The Economics of a Government Shutdown
By: Madeleine Armstrong
On October 1st, the nation narrowly averted a government shutdown, with Congress passing a last-minute temporary funding bill to keep agencies open until November 17. While the shutdown was avoided due to a bipartisan deal, it is worthwhile to consider how government shutdowns affect not only federal workers but also the general economy.
Why do shutdowns even occur in the first place? Under the Antideficiency Act, federal agencies are prohibited from “obligating or expending federal funds in advance or excess of an appropriation.” In other words, a shutdown occurs if Congress does not enact appropriations for government agencies by a certain date.
During a government shutdown, most federal agencies temporarily furlough their workers — though federal workers considered “essential” by Congress must continue to report to work. Both furloughed and essential workers do not receive pay until the shutdown ends. On the other hand, welfare benefits such as Social Security and insurance programs such as Medicare continue during the shutdown because they are authorized through laws and do not require annual approval.
On a macroeconomic level, a government shutdown can directly impact GDP. Federal spending comprises about 7% of GDP, which is substantially decreased during shutdowns due to the inability of the government to provide certain goods and services. According to the Bureau of Economic Analysis, the government shutdown from 2018-2019 resulted in a 0.3 decrease in GDP during the first quarter of 2019. However, it is important to note that the timing of a shutdown impacts how greatly GDP will be affected by federal spending. As such, Goldman Sachs has estimated that a government shutdown generally decreases GDP by 0.15 points per week regarding federal spending. Because GDP is measured monthly, it is equally possible that growth could rise by the same amount or more once the shutdown ends, making the effects economically negligible.
The impact of a government shutdown on employment has similar implications to GDP. The Bureau of Labor Statistics, a federal agency, collects employment statistics. Due to the collection periods that the BLS uses, the shutdown may or may not be reflected in employment data. If the 2023 shutdown was not averted, it would have been possible that it would have had no impact on labor market data if it had ended before or during the BLS reference period of October 8-14. The 2013 government shutdown occurred during a BLS reference period, which reported 400,000 government workers as not working during a one-month spike.
In regards to these changes in data collection, this can impact the decisions made by the Federal Reserve and other financial institutions. While Chairman Jerome Powell stated on September 20 that shutdowns do not “traditionally have much of a macroeconomic effect,” the Federal Reserve relies on data from the Bureau of Labor Statistics to make decisions regarding interest rates. As such, a long-term government shutdown could cause important economic data to be unavailable and thus potentially impact decisions regarding interest rates.
Government shutdowns may also contribute to negative indirect effects on GDP. Spikes in temporary unemployment may cause federal workers to decrease their spending habits. Additionally, shutdowns may negatively impact private consumption and investment due to concerns amongst consumers and investors. Licensing disruptions caused by a shutdown may also inhibit trade and lending activity.
The indirect effects on GDP are difficult to measure accurately and typically not included in estimates of GDP impact by shutdowns. Research suggests, however, that these consumption and investment changes could be significant. A Goldman Sachs survey indicated that two out of five Americans decreased consumption during the 2013 shutdown.
Overall, government shutdowns generally hurt the economy. They tend to cause a reduction in GDP and hurt both private consumption and investment. However, they do not inhibit essential functions such as Social Security payments, which around 66 million Americans rely on. Ultimately, the full impacts of a shutdown depend on its timing, which can impact data collection and fluctuations in output.