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

Like this most recent crisis, Congress averted disaster at the last possible moment. However, the brinkmanship pushed consumer confidence to rock-bottom levels, where it remained for months. The S&P 500 tumbled 17 percent and took more than six months to recover its gains.

That debt-ceiling deal called for steep cuts to national defense, highway construction, scientific research and other forms of discretionary spending that Congress must approve annually.

Another budget deal, reached in January of this year after another round of brinkmanship, included tax increases to help narrow budget deficits further.

Neither of those deals addressed the health and retirement spending that poses the greatest threat to the country’s long-term fiscal health. A failure to cut back these programs or find savings elsewhere prompted a round of deliberately disruptive across-the-board spending cuts — the so-called “sequester” — to take effect in March.

Along with an improving economy, those steps helped US budget deficits fall from 8.7 percent of GDP in the 2011 fiscal year to an anticipated 3.9 percent of GDP for the fiscal year that ended on Sept. 30.

However, this has all come at a steep cost.

In a report released on Monday last week, Macroeconomic Advisers estimated that 1.2 million more Americans would be working today if Congress had kept discretionary spending at the levels that were in place in 2010.

The forecasting firm estimated that Washington’s erratic behavior had also driven up unemployment by a further 900,000 jobs.

Zandi estimates the fiscal austerity has cost 2.25 million jobs. Without those measures, the unemployment rate wold stand at 6.3 percent now rather than 7.7 percent, he says.

Even many of those who disagree with the notion that policy uncertainty has hurt the economy agree that the spending cuts and tax increases should have been phased in more gradually.

“Fiscal consolidation has been a big drag on the economy,” said Paul Ashworth, an economist with Capital Economics.

The IMF called the US’ deficit-reduction efforts “excessively rapid and ill-designed” in June and said the sequester cuts would nearly halve US economic growth this year.

Meanwhile, Congress has punted on other important legislation like immigration reform that could boost the economy.

Construction firms have seen federal work plummet over the past several years. With the government shut down, they have been unable to use the federal E-Verify system to check workers’ immigration status or get permits to build in environmentally sensitive areas, said Ken Simonson, chief economist of the Associated General Contractors of America.

The delays could be more than an inconvenience for builders trying to line up financing for a new project, he said.

“You never know when the market’s going to turn and ... for some reason you may have missed the boat,” he said.

There is more turbulence on the horizon. Simonson said lawmakers may not have the stomach to avoid further cuts on transportation spending when they take up the issue next year.

Though Washington may be responsible for lackluster business on Main Street, it may not have much of an impact on Wall Street.

Many economists had expected the US Federal Reserve to begin scaling back its massive monetary stimulus program last month. The chaos in Congress means it now probably won’t begin pulling back its bond purchases until next year.

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