Government shutdowns are a real risk to the economy

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Government shutdowns are a real risk to the economy

With the current political upheaval in Washington, DC, the possibility of a government shutdown in this fall appears high. How bad will the economic damage be? The answer is solely determined by the length of the shutdowns-and their frequency.

There have been only three budget-related shutdowns of more than one week in U.S. history, one in 1995-1996 that lasted 21 days, the second in 2013 that lasted 16 days, and the most recent one in 2018-2019 that lasted 35 days.

In each case, the howls of anguish from across the country, especially the appearance of federal government workers in food lines since hundreds of thousands of them received no pay during the shutdown, created immense pressure on Washington and brought the shutdown to a rapid conclusion.

For these three shutdowns, however, the estimates of damage to the economy were minimal. The U.S. economy took an estimated $3 billion hit-only 0.01% of GDP in the case of the 2019 shutdown.

There was, of course, a temporary disruption in the government's activities due to the shut down. SBA loans for small businesses, Federal mortgage loan applications, processing of export licenses, loans, and guarantees, and the processing of federal contracts to small businesses. The delay in passport processing and the discontinuation of national parks was a major disappointment for thousands of vacationers. It halted the distribution of important food and cash assistance such as the Temporary Assistance for Needy Families program, the Supplemental Nutrition Assistance Program, and the Special Supplemental Nutrition Program for Women, Infants and Children. It even presented the specter of travel delays as it impacted the availability of TSA agents and air traffic controllers.

Government shutdowns are a political and legislative negotiation strategy. One side is deeply opposed to spending on a specific program and has the votes to block funding unless that program is reduced or eliminated, or another side is insisting on the addition of a program and has the votes to block the budget unless that program is included. It is a political game of who will blink first and concede to the other side, even if it's a big deal.

The idea expressed by those trying to reduce spending in the debates leading to government shutdowns is that increased government debt would cause a crisis-and the government would face an inability to obtain additional funding through debt. In August of 2023, Fitch Ratings cut the U.S. debt by one notch, from AAA to AA+, pointing to the 'deterioration' of the nation's finances, the growing debt burden, and the erosion of governance. In 2011 the company also made a similar move, with S&P making the same move. However, those moves made essentially no difference, and there's never been a hint that the U.S. government would be unable to finance its debt.

It's not unreasonable to expect more such shutdowns coming forward, said James Cameron of the National League for Democracy. In similar ways to presidential impeachment, shutdowns may become one of the recurring features of American politics.

Although past government shutdowns had few impact in the U.S. economy, the political fallout negatively impacted those viewed as the cause of shutdowns. Georgia Representative and House Speaker Newt Gingrich's political career was adversely impacted by the 1996 shutdown. Some think Trump lost more than he gained in the 2019 shutdown and that it had some impact on the 2020 election.

Despite the level of runningcor and depth of the political divisions in Washington, it is possible that we will see more shutdowns in the future. If the economy continues to shrug off short shutdowns like those of 1996, 2013, and 2019, it will be a reversible blow to the economy as a whole.

If these hardball negotiating tactics become routine, there is a real risk. If it happens, negotiators will begin to test the limit of shutdowns and the day will surely come that one will be extended well beyond the 35 days of the 2019 shutdown. A few weeks of a depressed economy can provide security for the economy. If political toughball tactics lead to a long-term shutdown, real and enduring damage can occur.

Richard Vague's career has encompassed fields as diverse as banking, energy, government, and the arts. He was recently appointed the Secretary of Banks and Securities for the Commonwealth of Pennsylvania. Vague was a co-founder of Gabriel Investments, an early-stage venture capital firm, and chairman and CEO of Energy Plus, an electricity and natural gas supply company, and co-founder and CEO of two banks: First USA, which was sold to Bank One and Juniper, which was sold to Barclays PLC. The Paradox of Debt: A New Path to Prosperity With Crisis is published by Theodore Leibovits.

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