Is the debt limit debate a drag on the economy?


I doubt that the debt ceiling is exerting a measurable drag on the economy right now, but Michael Ettlinger thinks otherwise. Here’s his argument:

Most businesses don’t make big investments or ramp up hiring when they see a substantial risk of the economy tanking. They don’t want to be on the hook for the costs if there aren’t going to be customers and revenue for what they produce. Right now the failure to increase the federal debt limit is creating such a risk and that may well be why the economy is starting to drag ...

It’s more than a coincidence that this slowing pace began when the attention in Washington, financial markets, and the media turned from the 2011 budget to the debt limit — and when Republicans in Congress and their conservative allies started most pointedly digging in their heels on a debt limit increase, attaching extreme conditions for their votes. That’s a situation that would give any rational business pause.

It wouldn’t be at all surprising to see an economic impact given the potential effect of a failure to raise the debt limit and the chance that this scenario may play out. After all, even if one believes the chance of inaction is small, it’s a big risk. One would expect to see decisions on hiring and investment postponed until the uncertainty is relieved. That’s not to say every business and corporation has its eyes on the debt limit debate as it makes its decisions. But the doubts about the economy that the debate is creating are certainly causing greater caution.

Businesses in this country hire millions of people each month, and if that caution is causing just 100,000 or 200,000 fewer hires than would otherwise occur, that would show up as a large impact on net job creation. And that may be just what’s happening.

If I were going to rephrase this a little bit, I’d say that businesses have a good sense that there's a lot of different risks out there — default in Europe, continued stagnation in America, the debt, the debt ceiling, etc. — and that there’s no way any sane person watching Washington is coming away with the warm sense that no matter what happens, our political leaders will respond swiftly and thoughtfully to safeguard the economy. So I’d probably agree with Michael that Washington is, on some level, scaring the private sector, but I think the effect is small, and the cause more diffuse than the debt-ceiling debate.

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