Is Congress to Blame for a Downshifting US Economy?

There is a lot of evidence to show that the economy is taking a hit because Congress can't, or won't, deal with the 'fiscal cliff' looming at year's end. Many experts are warning that the political gridlock in Congress is so severe that it has actually done damage to the economy and can possibly do a lot more.

By: David Grant, Christian Science Monitor
Published: Thursday, 5 Jul 2012
CNBC

Evidence is mounting that the economy is taking a hit because Congress can't – or won't – deal with the 'fiscal cliff' looming at year's end. The fight on Capitol Hill last summer over the national debt limit also took an economic toll.

A rising chorus of voices, inside and outside Washington, is warning that political gridlock in Congress is now so severe that it has actually done damage to the economy – and threatens to do a lot more.

President Obama, of course, is the chief "blame Congress" finger-pointer, perhaps to be expected as he fights to win reelection as the economy flails. But plenty of others – Federal Reserve Chairman Ben Bernanke, the US Chamber of Commerce, and Congress's own budget office, to name a few – also cite Congress as a factor that is inhibiting economic recovery, though they put it more diplomatically than does Mr. Obama.

Consider Mr. Bernanke's reply to lawmakers when asked June 7 about Fed efforts to stimulate the economy via low interest rates: "I'd be much more comfortable," he said, if "Congress would take some of this burden from us and address those issues."

Or take this complaint about how "uncertainty" is causing small businesses to refrain from hiring and investing. "Most of this uncertainty ... is coming out of Washington," concludes a June 14 report from the National Federation of Independent Business.

Then there's this tart assessment from the Congressional Budget Office about the consequences of lawmakers leaving unresolved some pressing decisions about future taxes and government spending. "Uncertainty about the resolution of fiscal policy early next year is weighing on the economy, we think, diminishing people's and businesses' spending this year," said CBO Director Douglas Elmendorf in June.

Wait a minute, you say? What about the debt crisis in Europe? What about the long-suffering housing market and the costs of "Obamacare"? What about layoffs in state and local governments? What about lack of presidential leadership, perhaps? Are they not to blame for the US economy running out of steam?

True, say many economists, some or all of the above contribute. But evidence is mounting that Washington's food fight last summer over raising the nation's debt limit and the "fiscal cliff" that looms at year's end are taking a toll on economic growth and employment. And both are crises manufactured in large part by an ineffective Congress.

"This economy can gain traction and really swing into full gear if we just nail down what we're going to do about the fiscal cliff and attaining fiscal sustainability," says Mark Zandi, chief economist of Moody's Analytics.

That's a big "if," if recent history is a guide.

That Was Then

Last summer, Congress engaged in a high-stakes game of chicken over raising the national debt limit – something it had done with few controversies some 90 times since 1940. The consensus now is that the fight hurt employment, crushed consumer confidence, caused a major credit-rating agency to downgrade the United States, and, according to a recent paper on the impacts of policy uncertainty, hampered overall economic growth for months.

The Constitution gives Congress much control over fiscal policy. It is Congress that decides government spending. Congress – not the president, not the Fed – draws up the tax code. And Congress, by its own law, controls the national debt ceiling.

The months when the debt-ceiling fight was in full swing – June, July, and August of 2011 – job creation dropped like a stone. In April of last year the US economy had generated a quarter of a million jobs, enough to keep pace with population growth. Then the debt-ceiling fight began, federal stimulus money ran out, and the Fed's quantitative easing program peaked – all affecting hiring. By June, the economy yielded just 84,000 new jobs, followed by 96,000 in July and 85,000 in August.

Consumer confidence also took a hit, falling 15.8 points as measured by the Michigan Consumer Sentiment Index. The largest drop ever – 19.5 points – came from hurricane Katrina in 2005. When Lehman Brothers collapsed in 2008, the Michigan gauge fell 15 points. After 9/11, it dropped 8.8 points.

Unlike the drops after Katrina or Lehman Brothers or 9/11, last year's plummeting confidence was Washington's responsibility.

"Never before in the history of the [monthly] surveys have so many consumers spontaneously mentioned negative aspects of the government's role in the economy, and never before have consumers rated economic policy so unfavorably," the Reuters/Michigan Survey said in releasing its August 2011 data.

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