The Cost of the Debt-Ceiling Fight

For a moment last fall, it looked as if the last-minute debt-ceiling deal was all for nothing. Democrats had caved to Republicans’ demands to cut spending in order to keep the government funded. But Standard and Poor’s decided that the brinkmanship displayed by John Boehner and Republicans reflected poorly on the country’s ability to pay its bills, and decided to lower the U.S.’s credit rating anyway from AAA to AA+. Luckily, that decision was taken more as a reflection of the rating agency than a proper assessment of the country’s credit-worthiness. The U.S. continues to sell Treasury bonds at record low interest rates, a sign that investor confidence hasn’t been shaken.

That doesn’t mean the tussle over the debt ceiling last summer came without cost. Economists Betsey Stevenson and Justin Wolfers have an op-ed in Bloomberg today assessing the impact of the debt-ceiling showdown:

High-frequency data on consumer confidence from the research company Gallup, based on surveys of 500 Americans daily, provide a good picture of the debt-ceiling debate’s impact (see chart). Confidence began falling right around May 11, when Boehner first announced he would not support increasing the debt limit. It went into freefall as the political stalemate worsened through July. Over the entire episode, confidence declined more than it did following the collapse of Lehman Brothers Holdings Inc. in 2008. After July 31, when the deal to break the impasse was announced, consumer confidence stabilized and began a long, slow climb that brought it back to its starting point almost a year later. …

Growth in nonfarm payrolls decelerated to an average 88,000 a month during the three months of the debt-ceiling impasse, compared with an average of 176,000 in the first five months of 2011 (see chart). Payroll growth subsequently recovered and has averaged 187,000 jobs a month since. Despite the rebound in job growth, employment is likely still below where it would otherwise have been.

Republicans’ decision last summer to toy with the debt ceiling to achieve their ideological goals clearly threw a wrench into the economy just as it was on the cusp of recovery. Yet things will only be worse next time around. Boehner has already said he intends to relitigate this fight when the borrowing limit will next need to be increased. The impasse will come at a tumultuous time, shortly after the election of the next president and following the expiration (or extension, if Congress takes action) of the Bush tax cuts. Democrats won’t be in such a trusting mood if Boehner once again demands spending cuts equaling the amount the debt limit is raised; last time the Super Committee was formed alongside the sequester cuts meant to be equally distasteful to both parties. Republicans have ignored that mandate and are doing everything in their power to avoid the implementation of the defense cuts in the sequester while increasing the burden of cuts on social spending.

 

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