Why the government shutdown will (probably) spark a recession

January 22, 2019

 

As of this writing, the United States is in the midst of the longest shutdown of its government in history. Many people have differing opinions on how this might impact them, if at all.

 

In addition to transportation security, food safety inspections, destruction of national parks, broken politics and much more, I would like to present you with my economic analysis of current events. I will provide links to back up my assertions as well.

 

tl;dr: I believe this shutdown will likely spark a recession.

 

Much longer explanation below.

 

Before I talk about why I believe this will spark a recession, we need to first define what a recession is. Because like it or not, things have definitions.

 

Some of you insist that we are currently in a recession, where others confidently assert that we are not.

 

You are all wrong.

 

Why?

 

Because the generally accepted definition of a recession is two consecutive quarters of negative economic growth. So, there is no way to be sure if we are in a recession until six months from any given point in time.

 

Frustrating, right? Well, that’s how it’s defined. I didn't do it.

 

Now that we have defined a recession, why do I believe this shutdown will likely spark one?

 

Because Gross Domestic Product (aka GDP) has a definition too. And GDP is how we determine the health of our economy.

 

In this case, GDP has a deceptively simple mathematical equation:

 

C+I+G+(X-M)

 

What does that equation mean?

 

First, let’s get rid of that (X-M) at the end. That means Exports minus Imports, or Net Exports. Although a critical variable in calculating GDP, I do not believe that part will be impacted by the shutdown specifically. The government shutdown might have an impact on our ability to export goods, but I don’t think it will be much, which is why we can ignore it for the moment.

 

The much bigger problem comes with those first three variables: C, I and G.

 

C stands for Consumption

 

I stands for Investments (not the stock market, but investing in physical things like warehouses)

 

G stands for Government spending.

 

Wait, what was that last one?

 

Yup, Government spending is one of the key variables which determines economic growth.

 

Again, don’t shoot the messenger. This is the equation for GDP.

 

Maybe now you can see where we might be a problem.

 

Because if the government isn’t spending money, the overall GDP equation has to go down, even in a partial government shutdown.

 

There’s more.

 

In addition to shrinking government spending, 800,000 Federal workers, and probably more contractors, aren’t being paid.

 

And people who aren’t paid aren’t spending money.

 

If people aren’t spending money, and government spending is falling, consumption (that first variable in GDP) will also go down.

 

And, if consumption goes, down, investment (that second variable in GDP) will also go down.

 

So, if all three of those things go down, GDP HAS TO FALL, unless we suddenly have a massive spike in exports, which never happens.

 

To recap:

 

Government spending is going down.

 

Government employees and contractors cannot spend money they don't have.

 

That will reduce consumption.

 

That will reduce investments.

 

And that will reduce GDP.

 

So yeah, this is not going to be good. And now you know why.

 

Granted, this is a somewhat simple and high-level economic analysis. I look forward to hearing constructive feedback from other econ-types who can add more detail and color to my thinking.

 

So, what can we do about it?

 

We can go back to squabbling about who is to blame for this ongoing problem.

 

Or, we can come together and recognize that this is not a game, and this shutdown will almost certainly hurt nearly every American, including you and me.

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