Shutting down the government could cost the federal government well over $2 billion dollars if it resembles the last shutdowns in 1995-1996, though the economy would be harmed in additional ways that are nearly impossible to measure.
The Office of Management and Budget estimated that two government shutdowns in 1995 and 1996, totaling 27 days, cost the federal government $1.4 billion. That’s over $2 billion in today’s dollars on costs like back pay to furloughed federal workers and uncollected fines and taxes. That number doesn’t begin to account for intangible losses in worker morale and productivity, and confidence in the federal government.
Doug Holtz-Eakin, the former director of the Congressional Budget Office, said a short-term shutdown will have a fairly small economic impact. The federal government spends roughly $3 billion a day in discretionary spending, so a disruption like the ones in 1995 and 1996 could wind up being roughly equivalent to the cost of keeping the government running for a day.
“A short government shutdown is not a very important event; it’s a hiccup,” Holtz-Eakin said. “I think the bulk of the costs are transitory and are paid back later. That’s really what happens. There’s some distraction costs that never go away and they’re real.”
Among those distractions is the amount of time federal managers and human resources employees must spend preparing their shutdown plans. Prior to the 1980s, many agencies would simply continue running if there was a funding gap. That changed with a legal memo from Attorney General Benjamin Civiletti saying government work had to stop, with the exception of certain employees.
That’s when those agencies had to start writing plans for a government shutdown – not a full time job, but additional responsibilities on top of their regular work, said John Cooney, a former Office of Management and Budget attorney who helped develop these plans. “They’d have to put aside whatever other functions they had because this one is on an absolute deadline,” he said.
These plans went largely untouched between the 1995-1996 government shutdown and the one that nearly took place in 2011, said Cooney. The good news is that some of the planning work that will have gone into this shutdown was done two years ago and is still fresh.
Though Holtz-Eakin maintains that a short shutdown of a few days will have a small effect, a longer one will have bigger effects. “You start to really impact the ability of government employees to spend,” he said. That’s 800,000 people who won’t be getting regular paychecks.
The proximity of a coming fight over the U.S. debt ceiling – borrowing authority will run out on Oct. 17, according to the Treasury Department – could exacerbate the market’s reaction to a shutdown as financial institutions lose confidence in the federal government. In the past, the effects have been limited: Bank of America-Merrill Lynch research showed that the the median change for the S&P 500 is a gain of 0.1 percent in the last 11 cases of a federal shutdown. That is followed by a median increase of 2.8 percent in the following month.
But the threat of a default tends to scare the markets more. “Once you move financial markets you hit the whole economy,” Holtz-Eakin said. “That’s a different set of issues, much bigger than the shutdown. But they’re close together in time this year, conflated together in minds.” The markets all posted a loss at the end of the day.
Another area where the shutdown will cost money is in contract spending, which has exploded in recent years and remains well over $500 billion a year even as the Obama administration has taken steps to curb it.
Though employees of firms that contract with the federal government won’t be furloughed the same way that federal employees are, there will be employees on standby who receive their salaries even as the contracts are temporarily on hold. And those contractors will ultimately get paid or get an equitable adjustment when the shutdown ends, said former Rep. Tom Davis, R-Va., who is now the Director of Federal Government Affairs for Deloitte. Like federal government managers, contracting officers have already lost work time going through all of their contracts to determine which ones will be affected by a shutdown and how they can keep things running.
“You’re paying for stuff that is not getting done,” Davis said of a shutdown. On top of that, he added, “the morale costs on this to federal workers and contractors is huge.” Federal workers were paid retroactively in past shutdowns, but there’s no guarantee that will happen this time around. Those effects will be outsized in Maryland and Virginia where tens of thousands of people work for government contracts. Maryland officials told the Washington Post the state would lose $5 million a day in lost income tax revenue.
Plus, Davis added, there is some general mischief that can occur when employees stay home and some work is left to unpaid interns and volunteers. Davis noted that the relationship between former President Bill Clinton and infamous intern Monica Lewinsky started during the November 1995 shutdown.