As the 2013 government shutdown continues, there does not seem to be an end in sight. That's bad news for our economy. While the economic impact of a government shutdown is trivial compared to what would happen if we breached the debt ceiling, it is not negligible.
In 1995 and 1996, the government shutdown for two periods of time totaling 26 legislative days. The Congressional Research Service estimated that those shutdowns cost the economy $1.4 billion, equal to $2.1 billion in today's terms. That's a lot of lost economic output, but it will likely be much worse today due to our fragile, barely-growing economy. Here's a comparison of the economic conditions during those shutdowns and the ones we have today.
Labor Market Conditions
Here's a graph of the unemployment rate from 1994-1997:
During that time, the economy was operating at full employment and there was little, if any, slack in the labor force. As you can see from this graph, we are still a long way from full employment today:
However, the unemployment rate right now does not tell the whole story when it comes to the labor market. Another good measure is the employment-to-population ratio. Here's what that looked like in the late 1990s:
As you can see, the ratio was climbing throughout this entire time period and was always above 62%. There was little slack in the labor market which gave workers the leverage to bargain for higher wages.
The opposite is true right now. The Great Recession caused the ratio to drop dramatically and it hasn't recovered. Part of that is due to baby boomers retiring. Part of it is due to young people staying in school longer. But a lot of it is due to weak economic growth; having a smaller percentage of your population working is never a good thing and that's what we have right now:
One of the main reasons for this is that while the companies have recovered, many workers have not. One of the best indicators of this is the share of national income that goes to labor versus corporate profits:
Labor has been losing its share of national income for decades while corporate profits have been rising. In the mid-1990s though during the previous shutdown, the extreme inequality between them had not risen yet. Workers still took home a significant chunk of the national income and corporate profits had yet to skyrocket. That's not the case today.
Another good measure of the economy is the growth of real gross domestic product (GDP). GDP measures the value of all the final goods and services produced in a country. Strong GDP growth is often associated with full employment as companies require more employees when they must produce more. Not surprisingly then, the economy was also growing at a faster pace during the previous shutdown than this time around. Here's real GDP growth from 1994-1997:
And here's our GDP growth since 2011:
Real GDP growth has fluctuated between 1% and 3% during the past couple of years. Between 1994-1997, it was between 3% and 5% the majority of the time. The shutdown cost a strong economy $1.4 billion then. With a weak economy now, it will cost us much more.
Inflation was also higher during the previous shutdown as core CPI fluctuated between 2.5% and 3% during much of that time. Core CPI measures the change in consumer prices but excludes food and energy prices as they are extremely volatile and distort the overall picture. Here is the measurement from 1994-1997:
Right now, inflation is stubbornly low and has consistently been below the Fed's target of 2% recently.
As all of these graphs indicate, the economy is in much worse shape right now than it was during the 1995-1996 shutdown. That means that a shutdown will hurt economic growth that much more. IHS Inc, a global research firm, estimated that the current shutdown costs $300 million in lost economic growth. That's not that much compared to a $16 trillion economy, but it will begin to add up as this shutdown drags on. Macroeconomic Advisers predicted that a two-week shutdown would reduce fourth quarter GDP by 0.4% and if it lasts until the end of October, it would cost 0.7%. Our fragile economy does not need that drag on economic growth. The 1995/1996 economy may have been able to handle a shutdown, but it's the last thing we need right now.