No, The Government Shutdown Didn’t Cost The Economy $24 Billion

Now that the government shutdown and debt ceiling brinksmanship are over, the media has turned to playing the blame-game and diagnosing how badly the fiscal fights hurt the economy. On Wednesday, right before the McConnell-Reid deal passed both houses, S&P estimated that “the shutdown has shaved at least 0.6% off of annualized fourth-quarter 2013 GDP growth, or taken $24 billion out of the economy.”

This number, $24 billion, has been repeated around the internet as representing the cost of the shutdown, but that’s wrong for two reasons.

First, S&P is calculating how much the shutdown hurt the economy in the 4th quarter, but does not add in any bounce-back effects that will happen in the first quarter of next year. Many of the federal workers who were furloughed had to reduce their spending and it will continue to have an effect into November and December. But they will receive pay for their missed time; eventually that money will circulate into the economy. That doesn’t mean there were no negative economic effects to furloughing federal workers. Many workers in other sectors depend on those workers to purchase goods and services and those workers will not receive back pay. But that $24 billion is overstated as it does not included the bounce back effect. At the beginning of the crisis, Macroeconomic Advisors estimated that a the furloughs caused by a two-week shutdown would reduce real GDP by 0.3% in the 4th quarter. However, it noted that most of that should be made up in the first half of next year, as happened in the 1995-1996 government shutdown.

Second, the Federal Reserve may have delayed tapering to offset some of the negative impact of the shutdown. The September FOMC meeting outlined those fears:

However, a number of others (FOMC members) pointed to heightened uncertainty about the course of federal fiscal policy over coming months, including the potential for a government shutdown or strains related to the debt ceiling debate, which posed downside risks to the economic outlook.

In his press conference, Ben Bernanke repeatedly emphasized that the fiscal fights in Washington would be a drag on the economy. It’s unclear whether the Fed would have begun tapering in September if there was not a potential government shutdown and debt ceiling fight lurking in the near-future. It might have delayed reducing its bond purchases anyways as the economy slowed. However, investors are already predicting that the Fed will likely continue delaying tapering until at least the spring of next year since the federal government may go through these fights again in January. If that’s the case, then the Fed almost certainly kept its policy more accommodative due to the shutdown, which offsets some of that $24 billion in negative economic costs.

None of this is to say that the shutdown wasn’t costly. It was. It caused needless suffering for many Americans and certainly hurt the economy. But it’s unlikely to have cost the economy $24 billion. Keep that in mind.

It’s A Great Day For American Political Institutions

Senate Majority Leader Harry Reid and Minority Leader Mitch McConnell have officially unveiled their agreement to reopen the government and prevent us from breaching the debt ceiling. Speaker John Boehner has finally surrendered and will allow a vote on the bill; it is all but certain to pass with mostly Democratic support. Hurrah! We have avoided committing financial suicide, even if it took us until the 11th hour to strike a deal.

As the House bill fell apart yesterday afternoon, many people began wondering if a default was a real possibility. Fitch put the country on “Credit Watch Negative,” citing the debt-ceiling brinksmanship that has cast doubt on the ability of the federal government to uphold the full faith and credit of the United States.

Ezra Klein has argued recently that confidence in our political institutions may be a bubble ready to burst. In today’s Wonkbook, he cited the Fitch analysis and maintained that our political system is fundamentally broken:

Here’s why it does matter: Fitch is right. Does anyone really want to argue with this statement? “Although Fitch continues to believe that the debt ceiling will be raised soon, the political brinkmanship and reduced financing flexibility could increase the risk of a U.S. default.”

Fitch and S&P aren’t saying anything that the rest of the country doesn’t believe. They’re not even saying anything that Wall Street doesn’t believe. Everyone knows that American politics has become a game of Calvinball played with live ammunition. The question facing traders is when to finally bet that this is the day when someone doesn’t make it out alive.

What you see with the Fitch and S&P calls is that the market price on the U.S. political system doesn’t reflect what market participants are coming to believe about it: that a once capable and reliable system is now dysfunctional and unpredictable.

