Unexpected negative shocks are bad news, at least in the short run. Depending on the severity and the element of uncertainty, such as the unfolding of the financial crisis and the aftershocks flowing through the markets for example, it can be like experiencing a slow-motion train wreck with seemingly no end.
According to most Market Monetarists whose work I’ve sampled, however, even the financial crisis was allowed to happen (able to be mitigated or avoided); and there is a question as to whether the shutdown should be regarded with any significance at the macro level – in theory, of course. That is to say that IF we had NGDPLT there is a strong possibility that a shutdown would not matter, any reallocation of resources could take place in short order resulting in not much more than inconvenience for those directly impacted – a barely noticeable blip on the radar.
But we don’t have NGDPLT. Nor do we have symmetrical inflation targeting, which would at least be much more predictable. What we have now is satisfaction with the current rate of inflation, even though it is nearly 50% lower than target, with no memory of the past. It is an inflation ceiling that, as such, behaves more like a commodity peg in effect so that reallocation of resources simply shuffles the deck chairs on the titanic instead of growing the pie as it occurs to ensure that displacement is minimized.
Given that the monetary policy described in the previous paragraph has created this macro nightmare world in which we now live, it is what is, and a shutdown will hurt most likely on a more permanent basis. The real question is: How much will it hurt?
This is something that Republicans should allow to sink into their thick craniums – their own preference for tight money makes all of the class warfare and no one can’t get anywhere without taking from someone else rhetoric of the statist left mostly true. There is no more growing the pie and raising all boats as long as monetary policy has a 2% inflation ceiling as its main feature. The “land of opportunity” rhetoric is now merely a fairytale. Welcome to Obamaville! You can check out any time you like, but you can never leave… And the GOP made it happen. Nice going chumps.