Going from Crisis to Crisis is Bad for the Economy

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The Cost of Crisis-Driven Fiscal Policy, a study conducted by Macroeconomic Advisers on behalf of the Peter G. Peterson Foundation, finds that the uncertainty created by the on-going short-term spending bills and perpetual brinksmanship around the debt ceiling has pushed the unemployment rate 0.6 percentage points higher than it would otherwise have been this year. It also finds that this fiscal uncertainty cost 0.3 percentage points of GDP growth per year since 2010.

A chart developed by the Center for American Progress documents what that difference means for job growth.

900,000 jobs lost

The study also finds that cuts to discretionary spending from 2011 to the present have cost the country 1.2 million jobs and 0.7 percentage points of GDP growth. About three-quarters of the $2.4 trillion in total deficit reduction enacted since fall 2010 are in the form of spending cuts.

The study blames the polarized federal government for having fostered an atmosphere in which sensible legislative strategies to address long range policies that would address the U.S. fiscal imbalance are impossible to achieve.  As a result, Congress has only been able to adopt short-term solutions that further contribute to the polarization and economic instability that has been the hallmark of the past two years, and has prevented the nation from recovering more systematically from the Great Recession.

The study also documents the potential impact of hitting the debt ceiling, which we will be faced with yet again in just a few short months. The study finds that:

  • Hitting the debt ceiling even briefly would cause a recession; staying at the ceiling for two months would deepen the recession amidst tremendous volatility.
  • Hitting the debt ceiling even briefly would push the unemployment rate to 8.5 percent; staying at the ceiling for two months would raise unemployment to nearly 9 percent, or over three million lost jobs.
  • Delaying an increase in the debt ceiling for two months would cause unprecedented volatility in federal spending.
  • Fed policy would be more constrained following a debt crisis than during the Great Recession, when the Fed could, and did cut the overnight interest rate by five percentage points.

A full copy of the report can be found here.

Neil Bomberg

About the author: Neil Bomberg is NLC’s Program Director for Human Development. Through Federal Advocacy, he lobbies on behalf of cities around education, workforce development, health care, welfare, and pensions. Follow Neil on Twitter at @neilbomberg.