There Will Be No $24B Economic Loss From the Government Shutdown
The news has been full of an estimate by Standard & Poor's that the U.S. economy suffered a loss of $24 billion due to the government shutdown. Interestingly, the reports contain few if any details of where those losses came from and the Standard & Poor's website does not seem to have any report backing up the figure either. I have found some of the suggested losses and they are all untrue. In reality, there will be no economic loss to the economy from the government shutdown.
Purported losses include missed wages by federal employees and contractors, the value of lost government services, and lost travel spending. Some of these losses did actually happen, but any losses in one part of the economy will be offset by gains somewhere else.
Certainly, some people have suffered losses due to the shutdown, principally those business owners who depend on tourists visiting Washington, D.C. or a federal site that was closed (such as a national park). Federal contractors who could not work and were not paid to work on other projects during the shutdown may suffer losses. However, they do not hold in the aggregate because every loss will be offset by a gain.
For all the tourist sites that lost money and visitors during the shutdown, there is a business somewhere that received or will receive more business than normal. People who cancelled trips to D.C., national parks, or other sites may instead have taken a trip somewhere else. Business owners in those substitute locations become winners due to the shutdown. Alternatively, people may have stayed home and spent the money designated for their trip at local restaurants, movie theaters, and shops, creating gains in those businesses.
If a business traveler cancelled a trip, that business will either spend the money on something else or it will end up as profit. Extra profits go to a business owner who will then spend the money. Even if money does not get spent, but is saved instead, those savings become investments which also benefit the economy.
All this lost spending is a perfect example of the famous broken window fallacy, just in reverse from the normal example. In the broken window fallacy, people perceive money spent to fix a broken window as a gain to the economy because they do not realize the money would have been spent somewhere else until it had to be diverted to fixing the window. In the current case money that was not spent somewhere during the shutdown gets shifted someplace else, but it still gets spent.
As to lost wages, federal employees will get back pay completely covering their lost wages during the government shutdown. This means that any spending they did not do during the shutdown, they are busy catching up on right now. Federal contractors may have lost wages during the government shutdown and may not recoup all those losses. However, those unpaid wages should end up as either extra profit for the contractor, savings for the government, or delayed employment for somebody.
If we ignore the slight loss from the delay in spending in a few of the above examples, I hope the above shows that there is no economic damage to the economy from lost wages or cancelled travel due to the shutdown. In the wider view of the whole economy, the money just ended up in different cash registers.
The final item in the supposed $24 billion in losses to the economy due to the government shutdown is the value of lost government services. It is true that many government services not performed during the government shutdown will never be replaced, as government workers will not all be able to make up the lost productivity. However, national income accounts value government services at their cost since there is no other way to value them (given the common absence of a price to provide a market value). Because the government workers are being paid for the days they did not work, the cost of government services will not decline and, therefore, neither will the government contribution to GDP. Citizens will get less for our tax payments, but the official economic value of government will be the same.
Hopefully, this column has provided a clear explanation that the economy will suffer no loss from the government shutdown, let alone a purported $24 billion. Some people suffered indisputable losses because of the shutdown and we can all feel sympathy for those unlucky people. However, the money lost by those people does not disappear as if in a magic trick; it ends up being spent somewhere else and providing an unexpected gain in a different part of the economy.
Many of the losses reported in the news are visible and easy for the media to find. The offsetting gains are harder to find but exist nonetheless. People reporting these stories may not understand economics or they may not wish to acknowledge that government does not grow the economy. Whatever the reason, the reality is that while the shutdown may not have accomplished anything other than disrupting many people's lives, it did not cause damage to the national economy. That usually happens when the government is open for business.