According to a new report from Macroeconomic Advisers, America's budget fights have cost more than 2 million jobs and slowed economic growth by 1 percentage point of the GDP since 2010. And that doesn't even account for the current shutdown fight raging on in Congress. The report estimates that the 2-week shutdown has already shaved off 0.3 percent of GDP growth. If we default, things will get much worse.
Even a short default could cost the U.S. another half a million jobs. If we have extended default, the unemployment rate will rise as high as 8.9 percent, as the Financial Times explains. Researchers at Macroeconomic Advisers found that "political discord forced the U.S. to pursue deeper spending cuts in the short term than it should have in recent years." This includes the automatic cuts under sequestration that started in March. The deadline to raise the debt ceiling is Thursday, but the Treasury Department estimates default would happen sometime between October 23 and November 1.
Update, 4:50 pm: CNBC reports that Fitch has put the U.S. credit rating on "negative watch."
Update, 2:40 pm: The Senate has suspended negotiations, and the DOW has dropped 120 points.
Felix Salmon at Reuters explains what default means:
The harm done to the global financial system by a Treasury debt default would not be caused by cash losses to bond investors. ... Rather, the harm done would be a function of the way in which the Treasury market is the risk-free vaseline which greases the entire financial system. If Treasury payments can’t be trusted entirely, then not only do all risk instruments need to be repriced, but so does the most basic counterparty risk of all. The US government, in one form or another, is a counterparty to every single financial player in the world.
World leaders are, of course, worried about American default. But Americans are also aware of the fact that budget fights hurt them. This week's Gallup Economic Confidence Index is the lowest it's been since November 2011. That low was part of a "long slump" stemming from debt ceiling negotiations that year. This weeks score is -39, which means that more Americans think the economy is getting worse than getting better.
Former Treasury Secretary Larry Summers (who lost a bid for Fed chair this year) warned on Monday that U.S. budget battles will not fix the economy. Republicans and Democrats should come together instead to focus on "growth strategies." Summers argues that Washington's fixation on a "grand bargain" is misguided:
Policies that indirectly address deficit issues by focusing on growth are sounder economically and more plausible politically than the long-term budget deals with which much of the policy community is obsessed.
So whatever budget deal Congress agrees on won't address the deficit in a meaningful way. But if Congress doesn't make a deal soon, the unemployment rate will go up and GDP growth will slow even more.