Tags: Zandi | shutdown | GDP | economy

Moody's Zandi: Prolonged Govt Shutdown 'Would Likely Precipitate Another Recession'

By Michael Kling   |   Tuesday, 24 Sep 2013 08:22 AM

The looming government shutdown will have a disastrous economic impact if it's prolonged, predicts Mark Zandi, chief economist of Moody's Analytics.

If Congress does not pass a budget by end of the month, the federal government will partially shut down on Oct. 1.

The longer a shutdown lasts, the worse the damage will be, Zandi warned in testimony to the Joint Economic Committee.

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A brief shutdown of three or four days would have a "modest" impact, reducing real GDP growth by about 0.2 of a percentage point. But if it continues three or four weeks, it would cause "significant economic damage," cutting real GDP by 1.4 percentage points in the fourth quarter.

"And this likely understates the economic fallout, as it does not fully account for the impact of such a lengthy shutdown on consumer, business and investor psychology," Zandi stated in his written testimony. "Any interruption much longer than a month would cause GDP to fall over the quarter, and one longer than two months would likely precipitate another recession."

Economic growth slowed substantially during the shutdown of about three weeks in late 1995 and early 1996, he noted.

Zandi also urged Congress to raise the debt ceiling before mid-October. "Any delay in raising the debt ceiling would have dire economic consequences. Consumer, business and investor confidence would be hit hard, putting stock, bond and other financial markets into turmoil," he stated.

"There will be a violent reaction in financial markets if policymakers fail to act in time."

Congress should eliminate the statutory requirement that Congress raise the debt ceiling, he argued. "It is an idiosyncratic, anachronistic and, as has been demonstrated, potentially destructive rule that is detrimental to sound economic policy."

Republicans hope to use the threat of a government shutdown as leverage to defund Obamacare and obtain further spending cuts.

The U.S. Chamber of Commerce, which usually sides with Republicans, said shutting down the government is a bad idea.

"It is not in the best interest of the U.S. business community or the American people to risk even a brief government shutdown that might trigger disruptive consequences or raise new policy uncertainties washing over the U.S. economy," the chamber stated in a letter to the House of Representatives.

The chamber also urged Congress to raise the debt ceiling "in a timely manner."

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