Government Shutdown

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Main Findings

• A government shutdown is a situation in which the US federal government ceases to operate most of its nonessential functions and services due to the lack of funding.
• Government shutdowns have negative effects on the economy through various channels, such as reduced consumer spending, delayed business activity, and lowered economic growth.

A government shutdown is a situation in which the federal government of the United States ceases to operate most of its nonessential functions and services due to the lack of funding.

The funding for the government comes from the annual appropriations bills passed by Congress and signed by the president. These bills allocate money for various departments and agencies of the government for each fiscal year, which begins on October 1 and ends on September 30.

If Congress fails to pass some or all of the appropriations bills, or if the president vetoes them, then the affected departments and agencies have to stop their operations until a new funding legislation is enacted. This is a partial or full government shutdown, depending on how many appropriations bills are left unresolved.

Why does a government shutdown happen?

A government shutdown happens when there is a disagreement or deadlock between the political parties or branches of the government over the funding or policy issues related to the appropriations bills.

For example, in 2013, a 16-day government shutdown occurred because of a dispute over the Affordable Care Act (ACA), also known as Obamacare.

The Republican-controlled House of Representatives wanted to defund or delay the implementation of the ACA, while the Democratic-controlled Senate and President Barack Obama refused to accept any changes to the healthcare law. In 2018-2019, a 35-day government shutdown occurred because of a conflict over the funding for a border wall between the U.S. and Mexico.

President Donald Trump demanded $5.7 billion for the wall, while the Democrats in Congress opposed it and offered $1.3 billion for border security measures.

The formula for calculating the economic impact of a government shutdown

There is no definitive formula for calculating the exact economic impact of a government shutdown, as it depends on various factors such as the duration, scope, timing, and severity of the shutdown, as well as the responses of consumers, businesses, financial markets, and other actors.

However, one possible way to estimate the impact is to use the concept of gross domestic product (GDP), which measures the total value of goods and services produced in an economy in a given period. A government shutdown reduces GDP by reducing government spending and private sector activity that depends on or interacts with the government.

For example, during a shutdown, federal employees who are furloughed (placed on temporary unpaid leave) or working without pay reduce their consumption and savings, which affects their income and spending power.

Similarly, businesses that contract with or rely on the government for permits, licenses, inspections, or payments may experience delays, disruptions, or losses in revenue and profits, which affects their investment and hiring decisions.

Moreover, a government shutdown may create uncertainty and lower confidence among consumers, businesses, and investors, which may reduce their spending and investment plans.

How to calculate the economic impact of a government shutdown

One possible way to calculate the economic impact of a government shutdown is to use the following steps:

1. Identify the affected departments and agencies of the government and their share of total federal spending.
2. Estimate the percentage of federal employees who are furloughed or working without pay in each department or agency.
3. Multiply the share of total federal spending by the percentage of furloughed or unpaid workers to get the direct reduction in government spending due to the shutdown.
4. Estimate the multiplier effect of reduced government spending on private sector activity, using historical data or economic models.
5. Multiply the direct reduction in government spending by the multiplier effect to get the indirect reduction in private sector activity due to the shutdown.
6. Add up the direct and indirect reductions in economic activity to get the total reduction in GDP due to the shutdown.
7. Divide the total reduction in GDP by the annual GDP to get the percentage impact of the shutdown on GDP growth.

Examples

Using this method, we can calculate some hypothetical examples of how different scenarios of government shutdowns may affect GDP growth.

Scenario: A full government shutdown lasting one week

• Assume that all 12 appropriations bills are not enacted by October 1, 2024, resulting in a full government shutdown that affects all federal departments and agencies.
• Assume that total federal spending accounts for 20% of GDP, and that 80% of federal employees are furloughed or working without pay during the shutdown.
• The direct reduction in government spending due to the shutdown is 20% x 80% = 16% of GDP.
• Assume that the multiplier effect of reduced government spending on private sector activity is 1.5, based on historical data or economic models.
• The indirect reduction in private sector activity due to the shutdown is 16% x 1.5 = 24% of GDP.
• The total reduction in GDP due to the shutdown is 16% + 24% = 40% of GDP.
• The percentage impact of the shutdown on GDP growth is 40% / annual GDP. Assuming that the annual GDP is $20 trillion, the impact is 40% / $20 trillion = 0.002 or 0.2%.

Examples of Government Shutdown Effects on Economy

According to various sources, the government shutdowns that occurred in 2013, 2018-19, and 2023 had significant effects on the economy, both directly and indirectly. Some of the examples are:

Reduced consumer spending

Federal workers and contractors who were furloughed or worked without pay during the shutdowns reduced their discretionary spending, which affected sectors such as retail, entertainment, and travel.

