US economy boomed during 1995/1996 shutdown
Every major economic indicator in the United States improved during and after the Clinton-era government shutdown that has dominated news analysis columns throughout the “defund Obamacare” debate.
Although the spending gaps that occurred from November 1995 to January 1996 are depicted almost unanimously by politicians and the establishment media as disasters for the United States, in fact the so-called shutdowns, during which a portion of government spending was temporarily reduced, did no discernible damage to the American economy, and may have boosted the financial well-being of the American people.
“I mean whatever effect Obamacare might have on the economy is far less than even a few days of government shutdown,” President Obama declared in a speech to supporters Thursday, giving a characteristic point of view that seems to be shared by a majority of Americans, who strongly oppose a government shutdown.
A review of economic performance, however, tells a very different story. The spending gaps of the Clinton presidency occurred from Nov. 14 through Nov. 19, 1995 and from Dec. 16, 1995 to Jan. 6, 1996.
Despite the greatly ballyhooed furloughs of government employees, unemployment stayed even at 5.6 percent during November 1995, the period of the first spending gap, which ended when a deal cut by President Bill Clinton and Republican legislators allowed government to stay funded at 75 percent.
Unemployment actually dropped to 5.5 percent during the second spending gap, which was more complete than the first.
Unemployment continued to plummet in the months following the shutdown, as a hamstrung Clinton allowed the rate of government spending increases to slow and headed toward the eventual budget surpluses that became the highlight of Clinton’s legacy. According to the Bureau of Labor Statistics, unemployment dropped half a percentage point within a year of the first shutdown and had dipped below five percent by the spring of 1997.
More surprisingly, gross domestic product increased during both quarters covered by the Clinton-era shutdowns. According to the Bureau of Economic Analysis, GDP began the fourth quarter of 1995 at $7.7 trillion and ended the second quarter of 1996 at $7.9 trillion. By the end of the second quarter 1996 GDP had topped $8 trillion.
Personal consumption expenditures, gross private domestic investment and personal income also increased during and immediately after the shutdown.
The GDP numbers are particularly striking because government spending is given outsized weight in GDP measures, which assume that every dollar in federal spending results in a full dollar’s worth of economic activity. Nevertheless, GDP continued to climb despite the suspension of transfer payments.
With a recent CNBC poll showing 59 percent opposition to the current shutdown threat, few are willing to speak up for the 1995-96 shutdown, though Newt Gingrich, who was House Speaker at the time, did argue over the summer that the dispute helped Republicans and paved the way to balanced budgets.
Harry Reid suggested people ask me about the effect of the 1995 government shutdown. It worked. We balanced the budget for 4 years.
— Newt Gingrich (@newtgingrich) July 30, 2013
Harry Reid asked about impact of 1995 govt shutdown. First reelected house gop majority since 1928. Welfare reformed. Budgets balanced.
— Newt Gingrich (@newtgingrich) July 30, 2013
By focusing only on public policy, however, Gingrich is being too modest. The best argument for the Clinton-era shutdown is found in the private economy. According to Federal Reserve flow of funds data [pdf], personal income also spiked throughout the period of the shutdown, from $5.2 trillion in the fourth quarter of 1995 to $6.3 trillion in the first quarter and $6.4 trillion in the second quarter of 1996.
One economic indicator that did take a dip during the shutdown period was the Conference Board’s Consumer Confidence Index, a “soft” measure that takes account of psychological rather than financial effects. Consumer confidence dipped sharply in December 1995 but rebounded rapidly throughout 1996.
That the Clinton-era shutdown produced no negative effects on our nation’s prosperity is not entirely surprising, according to one economist. Mark Vaughn, a fellow at the Weidenbaum Center at Washington University in St. Louis, notes that economic growth in the mid-1990s was more vigorous than it is today, and that the shutdown, however much it has grown in the popular imagination, was actually brief, totaling only 26 days over a period of three months.
“All the models we have of consumer behavior show that people spend based on their lifetime income, subject to short-term liquidity issues they may have,” Vaughn told The Daily Caller. “If people expect this to be a short shutdown, you’re not going to see much effect.”
Vaughn compares the non-disaster of the mid-90s to this year’s panic over the budget sequester, which also failed to inflict significant damage on the economy. “If you think about it, government does two things,” he says. “It purchases stuff and buys labor. For the labor part, the gap probably won’t last very long, and in the past people ended up getting paid for the time off; even if they don’t you’re most likely only talking about a few days. And as far as purchases, all you have to do is delay the purchase for a few days.”
There are substantial differences between 1995 and 2013 that suggest a spending gap might play out differently this year. The size of the government has vastly expanded; a raft of new federal regulations on business and finance have been passed; the number of Americans on federal public assistance has exploded; measures of private net worth, income and indebtedness are all much worse than they were in the 1990s.
Vaughn notes that the economy as a whole is much weaker in the Obama era than it was in the Clinton era.
“Still,” he told TheDC, “I think the lesson is — don’t bet on a large negative effect of a shutdown.”