The Congressional Budget Office (CBO) has estimated that the five-week partial shutdown of the government cost the economy $8 billion, from the time it started on December 22, 2018, until it ended on January 25, 2019.
President Donald Trump initiated the shutdown in order to extort $5.7 billion from Congress, after conservative commentators warned him that after failing to build a promised border wall in the two years Republicans had majorities in Congress, he could not expect cooperation once Democrats take over.
However, the gambit failed, and Trump caved on his demands and agreed to reopen federal operations for three weeks. During the closure, more than one million federal worker and employees of government contractors went without paychecks.
CBO estimates that the five-week shutdown delayed approximately $18 billion in federal discretionary spending for compensation and purchases of goods and services and suspended some federal services.
As a result of reduced economic activity, CBO estimates, real gross domestic product (GDP) in the fourth quarter of 2018 was reduced by $3 billion in relation to what it would have been otherwise.
In the first quarter of 2019, the level of real GDP is estimated to be $8 billion lower than it would have been—an effect reflecting both the five-week partial shutdown and the resumption in economic activity once funding resumed.
As a share of quarterly real GDP, the level of real GDP in the fourth quarter of 2018 was reduced by 0.1 percent, CBO estimates. And the level of real GDP in the first quarter of 2019 is expected to be reduced by 0.2 percent. The effect on the annualized quarterly growth rate in those quarters will be larger.
In subsequent quarters, GDP will be temporarily higher than it would have been in the absence of a shutdown. Although most of the real GDP lost during the fourth quarter of 2018 and the first quarter of 2019 will eventually be recovered, CBO estimates that about $3 billion will not be.
That amount equals 0.02 percent of projected annual GDP in 2019. In other words, the level of GDP for the full calendar year is expected to be 0.02 percent smaller than it would have been otherwise.
Underlying those effects on the overall economy are much more significant effects on individual businesses and workers.
Among those who experienced the largest and most direct negative effects are federal workers who faced delayed compensation and private-sector entities that lost business.
Some of those private-sector entities will never recoup that lost income.
All of the estimated effects and their timing are subject to considerable uncertainty.
In particular, CBO is uncertain about how much discretionary spending was affected by the partial shutdown, how affected federal employees and contractors adjusted their spending in response to delayed compensation, and how agencies will adjust their spending on goods and services now that funding has resumed.
In CBO’s estimation, the shutdown dampened economic activity mainly because of the loss of furloughed federal workers’ contribution to GDP, the delay in federal spending on goods and services, and the reduction in aggregate demand (which thereby dampened private-sector activity).
CBO’s estimates do not incorporate other, more indirect negative effects of the shutdown, which are more difficult to quantify but were probably becoming more significant as it continued.
For example, some businesses could not obtain federal permits and certifications, and others faced reduced access to loans provided by the federal government. Such factors were probably beginning to lead firms to postpone investment and hiring decisions. In addition, risks to the economy were becoming increasingly significant as the shutdown continued.
Although their precise effects on economic output are uncertain, the negative effects of such factors would have become increasingly important if the partial shutdown had extended beyond five weeks.
A conference committee was created as part of the deal to end, at least for now, the 35-day partial shutdown of the government.
The U.S. government runs on 12 appropriations bills that must be passed each year by Congress and signed by the president.
A stalemate over one of these, the fiscal year 2019 appropriations bill for the Department of Homeland Security, is what led to the shutdown, with Trump insisting it include $5.7 billion for a wall or similar barrier on the border with Mexico.
Former New Jersey Gov. Chris Christie said that Trump “blew it” when he shut down the government with “no plan on how to reopen it.”
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