2:27pm

Wed October 16, 2013
Economy

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

Originally published on Wed October 16, 2013 5:45 pm

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.

Copyright 2013 NPR. To see more, visit http://www.npr.org/.

Transcript

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The stock market today cheered the apparent debt ceiling deal. The Dow gained 206 points and all the major indexes closed higher. Investors have been watching the showdown in Washington closely since a default could have triggered a global financial disaster. At the same time, some damage has already been done and economists are now trying to figure out how much. NPR's Chris Arnold reports.

CHRIS ARNOLD, BYLINE: The stock market was definitely twitchy in the face of the standoff. When talks in Washington stall, the stocks would fall a bit. And when it looked like progress on a deal was being made, stocks would rise back up. But it's probably a good sign that investors at no point were ever predicting a total Armageddon.

DAVID KOTOK: The market does not believe the United States of America is going to default on its Treasury bills, bonds and notes.

ARNOLD: That's David Kotok, chief investment officer of Cumberland Advisors. He says, despite all the increased volatility, throughout this whole debt ceiling standoff, stocks stayed near all-time highs. And if many investors actually thought the government was going to default, we would've seen much more market mayhem and a huge plunge in stocks.

KOTOK: A serious market correction.

ARNOLD: But many economists say that 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 is co-founder of the forecasting firm Macroeconomic Advisers. He says while this crisis may have been averted through this last-minute deal...

JOEL PRAKKEN: That arrangement is simply 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 that we've experienced for the last several years.

ARNOLD: Prakken says this pattern of brinkmanship and short-term policy patches in Washington, all this, is hurting the economy. His firm just did an economic analysis of how much it's hurting.

PRAKKEN: We estimate that the cost of crisis-driven fiscal policies since 2009 has been to reduce the economy's growth rate by about 3/10 of a percentage point per year on average since then, with the result that the unemployment rate is higher to the tune of about 900,000 jobs.

ARNOLD: In other words, Prakken says about a million more Americans would have jobs if politicians in Washington were doing a better job of crafting long-term policy. That's over the past three years he's talking about. He says going forward, the U.S. has to work out a plan to deal with the rising cost of entitlements, Social Security, Medicare. Instead, lurching from one short-term fix to the next creates uncertainty, and that puts a drag on the economy.

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

ARNOLD: Another group has been serving executives in American companies over just the past two weeks, during the debt ceiling showdown. Michael Griffin is an executive director with CEB, which is an advisory firm working with companies across the country.

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

ARNOLD: But all the uncertainty over the past two weeks apparently made executives much more cautious when it comes to hiring people. The percentage of executives who said they were planning to hire workers...

GRIFFIN: Fell from 38 percent last quarter to 29 percent. It is a significant step back.

ARNOLD: 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 the 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. Chris Arnold, NPR News. Transcript provided by NPR, Copyright NPR.