Real Cost of Washington Dithering Over Budget

Practical Economics

The Cost of Washington’s Dithering over the Budget

If businesses and consumers had a clearer idea of federal policies, the unemployment rate would be 1.3 percentage points lower.

What’s the economic cost of Washington’s indecisiveness and gridlock on the federal budget and deficit? In terms of jobs, it’s about 2 million fewer folks earning a paycheck. The Federal Reserve Bank of San Francisco estimates that the unemployment rate would have been 1.3 percentage points lower at year-end 2012 if businesses had had a clearer picture of federal fiscal, regulatory and health care policies. Joblessness would have been a far more palatable 6.5% than the 7.8% it was.

See Also: Kiplinger's Economic Outlook

Since then, the jobless rate has eased modestly to 7.3%. But with Congress still shilly-shallying, uncertainty continues to plague both American businesses and consumers. Less than three weeks remain to fiscal year 2013, and lawmakers have made no move toward passing even temporary stopgap funding for fiscal 2014. Within an additional few weeks, federal borrowing will once again scrape against the legislated limit, threatening catastrophic default on Washington’s debt obligations here and abroad. Clearly, the San Francisco Federal Reserve Bank’s estimate still holds. Were it not for Congress’ inability to grapple in some rational and long-lasting way with the budget, the jobless rate would now be just 6% -- roughly the same as the 20-year average before the Great Recession.

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In addition, millions of Americans would be earning -- and therefore spending -- more. They’d hold full-time jobs rather than making do with part-time positions -- often with low pay and few or no benefits. In July, 8.2 million people were employed part-time, nearly twice as many as a decade ago, though that’s down from the jobless count of 9.1 million at the end of 2009.

What do businesses do when they are unsure how to plan for the future? They become hesitant about adding to payrolls: Sometimes hiring standards are raised, the number of interviews is increased or vacancies are no longer filled. All of those factors have been at play amid the current soft recovery and continue to be evident across nearly every industry. Even in construction and manufacturing, there has been only a modest pickup in hiring during the postrecession period. The only real pickups in hiring have been in energy and, to a degree, in health care.


Uncertainty about what’s ahead remains a top business concern. And unfortunately, there’s little reason to expect the fog to lift anytime soon. Odds are legislative discord is likely to once again have U.S. fiscal policy teetering on disaster’s edge this fall -- at best, lurching from one short-term deal to another. Plus, questions remain about exactly how Obamacare will affect businesses. The economy will suffer until Washington sends much clearer signals. Growth will continue to pick up, but only slowly. And businesses won’t invest big in new hires -- or new plants and equipment -- till they can see a brighter tomorrow.