Mon, Oct 21, 2013 - Page 9 News List

Washington becomes the biggest risk to the US economy

Economists and businesses warn that the perpetual debt and budget crises in the US make it difficult to invest, hire and plan for the future

By Andy Sullivan  /  Reuters, Washington

Illustration: Yusha

Consensus may be hard to find in Washington these days, but many corporate executives and economists seem to agree on one point: The biggest risk to the world’s largest economy may be its own elected representatives.

Down-to-the-wire budget and debt crises, indiscriminate spending cuts and a 16-day government shutdown may not be enough to push the US economy back into recession.

However, Washington’s policy blunders in recent years have significantly slowed economic growth and kept roughly 2 million people out of work, according to recent estimates.

Steep spending cuts are a big reason. The governance-by-crisis also may be prompting businesses to sit on their cash rather than building new factories, buying more equipment and hiring more workers, some economists say.

“Increasingly I’m of the view that the reason why our economy can’t kick into a higher gear is because of the uncertainty created by Washington,” said Mark Zandi, chief economist of Moody’s Analytics.

Congress on Wednesday voted to re-open the government and extend its borrowing authority through February of next year. But the deal did nothing to resolve the underlying disputes that led to the crisis in the first place — leading many to fear that the standoff may play out again in a few months. The plan sets up a forum to try to forge a more permanent budget deal, but few expect it to succeed.

“We have crisis after crisis after crisis and it has a corrosive impact on the economy,” said Greg Valliere, an analyst with Potomac Research Group. “If you’re a business, how do you make plans in this environment?”

Leading chief executives agree.

“Most CEOs I speak to in the United States say they’re seeing a slowdown in business because of this,” said Laurence Fink, the chief executive of giant asset manager BlackRock, in an interview on Wednesday. “I was on a conference call with many of them, and I heard across the board, a slowdown from the American consumer because of this narrative, so it’s having an impact on our economy already — and it’s going to have an impact on job creation at a time when we need more job creation.”

Not all economists agree that the political circus in Washington is hurting the economy in a measurable sense. While worries over the debt ceiling have pushed up the government’s borrowing costs over the past week, those increases are minimal, and the S&P 500 stock index remains near its all-time high.

However, the pace of recovery since the 2008 to 2009 recession has been unusually slow.

While the US’ total economic output is now higher than it was before the recession, the level of private investment remains lower than it was in 2007. Employers also continue to hire workers at a slower pace than before the recession.

Since the financial crisis eased, Washington has sent out one jolt after another. Democrats passed sweeping reforms of the healthcare system and the financial sector in 2010 which, whatever their merits, imposed wrenching changes on two pillars of the US’ post-industrial economy.

Public unease with the healthcare law helped Republicans win control of the US House of Representatives in 2010, ushering in an era of divided government that has led to repeated standoffs over taxes and spending. A near-shutdown in April 2011 led to the debt ceiling impasse in July and August of that year, which took the country to the edge of default and prompted the country’s first-ever debt downgrade.

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