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This fiscal fight cost the US economy $24 billion—but that’s just the beginning

Two weeks of drama in Washington haven’t moved the policy needle, but the government shutdown and fears of a debt default have their own costs.

  • Standard & Poors released an analysis forecasting the cost at $24 billion, or 0.6% of annualized fourth quarter growth. That means rather than a growth rate of close to 3%, we can expect closer to 2%, thanks to the interruption in spending by the government and by furloughed government employees and contractors, as well as businesses that have to hold up operations absent government efforts, like Alaska’s crab-trapping fleet. There’s also likely to have been less consumer spending given plummeting public confidence.
  • There’s also the cost of all the extra opening and closing down. In the 1995 and 1996, shutdowns cost the government $1.4 billion, according to the Congressional Budget Office (pdf). You can expect similar increases in operating costs once the government re-opens again.
  • The US had to borrow more money. Yes, the fight over borrowing and spending had the unintended consequence of forcing the US to spend more money on borrowing. On October 8, the Treasury rolled over $30 billion in monthly US debt, and interest rates increased 23 basis points over the previous issuance. That means the US taxpayer will spend tens of millions more to finance public spending. It’s not a lot in the grand scheme of the US economy, but it all adds up after awhile.
  • The long-term consequence of this kind of fiscal management could be as large as $700 billion. A report (pdf) prepared by the forecasting firm Macroeconomic Advisors came up with that number based on a study of the last four years of fiscal policy brinksmanship, attempting to measure the cost of uncertainty created by a tax and spending policy that lurches among stop-gap agreements:
    Screen Shot 2013-10-16 at 6.54.33 PMThe calculus includes the cost of too-low near term spending, the impact on corporate borrowing rates, and businesses’ reluctance to hire or invest without understanding what Congress will do next. While there are plenty of caveats to consider for an estimate like this, it seems clear that there are real and significant costs to running government on a crisis-to-crisis basis.

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