Economic costs may outweigh political gains if shutdown drags on

    President Donald Trump speaks during a news conference in the Rose Garden of the White House after meeting with lawmakers about border security, Friday, Jan. 4, 2019, in Washington. (AP Photo/ Manuel Balce Ceneta)

    As the White House celebrated a surge in job growth in the final month of 2018 Friday, economists warned a prolonged partial government shutdown could hasten and strengthen downward trends in the economy in the months ahead.

    “GREAT JOBS NUMBERS JUST ANNOUNCED!” President Donald Trump tweeted Friday morning just after some great job numbers were announced.

    According to the Bureau of Labor Statistics, the U.S. economy added 312,000 jobs in December, with average hourly pay up 3.2. percent from a year earlier. The unemployment rate rose slightly to 3.9 percent, reflecting more workers coming of the sidelines to search for jobs.

    Gordon Gray, director of fiscal policy for the American Action Forum, said the strong numbers reflect a healthy labor market in the late stages of a business cycle and should calm any fears of an imminent recession.

    “I’m happy about the big number, but one month is one month and we’ll see what the overall trend is,” he said.

    As the Dow Jones industrial average soared in early trading on the back of the better-than-expected jobs report Friday, larger concerns loomed over the long-term economic outlook as budget negotiations in Washington stalled and several government agencies remained closed for the 14th day.

    Congressional leaders left the White House Friday with only an agreement to continue talking. President Trump has demanded $5.7 billion for a border wall in the Department of Homeland Security’s appropriations bill, while Democrats have offered $1.3 billion for other border security measures.

    Congress passed bills to fund about 75 percent of the government before the midterm elections, but the rest of the funding bills have been held up by the border debate. House Democrats Thursday passed bills to fund most of the remaining agencies through September and a short-term continuing resolution for DHS without wall funding. Senate Republicans do not plan to vote on the legislation, and Trump has vowed to veto it.

    According to Senate Minority Leader Chuck Schumer, D-N.Y., President Trump Friday threatened to keep parts of the government closed for “a very long period of time, months or even years.”

    Asked about that comment afterward, Trump told reporters, “Absolutely, I said that. I don’t think it will, but I’m prepared.”

    Others on Capitol Hill are also grappling with the prospect of a shutdown that drags on far longer than any before it. Senate Appropriations Committee Chairman Richard Shelby, R-Ala., said Thursday the shutdown may last “months and months” if neither side is willing to compromise.

    A partial government shutdown over the two weeks surrounding Christmas and New Year’s Day has a relatively muted impact. One that extends for months or years would be much harder to shrug off.

    Kevin Hassett, chair of the White House Council of Economic Advisers, has warned the shutdown could have a dampening effect on January’s jobs report if federal workers are still furloughed when unemployment data is collected.

    “When we see the January jobs number, it could be a big negative,” Hassett told reporters Thursday. “But it would be because of the furloughed workers, who are ultimately going to get paid.”

    Hassett estimated the nation’s economic output will be slashed by 0.1 percent every two weeks that the partial shutdown continues.

    “I don’t really expect to see big economic effects of this, again, assuming that it ends relatively quickly,” he said.

    That is an increasingly tenuous assumption. Nine federal departments are directly affected by the shutdown: Agriculture, Commerce, Justice, Homeland Security, Housing and Urban Development, Interior, State, Transportation and the Treasury. Many agencies overseen by those departments, including the Internal Revenue Service, the Small Business Administration, the National Park Service, and the Bureau of Economic Analysis are now shuttered or severely understaffed.

    “There’s a limit at which you can continue to have a functioning government on these skeleton crews,” said Scott Baker, an associate professor of finance at Northwestern’s Kellogg School of Management who has studied the fiscal effects of the 2013 shutdown.

    None of this is happening in a vacuum. While government shutdowns have never been great for the economy, this one comes at an especially volatile moment that could intensify negative repercussions.

    The stock market just suffered through its worst December since the 1930s, bringing a close to the worst year for stocks in a decade. Trade tensions between the U.S. and China are injecting instability into both countries’ economies and American companies like Apple are beginning to feel the drag from that. President Trump is publicly feuding with the Federal Reserve over interest rates. And the financial stimulus created by tax cuts and increased federal spending last year is already trailing off.

    “The worst possible thing governments can do is have an uncertain future... To have a shutdown in the middle of this only exacerbates it,” said Katherine Willoughby, a professor of public administration at the University of Georgia and author of “Public Budgeting in Context.”

    Nobody knows what a months-long partial shutdown would do to the economy. The longest total shutdown ever lasted three weeks in 1995. The most recent extended shutdown in 2013 ended after 16 days.

    “We’ll be pretty deep into uncharted territory,” Baker said.

    Alfredo Ortiz, president and CEO of the Job Creators Network, said he feels for the federal workers temporarily going without income, but he sees the border wall as a bigger issue affecting all Americans. He also dismissed much of the talk of a lengthy shutdown coming from Washington.

    “I don’t think we’re talking a shutdown that’s going to be lasting months and months and months... I just feel there’s some grandstanding going on across the board everywhere,” he said.

    The unfunded departments employ about 800,000 workers, about half of them now furloughed and half working without pay. In the past, Congress has approved back pay for workers after shutdowns, and that is likely to happen again. Furloughed federal contractors typically do not get paid, though.

