Last debt ceiling debate indicates more economic hurt likely as another fight looms

The protracted, unsettling nature of the negotiations between the White House and Republicans dramatically slowed the recovery, economists conclude, looking back at the episode. Consumer confidence collapsed, reaching its worst level since the depths of the financial crisis. Hiring stalled, with the private sector creating jobs at its slowest pace since the economy exited the recession. The stock market plunged, sending the Standard Poor's 500-stock index down more than 10 percent.

Now, many economists warn that another powerful blow to the economy could be coming. With the government set to run short of money as early as next month, Republican lawmakers said Friday they would try to pass a bill raising the debt limit but only for three months.

"The debt ceiling debate in 2011 was pretty scary, and it hurt the economy," said Nicholas Bloom, an economics professor at Stanford University who has studied the relationship between uncertainty about government policy and economic activity. "I think that will happen again, and I'm worried."

There are already signs that fears about the next debt ceiling battle are holding back economic growth. Like in 2011, Republicans have been insisting that the government slash spending in exchange for a significant increase in the debt limit, which now stands at $16.4 trillion, though they have become more willing to accept a brief increase. President Obama says he wants the limit raised unconditionally and pledges he won't negotiate over it as he did in 2011.

The Treasury Department says the government will be unable to meet all its obligations at some point between the middle of February and early March unless Congress allows for more borrowing. If it does not, Treasury says the government would default — and most economists say this would severely hurt the economy.

But even a political debate that delays a resolution to the last minute is likely to have harmful effects. "The damage will mount quickly as the day of reckoning approaches," said Mark Zandi, an economist with Moody's Analytics.

This week, Morgan Stanley reported that its index of business conditions — a measure of corporate expectations about the state of the economy — plunged. The agreement forged at the start of the year to avert the automatic tax hikes and spending cuts known as the "fiscal cliff" did little to boost confidence.

"With another prolonged, high-stakes political circus expected in the coming months, fiscal policy uncertainty remains high. Business conditions expectations turned lower, and hiring remains subdued," Morgan Stanley economists wrote in a report.

Also this week, a Federal Reserve study showed that businesses around the country are growing increasingly concerned about the coming congressional debate. The analysis found that businesses were broadly concerned about uncertainty created by government policy.

Source: http://www.theusalinks.com/2013/01/19/last-debt-ceiling-debate-indicates-more-economic-hurt-likely-as-another-fight-looms/