Short Government Shutdown Would Have Only Minor Effect

By Cheryl Bolen

Sept. 25 — The economic impact of a government shutdown in 2015 would depend principally its length, with a shutdown of a few days having an almost negligible effect and a weeks-long shutdown likely to cut into gross domestic product, economists told Bloomberg BNA.

Dan White, senior economist at Moody’s Analytics, Inc., said their baseline forecast is for passage of a continuing resolution that will extend government funding to the beginning or end of December. The end of fiscal year 2015 is Sept. 30.

That said, there is a 50-50 chance of a government shutdown, however brief, White said. The Moody's “rule of thumb” for calculating the effect of a month-long shutdown is that it would shave about 1.5 percentage points from fourth-quarter GDP growth, he said.

“That is just really the impact of the government shutting down,” White said. “That doesn't include all the spillover effects of the uncertainty to other areas of the economy.”

Effects in Line With 2013

The federal government was shut down from Oct. 1-17 in 2013. And Moody's estimate of that shutdown's effect was somewhere between 15 and 20 basis points off of GDP growth, given its length, White said.

“If we were to have a government shutdown next week, we estimate that the impacts would be somewhere in line with what they were in 2013, so somewhere between 15 basis points and a quarter of a percentage point in terms of GDP growth,” White said, referring to the week of Sept. 28.

White also confirmed a figure cited by House Minority Leader Nancy Pelosi (D-Calif.) that the last government shutdown in 2013 cost the U.S. economy $25 billion. Third-quarter GDP in 2013 was about $16.9 trillion; subtracting 15 basis points yields about $25 billion, he said.

Federal Reserve Decision

The length of any shutdown is critical, especially when markets are volatile and given the Federal Reserve's decision to not raise rates in September, White said.

One of the reasons the Fed may not have raised rates is because of the uncertainty about government funding, White said. “If there was a budget in place going into the Fed decision, odds are they may have changed their decision.”

“With that much uncertainty in the market though, it is possible that the impacts of this government shutdown could be more magnified than the impact of the last government shutdown,” White said.

Length, Timing Are Key

If federal employees have to go a week without pay, that is one thing, White said. But if they have to go a month without pay, there is the risk of being late on bills and not being able to afford certain items, which has a much greater ripple effect throughout the economy, he said.

The situation is the same with contractors, White said. If they don't think they're going to get their money for a contracted project for a long period of time, compared with a week or two, projects and hiring could be significantly delayed as well, he said.

The timing of a shutdown also is a factor, White said. If a shutdown were to occur later in the year, it might affect consumer holiday spending in November and December, he said.

“And if you're a federal contractor or federal employee and you're not sure you're going to have a paycheck three weeks running up to the end of the year, that could be actually even more damaging,” White said.

Chamber: Negligible Impact

Martin Regalia, senior vice president for economic and tax policy and chief economist at the U.S. Chamber of Commerce, said the length of a shutdown determines its economic impact.

“A shutdown of a few days to a week would have almost no measurable impact on economic GDP growth,” Regalia said. “Now, if it lasts longer than that, you could get a small negative impact because of the delay in government spending—but then you have to go back and you have to look whether that government spending ever catches up again,” he said.

If the situation stopped government spending today, then as soon as spending is authorized, allowing government spending tomorrow, the “down” has to be added to the “up,” Regalia said. “If you just look at the ‘down,' that's not a GDP impact,” he said.

There has to be some dead-weight loss, Regalia said. The dead-weight loss of government spending has to be spending that is not going to take place at any point in time, not just government spending that comes in a day later, he said.

Hurricane Comparison

When the U.S. is hit with a hurricane, it sees a decline a GDP in that area, followed by a buildup or positive impact on GDP as businesses and people rebuild and get back to spending what they didn't spend during the storm and its immediate aftermath, Regalia said.

“So if you add both the down and the up, you get something that's generally pretty close to zero,” Regalia said. “So it's a timing issue more than anything else,” he said.

The impact of a brief government shutdown on business is relatively small, Regalia said. People don't adjust their consumption patterns if they think they're only going to be out of work for a week and their paycheck will be a little smaller one week and a little bigger the next, he said.

“For the most part, government shutdowns are not dead-weight losses—they're timing issues,” Regalia said. “And timing issues are much less important to GDP calculation over any reasonable length of time,” he said.

Longer Is Different Story

However, if the government were to shut down over two-and-a-half weeks like it did in 2013, then the economy could see some measurable dislocations, Regalia said. “They would be small, but they would be measurable,” he said.

“But then you would see a pickup when the dislocation ended and the checks went out, and the checks that were delayed went out, and the people's income that was delayed went out,” Regalia said.

In 2013, federal employees did not lose salary—they were paid back, Regalia said. It is hard to generate a dead-weight loss in perpetuity from something that affects the timing of payments, he said.

It is difficult to tell whether federal contractors were paid back, Regalia said. In the last shutdown, there may have been some displacement of goods and services by contractors, but Regalia suggested it was very small.

“While it may cause an impact with the government contractor, specifically, that's not going to show up in an overall GDP measure,” Regalia said.

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Shutdown Not a ‘Calamity.'

The U.S. economy is growing slowly, much as it was in 2013, so there are quarterly shifts up and down, Regalia said. But in the long run it is hard to concoct a model or rationale for why there would be a permanent dislocation and why it would amount to much, he said.

There is a tendency for those in government to characterize a shutdown as a “calamity” to be avoided at all costs, Regalia said. But even Hurricane Katrina didn't cause the predicted phenomenal displacements well into the future, he said.

Katrina caused significant dislocations of about 1 percent of GDP for about a quarter or two, until it was made up through rebuilding, Regalia said. There are still permanent dislocations from Katrina, but that was a major disaster, he said.

