What Could a 2024 Government Shutdown Mean for the US Economy?
In a time of rapid highs and lows in all sectors of the economy, it is important to understand the specifics of how governmental actions can influence the US financial system.
What is a government shutdown and how does it happen?
Though a government shutdown may seem like the end of the liberal world order as we see fit, it is more nuanced than an initial glance would suggest. Fundamentally, a government shutdown happens when US government offices that are deemed “nonessential” close down with a lack of funding. The lack of funding that starts the cascade of a shutdown occurs when the approval of the federal budget that finances the government gets delayed.
Though shutdowns happen within sub federal levels (ie. state, territorial, local), a government shutdown, as referred to in the news, is specifically about the federal government.
Historical precedent of shutdowns
Though there have been many close calls, especially in recent years, there have been 10 government shutdowns as a result of funding gaps. Though in retrospect the details of every shutdown will inevitably be boring and tedious, the most important –and recent– one happened from December 21st, 2018 all the way until January 25th, 2019. The government shutdown during former president Donald Trump’s presidency was the longest in US history, and was triggered by Trump’s proposal of a US-Mexico border wall. Partisan fighting in congress had a deadly spillover into the public sector, forcing the government to furlough nearly 800,000 federal workers in the span of just over a month.
Macroeconomic effects of a government shutdown
As the name suggests, shutdowns are inherently disruptive. They lead to massive delays in applications for passports, loans for small businesses, and even government benefits. Furthermore, national parks are unkempt, there are fewer safety inspections, as well as a litany of inconveniences that severely harden daily life. Although a longer shutdown wouldn’t end the economy as we see fit, it can have severe economic impacts. The shutdown of 18-19 cost over $11 billion, which nearly $3 billion lost permanently. Moreover, the first quarter of 2019 saw an $8 billion tank to real GDP, which can be translated to 0.2%. In fact, the Bipartisan Policy Center projects that the next one could cost more than $1 billion per week.
Why does this matter now?
Despite the threat of a shutdown always looming in the background of one of the most economically intense times in American history, some argue that the risk is uniquely likely now. Though the higher powers in both the senate and house of representatives in the US congress were able to formulate a holistic deal for 2024 funding, the future remains foggy as to whether they will be able to formulate hard legislation and pass it into law for the deadline in two weeks. This may seem like a dump of technical jargon, however it illustrates larger issues at scale: an increasing political divide among our federal government directly correlates to rougher financial decisions and policies in the future, with more compromises needed to be made among all parties involved. Political divides that directly affect the economy are becoming more apparent day by day, as many house republicans willingly use the threat of a shutdown in order to get provisions for tougher clamps on southern immigration. This time around, federal agencies such as the departments of Energy, Housing and Urban Development, and Veterans Affairs are the first to sit on the chopping block. The thesis behind this potential governmental stop is clear: as lawmakers duel it out on capitol hill, middle class Americans as well as general American constituents alike face the risk of their livelihoods eradicated.
Does this impact investment?
Though spillover effects of government shutdown can disrupt economic data collection such as monthly job reports, in turn leaving the Federal Reserve with minimal information as it attempts to navigate a landing within the complex economy. Moreso, data points to the consensus that shutdowns also reduce consumer sentiment leading to a reduction in consumer spending as well. Though this seems frightening, experts such as Joe Light of Barrons warn that suddenly dropping out of your investments would be a mistake. In fact, historical analysis concludes that while stocks may have dropped on average 10% post shutdown, they also rebound up to 18% on average in the 12 month period after.
Conclusion
Though government shutdowns have serious repercussions when they happen, in today’s political state, they are used as a bargaining chip to influence more partisan politics. Be that as it may, in the event of a shutdown happening, there are three key things to remember. The first, is to stay calm: government shutdowns will oftentimes not last more than a day, meaning that there will be minimal economic stagnation. Secondly, stay safe: make sure you do not make irrational decisions and pull out of all of your investments, instead, stay responsible and continue fiscal responsibility. Finally, plan for the future: as long as a government shutdown may last, it won’t be forever, you should always be thinking ahead with your money. Ultimately, government shutdowns are an inevitable part of the United States’ economic cycle, so your best bet is to remain calm and continue your financial education!
Bibliography:
https://www.investopedia.com/terms/g/government-shutdown.asp
https://www.nytimes.com/2024/01/07/us/congress-spending-deal-shutdown.html
https://www.cnn.com/2024/01/04/politics/government-shutdown-threat-negotiations/index.html
https://www.barrons.com/articles/government-shutdown-investors-da9767eb