Government shutdowns seem to have become a recurring theme in the United States’ political landscape, with economic repercussions that extend not only beyond politics, but beyond the US’s borders as well. As we delve into the economic fallout of a government shutdown, it’s important to learn from historical instances to try and understand the potential impact, and draw some valuable lessons for the future.
The Basics of a Government Shutdown
A government shutdown occurs when the U.S. Congress isn’t able to pass appropriations bills or a continuing resolution to fund government agencies and operations. This typically happens because of political gridlock. When a government shutdown occurs, federal agencies temporary stop most non-essential functions, federal employees are furloughed, and select government services come to a standstill.
Economic Consequences: Lessons from History
- Economic Disruption: Government shutdowns can extend collateral damage across nearly every sector of the economy. In the past, federal employees have faced unpaid furloughs, leading to reduced consumer spending. This, in turn, affects businesses that rely on government employees as customers. Though, furloughed employees are typically given back pay when the government reopens.
- Stock Market Volatility: The stock market tends to react negatively to a government shutdown. With greater uncertainty there can be increased market volatility. During the 2013 shutdown, for example, the S&P 500 experienced a downturn.
- Contractors and Small Businesses: Government contractors and small businesses that depend on federal contracts are usually hit hardest during government shutdowns. Delayed payments and uncertain project timelines can jeopardize their financial stability.
- Economic Growth: Government shutdowns can have a measurable impact on economic growth. The Congressional Budget Office (CBO) estimated that the 35-day shutdown in 2018-2019 reduced GDP growth by 0.02% in that quarter.
Mitigating A Government Shutdown
Given the historical lessons, there are strategies that can help mitigate the economic fallout of government shutdowns, including:
- Fiscal Responsibility: Promoting an overall sense of fiscal responsibility — both on the national and individual levels, can mitigate the financial fallout of a government shutdown.
- Continuing Resolutions: Temporary measures to fund the government can prevent abrupt shutdowns while lawmakers negotiate a longer term solution.
- Contingency Planning: Businesses that rely on government contracts should always have contingency plans in place to deal with a government shutdown, should one occur.
- Consumer Confidence: Offering assistance to federal employees and ensuring they receive back pay promptly can support consumer spending.
- Market Stability: Ensuring that financial markets remain stable during a government shutdown is incredibly important, both for the sake of domestic as well as international markets. Clear communication from the government can reassure investors.
The economic fallout of government shutdowns is not just a theoretical concern; it’s a reality that has played out in recent history. A stable and growing economy benefits all Americans, and proactive measures to prevent or mitigate the economic consequences of government shutdowns should be a top priority for policymakers.