Why economists are worried

Zachary A. Goldfarb / The Washington Post
Published Sep 30, 2013 at 05:00AM / Updated Nov 19, 2013 at 12:31AM

WASHINGTON — A prolonged government shutdown — followed by a potential default on the federal debt — would have economic ripple effects far beyond Washington, upending financial markets, sending the unemployment rate higher and slowing already tepid growth, according to a wide range of economists.

A shutdown of a few days might do little damage, but economists, lawmakers and analysts are increasingly bracing for a shutdown that could last for a week or more, given the distance between the two political parties. Such an outcome would suck money out of the economy and spread anxiety among consumers and businesses in a way that is likely to hold back economic activity.

And a default on the federal debt, which may occur within 30 days without congressional action, would be much worse, economists say.

Failing to raise the debt ceiling would require the government, a major driver of growth, to cut spending by about a third, potentially forcing delays in Social Security checks, military pay and payments to doctors.

There are other risks, too. On Oct. 17, the Treasury is scheduled to ask investors for $120 billion in loans. But if investors grow nervous about whether the United States will be able to pay them back, they are likely to demand higher interest rates, which would cause rates to spike throughout the financial system, leading to more expensive mortgages, auto loans and credit card bills.

Doubt could grow about the safety of parking money in the United States bonds, the linchpin of the global financial system.

“It's corrosive on the economy,” said Mark Zandi, chief economist of Moody's Analytics. A lengthy shutdown followed by a default would be “the nightmare of the recession all over again.”

Even if lawmakers find a way out of a shutdown or a default, this fall's brinksmanship — the fourth such crisis in two years — is likely to have negative effects on the economy. With so much uncertainty in Washington, economists say that businesses, flush with cash, have been reluctant to invest and hire.

“The simple story is it creates a tremendous amount of uncertainty,” said Ethan Harris, a top economist with Bank of America. “One of the unfortunate side effects of the brinksmanship is a message to business leaders to delay long-term commitments and wait to see whether something really bad happens.”

There are already signs of intensifying anxiety in the financial markets, which had largely brushed off the fiscal clash previously.

The stock market, as measured by the Standard & Poor's 500 index, was down four of five days last week, and the U.S. dollar also fell. More relevant, the cost of a type of insurance that investors use to protect themselves against default in U.S. government bonds has rocketed higher in recent days, suggesting the chances of default are increasing.

Business interest groups, usually aligned with the Republicans, have urged the GOP to abandon their demand for policy concessions, such as delaying President Barack Obama's health care law, in exchange for funding the government and raising the debt limit.

“It is not in the best interest of the employers, employees or the American people to risk a government shutdown that will be economically disruptive and create even more uncertainties for the U.S. economy,” the nation's leading corporate lobbying groups, led by the U.S. Chamber of Commerce, wrote Friday in a letter to Congress.