Does just arguing over the debt ceiling damage the recovery? - Bivens, Economic Policy Institute

[Bill USA]

http://www.epi.org/blog/

Given Boehner’s threat/promise of last week, this brings us back to the main question: Did last summer’s political wrangling over the debt ceiling inflict tangible harm on the economy?

Circumstantial piece of evidence exhibit A is that economic growth decelerated markedly in the middle of the year (see figure below on year-over-year GDP growth), roughly as the debt ceiling debate came to a head.

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Further, a paper by Scott Baker, Nicholas Bloom, and Stephen Davis (2012) has attempted to construct an empirical measure of economic uncertainty and estimate the association of rising uncertainty with economic performance. While the paper has often been cited by critics of the Obama administration who think that it estimates the effect of regulatory uncertainty on growth, there is actually almost nothing in the paper to support this reading.

But the paper does show a very large increase in economic uncertainty associated with the debt ceiling fight (see the figure below, which is lifted directly from the paper, including the association of the last spike with the fight over the debt ceiling). In fact, the index of economic uncertainty rose more in the midst of last summer’s debt ceiling fight than it did during the financial meltdown of fall 2008 (when Lehman Brothers collapsed).





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Companies are sitting on a $1.2 Trillion cash hoard rather than hire more people. Instead, they are using over-time and additions of contract labor to expand production. These all indicate that businesses are apprehensive about hiring people full-time as they are concerned the recession could get worse. Certainly, the Repubs threatening to kill the recovery either by more cuts in spending or causing a Government default on its extant obligations will adversely impact businesses' confidence in the sustainability of the recovery.