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Washington Examiner


Government Shutdowns Are Not Catastrophic

October 25, 2013

By Yevgeniy Feyman

Government shutdowns are, more than anything, political tools. Sometimes the politics end up having a net benefit the Clinton-era shutdown turned attention to the growing budget deficit and helped generate a budget surplus.

The recent shutdown, however, which lasted from Oct. 1 to Oct. 16, was different. Political brinksmanship over Obamacare and the debt ceiling were the main drivers of the shutdown this time around -- and the end result was (as before) to kick the can down the road.

Nevertheless, despite recent reports from the President’s Council of Economic Advisers and even the private sector, government shutdowns are not catastrophic.

First off, as I’ve written before, prior shutdowns barely budged important short-run economic indicators like the S&P, the Dow Jones Industrial Average, or the interest rate on short-term treasuries.

Primarily, this is because there are other, much more relevant economic factors involved in private sector decisions. The 1970s had price controls and the 1990s had a booming economy. Both play much bigger roles in investment and spending decisions than whether or not the government is "open."

Indeed, even this time around, with a weak economy and a lack of confidence in policymakers, the S&P closed 2 percent higher on the last day of the shutdown than it did the first day and maintained a steady upward trend during the second half of the shutdown.

But what about the big claim from the CEA that a staggering 120,000 fewer jobs were created in the private sector than would have been without the shutdown? It pays to first understand that this number has a significant margin of error.

The CEA came to their conclusion by developing a "weekly economic index" using short-run indicators. In general, predicting short-run fluctuations like these is very difficult to do and comes with a host of quibbles and concerns regarding accuracy.

Short-run changes in indicators tend to be very noisy, and even with a sudden "discontinuity" like the government shutdown, short-run fluctuations are affected by many other factors beyond the beltway.

There are other reasons to doubt the accuracy of their findings (or at least, to take them with a grain of salt). For one, the number of jobs added in August and September was 193,000 and 148,000, respectively.

If CEA’s projections are accurate, we should expect less than 100,000 new jobs to have been added in October and perhaps even a net loss of jobs, if August and September are any indicators of job growth.

While the economy is weak, it has been recovering (albeit slowly). History has shown that neither government shutdowns nor political brinksmanship pulls back growth to such an extent.

Finally, we get to the estimates of the effect on growth rates. CEA estimates that these recent events will reduce growth in the fourth quarter by 0.25 percentage points. This is certainly possible and would be due to reduced spending by government workers, government agencies, and government contractors.

But there’s more to this story. Government contractors who get delayed payments will simply shift their spending to a later period. Furloughed workers (who will end up receiving back-pay) will also shift their consumption patterns accordingly.

So while it’s possible that GDP growth in the fourth quarter will take a hit, the drop will likely be made up with a bump in the next quarter.

When thinking about the government shutdown, it pays to remember why rating agency S&P downgraded the U.S. last year it wasn’t due to brinksmanship but due to the country’s growing and unstable debt burden (pointing out that the sequester wasn’t enough).

The real catastrophe isn’t a government shutdown it’s the systemic failure to reach a proper, long-term deal on the debt and the budget.

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