The economic damage resulting from the Republican Party throwing a two week fit in the Congress shutting down the government trying to get a do-over of their opposition to the Affordable Care Act, did even more significant and lingering harm to the economy than we realized at first.
A Very Expensive Tea Party
By SIMON JOHNSON
The recent government shutdown and confrontation over the federal debt ceiling gained the Republicans nothing, at best – and may have cost them politically as a party. But it slowed the economy and undermined confidence in public finances in a way that will have a significant negative impact on future budgets of the United States. None of this should make for an appealing strategy, but Tea Party Republicans are giving every indication that they want to do the same thing again early next year. Their more moderate colleagues need to take a firmer hand.
The immediate and direct costs are nicely summarized in a blog post by James H. Stock – an academic economist on the president’s Council of Economic Advisers. His assessment is that the effect is a
0.25 percentage point reduction in the annualized G.D.P. growth rate in the fourth quarter and a reduction of about 120,000 private sector jobs in the first two weeks of October (estimates use indicators available through Oct. 12th).
This is actually lower than the impact expected by some private-sector forecasters; after talking with people I trust, I would not be surprised if the overall impact ends up being closer to a 0.5 percentage point reduction in the fourth-quarter growth rate (annualized, as in the quotation from Mr. Stock.)
Does the country make up this growth later, for example because federal workers can now pay their bills? Probably not, because there is a persistent effect in terms of increasing uncertainty about public finances and about economic performance – and this will depress both some kinds of consumption and many forms of productive investment.
Look also at the Gallup Economic Confidence Index, which has fallen sharply to a level not seen since the last debt ceiling showdown in August 2011. (Thanks to Mr. Bloom for emphasizing this series.)
Members of the Tea Party movement express concern about the longer-run federal budget – and the potential negative impact of future debt levels. But their tactics are directly worsening the budget over exactly the time horizon that they say they care about.
If shaking confidence in the Federal Government was one of the Republican fanatics goals for throwing their tantrum, then they were very successful in besmirching our rock solid image that allows US Treasury securities to be the world's benchmark for a safe investment. Their tantrum is also sending ripple effects across the domestic economy, and its effects will be felt in future budgets.
Those are the lingering consequences Americans must now endure for including a crew of reckless fanatics among the representatives they elected to this congress.
Also see: Shutdown ended, but the economic whacking it gave us is far from over. Where is the long view?