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As Dow tumbles, how much is politics to blame?

Dysfunctional politics, both in Washington and in Europe, is spooking markets worldwide. While perhaps not as dangerous as the economic dysfunction of 2008, it is still a concern.

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Prospects for new legislation to boost job creation, for example, are clouded by the partisan divide. More ominously, the chaos of a so-called government shutdown is possible starting barely a week from now, if the two sides can't come to a funding agreement as a new fiscal year begins.

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Ideological differences over what to do are part of the problem, as is election-oriented maneuvering. President Obama has blasted Republican House Speaker John Boehner (R) of Ohio for taking a "my way or the highway" position opposing tax hikes. But the president has recently laid down his own ultimatum, saying he'll veto any deficit bill that cuts Medicare without raising taxes on high-income Americans.

"Europe, Japan, and the United States must act to address their big economic problems," Mr. Zoellick urged in his public remarks. "I know well that ... means honest and difficult discussions with parliaments and publics. [But] delay will narrow choices and make them harder and more costly."

Growth in advanced economies have lagged behind forecasters' expectations this year. A range of factors can help explain the economy's recent rough patch – from the impact of high oil prices early this year to the spillover effects of Japan's earthquake and tsunami. But many economists say the political challenges in Europe are an important added headwind.

Lingering effects of 2008

Back in 2008 and 2009, the US government moved aggressively in efforts to quell a financial crisis, which was spawned by the large mortgage-related losses at commercial banks and investment firms.

But that resulted in a big jump in the federal government's own debt. That's a pattern typically seen in such crises, as governments experience falling tax revenues even as they ramp up spending on bank bailouts, stimulus efforts, and covering recession-related costs like unemployment insurance.

With this pattern visible in the US and other nations, governments are running close to constraints on their ability to run deficits in efforts to stimulate economic growth.

Meanwhile, private sector banks still have their own troubles.

The credit-rating firm Moody's lowered its grade on Greek banks Friday. And earlier this week, Moody's downgraded several large US banks, saying they would be less likely to get government assistance in a new crisis.

All this doesn't mean that government policy failures will hang like a millstone on the economy in the months ahead. Some economists note that the downdrafts in financial markets themselves could prod nations to deal more forcefully with their challenges.

But for now, at least, concerns about the public sector are running high among investors, consumers, and employers alike.

“With the current, anemic economic conditions, the unemployment rate will remain consistently high and tax receipts will remain low unless the focus shifts to long-term policies and economic growth,” Business Roundtable president John Engler said in a statement Monday.

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