Derek Thompson says this repeated debt ceiling brinksmanship is “like Groundhog Day, but 720x longer and completely horrible.Neil Irwin and Matt Yglesias argue that we’ll be doing this all over again in a few months.

They’re all wrong.

Today is the best day for America’s political institutions in a long time. We have permanently disarmed the financial nuclear bomb known as the debt ceiling

Why do I say permanently? Because the McConnell-Reid deal confirms that Boehner and GOP House leadership were bluffing the entire time. President Obama has called for a clean CR and clean debt ceiling hike for weeks. The final deal is a clean CR, a clean debt ceiling hike and enforcement of existing law in Obamacare (income verification). If Boehner and Co. were willing to cause an international financial crisis, they surely wouldn’t accept this deal. The fact that they’re surrendering reveals that they will never let us default.

Whenever we hit the debt ceiling next, Boehner will have no credibility to threaten a U.S. default if Republicans do not get what they want. President Obama can refuse to negotiate again with the full knowledge that the speaker will cave at the last minute. The world now knows that Boehner will not let us breach the debt ceiling

This is what Democrats have been fighting for this entire time. They have created a new governing norm that eliminates any possibility that the United States won’t pay its bills. Our government may have a number of problems, but for the first time in Obama’s presidency, we can confidently say that the debt ceiling cannot be used as an extortion device. That’s a massive victory for our political institutions.

The End of Debt-Ceiling Hostage Taking

Greg Sargent had a good post yesterday explaining why Democrats are so adamant that they will not give any concessions for raising the debt ceiling:

Democrats, by contrast, don’t believe this constitutes acceptable governing. They don’t believe budget negotiations should proceed under these conditions. They are not making an argument about what the House majority can legally or Constitutionally do; they are making an argument about what they believe the House majority should and shouldn’t do, about what does and doesn’t constitute good governing. They are making an argument about governing norms. The Dem argument is that this practice should be renounced by both sides. Dems believe making concessions under these conditions now will legitimize the GOP demand for negotiations to happen under them, making default later all but certain, because this sort of standoff will happen again and again, ultimately leading to miscalculation and disaster.

Bingo. The key here is that Republicans only have leverage to extract concessions out of Democrats if they really are OK with breaching the debt limit. There are some who are, but the House GOP leadership isn’t. That’s been abundantly clear for weeks now as Boehner has repeatedly commented that the U.S. cannot default on its debts. It’s even clearer if you look at how House Republicans have ramped down their demands.

After Boehner’s plan fell apart in the House yesterday, Senate Majority Leader Harry Reid and Minority Leader Mitch McConnell stepped back in and quickly brokered a deal that would stave off a default. It funds the government until January 7 and raises the debt ceiling until February 15 while strengthening the income verification requirements in Obamacare. It does not include a delay of the reinsurance fee, of the medical device tax or a ban on the Treasury Department’s use of extraordinary measures. It also sets up a bicameral conference committee with the goal of coming to a budget agreement by December 13.  Make no mistake: this is a Republican surrender. The income verification condition is simply an enforcement of current law. The rest is a clean CR and clean debt ceiling hike, exactly what President Obama and Democrats have been calling for the past month.

Due to parliamentary rules, a single senator (cough Ted Cruz cough) could drag out the Senate bill so a vote doesn’t take place until Saturday or Sunday. If all senators agree by unanimous consent to forego debate on the bill, it can be voted on today and head to the House, but that requires the agreement of all senators. If the bill originates in the House and is passed, the Senate can take it up and vote on it soon after. Thus, House Minority Leader Nancy Pelosi is pushing Boehner to bring it to the floor to speed up this entire process. No matter what though, it looks like the speaker will allow a vote on the bill, which will then pass with mostly Democratic support.

There is a more important point here: This is the end of debt-ceiling hostage taking.

It’s over. Boehner and Co. capitulated completely, because their entire strategy was a bluff. This deal proves that Republicans aren’t willing to breach the debt limit. If Boehner ever threatens to do so again in the future, no one should take it seriously. He no longer has the credibility to make those threats. The debt limit is not an extortion device. A minority party cannot use it to extract a policy concession from the majority. This is the new governing norm.