What the Protracted Shutdown Means for the U.S. Economy

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What the Protracted Shutdown Means for the U.S. Economy

The U.S. government shutdown is entering its third week as Republicans and Democrats continue to bicker over $1.7 trillion in discretionary spending. Such shutdowns are a peculiarity of U.S. politics. In the latest one, President Donald Trump has responded with budgetary cuts specifically intended to harm his political enemies.

What is the broader economic impact of the shutdown? How does it affect U.S. government debt? And what are the constitutional questions at stake in shutdown spending?

Those are just a few of the questions that came up in my recent conversation with FP economics columnist Adam Tooze on the podcast that we co-host, Ones and Tooze. What follows is an excerpt, edited for length and clarity. For the full conversation, look for Ones and Tooze wherever you get your podcasts. And check out Adam’s Substack newsletter.

Cameron Abadi: What exactly gets lost in a shutdown? How much income is getting lost; what kind of government services are being cut?

Adam Tooze: The shutdown affects roughly one-quarter of government spending that is considered discretionary. And what it does is remove the guaranteed funding for agencies. So—not entitlement spending, not the sending out of Social Security checks or, so far, the payment of interest on government debt—but practically everything in between.

And in the crosshairs, people are looking at a group of federal workers that number in the order of 750,000 who are then classed into those who continue working whilst being paid; those who are furloughed and receive no pay and are removed from their workplaces; and a large group in between, hundreds of thousands of people who are expected to go on working without being paid.

The vast majority of essential services—so-called, many of which are obviously so—continue to work. For instance, air traffic controllers are expected to go on working even if they’re not being paid.

And then there’s even politics concerning whether those arrears are going to be made up for the people who have been working. It goes agency by agency. Some agencies maintain the vast majority of their staff in position and working. Other really large ones, like the Department of Homeland Security, will furlough hundreds of thousands of people and have hundreds of thousands of people working without proper paychecks. In the Defense Department, a large slice of the civilian workforce—that’s hundreds of thousands of people—will be in one of those two states, either working without being paid or being furloughed. It’s really dramatic.

And the way in which this question of whether people’s arrears are going to be covered has become politicized is really shocking, because you’re effectively creating a sort of subclass of employees—federal employees—whose wage contracts and rights under wage contracts seem to be essentially up for grabs at the whim of elected political officials, which is a disastrous look and gives you an idea, I think, of just how much contempt some people on the American political right in particular feel toward government employees in general. It’s really shocking, even before we get into those issues of what you might call discriminatory cuts.

CA: What is the broader economic impact on the United States of this shutdown? The U. S. government is the biggest economic actor in the country. Does it rise to the level of an economic emergency when the government shuts down?

AT: Estimates from JP Morgan and S&P Global Ratings, the bond rating agencies, suggest an impact of an annualized 0.1 percent to 0.2 percent of GDP lost for every week that the government is closed. So, a 10-week shutdown would take you to a 1 percent impact annualized over the whole year.

Now, some of that would be made good if the government services were restored and paychecks went out. But it’s a significant shock. In an economy that, over the year, might grow 2 percentage points, 2.5 percentage points, to be losing 5 percent of that growth—or as it accumulates over weeks, 10 percent or 15 percent or 20 percent of that growth—is very considerable, even though these numbers sound small.

Because, as you say, the federal government is a massive fiscal economic organism. It’s part of the essential metabolism of the modern economy. And it’s one of the things that, under normal circumstances, gives the economy stability, right? It’s what’s called the automatic stabilizer function of modern government.

If you look back to the late 19th century or early 20th century, you could see wild swings in GDP in part because federal government in the U.S. would make up 1 or 2 percentage points of GDP.

So there wasn’t that kind of oceanic stabilizing force that is big government. Since the Great Depression, and then ever more since the Cold War, we have a federal government machine that is taking up a quarter to a third of GDP, something like that, being pumped through the federal government machinery. And that just gives the economy a sort of flywheel stabilizer. And if you stop that flywheel suddenly, it’s destabilizing.

If you dig deeper and really ask yourself what’s most worrying the markets with regard to this, it is a combination of three things. It’s the fact that the American economy itself appears perched somewhat perilously between booming growth and stagnation, if not actual recession. So the latest job numbers have been really quite ambiguous—hard to read. It’s not quite clear exactly where the U.S. economy is going. And that just merely confirms every conventional economist prejudice of exactly what you would expect to happen, given the kind of repeated policy shocks that the Trump administration has delivered. We’ve not seen a crash, but you would certainly expect to see a slowdown as people pull back from making long-term investment commitments.

