• Quick note - the problem with Youtube videos not embedding on the forum appears to have been fixed, thanks to ZiprHead. If you do still see problems let me know.

Shutdown - The Economic Implications

psionl0

Skeptical about skeptics
psionl0
Joined
Sep 29, 2010
Messages
22,062
Location
31°57'S 115°57'E
There is a lot of love being spread around for the GOP in the political threads ATM because of the shutdown.

However, I am curious about the economics of how this will play out. What sort of services will be affected (apparently visa seekers are going to have problems) and how this will play out in the markets both domestically and internationally.

Evidently raising the the debt ceiling on the 17th doesn't look like being a rubber stamp affair anymore and CNN commentators are talking about debt defaults.

Anybody have any thoughts (that don't include "#%$$%^@@%#$GOP!!!")?
 
As usual the amateur opinions only view half the economic transactions and create a false impression; Sowell's "compared to what ?" fallacy. Broken window fallacy in reverse.

Yes any shutdown will stop Federal spending an reduce GDP by definition. The_Don's citations of 0.9% is a GoldmanSachs estimate of QUARTERLY GDP results base on a 3 week shutdown. If we accept that number (dubious since the parts with continued funding were uncertain) 3wk/13wk ~23% of a quarter so it's a 0.9%/0.23 or an ongoing 3.9% GDP drag for it's duration. A far cry from the "shutdown the economy" rhetoric.

The avg length of the last 17 shutdowns is 6.5 days, so a 0.07% hit to annual GDP if we extrapolate the GS number. I've heard other estimates ~-0.025% of annual GDP/week of shutdown.

So what is missing from this consideration ? The alternatives -
- Historically after the shutdown some of the "stopped" funds are eventually spent making up for the backup, and reducing the GDP deficit.
- In the longer run, the items under consideration, tax on medical devices, has a negative impact on GDP too.
- The Oct1 ACA rollout has major problems - no eligibility verification, inadequate security for personal information. The resulting fraud is also a drag on GDP.

Which is worse - a 3.9% drag for a few weeks with some extent of 'makeup' spending at the end vs PERHAPS a year of fraud (extent and duration unpredictable) and a lifetime of reduced medical device innovation. That's hard to evaluate in a fair comparison.

WRT to a default - that's highly unlikely unless the party in charge decides to commit political suicide. There are all sorts of ways to avoid bond payment default. Of course it's far more difficult with Bernanke buying such a large fraction of general issue bonds, but ... they can 'print' money for interest payments as easily a for bond purchase. Talk of bond defaults is 100% pure political demagoguery at this point.

===

At the micro level large government contractors can typically survive weeks of shutdown, while small contractors may not.

The futures market is giving it a 'yawn' this morning.
 
Last edited:
stevea said:
So what is missing from this consideration ? The alternatives -
- In the longer run, the items under consideration, tax on medical devices, has a negative impact on GDP too.
- The Oct1 ACA rollout has major problems - no eligibility verification, inadequate security for personal information. The resulting fraud is also a drag on GDP.
Click to expand...
Newsflash: Obamacare is here, and the shutdown has done nothing to prevent that.
 
Default:

FWIW the 2013 annual interest due from the Treasury is ~$395B, but the October amt is only ~$12.9B (varies a lot month to month). Almost 1/8 of that interest goes to the Federal Reserve (holds >$2.06T of Treasuries) and back to Treasury. They need ~$11B to avoid default in October on the public debt. Drop in the bucket.
 
I'm quite certain there will not be a default. Paying interest on the debt is the highest priority (or should be) even if practically everything else has to be shut down. Not that I'm endorsing shutting everything else down.

stevea said:
The futures market is giving it a 'yawn' this morning.
Click to expand...

I was a bit surprised to see that yesterday (today your time) was actually an up day on Wall Street. I can only assume that means they think this won't last very long. If it start to show signs that it will drag on, however, I expect the markets to fall.
 
stevea said:
So what is missing from this consideration ? The alternatives -
- Historically after the shutdown some of the "stopped" funds are eventually spent making up for the backup, and reducing the GDP deficit.
- In the longer run, the items under consideration, tax on medical devices, has a negative impact on GDP too.
- The Oct1 ACA rollout has major problems - no eligibility verification, inadequate security for personal information. The resulting fraud is also a drag on GDP.

