Economists Say Fiscal Fits And Starts Hurt U.S. Growth

Traders at the New York Stock Exchange on Wednesday. Stocks surged on Wall Street after Senate leaders reached a deal that would avoid a U.S. default and reopen the government after 16 days of being partially shut down. i i

hide captionTraders at the New York Stock Exchange on Wednesday. Stocks surged on Wall Street after Senate leaders reached a deal that would avoid a U.S. default and reopen the government after 16 days of being partially shut down.

Seth Wenig/AP
Traders at the New York Stock Exchange on Wednesday. Stocks surged on Wall Street after Senate leaders reached a deal that would avoid a U.S. default and reopen the government after 16 days of being partially shut down.

Traders at the New York Stock Exchange on Wednesday. Stocks surged on Wall Street after Senate leaders reached a deal that would avoid a U.S. default and reopen the government after 16 days of being partially shut down.

Seth Wenig/AP

On Wednesday, the stock market cheered the debt ceiling deal in Congress. The Dow gained 206 points and all the major indexes closed higher.

Investors of course have been watching the showdown in Washington very closely, since a default could have been a global financial disaster. At the same time, economists are trying to figure out how much the jitters and uncertainty over all this has been hurting the economy.

The stock market was definitely twitchy in the face of the standoff. When talks in Washington stalled, stocks fell a bit, and when it looked like progress on a deal was being made, stocks rose. But it's probably a good sign that investors were never predicting Armageddon.

"The market does not believe the United States of America is going to default on its Treasury bills, bonds and notes," says David Kotok, the chief investment officer of Cumberland Advisors.

Kotok says that despite the increased volatility throughout this whole debt ceiling standoff, stocks stayed near all-time highs. If many investors actually thought the government was going to default, he says, we would have seen much more market mayhem and a huge plunge in stocks, what he calls a "serious market correction."

But many economists say the fact that the market didn't totally panic does not mean that this continuing series of political standoffs isn't a big deal.

Joel Prakken, co-founder of the forecasting firm Macroeconomic Advisers, says that while this crisis may have been averted through a last-minute deal, "that arrangement is going to kick the can down the road."

"In which case we'll have set up yet another near-term, calendar-driven fiscal crisis that will perpetuate the elevated level of uncertainty for the last several years," he says.

Prakken says this pattern of brinksmanship and short-term policy patches in Washington is hurting the economy. His firm just did an economic analysis of how much it is hurting, which concluded that the cost of crisis-driven fiscal policy since 2009 has been to reduce the economy's growth rate by about three-tenths of a percentage point a year on average.

"The result [is] that the unemployment rate is higher to the tune of about 900,000 jobs," Prakken says.

In other words, Prakken says about 1 million more Americans would have jobs if politicians in Washington were doing a better job of crafting long-term policy over the past three years.

Prakken says that the U.S. has to work out a plan to deal with the rising costs of entitlements, such as Social Security and Medicare. Lurching from one short-term fix to the next creates uncertainty, and that puts a drag on the economy.

"Buying a house, buying a car, building a new plant that you'll be operating for years if not decades — all of those kinds of decisions seem riskier in the face of this sort of uncertainty," he says. "And the natural inclination is for households to delay those kinds of expenditures and for businesses to delay those kinds of investments."

Michael Griffin is an executive director with CEB, an advisory firm working with companies across the country. His group has been surveying executives at American companies during the debt ceiling showdown.

"Across the past year we've seen a very slow and steady improvement among North American executives in terms of their outlook for hiring," Griffin says.

But all the uncertainty over the past two weeks apparently made executives much more cautious when it comes to hiring people. The proportion of executives who said they were planning to hire workers fell from 38 percent last quarter to 29 percent.

"It is a significant step back," Griffin says.

All economists agree that with unemployment still high following the Great Recession, the last thing the country needs is an unnecessary drag on growth. So conservatives and liberals alike are hoping Congress can stop stumbling from one debt standoff to the next and start making more progress charting a longer-term course for the country's future.

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