The looming federal government shutdown would greatly disrupt Washington, D.C., but unless it is prolonged, would have little economic effect elsewhere.
A government shutdown would be bad. That's the short version of what economists, lawmakers, and pundits have been saying since it became clear a budget impasse would threaten to close down government operations starting on October 1. For an average, outside-the-Beltway American, that badness can be hard to conceptualize. Here's a rundown of what the potential effects could be.
A Big Hit to Washington, D.C.
There's a reason why Washington is up in arms about a shutdown, and it's about much more than partisan politics. A shutdown could cost the Washington, D.C., metro area up to $200 million a day, according to the Washington Post.
Stephen Fuller, director of George Mason University's Center for Regional Analysis, estimates that 700,000 DC-area jobs could be affected by the shutdown. That includes the nearly 320,000 federal government employees who live in the metropolitan area, according to the Labor Department. By Fuller's estimates, nearly 60 percent of all federal employees in the Washington DC metro area could be forced to stay home from the office if Congress does not pass a bill to keep the government funded.
That means fewer wages, which translates to less shopping and eating out at restaurants around the city, further dragging down the local economy. And while workers might eventually get paid for the days they missed, the damage would be done for local restaurants.
It's not just fewer federal paychecks: it also means less tourism as attractions like the Smithsonian Institution's collection of museums and National Zoo close down, giving travelers nationwide and even worldwide less to do around the city. Add that to an end to garbage pickup and other services like the Department of Motor Vehicles, as the District's budget has to be approved by Congress. That means the potential for a rough (not to mention smelly and rat-infested) time in D.C.
Barely Noticeable in Many Other Places
According to government tallies, the D.C. metro area was home to 15.5 percent of all federal government employees as of September 2010. The only state that comes close to that total is California, at 8.2 percent, and that's statewide. Which means that whatever pain other states feel from lost federal wages, it will be far less intense than what Washington feels.
In fact, says one economist, a shutdown would have to be prolonged for the economic effects to reach into the lives of many Americans whose livelihoods are not directly tied to the federal government.
"The longer it goes on, the worse it will be," says Tom Jackson, principal economist for IHS Global Insight, but for many, "it would probably take quite a while" for the impact to be felt.
The economic effects won't touch a lot of Americans in remote areas, but it could show up in their lives as an inconvenience. For example, a shutdown could make it tougher to get a passport and would close down national parks, meaning a bruising to the economies of towns near places like Yellowstone and Yosemite.
Worse with Every Passing Day
Depending on its length, a shutdown could be a major drag on economic growth, according to one top economist. A three-to-four-day shutdown would drag fourth-quarter GDP growth down by 0.2 percentage points, as Moody's Analytics Chief Economist Mark Zandi told the Senate Budget Committee last week. Given that the economy grew at a rate of 2.5 percent in the second quarter, that's not a huge difference.
"The economic impact of the government shutting down for two to five days is literally difficult to measure" due to its small size, says John Canally, economist at LPL Financial.
But a longer shutdown would mean a bigger hit. If the shutdown drags on for three to four weeks, as it did in the 1995-6 shutdown, it could subtract 1.4 percentage points off of fourth-quarter growth, as Zandi said. In an economy that's already fragile, that's a massive consequence to Congress' budget impasse.
A Prelude to the Real Horror
Whatever issues the shutdown creates, it would likely be dwarfed by the prospect of a debt ceiling showdown. Though the two deadlines aren't related, they are coming one after the other: the nation is poised to hit the debt ceiling on October 17. If that happens, it could send panic throughout financial markets, sending stocks tumbling. It could also send interest rates spiking and threaten the nation's credit rating if investors and rating agencies decide that U.S. treasuries are risky.
Then again, it could mean lower interest rates as shaky investors put their money into treasuries.
"When investors are uncertain, they're going to go to high-quality investments or cash," says Canally. He expects investors will flock to investments that are considered ultra-safe, like treasuries, in the event of another debt ceiling debacle.
But the very fact that no one knows what to expect from hitting the debt ceiling is perhaps what makes it such a terrifying proposition. And it's why many economists want Washington to resolve the shutdown already so it can also get the debt ceiling out of the way as soon as possible.
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