Ongoing Brinksmanship and Failure to Raise Debt Ceiling Could Cause Another Recession

NEW YORK — As Congressional leaders and the President discuss a potential temporary solution to the current fights over the government shutdown and the debt ceiling, the repeated cycle of lurching from crisis to crisis has significant costs to the U.S. economy, according to a new report released today.

The macroeconomic analysis, “The Cost of Crisis-Driven Fiscal Policy,” quantifies the negative economic impact of governing by crisis, and examines the effects of Washington’s actions — and inactions — including events such as sequestration, the government shutdown, and brinksmanship over the debt ceiling.

The report concludes that crisis-driven government and the resulting fiscal policy uncertainty has directly harmed the American economy by increasing the unemployment rate by 0.6%, or the equivalent of 900,000 jobs. “The Cost of Crisis-Driven Fiscal Policy” was prepared by Joel Prakken of Macroeconomic Advisers, LLC, a leading independent research firm, for the Peter G. Peterson Foundation.

Michael A. Peterson, President and COO of the Peter G. Peterson Foundation, said: “This report makes clear that self-created fiscal crises have significant costs to our economy and to American families. These partisan battles not only threaten our fragile economic recovery, but they have not resulted in any comprehensive solution to our real fiscal challenge, stabilizing our long-term debt.”

“Partisan divided government has failed to address our long-term fiscal challenges sensibly, instead encouraging policy that is short-sighted, arbitrary, and driven by calendar-based crises,” said Prakken of Macroeconomic Advisers. “Based on this report’s findings, we can assert confidently that the crisis-driven fiscal policies of the last several years have damaged our still-struggling economy. One can only hope that our policymakers will implement more sensible policy in the future.”

The entire report is available here.

Additional top-level findings include:

• Fiscal Policy Uncertainty: Since late 2009, fiscal policy uncertainty has raised the Baa corporate bond spread by 38 basis points, lowered GDP growth by 0.3 percentage points per year, and raised the unemployment rate in 2013 by 0.6 percentage points, equivalent to 900,000 lost jobs. (Page 8)
• Government Shutdown: A 2-week partial government shutdown would directly trim about 0.3 percentage points from 4th-quarter growth. (Page 8)
• The Debt Ceiling: The paper considers two scenarios. The first assumes a brief, technical default that is quickly resolved, and the second assumes an extended, two-month stalemate. (Page 9)

• Discretionary Spending: Reductions in discretionary spending have reduced annual GDP growth by 0.7 percentage points since 2010 and raised the unemployment rate 0.8 percentage points, representing a cost of 1.2 million jobs. (Page 4)

About Macroeconomic Advisers
Macroeconomic Advisers is a leading independent research firm focused on the U.S. economic outlook, monetary policy, and fixed income markets. The firm combines rigorous analytical methods with an unmatched understanding of how monetary policy is conducted, offering unbiased and thoughtful analysis of where the U.S. economy is headed.

About the Peter G. Peterson Foundation
The Peter G. Peterson Foundation is a nonprofit, nonpartisan organization established by Pete Peterson — businessman, philanthropist and former U.S. Secretary of Commerce. The Foundation is dedicated to increasing public awareness of the nature and urgency of key long-term fiscal challenges threatening America’s future and to accelerating action on them. To address these challenges successfully, we work to bring Americans together to find and implement sensible, long-term solutions that transcend age, party lines and ideological divides in order to achieve real results. To learn more, please visit www.pgpf.org.