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A Government Shutdown from an Economist's Viewpoint

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Have you heard that a government shutdown would hurt the US economy like it did last time? Perhaps we should not believe everything we hear out of Washington and take a look at the facts before we draw a firm conclusion.

The U.S. government appears to be headed to a shutdown, and the White House has assured us that this is bad for the economy and that prior shutdowns have disrupted the economy. That got me to wondering, so I went and took a look. The last shut downs were in November 14 to 19, 1995 and December 16, 1995 to January 6, 1996. Bill Clinton was in office and presiding over a growing economy. The Republicans controlled Congress.

So what happened in the economy?

  • Government employment slipped in January but fully rebounded by March.
  • Retail Sales continued at record high levels through this time period. November and December 1995 came in 4.6% and 2.5% ahead of the year before. January 1996 came in 4.0% ahead of January 1995. No impact was discernable.
  • Defense Capital Goods New Orders were in Phase A (improving year-over-year comparisons in the monthly numbers, but below zero) before and through this time period. No impact discernible.
  • Nondefense Capital Goods New Orders posted year-over-year gains throughout with a dip in the growth rate in January 1996. November 1995 through February 1996 came in 8.6%, 10.1%, 1.7% and 10.5% above comparable year-earlier levels. Hardly a crisis, and it did not show up in employment.
  • U.S. Industrial Production was in Phase C (slower growth) from September 1995 to January 1996. The growth rate slowed from 5.0% to 1.9% in this time. There was no downturn. The rate of growth picked up into Phase B (faster growth) in February. Leading indicators and our analysis showed this to be a cyclical, not a political, event. By way of comparison, the growth rate in July 2013 was 1.4%, below the January 1996 low point.

The following is what happened in 1995-1996 (according to a Congressional Research Service report quoted in a Washington Post article). Here are some quotes from of the article's highlights:

Health. The National Institutes of Health stopped accepting new patients for clinical research and stopped answering hotline calls about medial questions. The Centers for Disease Control stopped monitoring disease.

Law enforcement. The Bureau of Alcohol, Tobacco, and Firearms stopped processing applications for firearms and alcohol. The federal government stopped work on about 3,500 bankruptcy cases as well as a number of child-support cases. The Border Patrol put a hold on hiring 400 new agents.

Parks and museums. The National Park Service closed 368 sites, such as Yosemite National Park in California. All told, some 7 million visitors were turned away. (One big exception was the south rim of the Grand Canyon, which stayed open only because Arizona agreed to pick up the tab.)

Regulatory agencies. The Environmental Protection Agency closes down almost entirely during a shutdown. So do certain financial regulators, including the Securities and Exchange Commission and the U.S. Commodity Futures Trading Commission. Although corporations can still file documents like 10Ks through automated systems, there's no one around to scrutinize the paperwork.

(Small parts of) Social Security. During the last shutdown, the Social Security Administration was able to keep on enough employees to make sure the checks kept going out. But the agency didn't have enough staff to do things like answer phone calls or help recipients who needed to change addresses. So some disruptions are possible.

Visas and passports. During the shutdown, around 20,000 to 30,000 applications from foreigners for visas went unprocessed each day. The State Department also had to let some 200,000 applications from Americans for visas gather dust.

Veterans. Although some key benefits continued and the VA hospitals remained open, a number of services were curtailed. These services ranged from health and welfare to finance and travel for veterans.

The above surely had a negative impact on individuals and whole families over the three weeks stretching from mid-December to January 6. No one wants this, and I don't want to minimize the difficulties this put on people, but it did not rise to the level of disruptive to the economy or a "self-inflicted wound." Let's make sure we listen to the political rhetoric carefully, keeping in mind the lessons from the past and the resiliency of the economy.

Discuss this Blog Entry 1

on Oct 17, 2013

I don't buy into the idea that government spending should be included in the GDP, or any other measure of country output. The government just shifts money around, it doesn't add any value to that money by taking it from one producer and moving it to another. The Chinese are doping the numbers by building ghost cities and putting the construction on their GDP numbers. None of it is sustainable.

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Brian Beaulieu

Brian Beaulieu has been an economist with ITR Economics since 1982 and its CEO since 1987. He is also Chief Economist for Vistage International and TEC, global organizations comprised of over 13,000...

Alan Beaulieu

One of the country’s most informed economists, Alan Beaulieu is a principal of the ITR Economics where he serves as President. ITR predicts future economic trends with 94.7% accuracy rate and...
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