The threat of defaulting on American federal debt thanks to lawmakers bickering over raising the debt ceiling — a situation that has now taken place twice, once in the summer of 2011 and again toward the end of last year — and other instances of governing by crisis increased unemployment by 0.5 percent, or in other words, meant the loss of 750,000 jobs, according to a new report from the Peterson Institute on International Economics.
Narrowly avoiding default, going over the fiscal cliff, and another year of harmful sequestration cuts combined with last year’s government shutdown sliced 1 percent off of real GDP economic growth, which is the same as losing $150 billion a year, according to the report. That translates into a bit more than half a percentage point increase in unemployment.
The report also notes that these crises hit close to home, increasing borrowing costs for the average American. The fiscal uncertainty ushered in by governing by crisis since 2010 has increased private borrowing spreads by nearly 40 basis points, and if that were fully reflected in higher mortgage interest rates, it would mean an extra $450 each month for mortgage payments on the median home.
While there is no threat of a government shutdown this year and some of the harm from sequestration has been reversed, another crisis looms, as the U.S. Treasury began taking “extraordinary measures” last week, such as cutting off Treasury sales to local governments, to buy as much time as possible before breaching the debt ceiling. The ability to avoid a default will run out by the end of the month, according to Treasury Secretary Jack Lew. The latest threat of default is already raising borrowing costs for the government.
Republicans, meanwhile, have been trying to pick a demand in exchange for raising the debt ceiling. Two ideas, approval of the Keystone XL pipeline and the repeal of a provision of Obamacare, have been scrapped, while House Speaker John Boehner (R-OH) has tried to sell his colleagues on restoring a recent change in pensions for the military. About 30 Republicans oppose raising the debt ceiling under any circumstances, however.
The last time Republicans made a long list of demands in return for keeping the government open and lifting the debt ceiling, the country lost 0.25 percent of economic output, the equivalent of about 120,000 jobs, in just two weeks. Yet lifting the ceiling, which simply allows the government to meet obligations it has already incurred, used to be a matter of routine, and many Republicans who are still serving in Congress voted to increase it without any demands under President George W. Bush.
This post has been updated to reflect the fact that the original report had an error; higher borrowing spreads have led to a $450 increase in mortgage payments, but it originally said $470.