Education Resource

How Much Did the Government Shutdown Actually Cost?

Master Instructor Blog

With the latest U.S. government shutdown behind us (for now), it is worth asking if it had a serious, lasting, or permanent effect on the economy. Traders would most likely say no: the S&P barely skipped a beat on shutdown day, and when the government re-opened 16 days later it was up 2.3% for the period. (SPY opened at 168.14 on 10/1 and closed at 172.07 on 10/16.)

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What you should take into consideration:

The opportunity cost or actual financial cost of operations that could not be completed because government offices were closed. Example: Alcatraz, a national monument, was closed. Therefore, San Francisco businesses that depend on tourism lost money. Example: With passport offices closed, there were people who cancelled overseas trips because they could not get their passport in time. This was a direct cost to them of airline tickets or prepaid tours they were unable to use.

The cost of paying furloughed Federal workers without getting any productivity in return. (After some discussion that they might not be paid this time because of the budget crunch, they were indeed authorized to receive their full back salary. In addition, some states allowed furloughed workers to keep unemployment compensation, so they were in effect paid twice.) Also, while Federal workers received their back pay, government contractors probably will not. Their spending (including upcoming holiday shopping) will have to adjust for the lack of earnings during the 16 day period.

The cost in confidence. You probably would not invest in a company when you know its management is mentally unbalanced, even if its business and its industry were fundamentally sound. Citizens, institutions, and overseas investors have long made their decisions on the assumption that the U.S. is one of the most stable and best-run economies in the world. For them, stock prices and borrowing costs have reflected this.

Right now, with stocks at an all-time high and borrowing rates close to historic lows, it is hard to make an argument that people are giving up on the U.S. economy. Yet, can we be even stronger without the dysfunctional behavior in D.C.?

According to S&P, the total cost of the shutdown was about $24 billion. The source also predicts that the GDP will grow 2.4% in Q4, compared to 3% if the shutdown had not occurred.

The crucial test comes on January 15, which is the kick-the-can-down-the-road deadline to both approve the budget and increase the national debt ceiling, so the U.S. does not default on its loans. A number of analysts have warned that the cost of this would be catastrophic. Stay tuned.

Source of S&P stats: http://swampland.time.com/2013/10/17/heres-what-the-government-shutdown-cost-the-economy/

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