Do the Math: The Costs of the Government Shutdown (And how to avoid them in the future)

This originally appeared as an opinion piece on June 10, 2011 in Politics in Minnesota.

The Minnesota state government shutdown looms larger and larger. But what is the cost of the shutdown? Some may think that closing down Minnesota government, partially or totally, however briefly, might yield savings. For those who believe government taxes and spending hurt private investment, the shutdown should produce a bonanza for private economic growth. Yet with public employees furloughed and their salaries and benefits not paid, programs not implemented, and projects not funded, all of this should lead to significant savings to the state, especially if it produces broader cuts and reductions in state and local spending.

But savings as a result of a shutdown are illusionary, outweighed by the costs. While ideally it would be best for the governor and the legislature to reach agreement, there is a serious need to consider adopting an alternative proposal to prevent future threats or real shutdowns–an automatic continuing resolution that funds and taxes the state at the same level of the previous biennium if no agreement is reached by the end of regular session.

There are savings associated with the shutdown. They include not having to pay wages and benefits to public employees. There are also operating costs as a result of not having to delivery certain programs. These could be savings in terms of health care expenditures to individuals for programs and services. The question is whether costs due to a shutdown are more or less than the savings?

How does one calculate the cost of a real or threatened shutdown? Economists use the term avoidable costs to refer to expenses that would not have to be incurred were some transaction or event not to occur. There are certain costs incurred with the shutdown that could be avoided if a budget deal were secured or no interruption in funding occurred.

What are avoidable costs? There are a host of costs incurred as a result of a shutdown that could be avoided. First, there are the costs associated with planning for the shutdown and then the start up of government functions. This also includes time spent by state agencies and workers on planning for the shutdown that is not spent on doing regular work. One cannot simply close and lock the state door at 5 PM–there must be an actual plan on how to do this, with this planning diverting state resources away from regular service delivery. These planning costs occur even if the actual shutdown does not occur. Second, there are the actual costs of shutting down the government such as laying off people, terminating or halting contracts.

Third, there are uncertainty costs. These include costs to state and local governments and school districts incurred as a result of not knowing how much money they will have for the next two years. A local government or school district not knowing know much money it will have may refrain or delay hiring teachers or planning programs. Uncertainty means creating contingency plans or otherwise delaying making some choices, thereby costing more money.

In addition to planning for the shutdown and restart, there are actual costs of starting up government functions such as rehiring individuals. It will cost money to notify, rehire, resume benefits, notify vendors, and begin implementing programs.

While government is shutdown, the State of Minnesota potentially loses revenue. This loss of state revenue includes delayed payments and tax collections and park fees. There are also litigation costs such as asking for temporary funding in court or in other litigation surrounding a partial shut down.

Finally, two last costs. There is a loss of personal income and out of pocket expenses associated with public employees being out of work. Many of these workers will have to pay for medical benefits out of their pocket or assume other expenses. And there is also a loss of state income and consumption as a result of public employees planning or actually being out of work. This loss of income includes losses to private vendors not being paid on contracts, lost business due to parks being closed, and other losses of income resulting in the state not operating. As more people are out of work, this hurts Minnesota’s economy.

Adding it up, the total costs associated with the shutdown exceed total savings. Moreover, many of the savings disappear once workers are rehired and programs have to address backlogs in services undelivered during the shutdown.

The point of this exercise here is simple: Taxpayers are going to spend more as a result of a government shutdown because Dayton and the Republicans could not agree. For conservatives who rant about government spending and taxes, their intransigence over tax increases and their unwillingness to compromise means taxpayers pay more.

Given the costs of a real or potential shutdown, can something be done? One solution is to adopt a variation of what they do in Wisconsin. In that state an automatic continuing resolution funds state programs if the legislature and the governor fail to reach agreement on the budget on time. Here in Minnesota given that there was a real shutdown in 2005, an almost shutdown in 2001, and many other years where special sessions were needed to reach agreement, automatically carrying over into the new biennium the previous budget and taxes solves many problems. It certainly does not address all budget issues and it is inferior to reaching agreements, but it is one way to avoid the costs associated with the threatened or actual shutdown.