What the Protracted Shutdown Means for the U.S. Economy

The US government shutdown is entering its third week, as Republicans and Democrats continue to squabble over $1.7 trillion in discretionary spending. Such lockdowns are a feature of American policy. In the latest, President Donald Trump responded with budget cuts specifically aimed at hurting his political enemies.

What is the wider economic impact of the lockdown? How does this affect US government debt? What constitutional questions are at stake in shutdown spending?

These are just a few of the questions I asked in my recent conversation with Foreign Policy economics columnist Adam Tooze on the radio show we co-host, Ones and twos. The following is an excerpt, edited for length and clarity. For the full conversation, search for Ones and twos Wherever you get your podcasts. And check out Adam’s Substack Newsletter.

Cameron Abadi: What exactly is lost in the event of a shutdown? How much is the loss of income? What kind of government services are being cut?

Adam Tooze: The shutdown affects nearly a quarter of government spending that is considered discretionary. What it does is remove guaranteed funding for agencies. So, not spending on entitlements, not sending Social Security checks, or even now paying interest on government debt, but practically everything in between.

In the crosshairs, people look at a pool of about 750,000 federal workers who are then categorized into those who continue to work while they get paid; Those who are furloughed receive no pay and are removed from their workplace; And a whole lot in between, hundreds of thousands of people who are expected to continue working without getting paid.

The vast majority of essential services – so-called, and obviously many of them are – continue to operate. For example, air traffic controllers are expected to continue working even if they do not get paid.

Then there is even the politics of whether these arrears will be reimbursed to people who were working. It goes agency by agency. Some agencies keep the vast majority of their staff in place and working. And really big ones, like the Department of Homeland Security, will furlough hundreds of thousands of people and put hundreds of thousands of people working without proper pay. In the Department of Defense, a large segment of the civilian workforce—hundreds of thousands of people—will be in one of these two states, either working without pay or on furlough. It’s really exciting.

And the way the question of whether people are going to be covered in arrears is politicized is really shocking, because you’re effectively creating a kind of subclass of employees – federal employees – whose wage contracts and their rights under the wage contracts seem essentially at the whims of elected political officials, which is a disastrous outlook and gives you an idea, I think, of the amount of disdain that some people on the American political right have for In particular towards government employees in the United States. general. It’s really shocking, even before we get into those issues of what we might call discriminatory cuts.

California: What is the broader economic impact on the United States as a result of this closure? The United States government is the country’s largest economic actor. Will it rise to the level of economic emergency when the government shuts down?

in: JPMorgan and Standard & Poor’s, the bond rating agencies, estimate the impact of an annual loss of 0.1 percent to 0.2 percent of GDP for each week the government is closed. So, taking 10 weeks off will get you to a 1% annual effect over the entire year.

Now, some of that might turn out to be good if government services are restored and paychecks stop. But it’s a big shock. In an economy that may grow during the year by 2 percentage points, or 2.5 percentage points, losing 5 percent of that growth – or, when accumulated over weeks, 10 percent, 15 percent, or 20 percent of that growth – is very significant, even though these numbers seem small.

Because, as you say, the federal government is a huge financial economic body. It is part of the basic metabolism of the modern economy. It’s one of the things that gives the economy stability under normal circumstances, right? This is called the automatic stabilization function of modern government.

If you look at the late 19th or early 20th century, you can see sharp fluctuations in GDP in part because the federal government in the United States would account for one or two percentage points of GDP.

So there wasn’t that kind of peripheral stabilizing force that is big government. Since the Great Depression, and then since the Cold War, we’ve had a federal government machine that takes a quarter to a third of GDP, or something like that, pumped through the federal government machinery. This gives the economy a kind of flywheel stabilizer. If you stop the flywheel suddenly, it will cause destabilization.

If you dig deeper and really ask yourself what is the most worrying thing about the markets regarding this, it is a combination of three things. It is a fact that the US economy itself seems somewhat stuck between a growth boom and a stagnation, if not an actual recession. So the latest jobs numbers have been very vague, and difficult to read. It’s not entirely clear where the US economy is headed. This just confirms all the traditional economic biases about exactly what we can expect to happen, given the kind of recurring policy shocks presented by the Trump administration. We haven’t seen a collapse, but you would certainly expect to see a slowdown as people pull back from making long-term investment commitments.

