Expert Commentary

Economic effects of the 2013 U.S. federal government shutdown

2013 reports by the nonpartisan Office of Management and Budget and Congressional Research Service on shutdown's impact on the economy and employment.

After a protracted, high-stakes standoff between the White House and Congress over the Affordable Care Act, the U.S. federal government experienced a “funding gap” and shut down on October 1, 2013. The crisis lasted until October 17, when Congressional Republicans backed down and agreed to a short-term spending bill.

The negative consequences are an important lesson moving forward as politicians again resume negotiations in the new year. But getting the specifics right about what really happened is essential, as the Annenberg Public Policy Center’s has pointed out.

So what were the true consequences? This is what is known so far:

On Nov. 7, 2013, the nonpartisan Office of Management and Budget issued a report detailing the widespread consequences. It does not make an independent overall assessment of the economic costs to the U.S. economy — a single figure derived from OMB’s own economic model — but rather details, sector-by-sector, the negative outcomes. The report does state that “leading independent forecasters estimate that the shutdown will lower fourth quarter real GDP growth by 0.2-0.6 percentage points or more, or $2-$6 billion in lost output”; of this figure, OMB notes that “some have reported this output loss on an annualized basis, in which case it amounts to up to $24 billion.” Other consequences include:

  • “Federal employees were furloughed for a combined total of 6.6 million days, more than in any previous government shutdown. At its peak, about 850,000 individuals per day were furloughed. That number fell once most Department of Defense civilian employees were able to return to work as the Pentagon implemented the Pay Our Military Act.”
  • “The shutdown cost the Federal government billions of dollars. The payroll cost of furloughed employee salaries alone – that is, the lost productivity of furloughed workers – was $2.0 billion. Beyond this, the Federal government also incurred other direct costs as a result of the shutdown. Fees went uncollected; IRS enforcement and other program integrity measures were halted; and the Federal government had to pay additional interest on payments that were late because of the shutdown.”
  • “The shutdown impacted millions of Americans who rely on critical programs and services halted by the shutdown. For example: Hundreds of patients were prevented from enrolling in clinical trials at the National Institutes of Health. Almost $4 billion in tax refunds were delayed. Agencies from the Food and Drug Administration to the Environmental Protection Agency had to cancel health and safety inspections, while the National Transportation Safety Board was unable to investigate airplane accidents in a timely fashion. Critical government-sponsored scientific research was put on hold. Notably, four of the five Nobel prize winning scientists who work for the Federal government were furloughed during the shutdown.”

The White House Council of Economic Advisors estimates that there was a “0.25 percentage point reduction in the annualized GDP growth rate in the fourth quarter and a reduction of about 120,000 private-sector jobs in the first two weeks of October.”

A 2013 report by the Congressional Research Service (CRS), The FY2014 Government Shutdown: Economic Effects,” also examines the impact of the shutdown on the U.S. economy and reviews third-party estimates of its effects. Predictions included “a reduction in gross domestic product (GDP) growth of at least 0.1 percentage points for each week of the shutdown, with a cumulative effect of up to 0.6 percentage points in the fourth quarter of 2013.”

The report’s findings include:

  • The direct impact of reduced federal spending is estimated to be the equivalent of 4.5% of the GDP. The ratings agency Standard & Poor’s predicted that the shutdown reduced the annualized fourth-quarter 2013 GDP growth by at least 0.6%, the equivalent of $24 billion.
  • The direct impact of reduced federal spending is estimated to be the equivalent of 4.5% of the GDP. While the effect of a 16-day interruption was thus relatively small on an annual basis, government spending has “multiplier effects” — every dollar has a ripple effect as it’s spent in turn. The Congressional Budget Office estimates that “$1 of reduced federal spending on goods and services could reduce GDP by between $0.40 and $1.90” over the next year, depending on the actions of the Federal Reserve.
  • Consumer, business and investor confidence was negatively affected by the shutdown, which “could have led consumers and businesses to postpone or cancel spending decisions, particularly large orders for consumer durables or capital investment.” The Conference Board’s consumer confidence index fell nine points between September and October, from 80 to 71, a 12.7% drop, but remained higher than it was in January 2013, during the “fiscal cliff” crisis, also known as sequestration.
  • The seeming inability to find a long-term solution to the U.S. budget creates uncertainty over “future policy as well as overall financial conditions, given the potential financial effects of a failure to raise the debt ceiling.” According to Moody’s, “half the CEOs in the Business Roundtable’s third-quarter outlook survey said Washington’s battles have affected their hiring plans over the next six months.”

The CRS report notes that calculations of the shutdown’s impact on the national economy do not take into account state-level losses (some estimates have been made), including decreases in the value of securities or individual costs that resulted from the unavailability of government services. Consequently, the total cost to the entire economy could be even higher.

Two previous shutdowns, in 1995 and 1996, had wide implications: Veterans’ services were curtailed, the CDC stopped disease surveillance, hundreds of national parks were closed and passports and visas stopped being processed. Even worse, more than 20% of federal contracts, representing $3.7 billion in spending, were affected adversely.

Keywords: Congress, economy, employment

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