Author Danny Vinik

No, The Government Shutdown Didn’t Cost The Economy $24 Billion

Danny Vinik 3 Comments

Now that the government shutdown and debt ceiling brinksmanship are over, the media has turned to playing the blame-game and diagnosing how badly the fiscal fights hurt the economy. On Wednesday, right before the McConnell-Reid deal passed both houses, S&P estimated that “the shutdown has shaved at least 0.6% off of annualized fourth-quarter 2013 GDP growth, or taken $24 billion out of the economy.”

This number, $24 billion, has been repeated around the internet as representing the cost of the shutdown, but that’s wrong for two reasons.

First, S&P is calculating how much the shutdown hurt the economy in the 4th quarter, but does not add in any bounce-back effects that will happen in the first quarter of next year. Many of the federal workers who were furloughed had to reduce their spending and it will continue to have an effect into November and December. But they will receive pay for their missed time; eventually that money will circulate into the economy. That doesn’t mean there were no negative economic effects to furloughing federal workers. Many workers in other sectors depend on those workers to purchase goods and services and those workers will not receive back pay. But that $24 billion is overstated as it does not included the bounce back effect. At the beginning of the crisis, Macroeconomic Advisors estimated that a the furloughs caused by a two-week shutdown would reduce real GDP by 0.3% in the 4th quarter. However, it noted that most of that should be made up in the first half of next year, as happened in the 1995-1996 government shutdown.

Second, the Federal Reserve may have delayed tapering to offset some of the negative impact of the shutdown. The September FOMC meeting outlined those fears:

However, a number of others (FOMC members) pointed to heightened uncertainty about the course of federal fiscal policy over coming months, including the potential for a government shutdown or strains related to the debt ceiling debate, which posed downside risks to the economic outlook.

In his press conference, Ben Bernanke repeatedly emphasized that the fiscal fights in Washington would be a drag on the economy. It’s unclear whether the Fed would have begun tapering in September if there was not a potential government shutdown and debt ceiling fight lurking in the near-future. It might have delayed reducing its bond purchases anyways as the economy slowed. However, investors are already predicting that the Fed will likely continue delaying tapering until at least the spring of next year since the federal government may go through these fights again in January. If that’s the case, then the Fed almost certainly kept its policy more accommodative due to the shutdown, which offsets some of that $24 billion in negative economic costs.

None of this is to say that the shutdown wasn’t costly. It was. It caused needless suffering for many Americans and certainly hurt the economy. But it’s unlikely to have cost the economy $24 billion. Keep that in mind.

“Go Out There and Win an Election”

Danny Vinik 1 Comment

Those were the words President Obama directed towards the Republican Party today as he further emphasized that this was the end of debt-ceiling hostage-taking. If the Republican Party doesn’t like the president or his policies, it should take its message to the American people and win elections. It’s a simple argument and it also applies to moderate Republicans. If they want to take back their party, win elections. Defeat Tea Party candidates in primaries.

Liberals are hopeful that this complete and utter defeat of the Republican Party in the debt-ceiling battle will lead to a change of GOP strategy. The theory goes that the Tea Party will see that its extreme tactics don’t work and will look for more practical methods to fight the president. This is highly unlikely to happen.

Boehner did an excellent job keeping his members unified, but grassroots organizations around the country have had about enough. Molly Ball has a great story today about how many conservative activists are ready to leave the GOP and want to primary every Republican who voted for the bill. Their belief is that Republican tactics didn’t fail, their leadership did. For the moment, there’s a gap between the opinions of these activists and the Tea Party members in Congress. These congressmen had nothing, but positive things to say about the speaker yesterday while Eric Erickson, Rush Limbaugh and other notable conservatives weren’t so kind. That gap will disappear soon enough as those congressmen look to stay on the good side of Erickson and Co.

Many reform conservatives were appalled with the Tea Party’s tactics. Ross Douthat hopes this was a learning exercise for the party so that it won’t “pull this kind of stunt again.” David Frum is ready for the Tea Party to exit altogether. He’s not alone in that opinion.

But Boehner and Republican leaders know that as much as they want to do that, they can’t. Whether they like it or not, the Republican Party needs the Tea Party as much as they need the moderates. They are listening to the Tea Party and not the moderates, because the Tea Party has no problem declaring war on the establishment and jumping ship. That may be electoral suicide, but the right wing doesn’t fear those consequences. The moderates do. It’s the same reason the hard-liners didn’t fear the political consequences of a futile government shutdown or the economic consequences of breaching the debt ceiling. It’s a game of chicken between the moderates and radicals. Whoever is willing to ditch the party and cause electoral defeat for both has control. Right now, that’s the Tea Party.

That’s why Boehner can’t simply cast aside his conservative members. It’s why he must do everything in his power to keep them happy and listen to them.

The way moderates take back the party is not through a civil war, but by defeating them in elections. As these extreme tactics fail, the moderate Republicans will earn more support from the marginal Tea Party voter. Slowly, they will win back their trust. This won’t be an overnight change. It will take at least the 2014 election cycle, probably longer and there’s nothing either party can do to speed it along. It’s deeply frustrating for Democrats to look across the aisle and see a party held captive by a small fraction of extreme members. For Republicans, it’s even more frustrating to be the ones held captive by those members. But casting aside those members in a nasty civil war will be political suicide for both the establishment and the Tea Party. The best thing moderate Republicans can do is win elections.