This is Why We Can't Have Nice Things: Debt Ceiling Damage
NEW YORK ( MainStreet) The damage from the debt ceiling isn't quite over.
Although Washington managed to raise the debt ceiling with an 11th hour deal between Republicans and Democrats, the economy may still be headed towards some harder times. According to researchers, seriously debating whether or not to pay the public debt can cause real, long term harm to the economy.
The problem is all about uncertainty.
Much of the problem concerning the debt ceiling involved this issue of uncertainty, or market confidence. Defaulting on the government's debt, even temporarily, would send the message that America can't be trusted to pay its bills and loans on time. That, in turn, would undermine investors' faith and drive up interest rates on Treasury bonds to compensate for the risk. Since much of the credit market is built on the idea of these bonds as riskless, reliable assets, the damage would have been severe.
Unfortunately, the government doesn't actually need to cross the threshold of non-payment in order to start investor worrying. The mere existence of a serious debate on Capitol Hill is enough to raise red flags on its own.
After all, if the debate sounds sincere enough, this might actually be the time they fail to reach an agreement. It's that kind of fear alone, whether or not America actually does default on its debt, that can ripple throughout the entire economy.
"I think that people were rather uneasy and uncertain about what was going to happen," said Thomas Hungerford, an economist with the Economic Policy Institute. "So this is going to end up affecting consumer confidence and business confidence. It's going to be hard to measure but for individuals or consumers, if their confidence is shaken, they just don't go out and buy things."
Whose confidence wasn't shaken?
According to Steven Davis, professor of international business and economics at the University of Chicago, that impact could be long lasting. Davis and his team have created a measurement called the Economic Policy Uncertainty Index , which quantifies uncertainty in the marketplace brought on by government policy and debates. The index gathers data from a number of sources, including news articles, scheduled changes to the tax code and disagreements about government spending on goods and services.
One consistent result, he says, is that when uncertainty jumps, the pain isn't far behind.
"Increases in the index portend lower investment, lower employment rates and lower economic activity than you otherwise would have forecasted," Davis said. "The peak responses occur about 12 to 18 months after the surprise movements in the policy uncertainty index, so it's a gradual process with the peaks several months later... [But] the weight of the evidence is clearly on the sides of the scale that says higher policy uncertainty is harmful to economic performance."