The uncertainty caused by gridlock in Washington is shrinking the country’s gross domestic product by 3 percent and costing somewhere between two and three million jobs. Or something like that.
I hedge because those numbers come from a study by three economists. Economics is an uncertain science, anyway, and more so when the subject is uncertainty itself.
Nicholas Bloom and Scott Baker from Stanford, and Steven Davis from the University of Chicago, say businesses and households are delaying spending and investing because of the political climate in Washington.
During a conference call August 8 that was set up by the nonpartisan group No Labels, Bloom said certain sectors are being hit particularly hard. He pointed to an Ohio company that makes furniture for hospital waiting rooms. Its business has come to a screeching halt because few in the health care industry are building new waiting rooms until they get some clarity over health care reform.
The defense industry, which faces year-end automatic cuts because Congress can’t agree on how to balance the budget, is in a similar situation. So are companies that are labor intensive.
"If every firm in the economy delays, you have a recession, and I think that’s one of the big factors going on now," Bloom said.
The economists came to their conclusion by creating a certainty index and matching it with monthly economic data reaching back to the 1980s.
How do you measure certainty? In a nutshell, they performed searches of the country’s 10 largest newspapers for articles containing "uncertainty" and related economic and political terms. They considered the amount of tax-related legislation set to expire – currently, a lot. Finally, they relied on a survey of professional economic forecasters done quarterly by the Philadelphia Federal Reserve Board. If the forecasters can’t agree on the future, it seems unlikely the rest of us will.
Washington has always been a mess, of course, and it was designed by the Founding Fathers to be so. According to Bloom, political gridlock wouldn’t be a problem if the two parties mostly agreed and were fighting over minor details.
Remember the government shutdown of 1994? Not a big deal, he said, because that represented political gamesmanship between Bill Clinton and Newt Gingrich over short-term budget issues that were resolved once everyone got tired of the nonsense.
The current situation, by contrast, involves a political culture that is evenly divided between two parties that want to take the country in different directions and don’t want to compromise over huge, long-term problems like the national debt. Unlike the 1994 budget shutdown, last year’s debt ceiling debacle reflected a complete breakdown in the political system.
Bloom likened the country’s situation to a movie where the good guy and villain are wrestling over the gun and everyone is waiting to see what happens next. Employers don’t know what’s going to happen with health care or taxes, so it’s best to wait and not hire anyone lest they become an unaffordable responsibility.
He said that in the past, stock market volatility has been tied to major economic news and the changing fortunes of major companies. Now it’s tied to what’s happening in Washington. He doesn’t see the situation improving until at least next year.
I’m pretty certain it’s going to take longer than that.
Steve Brawner is an independent journalist in Arkansas. His blog — Independent Arkansas — is linked at Arkansasnews.com. His e-mail address is firstname.lastname@example.org