On Monday, the U.S. government began its first partial shutdown in 17 years after Congress failed to break a partisan deadlock over whether to include provisions to defund President Obama's health care law in its annual spending bill. If the shutdown lasts through the end of the week—as expected—it would slice about 0.1 percentage point from economic growth, according to a Bloomberg survey of 40 economists.
This small hit to the economy would cost about $300 million a day in lost output at first, IHS told Bloomberg.
If the government shutdown, which has furloughed nearly 800,000 employees, extends beyond two weeks or more the impact will be profound. Nariman Behravesh, chief economist at IHS/Global Insight, told the Christian Science Monitor that for every week the government is closed GDP growth in the fourth quarter will be reduced 0.2 percentage points.
If it lasts more than two months, it would probably tip the economy into a recession, Moody's Anaylitcs chief economist Mark Zandi told a Senate committee last week.
Of course, it could be worse. And it will get worse—even if the budget fight is resolved—if lawmakers fail to raise the $16.7 trillion debt ceiling by Oct. 17. Here's a complete breakdown of what economic Armageddon might look like.
The debt limit, or ceiling, is the amount that the U.S. is allowed to borrow. And it must be raised if the U.S. is to pay for all the things—Social Security checks, payments on federal contracts, budget bills already passed—Congress has already bought.
The U.S. Treasury pays the bills Congress has authorized and collects taxes. There's typically a gap between tax revenue and authorized spending. The debt limit allows the Treasury to borrow a certain amount of money to cover that gap.
Once we break through the debt ceiling, the U.S. Treasury will no longer have the authority to borrow any more money. And that could be disastrous—although no one really knows what will happen since it's never happened before.
The worse case scenario is that a default of U.S. Treasury bonds could trigger a global financial crisis. At the very least, it would likely cause the economy to slow and raise interest rates for the government as well as corporations and homeowners.
Photo by Flickr user Brooks Elliott