So we seem to see that. We don’t do that truly We know if we see that, and the shutdown is going to make this more acute as a problem, because one of the agencies that was affected by the shutdown is the Bureau of Labor Statistics. It will stop publishing data in a timely manner, and then the lights will go off on economic policy. S&P commented that it believes the most immediate impact of the shutdown on markets is simply a lack of data, and a lack of good data.

So the completion of the triangle takes on a real flavor at this very moment: the Fed has to decide on the interest rate. This combination is very interesting from the standpoint of the kind of regular flow of confident expectations to a stable understanding of the nature of the American economy. There is no doubt that people have heard about the politicized attacks on US data collection devices in recent months. This just adds a cherry on top in terms of just closing the post.

This is a bad mix of factors – fundamental questions about the US economy, uncertainty about the data, and uncertainty about the Fed’s decision. So, yeah, it’s a bit of a risky situation that we’re in.

California: How do government shutdown dynamics affect US government debt?

in: So that’s not the question this time with this shutdown, because we’re not talking about the debt ceiling. The debt ceiling was increased over the summer — by $5 trillion in July — as part of budget legislation, which was passed under reconciliation. Therefore, it was easier to obtain the necessary majority in congress.

We are not looking at an immediate challenge to US credibility. There have been standoffs over closure over the past 15 years where this has been an issue. It is worth noting that the year is 2013, if memory serves me. So, you won’t see a huge amount of pressure from the bond market. This also, of course, makes reaching an agreement less likely.

But on a deeper level, what this points to – and what this conflict is about – is the issue of America’s deficits and debt. Honestly, whether either side cares anymore. I mean, sure, if you ask the American public, the national deficit and debt have been a concern for American voters at various points in modern history — and in Europe, it regularly features as a top 10 or top five issue among the German public, for example, and it’s hugely prominent in France right now. The French political system is devouring itself with debt.

So democracies don’t naturally tend to advocate for fiscal responsibility, right? This is a cynical conceit of a certain kind of economists and political scientists who do it. In fact, it is more natural for politics to take debt seriously.

In the United States, it’s not clear, frankly, whether that’s the issue here or whether it’s actually a struggle over polar political priorities and positions. The most likely outcome of all this conflict is some sort of settlement in which both sides get what they want, leading to increased deficits. So this will follow the model of the big, beautiful bill of the summer, where Republicans – while spouting platitudes about fiscal sustainability and so on – gave away huge tax cuts and dramatically increased the deficit. We talked about this on the show.

And I – as anyone listening to the show knows – am not a financial hawk. I don’t lose sleep over the level of US debt. But as a historian, you have to say this is unique. Never before have we been in a situation where the political class seems less concerned about debt.

California: The Trump administration claims the authority to make spending decisions unilaterally, regardless of what Congress says. What is at stake here in terms of the American constitutional arrangement, and in the broader sense of the government shutdown battle?

in: Yeah, I mean there’s two things that come to my mind. One of the unusual things is that they discovered a power no Spending, right? I’ve never encountered this before, but refusing to spend money appropriated by Congress is ultimately one of the main tools used by the Trump administration.

And I mean, it’s completely illegal, it seems, according to traditional jurisprudence, but it’s a very powerful mechanism. Because again, the standard assumption in political science is that politicians always want to spend, right? So the question is, how do you curb them? But in this case, what they do is say, “No, we’re not going to spend this money on USAID and things like that.” It’s basically an attack. It is a refusal to actually benefit from the budget allocations.

But what’s surprising is that the really hardliners – like Stephen Millers and others from the Trump administration – seem bent on this logic and are sort of looking for a state of emergency to allow them to declare this authority, right? They need emergency. And that was kind of in the background of that question we were discussing a minute ago about whether or not the lockdown itself constitutes an emergency, which would then allow you to do whatever you need to do.

But it’s pretty clear, isn’t it, that across the board they are seeking to provoke combat. They’re trying with ICE and these deportation interventions. They are deploying the National Guard. There is a sense that generating a crisis of sufficient magnitude to justify the kind of interventions they wish to make is a key element of the politics of the moment. This is paradoxical because it is still true that the vision of carnage for the United States that Trump, with Stephen Miller holding the pen, first declared in his first inaugural address, is just a very long distance from actual American realities.

It’s not easy to get to where they want to be. So, they have to force them to do so. The worry, of course, is that they’ll find some way to trigger a really horrific disaster of some kind, or a very violent confrontation of some kind. Ultimately, what may justify their very difficult idea of ​​federal power is a state of emergency.