Another Government Shutdown May Have Long-Term Implications On U.S. Fiscal Health

As the political class slinks almost inevitably towards a government shutdown, there will be consequences far beyond simply closing down national parks and assorted government offices.

There are the political consequences, of course. Traditionally, that’s meant Republicans getting the blame in the press, if not necessarily at the polls. There are economic consequences too, which reach far beyond the employment prospects of a handful of politicians.

The Congressional Research Service issued a report on the economic effects of shutdowns, and it ought to be informative reading for those stunt pols who think it’s A-OK to close up shop to make a point or something. Consider, for example, the effects shutdown have on economic growth:

According to research from Goldman Sachs, “A government-wide shutdown would directly reduce growth by around 0.15 percentage point for each week it lasted, or about 0.2 percentage point per week once private sector effects were included, and growth would rise by the same cumulative amount in the quarter following reopening.” More generally, several private sector economists expect the economic effects of a potential shutdown to be fairly small, although the current economic context is different than it was in FY2019 or FY2014, causing some uncertainty. In particular, several sources have noted that the publication of certain data, such as employment and inflation statistics, could be delayed, potentially affecting the ability of the private sector or policymakers, including the Federal Reserve, to make informed economic or policy decisions.

That’s probably just fine with those who dislike the Federal Reserve anyway. But the point remains: in the near-term, shutdowns do tap the brakes on economic growth. The longer a shutdown lasts, the great the effects become, though, presumably, any losses will be recovered in the future.

But there’s another item lurking in the background that could make any shutdown, regardless of duration, economically and politically painful and with losses that cannot be regained:

In a note published Monday afternoon, Moody’s [rating agency] spotlighted the political chaos that surrounds budgeting decisions in Washington, suggesting that such brinksmanship is inconsistent with its top Aaa rating.

“Fiscal policymaking is less robust in the U.S. than in many Aaa-rated peers, and another shutdown would be further evidence of this weakness,” they wrote.

“After having negotiated a contentious bipartisan debt limit deal in June, U.S. Congress is yet again renewing internal party disagreements that threaten a government shutdown and clearly reflect the political hurdles to U.S. fiscal policymaking,” they said.

That’s a polite way of saying this is no way to run a railroad. Or even a lemonade stand.

But Moody’s has yet to take the step Fitch did earlier this year when the ratings agency downgraded U.S. debt from AAA to AA+. The Agency cited an “erosion of governance,” rising debt and deficits, and a host of other issues as the reasons for the downgrade.

The politicians and assorted media outlets were aghast and agog that Fitch would do such a thing. It turns out, they were right. Moody’s still has a sliver of faith in the current crop of officeholders to do something right and respectable on the budget. They may be right. Or their own downgrade may be inevitable.

The opinions expressed in this article are those of the author and do not necessarily reflect the positions of American Liberty News.