Partisan gridlock in Washington is more than a political problem. Research now shows that a dysfunctional federal government has harmed the nation’s economy for at least four years and that making government work will put more Americans to work.
Researchers Sylvain Leduc and Zheng Liu of the Federal Reserve Bank of San Francisco quantify the negative economic impacts of gridlock in a Sept. 17 report titled “ Uncertainty, Unemployment and Inflation.” The most eye-catching of their conclusions is that, without the economic uncertainty caused by federal elected officials’ inability to pass a budget or agree on fiscal policy, the unemployment rate during the past four years would likely have been closer to 6 percent or 7 percent instead of above 8 percent.
“Heightened uncertainty lowers economic activity and inflation, and thus operates like a fall in aggregate demand,” Leduc and Liu write. “During the Great Recession and recovery, we estimate that higher uncertainty has boosted the unemployment rate by at least one percentage point.”
Uncertainty caused by government dysfunction inhibits hiring and investment. It also affects consumer confidence inordinately, according to Leduc and Liu, who created a model that confirms “high uncertainty has been a greater drag on economic activity in the Great Recession and recovery than in previous recessions.”
This contrasts with the deep recession of 1981-82, when uncertainty played no discernible role, according to Leduc’s and Liu’s statistical model.
A Hart Research/GS Strategy study conducted for AARP in July provides a snapshot of the damage that economic uncertainty has inflicted upon consumers. The survey shows that 78 percent of voters older than 50, and 67 percent of voters between 18 and 49, believe their personal circumstances have been “negatively affected by political gridlock in Washington.”
For working Mainers older than 50, especially, that financial insecurity translates to anxiety about retirement plans and investments, diminished buying power and delayed housing decisions, according to Lori Parham, state director for AARP Maine.
Leduc and Liu also note that, unlike during past recessions, changes to monetary policy designed to spur recovery, such as a reduction in interest rates by the Federal Reserve, aren’t available to help remedy the nation’s economic maladies because nominal interest rates are near zero.
The absence of monetary policy tools that helped the U.S. economy recover from recession in the past heightens the importance of finding a political solution to gridlock and, by extension, economic stagnation. That elevates the stakes in this year’s election.
The findings of Leduc and Liu demonstrate that any campaign talk of job creation loses credibility when delivered as part of a partisan message that doesn’t also address ways to restore confidence in Congress’ ability to achieve consensus.
This year’s campaign is to succeed her, but retiring Sen. Olympia Snowe, during a speech Wednesday in Stamford, Conn., made the strongest argument to voters about how they should approach this year’s elections when she said, “What reversing the bitter partisanship will demand … is all of us providing a political reward at the ballot box for those politicians who work toward common ground, and a political penalty for those who don’t.”
Elected officials might not create jobs, other than in government, but their intransigence can certainly stymie job creation, as evidenced by Leduc’s and Liu’s work. For that reason, the ballot-box political rewards Snowe mentions should be seen as an investment that will yield economic benefits.
Bipartisanship makes economic sense.