The possibility of a federal government shutdown this fall appears high, given the current vitriol in Washington, DC. How bad would the economic damage be? The answer is based solely on the length of the shutdowns-and their frequency.
There have been only three budget-related shutdowns in the U.S. history, one in 1995-1996 that lasted 21 days, a 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 those 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.
The estimate of the damage to the economy, however, was minimal for these three shutdowns. The U.S. economy took just 0.01% of GDP in the case of the 2019 shutdown, a result of a $21.4 trillion dollar budget being demonetized.
There's a temporary disruption in government operations as a result of the shutdown. It impacted things like SBA loans for small businesses, federal mortgage loan applications, the processing of export licenses, loans, and guarantees, and the processing of federal contracts to small businesses. The delays in passport processing and the closure of national parks were a blow to many vacationers, who were disappointed by the closure of national parks. 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. The impact of travel delays was reflected in the availability of TSA agents and air traffic controllers.
Government shutdowns are a political and legislative negotiation strategy. One side strongly opposes spending on a specific program and they have the votes to block approval of that program unless that program is reduced or eliminated-or another side insists on the addition of a program and has the votes to block the budget unless that program is included. It's a political game of who would blink first and concede to the other side, unless there's a major deal made between the two sides.
A central premise communicated by those trying to minimize spending in the debates leading to government shutdowns is that increasing 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 American debt by one notch, from AAA to AA+, describing the 'deterioration' of the economy, the growing debt burden, and the erosion of governance. In 2011 a similar move to S&P was made. But those moves made essentially no difference, and there has never been a hint that the U.S. government would be unable to finance its debt.
It is not unreasonable to expect more such shutdowns going forward, he said. In the case of the presidential election, shutdowns may become a recurring feature of American politics.
Although past government shutdowns were a disappointment in the U.S. economy, the political impact of the decision to shut down the U.S. economy negatively impacted those considered to be the cause of the shutdowns. Georgia Representative and House Speaker Newt Gingrich's political career was adversely impacted by the 1996 shutdown. Donald Trump lost more than he gained in the 2019 shut down, and it impacted the 2020 election.
The level of runningcor and depth of the political divisions in Washington are, albeit, such that we can expect more shutdowns in the future. As disruptive as future shutdowns will be, if they stay as short as the 1996, 2013 and 2019 shutdowns, the economy will continue to shrug them off.
If hardball negotiating techniques become routine, there is a significant risk. If that occurs, negotiators will begin to test the limit of shutdowns and the day will certainly come that one will be extended well beyond the 35 days of the 2019 shutdown. There is a possibility that the economy will survive a shut down in a few weeks. If a short-term and long-term shut down occurs, real and enduring damage can occur.
Richard Vague's varied career has encompassed fields such as banking, energy, government, and the arts. He recently served as Secretary of Banks and Securities for the Commonwealth of Pennsylvania. Vague was a managing partner of Gabriel Investments, an early-stage venture capital firm, and co-founder, chairman, and CEO of Energy Plus, an electricity and natural gas supply firm, 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 without Crisis is the book written by Daniel Ek.
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