In terms of a government shutdown, specific sectors of the economy are one thing, Regalia said. But GDP is a big number that encompasses a lot of people, over a lot of sectors and covers a broad geographic area, he said.

“And to suggest that a government shutdown is somehow going to derail that GDP, if the shutdown is relatively modest in length, isn't going to do it,” Regalia said.

Win by Design

John Cooney, a partner in the law firm Venable LLP in Washington, said the federal workforce has changed to include many more contractors, which complicates the economic picture.

Cooney was an assistant solicitor general and deputy general counsel at the Office of Management and Budget under President Ronald Reagan and helped steer agencies through a series of short-term shutdowns then.

A plan was developed and put in place in the early 1980s to ensure that the White House was able to win any shutdown battle with the Congress, then controlled by Democrats, Cooney said.

“It was consciously designed to produce this result and it has worked every time it's been tried so far,” Cooney said. “And this time, the administration will be better prepared,” he said.

Many More Contractors

There was no shutdown from 1995 to 2013, and in the interim, government delivery of services has changed a lot, Cooney said. Significantly more are delivered by contractors now, not federal civil servants, Cooney said.

Years ago, when the work of the executive branch was being done by federal civil servants and they were furloughed under Office of Personnel Management rules, the costs could be quantified, Cooney said.

But so many functions have been outsourced in the last 20 years that, while it is still possible to accurately capture the out-of-pocket cost to the federal government to furlough workers, it is not possible to calculate the amount private contractors incur when the government shuts down, he said.

There are many projects now that have a mix of federal civil servants and private contractors, essentially doing the same job of delivering a service, Cooney said. If the federal program is closed down for lack of appropriations and federal employees are furloughed, the private-sector workforce operating under a contract often cannot access, for example, a federal building, he said.

“So even though there is money available to that company to do its job and the workers show up at the appointed time, they can't get into their workspace, and so they have to go home,” Cooney said. “And so there's a net loss to the government from that,” he said.

Useful Reports

In October 2014, the Government Accountability Office prepared a report for the Senate Budget Committee on the 2013 shutdown, Cooney said. And in November 2013, the OMB prepared a report on the impacts and cost of the shutdown, he said.

In those reports, the basic reference to calculate the economic effect of the shutdown is information from the Bureau of Economic Analysis at the Department of Commerce, Cooney said. In January 2014, BEA estimated the direct effect of the shutdown on real GDP growth in the fourth quarter of 2013 to be a reduction of 0.3 percentage points.

The OMB report breaks down the number of furlough days by agencies, calculating there were a total of 6.6 million furlough days taken, Cooney said. At the top of the list was the Department of Defense with 1.6 million days, followed by the Department of the Treasury with 985,000 days and the Department of Agriculture with 737,000 days.

The report also contains page after page of adverse impacts on programs and services that the shutdown caused at a micro-level, such as 1,400 Occupational Safety and Health Administration (OSHA) inspections that did not occur and delayed home loan decisions by the Department of Agriculture for low-income workers in rural communities, he said.

Cost of Furloughs

During the 2013 shutdown, OMB reported that approximately 850,000 federal employees, or 40 percent of the civilian federal workforce, were furloughed for at least part of the shutdown, Cooney said.

After every shutdown, Congress has passed a bill to reimburse federal civil servants, not contract employees, for their lost time, but only Cooney said. “And the best estimate on that was $2.5 billion in paying federal workers for work they did not do,” he said.

There are a lot of intangibles as well that cannot be quantified, Cooney said. The procurement community has repeatedly asked whether someone has tried to calculate how much contractors lost when, on short notice, had to shut down their workforce for days, he said.

During a short shutdown, some private employers pay their contract staff for their time just to maintain good working relationships, even though the company will not be reimbursed by the government, Cooney said.

“But in any kind of longer shutdown, the employers can't afford to pay their workers at a time that the workers are not working,” Cooney said. “So there are extensive furloughs in the private sector if there's no other way they can keep people on board,” he said.

Other costs that cannot be quantified are the costs of shutting down and restarting an operation, the general lack of efficiency in the federal government and how that spills over onto federal contractors, Cooney said.

Uncertainty Biggest Problem

Dorothy Coleman, vice president of tax and domestic economic policy at the National Association of Manufacturers, said the uncertainty of a possible shutdown, combined with uncertainty over the passage of tax extenders, reauthorization of the Export-Import Bank and continuation of highway funding, among other legislation, is their biggest concern.

“There are a lot of unanswered questions going into the last quarter of the year, and certainly funding the federal government is critically important,” Coleman said.

Individual companies might have various interactions with government agencies and their situations would be fact-specific, Coleman said.

But from a broader perspective, NAM is always concerned about any shutdown, Coleman said. The government does provide some services that keep the economy running, including national security and even financial security that are important, she said.

“And we have always supported uninterrupted funding of the federal government,” Coleman said. “And I think particularly now when we have an economy that isn't where it should be and we continue to struggle,” she said.

Holding Back Investment

NAM members say that economic uncertainty is holding them back from making investment plans, Coleman said.

There's a general feeling that Congress needs to do its job, Coleman said. “And so there's some level of frustration when there's even talk of shutting down the government,” she said.

A shutdown has a ripple effect throughout the economy, whether its in travel, inspections or other government services, Coleman said. “We're still hoping this gets resolved in a timely fashion,” she said.

To contact the reporter on this story: Cheryl Bolen in Washington at

To contact the editor responsible for this story: Heather Rothman at

The November 2013 OMB report is available at

The October 2014 GAO report (GAO-15-86) is available at

A September 2015 Congressional Research Service report is available at