The economic consequences of a government shutdown can’t be calibrated on a spreadsheet with an economic model. It all depends on who wins public opinion—Congressional Republicans or the President and Democrats.
Federal spending is out of control. From 2007, the last full year before the financial crisis, to 2011, the second full year of economic recovery, spending has jumped $1.1 trillion—40 percent when a $200 billion increase would have satisfied inflation.
For any other country, a deficit exceeding 10 percent of GDP would force austerity by sending interest rates on government bonds through the roof. Alas, the United States prints the world’s currency—the dollar—so it can inflate its way to solvency, and the bond market is starting to take that bet.
Enter the Tea Party—that troublesome bunch of youngsters pushing elder Republicans to stand up for fiscal solvency, end the madness or halt funding for the government.