On October 1, the US government began its first shutdown since 1996 because the two chambers of its Congress could not come to an agreement on passing legislation to fund its operations. The Republican-dominated House of Representatives insists on language defunding sections of the Affordable Care Act, which is something that the Democrat-dominated Senate has refused to let through. Since the US government is not able to continue running its operations, it has been forced to suspend its non-essential services until funding legislation is passed.
The most noticeable effect of the shutdown is the furloughing of 800,000 personnel plus the 1.3 million personnel being required to report in without compensation. This reduction in the number of personnel has resulted in both the reduction and the suspension of services throughout the US government, ranging from routine FDA inspections to the Supplemental Nutrition Program for Women, Infants, and Children. Even though some sections of the US government has been hit harder than others, there is no section that has escaped the impact altogether.
Furthermore, the shutdown is having a similar effect on businesses serving as contractors of the US government. For example, some contractors are choosing to furlough their personnel because the US government cannot compensate them for their products and services at the moment. Of course, the impact of the shutdown is not limited to contractors because some businesses are no longer able to complete transactions based on suspended services or being hindered because of similar dependence on reduced services.
How the US Government Shutdown Impacts the U.S. Economy
Spending is the fuel that keeps economies running. For nations, spending can be separated into the four main components of private consumption, gross investment, government spending, and the net of exports minus imports, which is called the balance of trade. The impact of the US government shutdown on government spending is obvious, but it is also having a significant effect on both private consumption and gross investment. For example, the 2.1 million personnel not receiving compensation are no longer able to spend as much on purchasing consumer goods. In much the same manner, businesses impacted by the shutdown are neither able nor willing to spend as much on investing in the assets used to produce their revenues.
The consequences of this fall in spending are simple and straightforward. Less spending means that there is less cash circulating in the US economy, meaning that all participants have less cash to spend while also making them less willing to spend. Given enough time, the short-term consequences of less spending can convince businesses and other organizations to begin firing their personnel, resulting in even less cash circulating in the economy. Even assuming that the US GDP continues to grow despite the consequences of less spending, there can be no doubt that a sustained shutdown will make it more sluggish than it would have been under other circumstances.
How the US Economy Impacts the Canadian Economy
The US is important enough that a slowdown is bound to spread throughout nations considered part of the global economy. However, Canada is much more vulnerable than most of these nations because of the structure of its economy. First, the Canadian economy is more dependent on its exports than most national economies out there, so much so that exports make up about a third of its GDP. Second, the Canadian economy is heavily dependent on the US economy. In fact, more than 70 percent of Canadian exports are headed to the US, while more than 60 percent of its imports come from the same source.
However, the shutdown is not as bad as it might seem for Canadians because there is going to be little direct impact other than a fall in exports. For example, the fall in US private consumption from furloughed personnel is not going to influence Canadian private consumption, much as how most Canadian businesses are not going to end up languishing as unpaid contractors. However, the indirect impact of a fall in US economic activity can and will spread to Canada as time passes. Fewer exports mean less cash circulating in the Canadian economy, while an uncertain economic situation will cause both Canadian consumers and businesses to hesitate about spending on big purchases.
Conclusion
In the end, the US government shutdown is going to hurt Canada no matter the Canadian response to the problem. However, the exact degree of hurt is going to depend a great deal on the length of the shutdown. The longer that the shutdown lasts, the more time the loss of spending has to spread through the US and US-dependent economies as though a corrosive poison.
References:
http://business.financialpost.com/2013/09/30/what-a-u-s-government-shutdown-means-for-canada/
http://www.canadianbusiness.com/blogs-and-comment/how-will-the-u-s-government-shutdown-affect-canadas-economy/
http://www.huffingtonpost.ca/2013/10/01/us-government-shutdown-canada_n_4020665.html