Which is worse - a 3.9% drag for a few weeks with some extent of 'makeup' spending at the end vs PERHAPS a year of fraud (extent and duration unpredictable) and a lifetime of reduced medical device innovation. That's hard to evaluate in a fair comparison.
Click to expand...

The ACA cannot be repealed, defunded or delayed. That is a complete nonstarter. It's the signature achievement of the president's first term and too much political capital was invested in it to back down. Give it a chance and if the people don't like it, they can elect Republicans when the next elections come.
 
Puppycow said:
I'm quite certain there will not be a default. Paying interest on the debt is the highest priority (or should be) even if practically everything else has to be shut down. Not that I'm endorsing shutting everything else down.

I was a bit surprised to see that yesterday (today your time) was actually an up day on Wall Street. I can only assume that means they think this won't last very long. If it start to show signs that it will drag on, however, I expect the markets to fall.
Click to expand...

One opinion:
What's happening is that the markets, which are scared to death of a debt-ceiling breach and a default on U.S. government debt, think that the shutdown makes a deal to raise the debt ceiling more likely. (Logic: The longer the shutdown lasts, the more pain it will inflict, the less bargaining leverage the House GOP will have, and the more they'll be tempted to concede on the debt-ceiling deal.)
Click to expand...
 
stevea said:
Default:

FWIW the 2013 annual interest due from the Treasury is ~$395B, but the October amt is only ~$12.9B (varies a lot month to month). Almost 1/8 of that interest goes to the Federal Reserve (holds >$2.06T of Treasuries) and back to Treasury. They need ~$11B to avoid default in October on the public debt. Drop in the bucket.
Click to expand...
It might be a drop in the bucket but the problem is that without the debt ceiling being raised, the government won't be able to pay all of its bills - including social security.

Defaulting on social security payments in order to give money to Wall Street could be seen as a bad look politically.
 
Puppycow said:
I'm quite certain there will not be a default. Paying interest on the debt is the highest priority (or should be) even if practically everything else has to be shut down. Not that I'm endorsing shutting everything else down.
Click to expand...
Shutting down everything else (Medicare, Social Security) would be completely illegal, economically damaging, and socially devastating.

What's going to happen is that either Congress raises the debt limit, or Obama simply ignores or circumvents it.
 
Puppycow said:
I'm quite certain there will not be a default. Paying interest on the debt is the highest priority (or should be) even if practically everything else has to be shut down. Not that I'm endorsing shutting everything else down.
Click to expand...

My understanding is that government shutdown only impacts programs with yearly appropriations. Mandatory spending like financing costs, SS, Medicaid/Medicare, etc already have all the spending authority they need. Many military programs are given multi-year appropriations that don’t need Congress to authorize spending every year.

The part of the US budget impacted by a shutdown would therefore the remaining ~$400 - $450 billion. The debt limit, coming up in a few weeks is a much bigger hit if not passed as it would likely for the US to default on at least some of it’s committed obligations.
 
lomiller said:
My understanding is that government shutdown only impacts programs with yearly appropriations. Mandatory spending like financing costs, SS, Medicaid/Medicare, etc already have all the spending authority they need. Many military programs are given multi-year appropriations that don’t need Congress to authorize spending every year.

The part of the US budget impacted by a shutdown would therefore the remaining ~$400 - $450 billion. The debt limit, coming up in a few weeks is a much bigger hit if not passed as it would likely for the US to default on at least some of it’s committed obligations.
Click to expand...


The Supreme Court has previously ruled that the idea of "mandatory" spending is a fiction, convenient for politician-speak but completely illusory.
 
psionl0 said:
Defaulting on social security payments in order to give money to Wall Street could be seen as a bad look politically.
Click to expand...

Paying bondholders (most of whom are ordinary citizens, not Wall Street fat cats) what they are legally entitled to is absolutely necessary to avoid economic catastrophe. If you think the economic crisis and recession that followed the subprime/Lehman collapse was bad, imagine if the market for US treasurys melted down. The damage would definitely not be limited to Wall Street, just as it wasn't limited to Wall Street last time.

balrog666 said:
The Supreme Court has previously ruled that the idea of "mandatory" spending is a fiction, convenient for politician-speak but completely illusory.
Click to expand...

Interesting. Can you cite the case?
 
Well, it's been another week and now we are at debt ceiling battle.

So it's shutdown + worse.
 
You must log in or register to reply here.

Back
Top Bottom