Jeffrey Frankel on the Economic Impact of the Government Shutdown

October 1, 2013
By Jenny Li Fowler, HKS Communications

With the Oct. 1 government shutdown, hundreds of thousands of government workers will face indefinite furloughs and up to a million others will work without pay. Americans may soon notice government services being disrupted, if not canceled.

Jeffrey A. Frankel, James W. Harpel Professor of Capital Formation and Growth and a former member of the White House Counsel of Economic Advisors during the Clinton administration, says there's little the president can do at this point to help ease the impact of the shutdown.

Q: Do you expect this shutdown to have ripple effects across the general economy?

Frankel: The shutdown won't in itself have a major effect on GDP as a default on U.S. debt would. But the shutdown's effects, along with the ongoing effects of the sequester, are likely to increasingly impinge on people who depend on the government or interactions with the government. It will come as a surprise to people in "red states" that are as dependent on the goverment as people in "blue states," and in many important respects are more dependent.

Q: How will this government shutdown differ from the one that occurred during the Clinton Administration when you served on the White House Counsel of Economic Advisors?


Frankel: Perhaps the most important difference is that the economy back then was experiencing robust economic growth, in what eventually turned out to be the longest and most firmly established expansion in US history. Thus we were easily able to withstand the economic impact, and would have even if the Republicans had stuck it out longer. This time the economic reovery is not as well established, especially globally, and so a prolonged US fiscal crisis — something more than a few weeks of government shutdown — could send us back into recession. (By the way, the shutdown during the Clinton Administration happened before I got there in 1996.)

Q: What policy options are available to the president and the White House to mitigate the effects of the shutdown?

Frankel: Not much. Obama does not really have much choice but to wait until the "Tea Party" congresspeople tire of shooting themselves, their party, and their country in the foot.

Q: How can and will discussions about raising the debt ceiling be impacted by the government shutdown?

Frankel: The stakes in the debt ceiling are higher, including the dangers of a possible new global financial crisis and permanent damage to the US creditworthiness. It seems to me that the Tea Party congresspeople will be on even weaker ground. The main question is whether they will wait until the financial markets crash before relenting or whether they will see the inevitable shortly before that.

Given how rapidly the debt ceiling deadline is approaching, Washington will probably turn its attention to that now, without fixing either the shutdown or the sequester. Perhaps the effects will begin to be felt among ordinary Americans or in financial markets enough to start putting some pressure on Congress in the larger game.

Jeffrey A. Frankel, James W. Harpel Professor of Capital Formation and Growth

Jeffrey A. Frankel, James W. Harpel Professor of Capital Formation and Growth

"Obama does not really have much choice but to wait until the 'Tea Party' congresspeople tire of shooting themselves, their party, and their country in the foot."


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