Rana Foroohar: Congress Is Bad for the Economy

The relationship between wall Street and Washington is like a bad marriage. They fight, promise to change, try to believe each other and go back to their old ways. The government shutdown is only the latest of these tiffs. Stocks were down before the shutdown, up after, and they are likely to be volatile if politicians continue to duke it out over spending limits and the debt ceiling. None of it has been surprising. After all, we’ve seen this movie several times over the past three years. Congress squabbles, markets fall; Congress makes up, stocks rise. Even if this particular remake ends happily, one thing is for sure–the endless cycle of Beltway shenanigans is damaging our economy.

You can see it in the divide between the S&P 500 and Gallup’s consumer-confidence numbers. As behavioral economist Peter Atwater recently pointed out to me, these two numbers have historically almost always moved in step with each other. But while markets are higher today than they were in their precrisis peak in 2007, confidence, which reflects perceptions about the strength of the real economy, is lower.

No wonder both consumer and business spending are down. Government could be doing so many things to help the economy, from properly reregulating the banking sector to revamping education to funding the R&D that fuels job creation. But instead of leading the way to growth, some politicians remain obsessed with defunding Obamacare. While they complain that the law has created punishing uncertainty for businesses, their brinkmanship creates far worse uncertainty about bigger things–like whether we’ll have jobs. With or without shutdowns that shave 0.2 percentage points off GDP growth per week, we’ll be lucky to maintain 2% growth, let alone achieve the 3% we need for true economic health.

The divide between stocks and the real economy tells us some important things. For starters, the foundations of our recovery are weak. Equities have remained relatively strong because the Federal Reserve is artificially propping them up with $85 billion a month of asset buying. The tactic is understandable–the Fed has kept the money spigots open, risking market bubbles, in part because of “fiscal headwinds”–that is, growth-destroying partisan politics. Ben Bernanke can’t make Congress agree to fund the government or raise the debt ceiling, but he figures he can at least shore up stock and home prices.

The problem is that this monetary cycle is breaking down. People simply aren’t buying into the sugar high of this kind of policy anymore. For proof, look at how the Fed’s decision a couple of weeks ago not to taper off its massive spending spree boosted stocks for only a day. Each new round of quantitative easing does less to goose the market than the round before. “It all shows what a weak and narrow recovery we are in,” says Atwater.

It also shows the dangerously schizophrenic nature of our economy. As long as Congress remains too dysfunctional to keep parks open, let alone craft a real growth strategy for the country, the Fed has to play the role of economic stimulator of last resort, and banks, hedge funds and money managers have to play along. As Atwater points out, they are now using record levels of debt and leverage to buy up stocks, since the Fed’s money dump keeps interest rates so low. (I’m reminded of former Citigroup CEO Chuck Prince’s infamous line that “as long as the music is playing, you’ve got to get up and dance.”) A recovery seen mainly in the financial markets and built on the shaky foundations of debt rather than income growth is not what the U.S. needs.

We may not be able to keep even that kind of recovery going much longer. Whether any federal workers are around or not to produce the next jobs report doesn’t matter, because it’s not the unemployment number we need to look at. It’s the workforce-participation number, which is as low as it’s been since women started entering the labor force en masse in the 1980s. Only 63% of the population are working–about the same as in the beleaguered euro zone. It’s impossible to stage a robust recovery in an economy that depends heavily on consumer spending when so few people are getting paychecks.

And therein lies the real debt conundrum. The battles over spending limits and debt ceilings have nothing to do with the state of our public finances. They’ve actually improved in the past year, thanks to the sequester cuts that resulted from the last round of partisan budget battles. But ironically, those cuts, along with the continued political squabbling, have created a situation in which we have a weaker dollar, slower growth and a recovery that isn’t creating enough jobs to hold the percentage of working Americans steady. Too bad Congress isn’t eligible for furloughs.