Policy: Economy

U.S. sees limited economic harm from past budget crises

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Debt Ceiling,PennAve,Joseph Lawler,Economy,Budgets and Deficits,Government Shutdown

The budget crisis is over, for now, but the after-effects are yet to be sorted out.

Early reports have been dire: Standard and Poor’s said in an analysis that the 16-day shutdown has already shrunk the U.S. economy by $24 billion. The standoff over the debt ceiling, according to S&P, did even more damage by raising economic uncertainty.

And the cumulative effects may be worse, if Macroeconomic Advisers is right. In a study released Tuesday, the consulting firm estimated that the ongoing budget battles since 2009 have lowered gross domestic product growth by 0.3 percentage points per year, costing the U.S. about 900,000 jobs total.

President Obama cited similar figures in an address Thursday morning to discourage congressional Republicans from engaging in future confrontations, saying that “nothing has done more to undermine our economy these past three years than the kind of tactics that create these manufactured crises.”

The recovery from the 2008 financial crisis, now stretching into its fifth year, has been unusually slow, Michael Bordo of Rutgers and Joseph Haubrich of the Cleveland Federal Reserve Bank have found.

Yet there's little evidence that previous fiscal crises, including the 1995-96 shutdown and the 2011 debt ceiling standoff, hurt the economy.

In a research note for Deutsche Bank, economist Joseph LaVorgna noted that the economy grew at a brisk 4.9 percent annualized pace in the first half of 1996, following the end of the ’95-’96 shutdown.

And after the 2011 downgrade of U.S. debt, LaVorgna also pointed out, the economy grew at a 4.3 percent annualized clip over the next two quarters — the best two-quarter performance since 2003.

Macroeconomic Advisers, S&P and others theorize that the debt limit impasse could hurt economic growth by damaging consumer confidence and investors' certainty about economic policy. The Gallup daily Economic Confidence Index, a measure of consumer sentiment, fell to its lowest levels since 2011 in the days leading up to Wednesday's deal to raise the debt ceiling. The Baker-Bloom-Davis index of economic policy uncertainty also spiked in recent days.

“This is shooting in the dark,” Dean Baker, an economist with the left-leaning Center for Economic and Policy Research, said of claims that budget fights have hurt growth.

When it comes to the effects of debt ceiling showdowns, “people have been wildly exaggerating,” Baker told the Washington Examiner, saying that S&P’s commentary, in particular, has “no basis in reality.”

During the late July 2011 debt limit standoff, Baker noted, both consumption and investment, the two sectors that would be expected to slow if spiking uncertainty hurt growth, grew at a brisk pace in the third quarter of 2011. Instead, it was inventories that suffered — a component of GDP that does not closely track consumer confidence or economic certainty.

This time around, Baker expects the hit to consumer confidence caused by the brush with the debt limit to have an “invisible” impact on the economy, partly because “people have gotten used to uncertainty in the government.”

The shutdown, on the other hand, will have a clear impact on economic statistics, because of the direct reduction in government spending. Most analysts forecast that it would take a 0.1 to 0.2 percentage point bite out of the annualized rate of economic growth per week of the shutdown. Although furloughed workers will get back pay for the days they missed work, the third-quarter loss of spending would be permanent.

Nevertheless, it’s not clear that the shutdown will have a sizeable effect on the broader, non-governmental economy.

In 1995, private-sector growth boomed in the fourth quarter, while the government closed.

A repeat of the 1995 experience would mean that commerce will pick up throughout the fourth quarter, leaving no real trace of the effects of the shutdown.

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