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Krugman: Standoff may be over but effects remain

  • A furloughed federal employee holding a sign outside the Capitol. (JULIA SCHMALZ / Bloomberg News)

The government is reopening, and we didn't default on our debt. Happy days are here again, right?

Well, no. For one thing, Congress has only voted in a temporary fix, and we could find ourselves going through it all over again in a few months. You may say that Republicans would be crazy to provoke another confrontation. But they were crazy to provoke this one, so why assume that they've learned their lesson?

Beyond that, however, it's important to recognize that the economic damage from obstruction and extortion didn't start when the GOP shut down the government. On the contrary, it has been an ongoing process, dating back to the Republican takeover of the House in 2010. And the damage is large: Unemployment in America would be far lower than it is if the House majority hadn't done so much to undermine recovery.

A useful starting point for assessing the damage done is a widely cited report by the consulting firm Macroeconomic Advisers, which estimated that “crisis-driven” fiscal policy — which has been the norm since 2010 — has subtracted about 1 percent off the U.S. growth rate for the past three years. This implies cumulative economic losses — the value of goods and services America could and should have produced, but didn't — of around $700 billion. The firm also estimated that unemployment is 1.4 percentage points higher than it would have been in the absence of political confrontation, enough to imply that the unemployment rate right now would be below 6 percent instead of above 7.

You don't have to take these estimates as gospel. In fact, I have doubts about the report's attempt to assess the effects of policy uncertainty, which relies on research that hasn't held up very well under scrutiny.

Yet it would be a mistake to conclude that Macroeconomic Advisers overstated the case. The main driver of their estimates is the sharp fall since 2010 in discretionary spending as a share of GDP — that is, in spending that, unlike spending on programs like Social Security and Medicare, must be approved by Congress each year. Since the biggest problem the U.S. economy faces is still inadequate overall demand, this fall in spending has depressed both growth and employment.

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