Here we are a week into the Federal government shutdown and, as the Republicans and Fox News commentators like to say, the sky has not fallen. Nonetheless, in subtle ways, the shutdown is taking a toll on the economy. To pick one relatively small example, tech market analysts like myself who depend on data from the US Bureau of Economic Analysis, US Census Bureau, and the US Bureau of Labor Statistics are operating in the dark — just take a look at their Websites, e.g., "Due to the lapse in government funding, www.bea.gov will be unavailable until further notice." More substantively, approximately 800,000 Federal employees are not being paid, Federal government purchases of goods and services have come to a standstill, Federal grants to states and local governments are on hold, and Federal government services ranging from disaster recovery, meat and drug inspections, medical research, public health, to National Parks are not available to citizens and businesses.
Economists have estimated that each week that the Federal government shutdown continues will shave 0.1 to 0.2 percentage points from fourth quarter real GDP growth. Assuming that the shutdown lasts three-to-four weeks, that would reduce US real GDP growth from the expected 2.5% to 2%. That may not seem like a lot, but it is a significant amount when you consider the cause — the unwillingness of House Speaker John Boehner and Tea Party Republicans to allow a vote on a continuing resolution to extend existing levels of Federal spending unless the Administration and Democrats agree to defund Obamacare. At a time when US economy has been limping along and not generating enough new jobs to reduce US unemployment, this entirely avoidable slowdown is not something the US tech market needs. Why? Because with the US tech market growing about twice as fast as real GDP, the half percentage point slowdown in the US economy will translate to a one percentage point slowdown in US tech spending.
But much worse could be ahead if the Republicans do not agree to raise the Federal debt ceiling. Texas Senator Ted Cruz and other Tea Party Republicans have stated that they will not support such an increase unless the Obamacare is defunded, and many have downplayed the consequences of a Federal government debt default should that happen. But the reality is far grimmer. A failure to raise the debt ceiling would mean that the Federal government lacked legal authority to issue bonds to cover the deficit between Federal revenues and Federal spending. Interest on existing Federal debts would not be paid, payments to Social Security and Medicare recipients would not be paid, and hundreds of billions in other Federal spending would have to be cut. Interest rates would rise, not only on US securities, but on every other type of loan. Even if the default lasted just a few days, confidence in the US government and economy would take a hit, leading to big drops in US stock prices and to the investment portfolios and retirement savings of millions of Americans, as well as cutbacks in business investment, housing, and consumer spending. The US economy would almost certainly decline in Q4 2013 and Q1 2014, with potentially continued declines or at best weak growth in the rest of the year. Should this happen, US tech spending would fall in 2014, with poor prospects after that.
Fortunately, Speaker Boehner has been quoted as saying privately that he would not allow the US government to default. This implies that before October 17 he would allow a bill to raise the debt ceiling to come to a vote without an amendment to defund Obamacare, with a combination of Democrats and moderate Republicans allowing it to be adopted. If this happens as we expect, then we will avoid the worse case of a Federal debt default, and "merely" suffer the bad effects of a three-to-four week shutdown of the US government. It is a sad state of affairs that this looms as the best-case outcome of the current political environment.