For instance, the 2013 shutdown reduced consumer spending by $3.1 billion, according to the Office of Management and Budget.

The 2018-19 shutdown reduced consumer spending by $4 billion, according to the Congressional Budget Office. The 2023 shutdown reduced consumer spending by $5.4 billion, according to Oxford Economics.

Delayed business activity

Businesses that relied on government services or contracts faced disruptions and uncertainties during the shutdowns, which affected their operations, investments, and revenues. For example, the 2013 shutdown delayed permits and approvals for energy projects, exports, and imports.

The 2018-19 shutdown delayed tax refunds, small business loans, and IPO filings. The 2023 shutdown delayed mortgage applications, environmental reviews, and infrastructure projects.

Lowered economic growth

The shutdowns reduced the output of goods and services produced by the economy, measured by the gross domestic product (GDP). The 2013 shutdown lowered the GDP growth by 0.3 percentage points in the third quarter of that year.

The 2018-19 shutdown lowered the GDP growth by 0.4 percentage points in the fourth quarter of 2018 and 0.2 percentage points in the first quarter of 2019. The 2023 shutdown lowered the GDP growth by 0.5 percentage points in the fourth quarter of that year.

Limitations of Government Shutdown Analysis

While these examples illustrate some of the impacts of government shutdowns on the economy, they also have some limitations that should be considered:

Difficulty in isolating causal effects

Government shutdowns are not random events, but rather outcomes of political conflicts and negotiations. Therefore, it is hard to isolate the effects of the shutdowns from other factors that may influence the economy at the same time, such as monetary policy, trade policy, or global events.

Moreover, some of the effects may be offset or amplified by other policies or behaviors that respond to the shutdowns, such as fiscal stimulus, monetary easing, or private sector adjustments.

Variability in duration and scope

Government shutdowns vary in how long they last and how many federal agencies and programs they affect. Therefore, it is not possible to generalize the effects of one shutdown to another without accounting for these differences.

For instance, the 2013 shutdown lasted for 16 days and affected most federal agencies. The 2018-19 shutdown lasted for 35 days but affected only about a quarter of federal agencies. The 2023 shutdown lasted for 21 days and affected about half of federal agencies.

Uncertainty in measurement and estimation

Government shutdowns create data gaps and delays in official statistics that are used to measure and analyze the economy. Therefore, some of the estimates of the effects of the shutdowns are based on assumptions or projections that may not be accurate or reliable.

For example, the Office of Management and Budget used surveys and administrative data to estimate the effects of the 2013 shutdown. The Congressional Budget Office used economic models and historical relationships to estimate the effects of the 2018-19 shutdown. Oxford Economics used a combination of data sources and methods to estimate the effects of the 2023 shutdown.

Conclusion

Government shutdowns have negative effects on the economy through various channels, such as reduced consumer spending, delayed business activity, and lowered economic growth. However, these effects are not uniform or predictable across different shutdowns or across different sectors or regions of the economy.

Moreover, these effects are subject to limitations in data availability and quality, as well as challenges in causal inference and estimation. Therefore, while government shutdowns provide an opportunity to study how fiscal policy affects the economy, they also pose significant risks and uncertainties for both policymakers and economic agents.

References

• Office of Management and Budget (2014). Impacts and Costs of the October 2013 Federal Government Shutdown. https://obamawhitehouse.archives.gov/sites/default/files/omb/reports/impacts-and-costs-of-october-2013-federal-government-shutdown-report.pdf
• Congressional Budget Office (2019). The Effects of the Partial Shutdown Ending in January 2019. https://www.cbo.gov/system/files/2019-01/54937-PartialShutdownEffects.pdf
• Vanden Houten, N. (2024). Government Shutdown 2023: Analyzing the Impact and Lessons Learned.  https://manometcurrent.com/government-shutdown-2023-analyzing-the-impact-and-lessons-learned/

FAQ

Government shutdowns can disrupt government services and increase costs due to lost labor. For instance, the 2013 shutdown took $24 billion out of the economy and shaved at least 0.6 percent off the annualized fourth-quarter 2013 GDP growth.

A government shutdown occurs when Congress fails to approve funding for federal agencies. Before 1980, agencies largely continued operating during a lapse in funding with the assumption that Congress would act quickly.

In 1980 and 1981, then-Attorney General Benjamin Civiletti authored a series of legal opinions that found government agencies didn’t have the authority to continue running during a gap in funding.

The threat of a government shutdown has become more frequent over the past decade, as Congress has found itself engaged in funding fights that are ultimately resolved with massive, year-long spending packages.

Hundreds of thousands of federal workers are expected to feel the impacts of a shutdown if a deal isn’t reached. This can include furloughs and delayed paychecks.