Wednesday, October 16, 2013

Bill Gross on the Costs of the Shutdown and Debt Ceiling Fight

As I write, it appears that the budget impasse, the government shutdown and the debt ceiling debacle are all about to end. Assuming the GOP controlled house passes the current proposal on the table, and the crisis melts into the past, what were the economic costs of our dysfunctional politics?

Bill Gross, perhaps the world's foremost bond investor and debt expert, just appeared on CNBC and provided a decent first draft of the costs of political extremism.

First, he projects a one time hit to GDP growth from the uncertainty in DC of about .25 percent. Based upon current GDP, that is about $10 billion in lost GDP in this quarter. Other estimates put the cost at $24 billion. Hardly insignificant.

Second, he argues that perception of increased risk and volatility associated with US debt will add 5 to 10 basis points to the cost of our debt in terms of higher interest rates. That works out to about $15 billion per annum in higher government debt service costs. So basically, until the demise of extremist politics the US taxpayer will continue to pay for the risks of holding US debt. 

Moreover, this latest episode of extreme irresponsibility is simply the most recent since the financial crisis. A recent study estimates that the total hit to GDP arising from fiscal uncertainty since the crisis amounts to $150 billion, and up to 900,000 lost jobs.

I will write more on this topic in the next few days. But, it is clear that the irresponsibility of playing politics with the budget and debt ceiling is very costly to all Americans.

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