Economic impact of shutdown: Damage would increase with duration

April 6, 2011

The economic effects of a government shutdown could be significant in the Washington region and nationally if the impasse continues for several weeks, some economists said.

The impact would depend on the closure’s duration and on whether furloughed federal employees were eventually paid for their time out of work, as they were after the last shutdown, 15 years ago. If the estimated 800,000 workers did not receive back pay, the damage would be compounded as many families pulled back on spending, economists said.

Initially, however, if the government closes Friday, the effects are expected to be relatively minor, felt largely by tourists shut out of such attractions as the Smithsonian museums, the National Zoo and the national parks — and by the hotels and restaurants that depend on them.

“If it’s shorter than a week, the economic impact is no worse than a snowstorm,” said Stephen Fuller, director of the Center for Regional Analysis. “If it lasts longer, it will have negative consequences on the economy and not all of the losses will be recovered.”

At a town hall meeting near Philadelphia on Wednesday, President Obama warned that the uncertainty of a shutdown could slow the economic recovery.

“Companies don’t like uncertainty, and if they start seeing that suddenly we may have a shutdown of our government, that could halt momentum right when we need to build it up — all because of politics,” Obama said.

This week, hoteliers, restaurateurs and others who depend on the tourist trade at national museums and parks were bracing for a slowdown.

In a typical April day, about 800,000 people visit one of the 394 national park sites across the country. Tourists spend about $32 million a day in the communities just outside the parks, a National Park Service spokesman said.

“The bigger impact is in those gateway communities, like West Yellowstone or Gatlinburg, Tennessee — in many communities they are the economic engine,” said Park Service spokesman David Barna.

In Washington, where the closures would affect such landmarks as the Smithsonian’s National Air and Space Museum and the National Zoo, the impact would be keenly felt.

Smithsonian attractions, which bring in about 3.8 million visitors during April, would be closed, spokeswoman Linda St. Thomas said. The Mall would remain open, but during the last shutdown Park Service officials put up chains around the base of the Lincoln and Jefferson memorials and closed off the sidewalks to the Vietnam Veterans Memorial.

“It’s not something we enjoy,” Barna said. “We like people to have access to our parks.”

The broader effects of a shutdown would set in Monday, after the weekend, when an estimated 800,000 federal workers across the country would stay home from work. This would, in turn, disrupt countless contractors and other businesses that rely on the federal government.

About 11 percent of the Washington area workforce is employed by the U.S. government, according to the Greater Washington Board of Trade, and about a third of the region’s economy is dependent on it.

In a survey of businesses by the Greater Washington Board of Trade, about 71 percent of respondents said they were concerned or very concerned about a federal government shutdown.

“This is coming at a terrible time, when the economic recovery is still fragile,” said Matt Erskine, senior vice president at the Greater Washington Board of Trade.

If the shutdown dragged on, the effect on employment would be felt beyond the many furloughed government workers.

“Don’t assume that a two-week shutdown will not have an enormous impact,” said Stan Soloway, president of the Professional Services Council, an industry association representing government contractors. “This is people driven. If you are not getting reimbursed, even as a large company, there is only a short period where you can keep people on.”

The last federal shutdown, in 1995-96, offers limited insight into what to expect this year because the timing and circumstances are different. The last shutdown occurred in December and January, during a season when tourism is light at best. Moreover, only about 260,000 federal workers were furloughed then; this time, more than three times as many would be affected.

The 1995-96 shutdown appears to have had immediate but short-lived effects. An index of Washington’s economic health maintained by the Center for Regional Analysis fell from 100 to 94. It came right back up after the shutdown, however, when government workers returned to work and received back pay.

This time, there is no guarantee that furloughed workers will receive back pay.

There are about 370,000 federal employees in the Washington area, though it is not known how many of them would be furloughed.

“I don’t think the chances of federal workers’ reimbursement are very high right now,” said Rep. James P. Moran (D-Va.), who scheduled an emergency town meeting for Thursday in Alexandria. “This is different from what it was in ’95. Then I thought it was the worst it was ever going to get. Many of those in the [Republican] majority have no intention of reimbursing workers.”

Isabel Sawhill, a senior fellow at the Brookings Institution, said the shutdown would likely be “small potatoes” for the U.S. economy, at least at first. Federal spending accounts for about 20 percent of U.S. economic activity, but most of that comes from Social Security, other benefit payments and defense spending that would continue.

“D.C. might take a hit or other communities where there are big concentrations of federal employees,” she said. “I would not expect it to make much of an economic impact unless it goes on a long time.”

Staff writer Ariana Eunjung Cha contributed to this report.

Peter Whoriskey is a staff writer for The Washington Post handling investigations of financial and economic topics.
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