Krugman: Another Shutdown Is Possible in 3 Months

Monday, 21 Oct 2013 08:54 AM

By Michael Kling

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Despite the deal to reopen the government, happy days are definitely not here again, warns economist Paul Krugman.

Congress only found a temporary fix. We could be trapped in the same problem all over again in a few months, Krugman writes in his New York Times column.

While most commentators are blaming Congress in general for the standoff, Krugman takes aim specifically at Republicans controlling the House of Representatives.

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Some observers might say Republicans, who politically suffered the most, are chastened enough not to again prompt another shutdown.

"But they were crazy to provoke this one, so why assume that they’ve learned their lesson?" Krugman asks.

The economy clearly took a hit from the shutdown. But the damage from Washington politics started when Republicans took over the House in 2010, Krugman alleges, citing a report from Macroeconomic Advisers that estimates "crisis-driven" fiscal policy cut 1 percent from economic growth in the last three years.

"This implies cumulative economic losses — the value of goods and services that America could and should have produced, but didn't — of around $700 billion," he writes.

Plus, the report says unemployment is 1.4 percentage points higher because of government being run by political confrontation.

Although the firm's findings may not be completely accurate, one shouldn't dismiss its numbers as exaggerations, Krugman says.

"The main driver of their estimates," he points out, "is the sharp fall since 2010 in discretionary spending as a share of GDP — that is, in spending that, unlike spending on programs like Social Security and Medicare, must be approved by Congress each year."

Because lack of demand is the biggest problem the economy is facing, Krugman argues, that drop in spending has hurt both growth and employment.

The report, he adds, doesn't even consider other policy blunders that resulted from Republicans taking over the House in 2010, namely letting the payroll tax cut expire and slashing unemployment aid.

"Both actions have reduced the purchasing power of American workers, weakening consumer demand and further reducing growth."

Other experts are also pessimistic about Congress reaching a quick solution.

Although the economy "dodged a bullet," the respite "will be short," says Paul Edelstein, director of financial economics at IHS Global Insight, according to The Washington Post. "Democrats and Republicans remain far apart on fiscal policy and the stage is set for another showdown in January."

Economists worry that businesses and consumers, fearing another deadlock, may delay investments and purchases during the critical holiday shopping season.

"If people are afraid that the government policy brinkmanship will resurface again, and with it the risk of another shutdown or worse, they'll remain afraid to open up their checkbooks," Standard & Poor's U.S. chief economist Beth Ann Bovino states in a report, according to The Post.

"That points to another Humbug holiday season."

Editor’s Note: Add Up to $152,046 to Your Social Security Benefits Using Weird Trick

Related Stories:

Reich: 'Significant Chance of Another Government Shutdown in January'

El-Erian: Congressional Deal Does Not End Danger

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