FORTUNE — How much is Washington dysfunction harming the U.S. economy? Policymakers’ disaccord could be doing major behind-the-scenes economic damage. According to economists Juan Sanchez and Emircan Yurdagül at the St Louis Federal Reserve, U.S. companies are hoarding loads of cash specifically because of policy uncertainty. As a result, corporate spending habits could be costing the country millions of jobs.
On the surface, the U.S. government shutdown, caused by Washington gridlock, looks to be causing little immediate economic damage even as the country approaches a deadline where it could default on its debt. Chief U.S. economist at JPMorgan Michael Feroli estimates that each week the government is shut down the annualized growth rate of real GDP will fall about 0.12% quarterly. Yet the stock market, up slightly over the past two weeks, has shrugged this off.
However, the final findings of a St. Louis Fed report, preliminarily released in January but recently published in its entirety on the division’s website, inadvertently raise another issue. The study shows that U.S. firms are holding four times as much cash as in 1995 and 11 times as much as they were holding in 1979. After adjusting for economic growth and inflation by considering asset growth as well, cash on corporate balance sheets doubled between 2000 and 2010.
MORE: Default would be catastrophic for big banks
Sanchez and Yurdagül looked at several reasons why companies might be keeping cash: Did research and development spending decline? Is the tax burden associated with repatriating foreign earnings too great? Did companies stop spending on human capital? Or has overall policy uncertainty started to take its toll?
It was this last factor that was among the most important. To come to the conclusion, the duo tracked the total cash holdings vs. something called the “Economic Policy Uncertainty Index.” This index aggregated the frequency of news articles discussing policy-related economic uncertainty, upcoming expirations of tax code provisions, and economists’ disagreement over predicting economic statistics.
“There are several episodes where the two variables [policy-related economic uncertainty and the ratio between cash and assets] move in the same direction, in particular between 2008 and 2010,” the report says.
“The results suggest that some of these factors — namely, R&D expenditures and cash-flow uncertainty — … stop short of keeping up with the rise in the cash-to-asset ratio that occurred after the mid-2000s.”
MORE: Government shutdown’s biggest villain? Pride.
Non-financial U.S. businesses are sitting on over $1.8 trillion in liquid securities, according to the Federal Reserve. What might happen if they started spending this money?
“Political gridlock is one of the reasons for the muted recovery. Once you have confidence, people start borrowing money and investing in the future,” Fortress principal Mike Novogratz recently told Fortune.
It’s not a perfect comparison, but consider this. The Congressional Budget Office says that the 2009 $800 billion stimulus package created up to 3.6 million new jobs. Similar to public-sector spending, overall corporate spending can have a multiplier effect. Every $1 added to the economy is recycled several times to create something much more than one-plus-one. If you believe the private sector is more efficient than the government, the number of jobs created might be a higher number still.
The current number of unemployed people in the country is 11.3 million, as reported by the Bureau of Labor Statistics. Even if corporations spent just a fraction of the cash on their balance sheets, there is a good chance this number could be dramatically reduced.
