Real cost of lawmaker squabbles: 1.75M jobs, 2% economic output

The mounting polarization of U.S. politics imperils the U.S. economy, robbing it of jobs and investment. So warns economist Marina Azzimonti of the Federal Reserve Bank of Philadelphia, who created an index to measure the tone of political debate and its impact on hiring, investment and general economic growth. “Polarization significantly discourages investment, output and employment,” she said in the study released last week by the regional Fed bank. “Moreover, these declines are persistent, which may help explain the slow recovery since the 2007 recession ended.” (More: 5 ways the government shutdown affected investment portfolios) Ms. Azzimonti's political polarization index is based on a search of news stories to measure the coverage of lawmaker disagreement from January 1981 to April 2013. It climbed after the recession ended in 2009 and peaked toward late 2012. At the time, politicians were trying to resolve the so-called fiscal cliff, which would have inflicted tax increases and spending cuts on the economy. The index rose from about 75 in 1981 to about 200 at the end of last year. The project didn't include the recent government shutdown or fight over raising the debt ceiling. Using the period 2007 to 2012, over which the index jumped 64 points, the Azzimonti model found that employment decreases in conjunction with a surge in political infighting, with a peak loss of 1.75 million jobs after six quarters. Investment decreases as much as 8.6% after five quarters, and output shrinks 2%. Political clashes increase the volatility of fiscal policy, spurring uncertainty in economic policies. That in turn cools activity, she wrote. The index also spikes around election dates, be they for the president or Congress. It tends to be lower around military conflicts or national security threats, such as the Sept. 11 attacks. “This suggests that American politics are very polarized regarding economic policy or private-sector regulation reforms, but less divided when it comes to national defense issues,” said Ms. Azzimonti. (Bloomberg News)