Curious Capitalist

Foroohar: Washington Dysfunction Is Hurting GDP Growth

It's also cost the country an additional 2 million jobs

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J. Scott Applewhite / AP

For the last three years, there has been much speculation over the economic cost of partisan politics. A new study has put a number on it. According to a report prepared by Macroeconomic Advisors for the Peterson Foundation, the fiscal drag and uncertainty that has resulted from a more polarized Washington has shaved a percentage point off GDP growth since 2010 and cost the country 2 million jobs over the last three years.

The study’s starting point is an index of policy uncertainty from Stanford academics, which it tweaked to reflect the budget and fiscal debates in Washington over the last three years. The study takes into account factors such as news mentions of policy uncertainty, tax provisions that are set to expire by year-end (and thus come up for debate), and widely divergent ideas about what budget and spending policy is likely to be. These are then tallied against uncertainty in the market, as evidenced by things like the divergence between T-bill yields and mortgage rates, corporate bond rates, other credit spreads and the equity risk premium. Looking at all of this, Macroeconomic Advisors found that market uncertainty was strongly correlated with political uncertainty. The group then created a counter-factual model of what the economy would have looked like if policy had been perfect—meaning no budget fights, debt-ceiling standoffs, or sequesters. The result would have been an addition 3/10th of a percentage point of growth per year, plus 2 million more jobs.

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The headwinds have of course increased with the last three weeks of government shutdown. “While it’s true that our current fiscal situation is unsustainable, and we need entitlement reform, that’s a long-term problem,” says Macroeconomic Advisers co-founder Joel Prakken. “The near term fiscal contraction caused by a partisan government and calendar driven politics has forced an economic contraction when the economy is already weak.” What’s more, says Prakken, the fact that the Federal Reserve has had to step in and keep rates low and asset buying high in lieu of real, growth-oriented fiscal policy has led to a situation where the Fed can’t do too much more to goose the economy. “Ideally, we’d be in a situation now where the Fed could lower rates if it needed to in order to help growth,” says Prakken.

In the short-term, the debt wrangling means that the Fed is unlikely to start tapering back it’s $85 billion-a-month asset buying program. Macroeconomic Advisers estimates that a default on U.S. Treasury debt could push the unemployment rate up from its current 7.3% to 8.5%, thanks to rising borrowing costs, falling asset prices, and the fiscal pullback that would result if the government had to stay under the debt limit for very long (which would necessitate bringing spending into alignment with tax revenue immediately, a multi-billion shift). “I’m incredulous about what’s happening in Washington,” says Prakken, echoing the rift that many outside the Beltway feel. “Politicians who are saying this isn’t a big deal – they are wrong.”

7 comments
CASSE3
CASSE3

Should economic growth really be our top national priority anyway?

Stichmo
Stichmo

Part of me thinks at least some Republicans have understood this all along and have hampered the economy intentionally.  Then when job and GDP growth is less than desired, they complain that "Obamanomics" is the cause of all our troubles.  Prior to this, no one has really called them out for their destructive behavior, which started by at least early 2010 with letting extended unemployment benefits lapse three times to create uncertainty.

Unfortunately for them, shutting down the government and threatening default this fall is NOT below the radar screen of most media outlets and the general public.  So next fall when Democrats run against the Republican brand because they intentionally damaged the economy it is likely to get more traction with voters.


FrankBlank
FrankBlank

This crisis is another act in a five year long play.   The republickkkans vowed to wreck Obama's presidency the day he got in.  Wrecking the country is the only means to that end - and they are using it for all it's worth.  

Oh, heavens, they say, we don't want to wreck the country.  We just _have_ to wreck the country.  But maybe we'll settle for driving it into a brick wall.   

ThomasHall
ThomasHall

The GOP are the job killers not creators. More jobs were created under Clinton than Reagan, Bush I and Bush II combined while five million manufacturing jobs were shipped offshore under Bush-Cheney while hundreds of billions of tax revenues were lost as thousands of GOP-enabled corporations dodges taxes offshore. The GOP lead the way on the deregulation of the big Wall St. banks and the GOP-Phil Gramm legislation enabled the subprime mortgage bankster fraud that took down Wall St., the job-creating housing industry/market and our economy along with $15 trillion in Americans household wealth, 4+ million homes with another nine million underwater, and nine million jobs.

The GOP opposed the auto industry and Wall St. bailouts without which America would be in another GOP-Hoover Great Depression as opposed to a Bush Great Recession. They GOP opposed also the ARRA which along with the bailouts worked. Instead, the GOP have deliberately sabotaged the economy and the weak job growth with an all-time record number of blocked bills (430+), blocked appointments, and required 60-vote super majorities following their concerted cabal to block everything that Pres. Obama and Democrats have proposed hoping to use it to unseat the President in 2012, but failed. Since the election nothing as changed, the GOP are still the do-nothing obstructionists aided by their extremist GOP baggies elected in 2010 thanks to the GOP-SCOTUS's Citizen United corruption of democracy flood of unlimited, usually anonymous, campaign funding by the rich, the GOP elections rigging gerrymandering that created a baggy monster threatening the GOP establishment and with the GOP ongoing voter suppression efforts.

The obstructionism and dysfunction is all on the GOP side as Democrats have been fighting the massive cuts and the GOP's pro-rich, anti-poor, anti-worker agendas to help the working class for a change. Notice that the GOP only become born-again deficit hawks when out of the White House having created the bulk of our National Debt, less than $800 billion through Carter, under Just Reagan, Bush I and Bush II whose ongoing unpaid bills are still going on. The GOP have historically NEVER represented the working class. Only by removing the GOP from office will America have a chance to recover from past GOP abuses of power.

j45ashton
j45ashton

 So here is what is going to happen.  Sooner or later, before default or after, Boehner will let the full house vote on an essentially clean CR and on raising the debt ceiling to the date determined by the Senate.  But rather than making this decision himself, he'll let the situation make the decision.  In other words, the situation (financial & economic) will get so bad, he will give himself & other moderate Republicans some cover.  They'll be able to say they did it for the good of the country.

But the reason he'll wait until things get really bad is Boehner knows that moderate Republican & the GOP will soon become victims of their own gerrymandering, and he can’t face it.  As a result of their vote to open the gov't & raise the debt ceiling, within heavily GOP gerrymandered districts there will be bitter tea party challenges to these moderate Republicans.  The tea party candidates will win their primaries over most moderate Republicans, and Boehner knows what will happen next.  It will be Harry Reid & Sharon Angle all over again.  Many of these rightwing nuts will be defeated, and the Democrats will regain the House.

swagger
swagger

as the right wing extremists would say "winning".

reflectionephemeral
reflectionephemeral

This is a very misleading headline. 

The push for austerity, and the uncertainty-causing hostage-taking, aren't something "Washington" did. They are things that <i>Congressional Republicans</i> did.