January 19, 2013
The Washington Post is still banging the drum trying to tell readers that the budget battles in Washington are going to slow the economy with an article headlined, “last debt ceiling debate indicates more economic hurt likely as another fight looms.” While many readers may be too young to remember, this is exactly what the Post and other media outlets were telling us last month about the standoff over the “fiscal cliff.” There were numerous news stories telling us that consumer confidence was plunging in December, causing consumers to put off purchases, and that businesses were curtailing hiring and investment.
All of these claims proved to be wrong. Hiring continued in December at the same pace as its average over the last year, retail sales increased at a healthy 0.5 percent rate from November and the Fed just reported a big jump in factory output for the month. Having relied on a group of experts who were shown to be completely wrong in their understanding of the economy, one might think that the Post would reach out to a broader range of suspects.
But no, we have largely the same group making the same sorts of mistakes. The paper tells readers:
“The U.S. economic recovery was chugging along in the summer of 2011 when a partisan fight broke out over whether Congress would raise the federal debt limit and avoid a national default.
“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.”
This story is almost completely wrong.
First, it is important to realize that there are two components to the consumer confidence indices. One measures current conditions, what people think about the economy today. The second measures future expectations, what people think the economy will look like in 6 months. The current conditions index tracks consumer spending closely, the future expectations index is highly erratic and has almost no relationship to spending.
This is not surprising. Most people are not sitting around the kitchen table making economic forecasts. Most of what they are likely to think about the future state of the economy is coming from the Chicken Littles who serve as expert sources for media outlets like the Post.
When it comes to their purchasing decisions, people rely on what they see around them: factors like if they have a secure job and whether their pay is rising. However if you ask them about the future, they repeat back the Chicken Little lines. The current conditions index actually showed little change through the last debt ceiling battle as did consumption. In fact the savings rate actually fell through the summer averaging 4.4 percent in the three months immediately preceding its resolution, compared with 4.8 percent in the prior three months. Apparently consumers didn’t get the economists’ message that they were supposed to stop spending out of fear.
While the market did plunge by 10 percent this was most likely due to something that the Post’s distinguished economists apparently missed, the euro crisis. Spain, and most importantly Italy, entered the list of crisis countries during this period, with the interest rates on their long-term debt soaring well above 6.0 percent. This was associated with a plunge in yields on U.S. Treasury bonds, which presumably these economists noticed. (Maybe they attributed the lower interest rates on Treasury bonds to increased concerns about the ability of the government to pay its debt.)
The slowdown in hiring was in part random seasonal fluctuations (we had a similar summer slowdown this year, with no debt ceiling battles) and due to the winding down of the stimulus, which had the predictable effect of slowing economic growth. Growth in the first quarter of 2011, well before the debt ceiling battles were coming to a head, was just 0.1 percent. If firms were putting off hiring because of uncertainty about the debt ceiling then they would be looking to fill their labor demand by increasing worker hours. However there was virtually no change in the length of the average workweek over this period.
In short, there is little evidence that the debt ceiling debate had any noticeable impact on the economy. It is likely that most of the country accepts the fact that the girls and boys in Washington will have these big fights but at the end of the day they will resolve matters so that there are not major disruptions to the economy. They therefore act accordingly. Thus far, this would have been the optimal path for people to follow and it is likely to be the optimal path in the future.
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