agencies, Moody’s and Fitch, did not follow suit. U.S. government bonds continue to be sold at extremely low interest rates. A shutdown probably will not change this, but discussion of not renewing the debt ceiling or any actual postponement of payment of U.S. obligations could.

The consequences of a downgrade could well be much more severe than the consequences of a shutdown. A downgrade would increase the cost of federal government borrowing, increasing the deficit.

More taxpayer dollars would go to debt repayment as opposed to the things citizens actually want, whether that be healthcare, national defense, education or hurricane relief. Worse yet, once credibility is lost, it is hard to restore.

The second danger of a shutdown is that increased uncertainty about government policies discourages businesses from hiring workers or investing in new machines and technologies. Economists have found evidence that policy uncertainty has substantial negative effects on the economy. The passage of the tax bill, however, does mitigate this risk quite a bit in the short term.

In short, there is nothing particularly good about a shutdown from the economic standpoint. A shutdown slams federal workers and contractors, inflicts damage on local economies, especially in the greater-Washington, D.C. area, and damages the credibility of our government.

If a shutdown (if one occurs) does not last too long, the economy should bounce back, having suffered small but tangible damage. A longer shutdown, or one that leads to broader unresolved conflicts, could have even greater effects.

A shutdown might not be that bad, but why harm yourself when you don’t have to?

Evan Kraft specializes in the economics of transition, monetary policy and banking issues as a professor at American University. He served as director of the research department and adviser to the governor of the Croatian National Bank.