It’s just a “partial” government shutdown. Threats of a U.S. government default are overblown. The federal government is too involved in the economy, anyway.
These are some of the excuses used to justify repeated standoffs in Washington over federal spending. The politicians doing the fighting usually insist the economy can withstand their histrionics and everything will go back to normal once it’s over. Yet economists increasingly see lasting damage from the drawn-out budget bickering, with a new study contending that political standoffs have cost the economy 900,000 jobs this year alone. And Fitch, the rating agency, now says it may join Standard & Poor's in downgrading the U.S. credit rating.
Most people probably want to forget about all those dispiriting (and unnecessary) fights in Washington, but it’s worth a brief recap. In the summer of 2011, Democrats and Republicans argued until the last second over raising the government’s borrowing limit. The brinkmanship led to the S&P downgrade, the first ever for U.S. Treasury securities. S&P cited political dysfunction rather than actual financial problems as its primary concern.
That standoff led to the creation of a Congressional “supercommittee” that was supposed to resolve budget disagreements once and for all, but ended up accomplishing nothing because the committee was, well, staffed with politicians who couldn’t reach any agreements.
That set the stage for the “fiscal cliff” deadline at the end of 2012, which led to a few tax hikes but also left most of the big issues unresolved. A few months later the “sequester” kicked in, cutting federal spending at most agencies by about 5% because members of Congress couldn’t prioritize what was worth funding and what ought to be cut. Those cuts remain in effect.
Now, of course, we’re mired in a government shutdown, since Congress can’t agree on how to fund the federal bureaucracy. And since the government has once again hit the limit of its borrowing authority, we’re once again facing the risk of default on U.S. obligations if Congress doesn’t cry uncle and extend the limit during the next few days.
Will it ever end?
It better, because the broken political machine in Washington is throwing shrapnel straight into the gears of the mainstream economy. The new study, conducted for the Peter G. Peterson Foundation by Macreconomic Advisors, a private research firm with no obvious political leanings, attempts to tally the total impact of those political machinations on the U.S. economy. It’s a lot more substantial than the political class would prefer to acknowledge.
In 2013 alone, political uncertainty cut GDP growth by 0.3 percentage points and pushed the unemployment rate 0.6 points higher than it would have been with more effective government. That happens because troubling news out of Washington tends to push stock prices down and interest rates up, "undermining wealth and raising private borrowing costs," according to the study. Consumers and businesses spend and invest less as a result. That equates to 900,000 lost jobs—without taking into account the recent jitters caused as Washington gets closer to defaulting.
If the government actually does default, it will most likely cause a new recession and dwarf the negative impacts of the last several standoffs. “Partisan divided government has failed to address this long-run problem sensibly,” the study says, “instead encouraging policy that is short-sighted, arbitrary, and driven by calendar-based crises.”
There are solutions: Address core problems like the mismatch between spending and revenue instead of linking budget deals to side issues such as Obamacare. Solve budget problems before they escalate into a crisis. Wait until the economy is healthier before enacting spending cuts or other austerity measures meant to shrink the deficit. And, oh yeah – agree on something every now and then. You don’t need to be an economist to know that Congress has a massive deficiency in that.
Rick Newman’s latest book is Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.