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The recent government shutdown and confrontation over the federal debt ceiling gained the Republicans nothing, at best – and may have cost them politically as a party. But it slowed the economy and undermined confidence in public finances in a way that will have a significant negative impact on future budgets of the United States. None of this should make for an appealing strategy, but Tea Party Republicans are giving every indication that they want to do the same thing again early next year.

On the political gains from recent tactics, it is hard to find any good news for the Republican side as a whole. Representative Thomas H. Massie, Republican of Kentucky, got it right when he said, “Goose egg, nothing, we got nothing,” in terms of policy changes. And opinion polls moved more sharply against Republicans than some had expected. Prominent Republicans including Senators John McCain of Arizona and the minority leader, Mitch McConnell of Kentucky, have now come out strongly against further shutdowns.

Unfortunately, they do not control Republicans in the House of Representatives.

The shutdown and debt ceiling brinkmanship did real damage to the economy. The immediate and direct costs are nicely summarized in a blog post by James H. Stock – an academic economist on the president’s Council of Economic Advisers. His assessment is that the effect is a


0.25 percentage point reduction in the annualized G.D.P. growth rate in the fourth quarter and a reduction of about 120,000 private sector jobs in the first two weeks of October (estimates use indicators available through Oct. 12th).

This is actually lower than the impact expected by some private-sector forecasters; after talking with people I trust, I would not be surprised if the overall impact ends up being closer to a 0.5 percentage point reduction in the fourth-quarter growth rate (annualized, as in the quotation from Mr. Stock.)

Does the country make up this growth later, for example because federal workers can now pay their bills? Probably not, because there is a persistent effect in terms of increasing uncertainty about public finances and about economic performance – and this will depress both some kinds of consumption and many forms of productive investment.



¶The latest forecasts from the Congressional Budget Office (released in September) show a short-term improvement in the budget, i.e., a lower deficit, and then debt levels rising further down the road, with the debt-to-G.D.P. ratio reaching around 100 percent by about 2040.

¶The major long-term issue the United States faces is rising health-care costs (not just the part that the federal government pays for), but an important part of our projected future deficits is interest costs, i.e., what the government needs to pay holders of its debt.

¶The United States dollar is the world’s primary reserve currency and safe haven; the asset that major investors, such as central banks and big international companies, actually buy is United States Treasury debt. In the short term, when Congress acts in a crazy and irresponsible fashion that makes the world feel more unstable, investors “seek safety” and actually buy American government debt, pushing down yields (bond prices and yields move inversely to each other). The United States is the only country in the history of the world that has this feature; most countries, when they act irresponsibly, see their bond yields go up.

¶Over a longer period of time, of course, investors get the message: United States Treasury debt is not so safe and cannot be trusted as in the past. They should look for alternative assets. The euro may bounce back. The British pound, Swiss franc and Japanese yen have all been contenders in the past. And the most real threat over the next 20 years is probably the rising international role of China’s renminbi.

¶Unwittingly and perhaps inadvertently, the Tea Party is helping to fulfill the prophecies of my Peterson Institute colleague Arvind Subramanian, who has long predicted that the renminbi will eclipse the dollar – and that China is likely to surpass the United States, in terms of economic weight and political clout. Speeding up such a transition will directly increase the interest cost of the national debt and exactly run counter to what Tea Party representatives claim they want to do. The change would make the longer-run public finances of the United States worse, not better.

¶In a parliamentary democracy, this kind of careless approach would condemn the responsible party to a long period of fruitless opposition, like that experienced by Britain’s Labor Party in the 1980s and early 1990s.

In the American system, with its carefully conceived checks and balances, an organized and well-funded minority can do a lot more damage – as we have just been reminded. The only force that can rein in Tea Party extremism – and get the nation off the road to fiscal ruin – is resurgence among Republican moderates. Unfortunately, their recent performance has not been impressive. http://economix.blogs.nytimes.com/2013/10/24/a-very-expensive-tea-part
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Originally posted by Niki2:
Amazing how he can keep repeating something long after it's been proven false over and over and over, even by those on the right. Once again: HE...IS...NOT...REAL, simple as that.

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