What’s at stake in an extended government shutdown this time around

Here we go again. As I write this, lawmakers appear unlikely to pass a budget to fund the federal government for the new fiscal year starting Oct. 1. If they do not, the government will shut down. This isn’t a big deal for the economy if a shutdown lasts a few weeks, but economic damage will mount if it lasts much longer than that.

Government shutdowns have become commonplace in recent years. This would be the 11th significant one since 1980, when the courts ruled that the government could not operate if lawmakers didn’t provide the funds.

Notable shutdowns include the 21-day closure in 1995-1996 when then-Republican House Speaker Newt Gingrich battled President Bill Clinton over government spending. In 2013, the government was shuttered for 16 days over Obamacare. And the longest ever shutdown of 35 days occurred in 2018-2019 over funding to expand President Donald Trump’s wall on the border with Mexico.

Past shutdowns have lasted no more than a few weeks because political pressure to end it ratcheted up quickly. Once furloughed government employees didn’t receive a paycheck, lawmakers started to get angry calls, and once government services began to stop, most Americans became fed up and began assessing blame. Recalcitrant lawmakers, worried about their reelections, relented.

This time, a few hard-right House Republicans form the roadblock to passing a federal budget. They want more spending cuts than lawmakers had agreed to a few months ago to resolve the battle over increasing the Treasury debt limit. Some are also opposed to more funding for Ukraine in that country’s war with Russia, and still others want to defund the myriad investigations of former President Trump.

If history is a guide, these House Republicans will quickly give up their fight once there is a shutdown and voter ire mounts. While even a short government shutdown isn’t great for an economy grappling with other meaningful headwinds — including the resumption of student-loan payments, surging oil prices, higher long-term interest rates, and the UAW strike — it won’t be enough to push the resilient U.S. economy into recession.

There is reason to worry that a shutdown will drag on. Republicans have only a four-vote majority in the House, and Republican House Speaker Kevin McCarthy has a tenuous grip on his caucus given the latest House rules that even a single member of Congress can challenge his leadership. So, getting anything through this Congress, let alone a contentious budget, is monumentally tough.

If the shutdown lasts for more than a month, there will be noticeable fallout on the economy, and if more than a couple of months, recession will become a serious possibility.

The first casualties will be federal government employees. Close to 1 million workers, about half of federal government employees, will be furloughed, while the other half will be considered essential and need to report to work. No one will receive a paycheck until the government reopens, and while everyone will ultimately get their back pay, they won’t know when that will be, and will face significant financial hardship in the meantime.

Next to take it on the financial chin would be private companies that contract with the federal government for all kinds of goods and services. Think office furniture, military equipment, janitorial services, and cloud computing. When the government is shut down, these companies don’t get paid, and their employees aren’t able to work. This eventually could hurt millions of workers.

The government shutdown will then quickly go from being a nuisance to a bad migraine. A potential homebuyer in a flood zone may not be able to close on their mortgage because they can’t get federal flood insurance. Or a food processing factory may need to stop operations because they are unable to get the appropriate certifications for an inspector from the Food and Drug Administration. And the Securities and Exchange Commission won’t be able to do the work necessary for a privately held company to issue stock and go public.

From my own perspective as an economist, consider that with a shutdown the government will stop collecting and publishing key economic statistics. So what? you may ask. Well, the Federal Reserve is watching these numbers carefully to determine when to stop raising interest rates. Without them, it is much more likely that policy makers will make a mistake and either not raise rates enough, allowing inflation to take root, or raise rates too high, pushing the economy into recession.

Most disconcerting is that a lengthy shutdown will further call into question the ability of our lawmakers to accomplish anything, even the essentials like paying on the nation’s debt. What will happen in early 2025 when they must raise the debt limit again?

Past government shutdowns weren’t long enough to do much harm to consumer confidence and investor sentiment. But that’s not likely to be the case if the shutdown extends for more than a few weeks, particularly now given the fragility of the collective psyche. A recession is ultimately a loss of faith, and a lengthy government shutdown will be sure to shake that faith.

It is hard to imagine lawmakers would take it this far, but it is not unimaginable.

Mark Zandi is chief economist for Moody’s Analytics.