Fiscal fights exact heavy toll on economic growth

A shutdown through the end of the month would shave 1.5 percentage points off economic growth in the October-December quarter, he said.

If pushed to Thanksgiving, the economy would essentially “stall out,” Zandi said. “At that point, we’ll fall back into a recession.”

Moreover, the shutdown is seeping into the mortgage market, creating new hurdles for the housing market’s recovery. With many government offices closed, small businesses are having trouble getting loans and U.S. exporters are being held up from selling their products overseas, Zandi said. 

“Policymakers need to get off the front page and, if they do, the economy will be “off and running.”

But while the shutdown is rippling through short-term growth projections, the economy would pay a massive price for failing to raise the debt limit, plunging it into a “dark, deep recession” that policymakers will be powerless to stop, Zandi said.

That would lead to a sharp rise in interest rates and an evaporation of confidence with “no policy response.”

Zandi has never been a fan of the debt ceiling and calling it “anachronistic” and suggesting it be “neutered.”

Still, chances of a debt-ceiling breach seemed remote on Friday even as Congress and the White House continued grasping for an agreement that would reopen the government and boost the Treasury’s borrowing capacity.

To bring an end to years of nearly constant gridlock, the economists argue that Congress needs to adopt new budget rules that would steer policymakers away from prolonged fiscal fights.

Kevin Hassett, director of economic policy studies of the American Enterprise Institute, urged lawmakers to, after the current debate irons out, create a mechanism that keeps Congress out of this vicious cycle of regular budget standoffs and provide an “exit from this world of uncertainty.”

Under Hassett’s plan, if spending falls under a preset cap set by lawmakers then Congress would automatically have to raise the debt limit and pass a continuing resolution to keep the government funded.

Hassett suggested tying spending levels to GDP while Zandi floated an idea to connect structural debt levels to economic growth estimates.

Each would be designed to give Congress some flexibility based on economic conditions but would allow lawmakers to sidestep these kinds of fiscal battles and point them toward better budget outcomes.

Committee Chairman Kevin Brady (R-Texas) said that in the grand scheme of how lawmakers work through their budget issues that there has “got to be a better way going forward” because the “sequester is not built to last.”

Zandi and Hassett agreed that five years of political uncertainty on Capitol Hill has cost the economy millions of jobs and billions of dollars in economic growth. 

Zandi estimates the repeated brinkmanship over fiscal issues has meant a loss of $150 billion in growth and 1.1 million jobs. 

Hassett’s figures were more than double — a 3.2 percent loss in economic growth and about 2.3 million jobs. 

“The last five years were quite harrowing with what was going on in Washington,” Zandi said. 

He argued that the private sector has made great strides since the 2008 financial crisis and is in “unbelievably good shape.” 

But he said brinkmanship is holding the economy back.

“We have to get beyond this,” he said. “We can’t get back into this morass. We’ve got to get out of this mess.”