The longest shutdown's lasting cost

The longest federal government shutdown in modern American history has ended after forty-three days. The Congressional Budget Office has now tallied the damage. It estimates that the lapse in funding cost the economy about $11 billion of GDP that will never be recovered.

The deal that reopened the government on 12 November settled little. A stopgap bill funds most agencies only until 30 January, alongside full-year appropriations for agriculture, military construction and the legislative branch. Democrats secured a promise of a Senate vote in December on extending enhanced health-insurance subsidies, the issue over which they had refused to pass a funding bill in the first place. The previous record, the 35-day closure that ended in January 2019, has been beaten by more than a week.

Losses that stay lost

Furloughed federal workers were eventually paid in arrears. Others were less lucky. Private government contractors, travel operators, concessionaires and small suppliers lost revenue they will not get back. Hundreds of corporate merger reviews, FDA drug approvals and permits for environmental infrastructure were held up for months, and billions of dollars of private investment were frozen along with them.

The mechanism is simple. When the government stops paying, federal employees defer spending until their back pay arrives, and most of that demand returns in the next quarter. Contractors have no such guarantee: Congress has not historically reimbursed their workers, so a janitor or IT technician on a federal contract simply loses six weeks of wages. The same applies to an airline that cancels flights. In the final weeks the aviation regulator ordered carriers to trim schedules at dozens of large airports because air-traffic controllers, working without pay, were calling in sick, and a seat that did not fly cannot be sold later.

Even the federal workers' back pay was in doubt for a time. A law passed after the 2019 closure guarantees it, but the White House budget office floated a reading under which furloughed staff might not be owed anything, and agencies issued layoff notices during the lapse. The deal that ended the shutdown confirmed back pay and reversed those layoffs, which removed one source of lasting damage but only after weeks in which many households cut spending on the assumption that the money might never come.

Measuring what was missed

The CBO's arithmetic follows a pattern it set in 2019, when it judged that the 35-day closure had reduced output by $11 billion, of which $3 billion was permanently lost. This time the permanent loss is much larger, because the closure ran longer and, unlike the partial shutdown of 2018 and 2019, reached almost every agency, even disrupting food-assistance payments at the start of November. The immediate hit to fourth-quarter growth will be much bigger than the permanent loss, followed by a partial rebound early next year, which will make the quarterly figures hard to read for months.

The data themselves took damage too. Statistical agencies could not collect some October price and employment figures while their staff were furloughed, and those surveys cannot be run after the fact. The Federal Reserve will therefore go into its December meeting with gaps in the numbers it most relies on, at a time when policymakers were already divided over whether to cut rates again.

Money markets felt it too

The shutdown also drained cash from the financial system. Taxes kept flowing into the Treasury's account at the Fed while many payments stopped, so the government's cash balance swelled and bank reserves shrank by the same amount. That added to the strain in overnight funding markets in late October, when repo rates rose above the Fed's own administered rates and banks drew on the central bank's standing repo facility. As spending resumes, the process runs in reverse and reserves flow back to banks, which should ease funding conditions into the year-end.

No savings to show

The shutdown also showed how useless funding lapses are as a way to control the budget. The government saved no money in net terms, paid heavily to restart its operations and did direct harm to the wider economy. Federal workers receive full back pay for work they were barred from doing, agencies pay for the administrative cost of shutting down and restarting, and late-payment interest accrues on overdue bills to suppliers.

The dispute over health subsidies has not gone away either. The enhanced premium tax credits for insurance bought on the Affordable Care Act exchanges expire at the end of this year, and open enrolment for next year began on 1 November with higher premiums already on the price lists. If the December vote fails, millions of households will face larger bills in January, which will shape the fight over the next funding deadline.

A small number, fairly measured

The strongest objection is one of scale. An $11 billion loss is a rounding error in an economy producing about $30 trillion a year, and most of the delayed federal spending will be made up next quarter. That is true in aggregate, but the cost is concentrated on firms least able to absorb it: small contractors with thin margins and no access to cheap credit, and businesses that depend on federal permits to start projects. For a small supplier to a national park or a defence base, six weeks without revenue can mean a lost year of profit.

The next test comes quickly. The stopgap expires on 30 January, and the December vote on health subsidies will show whether the dispute that caused this closure has been resolved or merely postponed. After a 43-day shutdown the budget is no smaller and the economy is $11 billion poorer. Holding the budget hostage is about the most expensive way to run a government, and the next time Congress tries it, contractors and small suppliers will again pick up the bill.