Lawmaker Squabbles Cost U.S. 1.75 Million Jobs: Cutting Research

The mounting polarization of U.S. politics imperils the U.S. economy, robbing it of jobs and investment.

So warns economist Marina Azzimonti of the Federal Reserve Bank of Philadelphia, who created an index to measure the tone of political debate and its impact on hiring, investment and general economic growth.

“Polarization significantly discourages investment, output and employment,” she said in the study released last week by the regional Fed bank. “Moreover, these declines are persistent, which may help explain the slow recovery since the 2007 recession ended.”

Azzimonti’s political polarization index is based on a search of news stories to measure the coverage of lawmaker disagreement from January 1981 to April 2013. It climbed after recession ended in 2009 and peaked toward late 2012. At the time, politicians were trying to resolve the so-called fiscal cliff, which would have inflicted tax increases and spending cuts on the economy.

The index rose from about 75 in 1981 to about 200 at the end of last year. The project didn’t include the recent government shutdown or fight over raising the debt ceiling.

Using the period 2007 to 2012, over which the index jumped 64 points, the Azzimonti model found employment decreases as a result of a surge, with a peak loss of 1.75 million jobs after six quarters. Investment decreases as much as 8.6 percent after five quarters, and output shrinks 2 percent.

Political clashes increase the volatility of fiscal policy, spurring uncertainty in economic policies. That in turn cools activity, she wrote.

The index also spikes around election dates, be they for the president or Congress. It tends to be lower around military conflicts or national security threats, such as the Sept. 11 attacks.

“This suggests that American politics are very polarized regarding economic policy or private-sector regulation reforms, but less divided when it comes to national defense issues,” said Azzimonti.

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There isn’t yet much evidence that the U.S. is enjoying a manufacturing renaissance, according to JPMorgan Chase & Co.

Speculation that the economy may be poised to industrialize again has been fanned by cheaper energy and technological advancements at home as well as rising labor costs in Asia and a weaker dollar.

“While these advantages are real, it is far from clear whether they are strong enough to reverse the gradual longer-term decline in manufacturing as a share of U.S. activity and the longer-term decline of U.S. share in world trade,” Robert E. Mellman, a New York-based economist for the bank, said in an Oct. 18 report.

Manufacturing output rose just 1.6 percent at an annual rate in the first quarter compared with an average of 3.1 percent in the two decades through 2007. Production is also still 5 percent below its pre-recession peak.

Employment in the sector accounts for just less than 9 percent of all jobs, down from 17 percent in 1987, the report said. In the latest three months, factory employment was 13.1 percent below where it was at the end of 2007, compared with total employment, which was just 1.5 percent lower.

While the U.S. is no longer losing share of merchandise exports in world markets, it’s not gaining either, said Mellman. If the U.S. were becoming more competitive, domestic producer prices would grow more slowly than prices of Chinese imports, he said. That hasn’t been the case,

No building boom has occurred for new plants outside of the petrochemical industry, JPMorgan said. Indeed, real investment in structures for the manufacturing industry fell at a double-digit pace through the first half of this year.

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The Europe-wide austerity push has exacerbated the recession in economies requiring bailouts, according to a study by an economist at the European Commission.

Published this week, Jan in ’t Veld’s analysis shows that the multiplier effect of budget consolidations ranged between 0.5 and 1 depending on each country’s degree of economic openness. A multiplier shows the magnitude of how an economy responds when government budgets shift.

Ripple effects as the economic effects of other countries’ austerity programs spread to neighbors can then add between 1.5 percentage points and 2.5 percentage points to the negative growth effects, he said.

“The finding of larger negative output effects and significant negative spillovers does of course not imply that fiscal consolidations should have been avoided,” said in ’t Veld. “A slower pace of consolidation could have raised general fears of a sovereign default.”

Countries with current account surpluses might consider easing their fiscal adjustments to support growth elsewhere, he said.

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The greater a U.S. company depends on loans from banks, the more its stock price reacts to monetary policy shifts.

That’s the finding of a paper published this week by the Centre for Economic Policy Research in London, based on 4,408 companies from 2003 to 2008.

A two-standard-deviation increase in a company’s reliance on a bank, as measured by the ratio of bank debt to total assets, makes its stock 25 percent more responsive to changes in interest rates. That means a stock can fall about 4 percent on average in response to a 1 percentage point surprise increase in the Federal Reserve’s benchmark rate, authors Filippo Ippolito, Ali Ozdagli and Ander Perez wrote.

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Switzerland’s experience demonstrates why central banks in rich nations have backed away from intervening in currencies, according to the Federal Reserve Bank of Cleveland.

The Swiss National Bank resumed interventions in 2009 in a bid to cap the value of the franc amid deflation concerns. The resulting period has met “with both failures and successes,” Owen F. Humpage, a senior economic adviser at the district Fed bank, specializing in international economics, wrote in the Oct. 18 report.

The upshot for the SNB is that foreign-exchange interventions can’t systematically influence currencies independent of a country’s monetary policy. In addition, focusing interest rate policy on an exchange rate can potentially conflict with a price stability goal, he said. It also left the bank open to currency losses.

“To affect exchange rates central banks must change their monetary policy,” Humpage said. “Any monetary authority contemplating intervention should consider the recent Swiss experience.”

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Vietnam, Poland and Hungary have the best growth potential among emerging markets in the medium term, according to a new metric devised by Nomura Holdings Inc.

The indicator accounting for purchasing manager indexes, credit, fiscal flexibility and industrial production in 15 countries ranked South Africa, Egypt and South Korea the least favorable, Nomura’s team of foreign exchange strategists said in an Oct. 18 report.

On the purchasing managers’ measure, Hungary and Vietnam have the best outlook, while Singapore and Mexico stand in the best shape when credit growth is the focus. Vietnam and Indonesia enjoy good prospects in industrial production and Poland and Hungary have the most fiscal flexibility.

The study follows one the Nomura strategists published last month based on which economies had external weaknesses. It found Ukraine, Turkey and Chile were the most vulnerable and Russia, China and Malaysia the least.

To contact the reporter on this story: Simon Kennedy in London at skennedy4@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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