The United States recently emerged from the longest government shutdown in its history, one that halted operations, froze budgets, and led to 1.4 million federal employees being either furloughed or working without pay for forty-three days. The most noticeable economic damage this time around, though, was not in closed museums or perhaps even the saga surrounding SNAP benefits. This time, it was in the sky.
By the end of October, the Federal Aviation Administration (FAA) reported that over twenty major air-traffic control facilities were operating below minimum staffing levels. This staffing shortage increased as unpaid controllers reached their limits. In an attempt to ameliorate the crisis, the FAA ordered up to ten percent of scheduled flights to be cut at more than forty major airports. Expectedly, this led to cascading delays, supply-chain disruptions, cargo backlogs, and stranded travelers.
This shutdown, then, was not just some political stalemate, as purported enemies in DC fought over the direction of the federal government. It was a live demonstration of how fragile the institutional infrastructure of our modern interventionist economy is — and why economics remains indispensable for understanding these moments of systemic stress.
Ostensibly, there is no mystery to air travel. Planes take off; planes land. Of course, any minor reflection upon the matter reveals that it must be — and in fact is — much more complicated. Our air travel network comprises one of the most elaborate coordination systems in human civilization, with millions of moving parts (both literally and figuratively) synchronized across time and space. This should not surprise us, for every economic system contains a coordination system.
The shutdown, however, revealed how fragile that coordination is, especially when the government is responsible for such a system. When the FAA ordered airlines to reduce flights, other areas of the economy were also affected. You cannot turn one dial and expect nothing else to change. Not only were passengers affected, but cargo schedules were disrupted, supply chains were backed up, manufacturers had to halt production, and perishables risked spoiling — just to name a few.
This is because the structure of production is temporal. Economic goods are not immediately made available once entrepreneurs decide to create them. No, goods must be concocted, produced, shipped, and delivered in order to reach customers. All of this, of course, takes time. The production structure spans a multitude of stages, and it relies on stable expectations. When the FAA’s operations broke down, so did these time-sensitive production processes. Entrepreneurs could not coordinate their plans because the institutional framework they relied on — in this case, flight schedules, shipping availability, and travel routes — suddenly became unreliable. Markets cannot function when the institutional infrastructure required to coordinate production collapses.
One of the challenges of economic life, as F.A. Hayek pointed out, is the coordination of knowledge that is dispersed among millions of people, not just the allocation of resources. To even begin considering allocation, consumer preferences must be ascertained. Prices do this beautifully — when institutions let them, that is. Even ignoring the fact that government control of the entire apparatus means that much of the network operates without price signals (thus rendering it incapable of accurately reflecting consumer preferences), the price signals that are in place were weakened during the shutdown. Prices become unstable when air-traffic capacity changes by the hour. Which cargo firm can coordinate deliveries efficiently when ground stops are issued with little warning? Imagine manufacturers trying to use air freight to receive their inputs while major airports are throttled.
Even where the market is allowed to operate regarding the use of air travel, government actions rendered those mechanisms less effective. The knowledge problem reared its ugly head, as institutional breakdown prevented information from flowing through the market, meaning prices could not accurately coordinate plans. The shutdown did not just create idle government employees — it degraded our economy’s ability to accumulate and process key economic data. The result was not just uncertainty regarding travel, but uncertainty about production itself.
Entrepreneurs must commit capital today for goods that will only be finished months or years later. To make this type of temporal commitment, stable expectations are imperative, especially in sectors that depend on complex logistical coordination. Any hiccup can be massive — a hiccup like the shutdown. Without guaranteed staffing, air travel became too unpredictable, which in turn made the production structure unpredictable. This is no small matter. Yes, a cancelled flight is massively inconvenient. A missed input delivery can also be quite costly. A missed production window, however, can destroy a business operating on tight profit margins.
What the shutdown did was depreciate institutional capital, what we might call the rules of the game. More than just reducing government “services”, the shutdown increased entrepreneurial uncertainty. The marginal entrepreneur is now more likely to find it unprofitable — at least in his expectations — to begin a business venture. The marginal business owner may have just missed the shipment of materials or goods that would have kept him afloat. Even the super-marginal business owner who will remain in business has to recalculate his entire model. This depreciation will continue to impact coordination long after the shutdown ends. Every missed market exchange is a missed opportunity for our society to be made better off. We are, quite literally, poorer because of this shutdown, and it has increased the possibility of being made poorer still in the future. Institutional capital, and capital in general, cannot be turned on and off like a light switch.
Shutdowns are often discussed along political lines — which party “won” and which party “lost.” The economic impact is often only discussed in terms of its immediate consequences. The long run, though, is seldom considered. The 2025 shutdown did more than just inconvenience travelers. It exposed the fragility of our institutions due to their close connection to the government. A private, decentralized air travel network would be far less prone to the type of shock we saw recently. Our current system creates a single point of failure, both in funding and technology. When the FAA’s NOTAM system crashed in 2023, the entire country’s airspace went offline. Meanwhile, decentralized private systems — like Canada’s Nav Canada — show that decentralized distribution of control is better capable of containing disruptions instead of allowing them to cascade throughout the country. This is because polycentric governance increases resilience, as entities have stronger incentives to upgrade technology, and more importantly, introduces redundancy that can keep the system running if one touch point fails.
A shutdown is a corrosive solvent for planning, coordination, and trust. Knowledge flows are disrupted or destroyed. Time horizons are shortened. The conditions necessary for a properly functioning economy should not be played with. We are made poorer by every missed opportunity to trade. The solution here is not more politics, but to notice how fragile our economy has become.
The post What the Shutdown Taught Us about Institutional Fragility was first published by the American Institute for Economic Research (AIER), and is republished here with permission. Please support their efforts.
