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Budget Crises Taking an Economic Toll

My latest post for U.S. News & World Report’s Economic Intelligence blog warns that, while the latest budget crisis is over, the political dysfunction that produced it persists.  And that’s bad news for the economy as well as the budget.

We’ll face another government shutdown if policymakers can’t strike a deal to fund the government after January 16th, and another default crisis later in the year if they can’t strike a deal to raise the debt ceiling (or, better yet, eliminate it).  Moreover:

[T]he “continuing resolution” that keeps the government running through January 15th sets total funding for discretionary (non-entitlement) spending very low.  The standard economic prescription for an economic recovery that’s struggling to gain traction is a temporary increase in government purchases of goods and services — not the austerity that policymakers just enacted.  That drag on the economic recovery is compounded by the uncertainty about whether we’ll replay the crisis that we just endured. . . .

The economic forecasting firm Macroeconomic Advisers (MA) estimates that our lurching from crisis to crisis since the 2010 election and the policy choices we’ve made to resolve them have cost us up to a percentage point per year of slower economic growth and up to 2 million jobs.  Paul Krugman makes a good case that the cost is even higher, because MA did not include the premature termination of the temporary payroll tax cut as part of the fiscal cliff deal and the scaling back of federal emergency unemployment insurance in February 2012.

There’s a sensible way to address the twin challenges of promoting a stronger recovery and putting the debt on a declining path relative to the size of the economy.  As the International Monetary Fund advises, sequestration “should be replaced with a back-loaded mix of entitlement savings and new revenues. . . .  At the same time, … [a] slower pace of deficit reduction would help the recovery at a time when monetary policy has limited room to support it further.”