MIT Sloan’s Simon Johnson reflects on the potential long-term impact of the recent U.S. government shutdown.
How costly were the recent U.S. government shutdown and the eleventh-hour agreement by Congress to raise the debt ceiling until February 7, 2014?
The day before the standoff was resolved, Standard & Poor’s, the rating agency and research firm, said the dispute had shaved at least 0.6% off of annualized fourth-quarter 2013 GDP growth — and taken $24 billion out of the economy.
But assessing broader impact is more complicated. At an October 22nd panel discussion sponsored by the MIT Center for Finance and Policy on the causes and consequences of the recent U.S. fiscal crisis, Simon Johnson, MIT Sloan’s Ronald A. Kurtz Professor of Entrepreneurship and former chief economist at the International Monetary Fund, offered some historical perspective.
“Every time the world seems to be more unstable — because, for example, we blew up our banking system in 2008 or threatened to blow up our government in 2011 — where does the smart money go?” he asked. “Into dollars, not out of dollars.” However, Johnson is not sure about how long this situation can last.
“Sooner or later,” he suggested, “people are going to want to diversify. The British were out last week inviting the Chinese to establish, or make more prominent, a [Chinese] currency market offshore in London. And if you go back to the history of the 1950s and 1960s, that’s where the Eurodollar market began to develop as well.”
So how much time does the U.S. government have to get its house in order? Johnson said it’s hard to predict. Far and away the most meaningful changes, Johnson said, would be to reduce healthcare spending — both what the government spends and what private individuals spend — and to get politicians to act more responsibly.
“I take the debt fairly seriously,” Johnson said. “But I wouldn’t rush into a precipitous fiscal adjustment right now. I would worry much more about the way politicians behave, and the way in which [they] shout and scream and say, ‘We’re going to shut this down, we’re going to default on [the debt] and so on.’ That has real consequences. And it has real consequences if it shoos people away from the dollar in a much more damaging way than any conscious decisions people are making.”