Further Thoughts on the Shutdown

There has been a lot of news coverage of the terrible “costs” the government shutdown imposed on the US economy. The number I have been seeing the most is $24 billion. The ratings agencies have tossed out an estimate that the shutdown reduced 4th quarter growth from a 3% rate to a 2.4% rate. The subtext of all these reports is clear: “Evil Tea Party Republicans! Bad Republicans! Bad! Bad!”

 Let’s just do some back of the envelope calculations. The overall size of the US economy is around $16.6 trillion, or around $45 billion a day. Over the sixteen days of the shutdown, $24 billion works out to $1.5 billion a day. So whoever came up with the $24 billion number figured that a partial shutdown eliminated 3.3% of the American economy during that period.

 When you dig further into the numbers, the estimate for lost economic activity seems to boil down to two factors: reduced travel bookings, and the shutdown of the national parks. It does not include lost wages for Federal employees, because they were given back pay. Some contractors presumably had some lost time, but I have not seen those numbers broken out. The big enchilada is the reduction of business at the national parks. Now, the local communities undoubtedly suffered a loss of business during the shutdown period. But what the analysis ignores is the substitution effects caused by the park closures.

 The simplest way I can explain substitution effects is through an example. Have you ever gone to the multiplex to see a movie, only to find out that the movie you went to see is sold out? Every time this has ever happened to me, I pick another movie to see. I substitute one product for another. Notice, from the point of view of the hit movie producer, they have lost a sale. I didn’t go see the hit movie. But from the point of view of the producer of the plan B movie, they gained a sale. From the economic point of view of both myself and the movie theater, there was no change at all. The theater sold a ticket, and my wallet was lighter by the same amount.

 In this example, there were winners and losers, but the overall amount of economic activity was unchanged. Even if you don’t choose another movie, you’re already out of the house. You may go to a bar. You may go out to eat. You may go shopping. A rational person would conclude that consumers will substitute an alternative form of entertainment for the lost opportunity to see the hit movie.

Tourism, like all forms of entertainment, is a redistributive form of economic activity. No new wealth is created. Instead, wealth is transferred from those who have it (the tourists) to those who want it (the vendors). Change entertainment venues, and you have different winners and losers. But the net amount of wealth remains the same. Government statistics do not measure wealth; they measure activity. But even on the activity side, without an accurate measurement of the substitution effects, it is not possible to blithely announce that the economy suffered a significant loss because of the shutdown.