How Washington’s Dysfunction Harms Economic Growth
U.S. President Barack Obama and Republican nominee Mitt Romney traded barbs in last week’s presidential debate over the costs of both Romney’s tax plan and Obama’s Medicare changes. What neither candidate addressed, however, is the huge economic cost of the current state of political dysfunction.
It’s easy to dismiss Washington’s gridlock as business as usual. Congress has long been saddled with dismal approval ratings, and those are unlikely to improve after its recent decision to simply fund the government for a few more months instead of dealing with substantive budget issues.
Yet this failure is damaging the U.S. in subtle and serious ways. Washington’s inability to reduce the national deficit and debt undermines economic growth and global competitiveness.
The evidence no longer seems debatable. Last year’s showdown over whether to raise the U.S. debt limit increased the nation’s borrowing costs by $1.3 billion in 2011 alone, according to the Government Accountability Office, and Federal Reserve Chairman Ben S. Bernanke blamed the polarized debate for disrupting the economic recovery. A new Federal Reserve study shows that had there been no uncertainty over the past four years, the U.S. unemployment rate would have been closer to 6 percent or 7 percent than the 8 percent to 9 percent actually registered.
A 2011 study by economists at the University of Chicago Booth School of Business found periods of economic policy uncertainty -- such as the debt-ceiling dispute, the collapse of Lehman Brothers Holdings Inc. and the 2010 midterm elections -- are followed by significant declines in output, investment and employment. The peak impact comes nine to 24 months after the period of uncertainty, with gross domestic product declining 2.2 percent, private-sector investment falling 13 percent and employment dropping by about 2.5 million workers as businesses and households -- uncertain about future taxes, spending levels and interest rates -- postpone purchases and slow hiring.
That’s hardly comforting given the looming $607 billion in spending cuts and tax increases slated to take effect next year -- the so-called fiscal cliff. If Congress is unable to reach an agreement to scale back the changes, it will almost certainly tip the U.S. back into recession. Last month, Moody’s Investors Service Inc. cautioned it would probably lower its U.S. credit rating if Congress fails to engage in a “relatively orderly process” for increasing the debt limit and reducing the national debt. That’s a pretty tall order given last year’s .
It’s not as if the economy is robust to start with. Business investment contributed just 4.2 percent to second-quarter GDP, down from 7.5 percent in the first quarter and 8.6 percent in 2011, according to the Bureau of Economic Analysis. Chief executives of the nation’s largest businesses repeatedly warn they won’t restart investment unless Congress acts to avert the fiscal cliff.
Unfortunately, Congress shows no appetite for compromise. House Speaker John Boehner said he was “not confident at all” that Republicans would reach a deficit reduction agreement with Obama after the Nov. 6 election. Is that really the message Congress ought to be sending to shaky financial markets around the world?
It’s little wonder that the White House has embarked on an effort to use executive authority to bypass congressional inaction, despite Obama’s campaign pledge to avoid doing so. The president’s “We Can’t Wait” initiative has used executive power to push through changes on renewable energy, mortgage refinancing and infrastructure investments.
Can he do more? Not really. Authority to tax and spend is vested in Congress. Big-ticket issues, such as entitlement reform, spending cuts and a tax overhaul, are rightly the shared responsibility of the legislative and executive branches.
Divided government need not be a barrier to agreement. (Or to economic growth: Many economists think periods of divided government are actually beneficial, because gridlock minimizes unproductive government action, allowing the private sector to allocate capital more efficiently.) The Social Security reform of 1983 and welfare reform of 1996 are examples of bipartisan deals in which both parties swallowed some distasteful provisions to achieve, on balance, a better system.
At any rate, a divided government is not the same as a dysfunctional one. Uncertainty about the ability of the nation’s political leaders to deal with its fiscal mess threatens to undo the meager economic gains the nation has eked out since 2009 and throw the economy dangerously off-track.
What the U.S. needs is a decisive government. The decision to compromise is the first one Congress should make upon returning from the campaign.
To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at email@example.com.