As the dust settles, economists are adding up the collateral damage. The results aren’t pretty:
- The loss of government services during the three-week shutdown will take a roughly $3.1 billion bite out of gross domestic product, according to economists at IHS Global Insight. That represents just the hit from lost government services.
- The shutdown also forced non-government business losses, temporary layoffs and other interruptions in business spending. The full extent of the damage won’t be known for some time. Economists at Standard & Poor’s estimate the total cost at about $24 billion, or a 0.6 percent GDP haircut. Others guess it's about half that. Either way, it's a heavy price to pay.
- Then there's the loss in U.S. economic prestige, which is also hard to gauge, but keeps getting whittled away every time Washington goes into gridlock over spending.
“The exact impact on the rest of the economy will be hard to measure until delayed economic data are released,” according to the research note by IHS economists Doug Handler and Paul Edelstein.
But they estimate the economy will grow at just a 1.6 percent annual rate in the last three months of the year – less than the 2.2 percent they had expected if the government had stayed open.
Those tens of billions of dollars of lost economic activity (along with a shortfall in government taxes on that activity) were obliterated by a political standoff that produced little more than a pact to try again to reach a long-term agreement in three months.
The deal amounts to a three-month cooling off period, temporarily ending the insanity that descended on Washington three weeks ago, froze the government’s budget authority on Oct. 1 and threatened to force the Treasury to default on $12 billion in public debt.
The agreement approved Wednesday restores budget authority until January 15 at current spending levels, including back pay for furloughed government workers, and extends Treasury’s borrowing authority until February 7.
It also releases the government from the hostage crisis that began with sweeping demands from House Republicans aimed at “defunding” the administration’s health care law, President Barack Obama’s signature domestic program, which began enrolling uninsured Americans on Oct. 1.
The only concession in the final deal was an agreement to verify the incomes of people signing up for health plans and looking for government subsidies to help pay the premium. A tax on medical devices – once high on the list of House GOP demands – remains unchanged.
The overall damage would have been much greater if the debt limit had been breached. That would have stopped a large chunk of government spending that continued flowing through the economy.
Government spending on Medicare and Social Security, nearly half of total government spending, was not affected because those checks are paid by trust funds that aren’t subject to the annual budget process. Same for the roughly 7 percent of spending that goes to pay interest on the national debt.
Military servicemen and women continued to get paid, but civilian contractors were furloughed. That lost spending amounted to about three-tenths of a percent of annual GDP.
Some orders for government supplies were put on hold. But those orders will have to be made up later, so there was likely little lost production during the past two weeks.
“For a brief shutdown, it seems unlikely that contracted production of defense-related goods (mostly weapons systems, munitions, and petroleum) would be even temporarily curtailed,” wrote economists at Macroeconomic Advisors.
While some deferred business will be made up in the weeks and months ahead, others losses are permanent.
Businesses catering to tourists visiting nation parks, for example, can’t make up the revenue on lost hotel bookings. Recreation in national parks, wildlife refuges, forests, marine sanctuaries, and other federally managed lands and waters contributed more than 600,000 jobs to the economy in 2010.
Realtors are reporting that some home sales are being canceled because of delays in mortgage approvals. That’s because lenders couldn’t confirm income tax returns and Social Security data. Furloughs at the Federal Housing Administration produced a backlog in loan processing for first-time homebuyers.
For those who had sold their old house or moved out of an apartment, that delay meant a surprise out-of-pocket cost to find alternate housing. (On the other side of the ledger, the hotel or temporary landlord made an extra month’s rent.)
Most commentators observed that the stock market “remained relatively calm” throughout the two-week Congressional break with reality, but many individual investors weren’t as assured. In the first week after the shutdown, the net value of market losses came to more than $400 billion. The market then staged a rally that added back more than $800 billion in net value. If you didn’t panic, you came out ahead. If you sold into that trough you lost money.
Longer-term damage is the toughest to estimate.
With the holiday shopping season approaching, consumer sentiment fell this month to its weakest level in nine months, according to the widely watched survey by Thomson Reuters and the University of Michigan. The drop was driven by a gloomier outlook about the economy – which typically prompts consumers to tighten up on their spending
“The ongoing government shutdown was a significant factor in this decline, and unfavorable references to government economic policy were mentioned spontaneously by 35 percent of consumers, a new all-time high,” according to economists at Barclays.
Consumers are also more worried about their job prospects.
While the deal struck Wednesday allowed the government to avoid an outright default on its debts, the political spectacle also horrified government and business leaders around the world. The hard cost of the loss of confidence won’t be known for months or years. To the extent it discourages investments, it will hamper the already weak recovery.
A lot depends on whether the three-month extension produces a resolution to the underlying political standoff. If no agreement is reached the next time the debt ceiling approaches, confidence will fall further.
“The U.S.’s prestige in global financial markets and world capitals will continue to deteriorate if we lurch from crisis to crisis,” said the IHS economists.