7 Ways the Government Shutdown Will Affect the Economy

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It's not just a tourist annoyance.Photo: Emmanuel Dunand/AFP/Getty Images

The government shutdown that began last night isn't so much an economic calamity as a political one. (The real economic fun will begin later this month around the debt-ceiling showdown, in which a failure to make a deal might actually result in the destruction of American prosperity as we know it.) But the shutdown is having ripples in the economy and hurting a lot of people for no particularly good reason.

Here are seven of the biggest ripples:

1. The stock market is going up.
Wait, up? Wasn't the House GOP's hostage-taking supposed to tank the markets? Actually, the mild stock rally we've seen today (Dow up 58 points) is fairly predictable. What's happening is that the markets, which are scared to death of a debt-ceiling breach and a default on U.S. government debt, think that the shutdown makes a deal to raise the debt ceiling more likely. (Logic: The longer the shutdown lasts, the more pain it will inflict, the less bargaining leverage the House GOP will have, and the more they'll be tempted to concede on the debt-ceiling deal.) "Now that the shutdown is a reality, people are starting to anticipate some sort of [debt-ceiling] settlement," Colin Cieszynski, senior market analyst at CMC Markets, told the WSJ. "It's a matter of time."

2. More austerity is hitting the economy at exactly the wrong time.
Services deemed "essential" — things like Social Security, Medicare, Medicaid, air-traffic control — will continue during the shutdown. That's a relief. But lots more programs and agencies will shut down — everything from the National Zoo to the Securities and Exchange Commission, which is operating with cash on hand at the moment but could be forced to close nonessential functions if the shutdown persists. These huge cuts in government spending, on top of the already-shrunken spending from sequestration, are a good way to reduce the deficit very, very quickly. But they're just the wrong recipe for the economy, which was already suffering from Congress's previous cost-cutting efforts.

The harm won't be limited to the public sector either. The Small Business Administration — another government agency affected by the shutdown — won't be initiating any new loans during the shutdown, meaning that Main Street businesses will find it harder to grow, even with a short shutdown.

3. That austerity could hurt growth.
Most economists predict that the cost-cuts included in the shutdown will shave a non-negligible percentage off economic growth in the coming weeks. Barclays economists predict a .12 percent loss in this quarter's real GDP numbers for every week the shutdown lasts. Market research firm IHS says the shutdown will take $300 million out of the economy every day. In 1995, a 21-day shutdown cost the country $1.5 billion. That's chump change compared to the overall federal budget, but our economy is more fragile now than it was in 1995, and a similar drag on growth could tip us back into economic troubles.

4. We'll be in the statistical dark.
Every month, the Bureau of Labor Statistics and other federal agencies release a trove of data about the economy — jobs gained or lost, manufacturing output, and other markers of economic health. Well, guess what. In a shutdown those numbers don't come out. We won't get a monthly jobs report this Friday, and while most normal people don't see these reports anyway, they're an important metric that policymakers use to calibrate their economic efforts and traders use to plan their strategy. Without them, we're flying blind.

5. Consumer confidence could plummet.
That's a fancy way of saying, "A lot of people are going to stop spending so much." The at least 800,000 government workers who are being furloughed as a result of the shutdown are the most visible victims of D.C.'s dysfunction. But there are other victims too: restaurants and other stores that serve government workers, trinket shops outside national parks and monuments that depend on visitor revenue, government contractors who won't be paid until a deal is reached. Brad Plumer has a good, depressing rundown of all the programs that will be hit by the shutdown — food-safety inspection, Head Start, and tourist attractions, among others. 

The people who work at these agencies all spend money — on food, on clothing, on cars and vacations and the basic necessities of life. When that money goes away, the effect is a nationwide loss of confidence. Even if a shutdown lasts only a week or two, the scare associated with a sudden furlough or a decline in business could make people hesitant to start spending again.

6. The Fed might keep its foot on the gas for longer.
It's a bit early to start speculating on how the Federal Reserve will handle a shutdown. But those who thought the Fed was going to cut back on its stimulus measures last month were wrong, and those who think the Fed will pull back this month are likely to be wrong, too. The Fed has said it's looking for the economy to stabilize a bit more before it slows its bond-buying programs, which have propped up the markets for the past few years. And if they survey the dysfunction that led to a shutdown, it will be hard for them to justify pulling back just yet. If the shutdown drags on, expect another few months of bond-buying, at the very least.

7. The long-term effects could be worse than we expect.
It's true that the government has shut down before and bounced back fairly easily. As I said above, the real danger is the debt-ceiling fight that will happen in the coming weeks. But that doesn't mean there are no long-term hazards of a shutdown. Each time we bring our economy to the brink of failure over a concocted political crisis, there are consequences. Foreign governments could lose a bit of their respect for the U.S.'s financial standing. Entrepreneurs looking to bring their companies to the U.S. could look at our self-created dysfunction and think, Thanks but no thanks. Policymakers could be unexpectedly happy with the results of a shutdown and try to implement more harmful austerity policies, under the assumption that the programs that were shut down won't be missed anyway.

The point is, we don't know where the butterfly effect of a shutdown leads. If we're lucky, we get away with a debt-ceiling deal, an end to this political stalemate, a minimal drag on GDP, and a week or two of economic hardship for federal workers and those who serve them. If we're not, we could be setting in motion a chain of events that could endanger the entire country's economic future. That's the gamble we've now taken.