Self-inflicted wound of shutdown may continue to fester

Self-inflicted wound of shutdown may continue to fester
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The hall of fame for ineffective and downright economically damaging political actions has a new member: the great 2018-2019 U.S. government shutdown.

At 35 days, that record-setting partial closure of the federal government joins the ranks of several other recent world-class self-inflicted wounds. Among them are the U.S.-China trade war, the U.K.’s Brexit chaos, the yellow vest protests in France and Tokyo’s intention to raise consumption taxes after a similar decision in 2014 sucked Japan into a recession.

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Going back a little further, the 2017 U.S. tax cuts — sold as a major growth stimulus — were so badly timed and designed that the deterioration in the country’s fiscal position will far outweigh the scant and quickly fading economic benefits.

According to the Congressional Budget Office, the just-ended (but only temporarily?) government shutdown caused the delay or suspension of approximately $18 billion in compensation payments and government purchases of goods and services.

Of course, that figure ignores the personal hardships and economic and financial damage the shutdown created for thousands of individual families. The CBO’s aggregate assessment, the likes of which economists are known for, clearly doesn’t begin to tally the human suffering — emotional and  financial — that the shutdown has inflicted.

Much of the delayed spending will be recovered, leading the CBO to estimate the permanent loss will be somewhere around $3 billion. For the $18 trillion U.S. economy, that represents a minuscule 0.02 percent of GDP— a rounding error significantly smaller than the average annual revisions to U.S. GDP. 

Looking beyond the shutdown, many other uncertainties affecting America’s current economic trajectory could have a far bigger impact on GDP growth. Among them are a possible inventory unwinding related to the U.S.-China trade war, the effect of the ongoing U.S. housing slump or even seasonal adjustment problems during colder quarters. The government shutdown adds just another source of uncertainty to an already iffy outlook.

But the shutdown’s impact on measurable growth isn’t the big worry. What’s far more concerning is the damage it may inflict on consumer and business sentiment. One U.S. consumer confidence survey taken in early January already shows a sharp decline.

The causation here is likely similar to an increase in unemployment. The shutdown directly affected only a fairly small share of the population — around 800,000 government workers, or just 0.5 percent of the 157 million Americans with jobs.

Yet many more than that likely know — or had contact at an airport or government agency with — federal workers who missed paychecks. The resulting hit to consumer confidence could lead to more precautionary savings and a slower pace of consumption growth for the rest of the year.

So far, business confidence hasn’t deteriorated any further in January. In fact, surveys show a small improvement in sentiment in contrast to consumers’ loss of confidence. But don’t bother to cheer. That’s most likely because business optimism had already been badly shaken by the U.S.-China trade war and financial market volatility.

Here’s another aspect of the shutdown’s aftershocks that would worry me if I were a politician: the growing mistrust Americans have of government in general.

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If political leaders so easily risk grievous economic harm to hundreds of thousands of people for something as meaningless as a border wall (however one wants to define it), how will they be able to convince Americans that dramatic cuts in government spending and/or higher taxes are necessary when Washington is eventually forced to deal with the inevitable fiscal crisis its policy actions will create?

Oh yeah, let’s not forget about the stress the shutdown is causing for economists this week as we try to catch up with all the data that wasn’t published in the past five weeks.

But seriously, greater volatility in economists’ forecast revisions could also add to investors’ nervousness about the U.S. financial markets and may even lead the Federal Reserve to alter its assessment of the economy, which could affect the outlook for further rate hikes this year.

The many negative feedback loops rippling through the U.S. economy from the shutdown — despite its negligible direct impacts — lead to a question inspired by a 1969 antiwar song made famous by Edwin Starr: Government shutdowns, what are they good for? Absolutely nothin’!

Markus Schomer is the chief economist at PineBridge Investments.