    The shutdown may test how long vital federal employees, including Border Patrol and Transportation Security Administration agents, are willing to work without a paycheck, especially at a time when the job market is booming. According to CNN, hundreds of TSA workers have called in sick this week at at least four major airports, and union officials expect those numbers to grow.

    “Maybe it’s time some of those folks start looking at other jobs that aren’t government jobs,” Ortiz said.

    However, he pointed to members of the National Border Patrol Council who stood with President Trump at the White House Thursday and defended the shutdown.

    “It’s worth doing what they have to do because the safety of our country is at stake,” Ortiz said.

    President Trump dismissed concerns about the financial welfare of federal workers in the event of an extended shutdown Friday, saying “a strong border” would be their safety net.

    “It’s very important we have great border security. I think it’s going to be over with much sooner than people think,” Trump said.

    If he is wrong, the consequences of a shutdown will extend far beyond the federal workforce, potentially affecting businesses and taxpayers across the country.

    “As you’re turning more people away, as people are not getting paid, as people are furloughed and can’t work, its exponential,” Willoughby said. “You begin to feel these things and you feel it more strongly as it persists.”

    Restaurants and food truck operators near federal offices are already complaining of lost business with much of their customer base out of work. The Greater Washington Board of Trade estimates about 20 percent of the D.C. area’s economy is dependent on federal funds, and the region may lose $400 million of economic activity every week the government is closed.

    Businesses near national parks that rely on tourist traffic for customers could also suffer, especially if the shutdown lasts into peak tourism seasons. Cuts in staffing for sanitation and emergency services at the parks have already caused some complications.

    The Department of Agriculture said last month payments for the Supplemental Nutrition Assistance Program would continue at least through January. Other nutrition assistance programs will have to operate entirely on state and local funds until the department reopens.

    The Small Business Administration and Federal Housing Administration will be unable to process new applications for loans, leaving business owners and homebuyers without an essential source of credit. Ortiz downplayed concerns about the SBA, pointing to online loans and community banks that are stepping up lending opportunities.

    “Outside of the SBA loans, there’s other alternatives,” he said.

    More than half of the IRS workforce has been sidelined as Americans contend with significant changes to the tax code ahead of the April 15 filing deadline. If the shutdown continues into the spring, tax refund checks for workers and businesses could be delayed.

    Nearly all HUD staffers have been furloughed, suspending many programs including health and safety inspections for low-income housing. According to NBC News, funds for public housing operations are currently available through the end of January, but it is unclear what will happen in February.

    According to The Washington Post, an extended closure of the Securities and Exchange Commission could further roil stock markets by delaying initial public stock offerings, cutting off access to regulatory guidance, and halting ongoing investigations. Companies like Uber, Lyft, and Airbnb will need SEC approval before they move forward with IPOs.

    “You lose momentum in all the programming affected,” Willoughby said. “You lose money. You lose tremendous morale of employees and the public. You disrupt intergovernmental relationships... It’s frankly a real tragedy to have these shutdowns.”

    With researchers at the Commerce Department furloughed, economic reports on home sales, trade deficits, and other data will be delayed, complicating attempts by the Federal Reserve and private investors to assess the state of the economy. Even if offices reopen, a backlog of reports that will need to be completed is already growing.

    “There are lot of functions of government that aren’t life or death, but there’s information the government produces that other industries and academic people use for research and economic forecasts,” Baker said.

    Economists have struggled to quantify the damage done by past shutdowns, but Gray stressed there indisputably was some. He identified three areas of costs: federal budgetary costs, foregone government services, and economic disruption.

    “In terms of the dollars the federal government is going to spend or forego because of the shutdown, the most oft-cited big number here is the amount of payroll the government is going to expend on furloughed workers,” Gray said.

    The Office of Management and Budget assessed the budgetary cost of the 2013 shutdown as approximately $2 billion. Taking into account all lost services, spending, and revenues, Standard & Poor’s estimated a cumulative cost of $24 billion.

    Even more difficult to calculate than the economic cost is the political benefit of instigating a shutdown, but Gray is skeptical there is any, let alone enough to outweigh losses.

    “I think the costs of the shutdown are small, but they’re non-zero... Nobody wants to get nothing for something, no matter how big that something is,” he said.

    Working with Constantine Yannelis of New York University, Baker reviewed spending, savings, and debt data for more than 60,000 households with members employed by federal agencies affected by the 2013 shutdown.

    They found an immediate 10 percent decline in average household spending after the shutdown began. Households with workers who were furloughed and required to stay home cut spending by 15 to 20 percent. Similarly, the retroactive payment of workers when the government reopened led to a significant increase in household spending in the days after paychecks were dispersed.

    For most affected workers, the 2013 shutdown only delayed one biweekly paycheck. As the current one heads into its third week with no end in sight, more payments could be missed.

    “In the 2013 version, we saw a pretty quick rebound,” Baker said. That may not be the case if missed paychecks start to pile up.

    Closing out 2018 with a stellar jobs report may reinforce confidence that the economy can absorb whatever costs the shutdown imposes. While that may be true, Gray suggested that interpretation misses the point.

    “We often hear, ‘We have a great economy. We can afford to do this’... That doesn’t make any sense. That’s sort of a giveaway that it's bad economic policy,” he said.

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