Economist Warns Political Brinkmanship Could Have ‘Cataclysmic’ Effects on U.S. Economy

“Political uncertainty is generated by the brinkmanship here in Washington over the budget, over the debt ceiling, over policy and regulation. All those things combined have weighed heavily on economic activity,” Zandi said.

Zandi said that political uncertainty is a strain on the national economy, keeping monthly hiring rates 20 percent lower than they should be in a healthy economy.

“The political uncertainty is key to the lack of hiring and the unwillingness for businesses to take a risk,” he said.

Zandi said political uncertainty rose after the stimulus act in 2009, shaving about $150 billion from GDP, which translates into more than one million jobs lost.

He also urged Congress to raise the debt ceiling before mid-October.

“If [the government shutdown] goes on for six or eight weeks, that means the debt limit is in play. We'll probably breach it. In my view, breaching the debt limit would be cataclysmic,” Zandi said. “It would mean higher mortgage rates, higher borrowing costs for businesses, lower stock prices, lower house prices, a full-blown recession and there would be no reasonable policy response to it.”

Treasury Secretary Jack Lew told Congress on Wednesday the country is likely to reach its borrowing limit on Oct. 17, putting the government in a position of being unable to meet its financial obligations.

Chad Stone, chief economist at the Center on Budget and Policy Priorities, said the economy has generated plenty of uncertainty on its own in recent years, and “policy squabbles” over long-term deficit reduction and over the appropriate mix between spending cuts and tax increases have made the situation worse.

Allan Meltzer, an economics professor at Carnegie Mellon University, told the committee that investments are critical to a strong economy, but budget uncertainty keeps people from investing. A long-term budget plan would help stabilize the economy, he said.

Meltzer said a short-term government shutdown would not be detrimental to the economy. Instead, he said, the unsustainable budget deficits were of greater concern for economic growth.

“There are two overriding problems. One is unsustainable budget deficits, especially underfunded entitlements. Second are the demands for higher tax rates and decisions to increase regulation, raise current expected future costs, and heighten uncertainty,” he said. “Uncertainty is the enemy of investment and that is the main reason, in my opinion, why the long-term growth rate is down.”