As the clock ticks down to another potential U.S. government shutdown, economic experts warn of catastrophic consequences that could surpass the $3 billion loss incurred from the longest shutdown in history, which occurred in 2019. The Congressional Budget Office (CBO) calculated this hefty sum as a permanent withdrawal from the U.S. economy during the 35-day standoff. With another shutdown appearing increasingly likely within the next two weeks, the stakes are high, and the economic impact could be even more devastating.
The political climate is tense and fraught with discord, with House Republicans reportedly engaging in heated debates behind closed doors and openly dismissing the potential costs of a shutdown. This standoff, coupled with the new risks posed by wary credit rating agencies, could push the impending shutdown into uncharted fiscal territory. If the shutdown becomes protracted, the government and the U.S. economy will bear the brunt, with each passing day accruing billions of dollars in losses, many of which may never be recovered.
The Potential Cost of a Government Shutdown: A Dive into the Economic Impact
The Congressional Budget Office (CBO) estimates that the most expensive government shutdown in history, which took place in 2019, cost the US economy around $3 billion. Now, with another shutdown on the horizon, experts are predicting that the financial impact could be even more significant.
The Rising Cost of Government Stoppages
The cost of a government shutdown to the economy increases with each passing day. While most of the withheld funds are spent when the government reopens, studies have shown that billions of dollars are likely to be permanently lost. Such shutdowns have real-life impacts that are often overlooked until after the fact. Casey Burgat of the Graduate School of Political Management at The George Washington University notes, "This is a real thing that impacts people’s lives and it doesn’t seem to be a big factor in whether something gets done on time or not."
Forecasting the Duration of the Shutdown
The duration of the impending shutdown is a matter of speculation, with estimates varying from two to three weeks to an unprecedented full quarter. Goldman Sachs and Strategas Securities predict the shutdown to last approximately two weeks. However, Moody’s Analytics chief economist Mark Zandi presents a more grim scenario, suggesting the possibility of a shutdown that lasts an entire quarter, which could cut 1.2 percentage points from the fourth-quarter growth.
The Impact on Federal Programs and Workers
While Social Security and Medicare remain unaffected in a shutdown, other programs that rely on annual appropriations bear significant costs. These agencies must spend considerable time and resources developing contingency plans. Moreover, federal workers, such as TSA agents, are often asked to continue working without pay until the government reopens.
A New Threat: The Credit Ratings
A new economic threat linked to government shutdowns has emerged in the form of credit ratings. Fitch downgraded the US government’s top credit rating in August, citing government dysfunction as a key factor. Moody’s, the last major agency to give the US Treasuries a clean AAA rating, may also consider a similar move during the shutdown, according to Jeannette Lowe, Strategas Securities managing director of policy research.
Takeaways
An extended standoff seems increasingly likely, and the financial implications could be significant. A protracted shutdown could further damage the US’s fiscal position and credit rating. Government shutdowns are a costly affair that, as Gordon Gray of the American Action Forum points out, rarely result in an improved fiscal position for America. While some see a shutdown as an opportunity to get the country’s fiscal house in order, the real economic impact is undeniable and far-reaching.
