BEYOND THE NUMBERS
Stone: Political Gridlock and Brinksmanship Threaten Economic Recovery
First, make no mistake: while a government shutdown would be disruptive to the economy, a failure of the federal government to honor financial obligations that it has already incurred — whether to bondholders, government contractors, or veterans — would be disastrous. Evidence from the 2011 debt-ceiling crisis suggests that debt-ceiling brinksmanship is costly even if a last-minute deal is struck.
Second, resolving budget issues to avoid a government shutdown or debt default is only half the battle. The specific measures taken matter just as much. Moreover, a stopgap deal or one that both sides are not committed to seeing enforced merely postpones the next showdown. That’s what happened in 2011. Hard decisions to address the challenge of achieving longer-term fiscal stabilization were assigned to a special committee and a budget enforcement mechanism was put in place that was supposedly so unpalatable to both sides that it would guarantee an agreement. But here we are with sequestration, a possible government shutdown, and a debt-ceiling crisis.
There’s a broader lesson here. Commissions (or super committees) and budget rules don’t work without policymakers who are committed to the goal of fiscal stabilization and willing to make compromises in the interest of avoiding serious harm to the economy and in the interest of sound budgeting. Discretionary caps and PAYGO rules helped policymakers adhere to the 1990 and 1993 budget agreements, which together with a strong economy led to budget surpluses and declining debt by the end of the 1990s. But budget rules and deficit-control measures cannot force unwilling policymakers to make choices they see as unpalatable or bridge fundamental policy differences that leave little room for compromise.
The problem is even more difficult in a weak economy where larger deficits are appropriate in the short-term to support an economic recovery, but policymakers must also demonstrate a commitment to longer-term deficit reduction.Click here for the full testimony.