If nothing else, Congress has behaved irresponsibly by shutting down the government. For starters, the federal programs that sap the most government resources – Medicaid, Medicare, and Social Security – have been left untouched. These are mandatory programs with dedicated funding streams. And in Fiscal Year 2012, mandatory spending made up around 63 percent of total federal expenditures.
Moreover, the programs that get hit the hardest are those that cant afford to take the hit – the National Institutes of Health, for instance, is now turning away children with cancer from their clinical trials; the Women, Infants, and Children program (WIC) can only stay afloat for another week or so before it stops being able to provide supplemental nutrition for low-income mothers and their children. To make a long story short, the shutdown wont be the "cleansing" that many on the right hoped it would be.
But just because a government shutdown isnt "good," it doesnt mean that its necessarily "bad." Some (like the folks at IHS Insight) have projected that the government shutdown will cost about $300 million per day – and could reduce this quarters GDP growth. But even these estimates are relatively small in an economy that generates over $43 billion per day. That is to say, shutting the government down wont tank the economy.
Lets look at how previous shutdowns have played out. In 1976, from September 30 through October 11, the federal government partially shut down when President Gerald Ford (R) vetoed funding bills for the Departments of Labor and Health, Education, and Welfare. By October 11, a continuing resolution restored funding to the government and business resumed as usual.
So what happened to the economy in that time? We can look at three important indicators to get rough idea: the interest rate on 5-year treasuries; the level of the S&P 500; and the level of the Dow Jones Industrial Average. As these indicators reveal, the 76 shutdown didnt have much of an effect on the economy. From the period immediately before to the period immediately after, the interest rate actually fell by 0.02 percentage points on average; and the S&P and the Dow both fell an average of 0.3 percentage points.
The eight shutdowns – lasting only a few days each – during the Reagan administration were similar non-events. The longest lasting shutdown, which occurred under the Clinton administration, lasted 21 days. The S&P and Dow both moved up about 0.2 percentage points on average during this period (this may have happened because the ‘96-‘97 shutdown finally turned political attention to the budget deficit – and helped generate budget surpluses for the remainder of the decade).
These are, of course, short-run, macroeconomic indicators. There are likely transitory costs that are less easily measured – this includes the time that federal workers spend preparing for the shutdown and the fact that furloughed workers have to push back any work they would have done earlier. But the reality is that any dip in government-induced demand over a short-run government shutdown will likely be made up in later quarters.
Bottom line? Temporary government shutdowns are generally irrelevant to the economy as a whole. Businesses will keep operating and most government workers – 2 million out of about 2.8 million – will keep going to work and receiving paychecks. But the shutdown wont stop the United States from paying its debts on time and shouldnt put the credit worthiness of the United States at risk (the impending debt-ceiling battle, however, is primed to do much more damage). Of course, this still depends on the relative size of government compared to the economy, and on the health of the economy itself.
Federal government spending is now around 23.5 percent of the economy currently – during the Clinton shutdown it was close to 20 percent, and it hovered around 22 percent during the Ford shutdown. When the government represents a bigger share of total economic activity, a shutdown will necessarily have a bigger effect on the economy – but theres a little more to it. The broader economic conditions are likely to be even more relevant. Price controls in the ‘70s for instance were likely more important in determining the direction of the equities market. The booming economy of the late-‘90s certainly overshadowed the government shutdown as well.
Of course, a long-term government shutdown would prove more disastrous than the relatively short-term shutdowns weve experienced. Eventually, Social Security checks would be delayed, and more of the governments safety net would start falling apart. Contractors would likely see their payments canceled altogether, and furloughed workers would start experiencing "skill atrophy" and could end up unemployed. The likelihood of a long-term shutdown is slim, however, as neither party ends up looking good during these standoffs.
The moral of the story is simple – government shutdowns arent good, but theyre far from apocalyptic.
Original Source: http://thehill.com/blogs/congress-blog/politics/327019-panicking-about-the-shutdown