So we appear to be seeing that. We don’t really know whether we’re seeing it, and the shutdown will really make this much more acute as a problem, because one of the agencies that’s affected by the shutdown is the Bureau of Labor Statistics. And it will stop publishing data in due course, and then the lights go out in terms of economic policy. S&P comments that it thinks the most immediate impact of the shutdown on markets is just the lack of data, the lack of good data.

And then completing the triangle acquires real piquancy at this particular moment: The Fed has to make an interest rate decision. And that combination is dramatic from the point of view of the kind of regular flow of confident expectations of stable understandings of what the U.S. economy is. People will have heard, of course, about the politicized assaults on the American data collection apparatus over recent months. This just adds the cherry on top in terms of just shutting the publication down.

And that’s a bad combination of factors—the underlying questions about the U.S. economy, the uncertainty over the data, and the uncertainty over the Fed’s decision. So yeah, it’s a somewhat precarious kind of position that we’re in.

CA: How do the dynamics of the government shutdown affect U.S. government debt?

AT: So that’s not the question this time with this shutdown, because we’re not talking about the debt ceiling. The debt ceiling was increased over the summer—by $5 trillion in July—as part of budgetary legislation, which was passed under reconciliation. So it was easier to get the majorities necessary in Congress.

And we’re not looking at an immediate challenge to the credit of the United States. There have been shutdown standoffs over the past 15 years where that’s been an issue. Notably, if memory serves, 2013. So you’re not going to see huge amounts of pressure from the bond market. That also, of course, makes an agreement less likely.

But at a deeper level, what this points to—and what this struggle is about—is the question of America’s deficit and debt. And, frankly, whether either of the two sides care anymore. I mean, certainly if you ask the American public, the national deficit and debt has been a concern to American voters at various points in recent history—and in Europe, it regularly features as a top 10, top five issue among the German public, for instance, and is hugely salient in France right now. The French political system is chewing itself up over debt.

So democracies don’t naturally tend to utter fiscal responsibility, right? That’s a cynical conceit of a certain sort of economist and political scientists that they do. In fact, it’s more normal for politics to actually take the issue of debt seriously.

In the United States, it is unclear, frankly, whether that’s the issue here or whether it’s really a clash over political polar priorities and posturing. And the most likely outcome of all of this struggle is some sort of compromise on which both sides get their way and the deficit is further increased. So this will be following the model of the Big, Beautiful Bill in the summer, where the Republicans—while mouthing platitudes about fiscal sustainability and so on—gave away giant tax cuts and substantially increased the deficit. We talked about this on the show.

And I’m—as everyone listening to the show will know—I’m not a fiscal hawk. I’m not losing sleep over America’s debt level. But as a historian, you have to say that this is unique. We’ve never been in a position before where the political class appears to care less about the debt.

CA: The Trump administration is claiming the power to make spending decisions unilaterally, regardless of what Congress says. What’s at stake here in terms of the U.S. constitutional arrangement in the broader terms of this government shutdown fight?

AT: Yeah, I mean, two things come to mind. One of the extraordinary things is that they discovered the power of not spending, right? I’d not come across this before, but the refusal to spend funds appropriated by Congress is, after all, one of the major levers that the Trump administration is using.

And I mean it’s thoroughly illegal, apparently, according to the judgment of conventional jurisprudence, but it’s a very powerful mechanism. Because again, the standard assumption in political science is that politicians always want to spend, right? And so, the question is, how do you restrain them? But in this case, what they’re doing is saying, ‘No, we’re not going to spend that money on the U.S. Agency for International Development and things like that.’ It’s basically an attack. It’s a refusal to actually make good on budgetary allocations.

But what’s fascinating is that the really hardcore—the Stephen Millers and so on of the Trump administration—seem bent on this logic and are kind of looking for the emergency to allow them to declare this power, right? They need the emergency. And that was kind of in the background of also that question we were discussing a minute ago about whether or not the shutdown itself constitutes the emergency, which would then authorize you to do whatever you need to do.

But it’s pretty clear, isn’t it, that across the board, they’re looking to provoke a fight. They’re trying with ICE and these deportation interventions. They’re making deployments of the National Guard. There is a sense that the generation of a crisis sufficient in scale to warrant the kind of interventions they want to make is a key element of the politics of this moment. And it’s paradoxical because it still remains true that the carnage vision of the United States that Trump, apparently with Stephen Miller holding the pen, first announced in his first inaugural speech, is just a very long way removed from actual American realities.

It’s not easy to get to the kind of place that they want to be in. And so, they have to force it. And the worry, of course, is that they’ll find some way of provoking a truly horrible disaster of some type, a very violent confrontation of some kind. Ultimately, what would justify their very hard notion of federal power is an emergency.

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