When it comes to the intended consequences of a goverment shutdown, they are rather simple: a shut down government (which to many is the best news possible). So what about the unintended consequences? Here is Bank of America with a quick summary of what would begin to happen at 12:01 am tonight, and continue for the duration of the shutdown.
What are the unintended consequences of a shutdown?
The shutdown will likely add to the budget deficit. It is costly to stop and start programs. The 1995-96 shutdown directly added $1.4 bn to the deficit (about $2.5 bn in today’s dollars) Moreover, the shock to growth will undercut tax revenues. In addition, ironically it does not impact the implementation of Obamacare since it is an entitlement similar to Medicare. However, there is some chance it could delay US economic data releases: in 1996, the December employment report was delayed two weeks as a result of the shutdown then. The Federal Reserve and the Post Office, both of which do not depend on Congressional appropriations, will not see any cutbacks due to a shutdown.
So for those asking if daily POMO will continue, the answer is a resounding "yes" - the government may be shut down but the wealth effect (to the 0.01%) will continue. Furthermore, it goes without saying that this is a very limited list, as nobody can truly predict what is unintended, or unpredictable (just ask money markets in the aftermath of the Lehman bankruptcy). For the full impact of intended consequences and otherwise, empirical observations will be the best gauge.
Finally, in terms of what is known about the shutdown's impact, here again is BofA, whose core observation, that "market pressure" (i.e. a selloff) will "hopefully spark an agreement" is 100% correct.
Should we have a shutdown, we would expect it would be relatively short — public uproar and market pressure will hopefully spark an agreement. A shutdown of a few days would likely have no real measurable effect upon the economy and result in only a small sell-off in the markets. Most of the federal government will keep running in the event of a shutdown, but a significant number of federal employees will be furloughed without pay, perhaps as many as one million. The impact on 4Q GDP growth should rise with the length of the shutdown: a coupleday shutdown would likely have zero net impact upon growth; a two-week shutdown could shave 0.5pp, while a one-month shutdown could lop 2pp from 4Q growth. These are, of course, rough estimates and subject to big standard errors.
The key source of uncertainty is the impact on consumer and business confidence. The revised GDP data showed very weak growth in 4Q 2012 and 1Q 2013 around the fiscal cliff negotiations, which in large part reflects heightened uncertainty. This time around, the hit to confidence and the markets could be larger still if a protracted shutdown signals the potential for an unmanaged process after the debt ceiling is breached. Lingering uncertainty — let alone a fiscal accident — would raise the chances that the Fed does not taper until next year.
And as is well known, we can't have any tampering with the New Normal prerogative #1: preserving confidence at all costs.