How Washington Is Killing Jobs

Debt-ceiling brinksmanship means politicians are creating economic problems, not solving them.

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You won't find a sign on the door that says "Dept. of Job Destruction." But when Washington politicians step to the microphone to decry the woefully weak job market, they ought to direct the blame at themselves.

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On the surface, the recent hiring slowdown is puzzling. Over the last couple of months, the economy has dodged several bullets, which ought to boost hiring, not short-circuit it. After hitting $4 per gallon, gas prices have retreated by about 10 percent, putting a bit of additional spending money in consumers' pockets. Europe has averted a debt crisis yet again. The stock market survived the end of the Federal Reserve's two-year stimulus plan, allaying fears of a sudden plunge. By some measures, the economy shows encouraging signs of life. A healthy boost in chain-store sales shows some consumers are spending. Even long-suffering small-business owners show signs of increasing optimism.

Companies remain loath to hire, however, and gathering gloom over scarce jobs could easily reverse gains elsewhere. The latest jobs report is a major disappointment, with the economy creating just 18,000 jobs in June, far below expectations of 100,000 or more. Most employment indicators are suddenly going in the wrong direction. The percentage of adults in the workforce is declining as more people choose not to work. Pay is rising by less than inflation, which means many families are falling behind. The length of the average workweek is falling when it ought to be rising. In addition to 14.1 million unemployed Americans, millions more are working less than they want. These are not the signs of a rejuvenated economy.

What could be wrong? Part of the problem is the long hangover from the 2008 financial crisis, which is still causing pain in the housing and credit markets. But there's a fresh danger that's beginning to unnerve consumers and CEOs alike: the risk of a U.S. debt crisis triggered by political gridlock. Washington's debt problem is nothing new, of course, but it has suddenly become urgent on account of the feud over whether to raise the nation's debt ceiling so the government can continue to borrow. Congress has raised the debt ceiling many times before and never refused to do so. But congressional Republicans are forcing a showdown this time around, using the debt ceiling as a bargaining tool to drive through spending cuts that voters supposedly sent them to Washington to enact.

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While important, the national debt is usually a fairly arcane matter most Americans don't worry about. It always gets worked out, somehow. But this time, it's different. The last-minute brinksmanship in Washington is bringing the nation closer than usual to a genuine crisis. If the debt ceiling isn't raised by early August, the government will have to immediately cut about 40 percent of its spending, which is the amount financed by borrowing. A cut of that size would amount to about 10 percent of the nation's GDP, which investing firm T. Rowe Price says would be "a massive adverse shock."

The conventional wisdom is that it's all a bluff. Politicians might be crass and even corrupt, but they're not self-destructive. Except now, Americans aren't so sure. Dire predictions about what could happen if there's no debt deal in Washington are beginning to impact consumer confidence and weigh heavily on the minds of business leaders. Ryan Sweet of Moody's Economy.com points out that confidence surveys show Americans are getting gloomier, even as fundamentals such as debt levels and spending have been improving. "The catalyst for the decline … may be related to the drumbeat of media attention to the debt ceiling and the doomsday scenario if it's not raised," he writes. "If the debt-ceiling issue is not resolved soon, declines in sentiment will intensify."

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That affects the job market because business leaders closely follow the attitudes of consumers, since that's where much of their business comes from. And if consumers are spooked, businesses are very unlikely to bring on workers they may have to let go in a few months. The latest data show that companies have even stopped hiring temporary workers, who they usually bring on before hiring more full-timers.

Business leaders in general are also disgusted by the sophistry of politics and the never-ending conflict in Washington, which turns solvable problems like the debt into unnecessary economic dangers. "There's one bomb waiting out there: the debt ceiling," says Ethan Harris, head of North American economics for Bank of America Merrill Lynch. Like many others, he feels there will be a last-minute solution. But he also sees the risk of some kind of default on U.S. debt if there's no deal, which could trigger a free-fall in financial markets that's not easily reversed. Even if there is a deal, it could still hurt the economy if it calls for major short-term spending cuts.

As a rule, business leaders don't make long-term commitments—like expanding their payrolls—when there's uncertainty over something so big that it could single-handedly torpedo the economy. Meanwhile, stimulus plans have gone out of fashion in Washington, and the Fed has finally yielded to its many critics and ended the quantitative-easing program widely and simplistically derided as "printing money." The ongoing housing bust remains a huge problem that saps the wealth of the middle class, yet there's no serious talk of any kind of help from Washington.

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State and local governments, meanwhile, are shedding jobs, since tax receipts are down and there's no more federal stimulus money to help keep cops and teachers on the payroll. We've finally got shrinking government, an end to all those controversial bailouts, and a tightening tourniquet around government spending. The only tradeoff, it seems, is a few million jobs.

Twitter: @rickjnewman

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