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September 26, 2013

Economic Costs of Washington Dysfunction Weigh Heavily

by Mil Arcega

The U.S. Senate is expected to work on an emergency funding bill this weekend to keep the government operating after its spending authority runs out October 1. The bill would still require approval from the Republican-led House of Representatives, which earlier this week agreed to fund the government only if none of the funds are used to implement President Barack Obama’s signature health care law. But even if lawmakers succeed in averting a costly shutdown, some say the U.S. economy already is paying the price for political dysfunction.

It’s down to the wire again as Washington wrestles with another fiscal deadline. But even if lawmakers succeed in defusing the latest crisis, the uncertainty carries a hefty price tag.

One study suggests that since the last budget impasse in 2011 - the market volatility, hiring delays and reduced consumer demand have shaved about $150 billion from the country’s gross domestic output.

Testifying in Congress this week, economist Mark Zandi said that’s equivalent to more than one million jobs. “If political uncertainty had not risen to the degree that it has, the unemployment rate today would still be high, uncomfortably high, but at 6.6 percent [we’re currently at 7.3 percent, it would be 6.6 percent] that would make a meaningful difference to our economy’s performance.”

Washington’s political dysfunction was evident this week when freshman Republican senator Ted Cruz railed for 21 hours against the health care law to delay a procedural vote. As part of his speech, he read excerpts from a children's book.  
 
Fiscal reform advocate Robert Bixby said that’s not a winning formula for Republicans. "If their position is they would not increase the debt ceiling or indeed pass any appropriations bills unless Obamacare is repealed or defunded, that I think would be viewed by the public as an unreasonable demand and I think they would hold Republicans responsible.”

Likely to be even more contentious is the coming debate on the debt ceiling. Failure to raise the debt limit will mean the U.S. government could run out of money to pay its debts by October 17 - the consequences of which Mark Zandi says “would be cataclysmic. It would mean higher mortgage rates, higher borrowing costs for businesses, lower stock prices, lower house prices, a full blown recession and there would be no reasonable policy response to it.”

But another leading economist says those claims are greatly exaggerated. Alan Meltzer says the budget debates are necessary and more likely to lead to a compromise.

“There will be consequences, but the consequences will depend upon how long the default goes on. It isn’t going to go on forever and it probably will arouse enough reaction from the public that will, if we don’t get the agreement before, we’ll get it after,” said Meltzer.

The domestic wrangling is a big worry for U.S. trading partners. Many countries, especially those in emerging markets are dependent on American consumer demand for their exports. Another political stalemate could erode the world's confidence in the U.S. economy, which had been showing modest but steady signs of recovery.