It didn’t have to be this way. The latest government crisis in Washington continued to reduce confidence in our elected leaders. I have a phrase I use to suggest the media’s psychological influence on the behavioral way we approach our money and investing—and that is “the Creation of Crisis”. I have made the suggestion on this blog before that Behavioral finance, or balancing fear and greed with a long-term investment strategy, is something each of us struggle with, and 24-hour news television sometimes only adds one more irrational voice in our heads. Well, the media certainly did their part to scare folks as Thursday drew nearer, but the politicians didn’t need much help.
Much of the political wrangling as these deadlines come to pass is focused on the a raise of the “debt ceiling”. This is money that the government has already spent. In my opinion, if there is an argument to be made it has to be about getting future spending in line with current tax revenues—and working on a reform to bridge this gap. This was not done, and here’s more bad news: the deal passed last week maintains the sequester and only funds the government through January 15 and raises the debt ceiling until February 15.
Unfortunately, kicking the can down the road means that we’ll be revisiting the issue again after the New Year. There’s a tremendous amount of mistrust not only between the parties, but also within the Republican Party, meaning that the next fiscal showdown may be just as acrimonious and drawn out.
An eye-popping new report suggests that Congressional budget battles, debt ceiling standoffs, and federal spending cuts have cost the country nearly 3% of GDP growth since 2011 – roughly $700 billion in lost economic growth. Digging a little deeper into the numbers, we discover that spending cuts alone have taken a significant chunk – 0.7% - out of annual GDP growth since 2010. Worse, this is an annual reduction in GDP growth, meaning the effects compound over time.[i]
If the current budget battle morphs into a protracted series of short-term arrangements, raising policy uncertainty in the process, the economy will likely suffer as well. Focus of the argument can and should shift to pragmatic solutions with political consensus.
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[i] http://www.macroadvisers.com/2013/10/the-cost-of-crisis-driven-fiscal-policy/
