Washington biggest risk to US economy

Oct 18 2013, 01:33 IST
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SummaryBut Washington’s policy blunders in recent years have significantly slowed economic growth

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 shutdown may not be enough to push the US economy back into recession. But 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. But 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 reopen 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 Potomac Research Group analyst Greg Valliere. “If you’re a business, how do you make plans in this environment?”

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. 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.

Though Washington may be responsible for lacklustre business on Main Street, it may not have much of an impact on Wall Street. Many economists had expected the Fed to begin scaling back its stimulus programme last month. The chaos in Congress means it now probably won’t begin pulling back its bond purchases until next

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