U.S. Government Shutdown Is Unlikely to Cause an Immediate Recession

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The U.S. government is facing a possible shutdown on September 30, 2023, if Congress fails to pass a spending bill or a continuing resolution to fund the federal agencies. The shutdown would affect about 800,000 federal workers who would either be furloughed or work without pay, as well as many government services and programs that would be suspended or reduced. However, experts say that the shutdown is unlikely to cause an immediate recession, as long as it is resolved quickly and does not coincide with other economic shocks.

The economic impact of a government shutdown

According to the New York Times, a government shutdown would have a negative impact on the U.S. economy, but the magnitude and duration of the effect would depend on how long the shutdown lasts and how widespread it is. The White House and Wall Street estimates suggest that the economy could withstand a brief shutdown, with risks mounting the longer it lasts.

A government shutdown would reduce the gross domestic product (GDP), which measures the total value of goods and services produced in the country, by about 0.1 percentage points per week, according to the White House Council of Economic Advisers. This means that a one-week shutdown would lower the annualized GDP growth rate by about 0.4 percentage points, while a four-week shutdown would lower it by about 1.6 percentage points.

A government shutdown would also affect consumer and business confidence, which could lead to lower spending and investment. According to a survey by the University of Michigan, consumer sentiment fell sharply during the previous shutdowns in 2013 and 2018-2019, and took several months to recover. A similar drop in confidence could occur this time, especially if the shutdown is prolonged or combined with other uncertainties, such as the debt ceiling, the coronavirus pandemic, or the global supply chain disruptions.

The historical precedents of a government shutdown

The U.S. government has experienced 21 shutdowns since 1976, when the current budget process was established. The longest shutdown was from December 22, 2018, to January 25, 2019, which lasted for 35 days and affected nine federal departments and several agencies. The shutdown cost the economy $11 billion, according to a Congressional Budget Office report.

The second longest shutdown was from October 1 to October 17, 2013, which lasted for 16 days and affected the entire federal government. The shutdown resulted in an estimated $24 billion in lost economic output, according to a Congressional Research Service report. The report also found that the shutdown had negative effects on federal employees, contractors, beneficiaries, state and local governments, and the public.

The shortest shutdown was on February 9, 2018, which lasted for less than nine hours and had a minimal impact on the economy. The shutdown occurred when Congress missed a midnight deadline to pass a spending bill, but quickly resolved the issue and reopened the government by early morning.

The possible scenarios of a government shutdown

The current situation is different from the previous shutdowns, as the federal government is operating under a continuing resolution that expires on September 30, 2023. This means that Congress has not passed any appropriations bills for the fiscal year 2024, which begins on October 1, 2023. Therefore, if Congress does not pass a new spending bill or another continuing resolution by the deadline, the government would shut down entirely, affecting all federal agencies and programs.

U.S. Government Shutdown Is Unlikely

However, there are some exceptions and exemptions that would allow some government functions to continue during a shutdown. For example, some activities that are essential for national security, public safety, or the protection of property would be exempt from the shutdown, such as the military, law enforcement, air traffic control, and social security payments. Some activities that are funded by sources other than annual appropriations, such as user fees, trust funds, or mandatory spending, would also be exempt from the shutdown, such as the postal service, Medicare, and Medicaid.

The likelihood of a government shutdown depends on the political dynamics and negotiations between the White House and Congress, as well as the public opinion and pressure. The main issues that are dividing the parties are the size and scope of the $3.5 trillion reconciliation bill that Democrats are pushing for, and the debt ceiling that Republicans are refusing to raise. The reconciliation bill would expand social programs and address climate change, while the debt ceiling would allow the government to borrow money to pay its existing obligations.

There are several possible scenarios that could happen before or after the deadline. One scenario is that Congress passes a short-term continuing resolution that would fund the government for a few weeks or months, and buys more time to reach a deal on the reconciliation bill and the debt ceiling. Another scenario is that Congress passes a long-term spending bill that would fund the government for the entire fiscal year, and includes provisions to raise the debt ceiling and enact some or all of the reconciliation bill. A third scenario is that Congress fails to pass any spending bill or continuing resolution, and the government shuts down until a compromise is reached.

The implications of a government shutdown for the U.S. and the world

A government shutdown would have implications not only for the U.S. economy, but also for the global economy and the international relations. The U.S. is the world’s largest economy and a major trading partner for many countries, so a slowdown or disruption in its economic activity would have spillover effects on other markets and regions. A government shutdown would also undermine the credibility and reputation of the U.S. as a leader and a reliable ally, and could affect its ability to deal with various challenges and opportunities, such as the coronavirus pandemic, the climate change, the China rivalry, and the Afghanistan crisis.

Therefore, a government shutdown is something that should be avoided or resolved as soon as possible, as it would have negative consequences for the U.S. and the world. However, a government shutdown is unlikely to cause an immediate recession, as long as it is short-lived and does not coincide with other economic shocks. The U.S. economy has shown resilience and recovery in the past, and could overcome the temporary setback of a government shutdown, if the political leaders and the public work together to find a solution and prevent a crisis.

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