Late last week, President Trump and congressional Democrats came to an agreement to end the longest government shutdown in American history. The opposing parties struck a short-term three week deal to reopen the government and provide financial relief for the nearly 800,000 furloughed federal workers.

Initial estimates by the nonpartisan Congressional Budget Office put the damage done to be around $3 billion in permanently lost economic activity. The report, released Monday January 28, suggests that GDP growth was reduced by a not-so-insignificant 0.3% over the period.

The timely analysis is a helpful early estimate of the true cost of gridlock, but it undoubtedly misses other real long-term economic impacts from these political sideshows.

We’ve Been Here Before

If the latest government shutdown feels like ‘Groundhog Day,’ that’s because it is. Early last year, the federal government also shut down, and the issues were very similar. From our piece on January 22, 2018, describing the disagreements that led to that particular shutdown:

“Broadly speaking, Democrats are demanding passage of the DREAM Act, while Republicans and President Trump are demanding funding for the border wall.”

Some pundits believe that the only reason our political leaders were able to reach a compromise over the current shutdown is because New York City’s LaGuardia airport was forced to close indefinitely, after frustrated TSA workers stopped showing up to work.

It is safe to say the Founding Fathers did not draft the Constitution thinking that hostage government employee paychecks would become acceptable collateral for political agendas. We view the latest government shutdown as symptomatic of a larger problem.

Polarization Is Worse than Ever

If you feel the current political environment is more divided than ever, you are not mistaken. While it is difficult to assess the scope of the divisiveness in the moment, a historical analysis of ideology and politics shows an unmistakable trend.

In 1980, almost the entire House of Representatives could have been characterized as centrist. Some leaned left, and some leaned right, but the large majority of political viewpoints were relatively moderate.

Today, per research at the Financial Times, nearly half of both the Democratic and Republican caucuses could be labeled as extreme left or extreme right (sourcing from the Database on Ideology, Money in Politics and Elections). Unsurprisingly, the number of representatives with centrist views has been meaningfully hollowed out.

The implications are clear: It is increasingly difficult to find compromise with so many extremists among our elected representatives.

Long-Term Economic Impact

The shutdown’s short-term losses are painful. They directly cause hundreds of thousands of workers to go without pay, reducing their ability to spend and undercutting economic growth. Additionally, closed services such as the national parks further reduce economic activity and government revenues.

While these short-lived pain points can be estimated, the long-term consequences of such extreme political grandstanding may have the bigger impact. As American politics becomes more polarized, it gets harder for our government to pass necessary bi-partisan legislation that deals with real issues facing the economy.

Instead, the business community is increasingly stuck having to navigate uncertain policy environments. One political party takes power and shoves through their pet priorities, until the other side takes power and rolls those policies back.

This so-called “regulatory ping pong” destabilizes our business environment, clouds the long-term visibility for CEOs, and reduces business investment and consumer confidence. Quite possibly, the sluggish growth of the post-Global Financial Crisis period could be at least in part attributed to disappointing business investment and the difficulty in making capital expenditure outlays in such an uncertain regulatory regime.

Policy instability raises the bar. It requires capital allocators to consider the rules of today, and whatever those rules could possibly be tomorrow. For the US economy to reach its full potential, finding compromise amid differing viewpoints is critical to maintain a healthy business environment that encourages economic growth.