Daily Archives: January 3, 2012

The failure of the “Super Committee” last year to reach a budget deal underscored the underlying wedge in US politics. The distribution of the electorate through most of the post-1945 years has been a dominant centre, slightly to the left or right of centre. This enabled legislative compromises to be reached with relative ease.

But a political tsunami has emerged out of our past in the form of the Tea Party, with its ethos reminiscent of rugged individualism and self-reliance. That was a dominant force for over a century, but has faded since the New Deal. The Tea Party has yet to obtain sufficient traction to forge majorities for new legislation. But its influence beyond its numerical strength has created an effective veto of new legislation before the current heavily Republican House of Representatives. It has so altered the distribution of votes within Republican Party’s House caucus that the party’s centre has moved closer to the Tea Party. Moreover, the heavy House Democratic losses of moderates in 2010 shifted the centre of gravity of their caucus to the left.

This has created something of a bimodal distribution leaving a much diminished centre. The Senate, although less affected by the 2010 election has not been immune from this shift. The days of Senators Pat Moynihan, Bob Dole, and Lloyd Bentsen seem a long time ago.

The emerging fight over the future of the welfare state, a paradigm without serious political challenge in eight decades, is accentuating the centre’s decline. The welfare state has run up against a brick wall of economic reality and fiscal book-keeping. Congress, having enacted increases in entitlements without visible means of funding them, is on the brink of stalemate. As studies by the International Monetary Fund have demonstrated, trying to solve significant budget deficits predominantly by raising taxes has tended to foster decline. Contractions have also occurred where spending was cut as well, but to a far smaller extent.

The only viable long-term solution appears to be a shift in federal entitlements programmes to defined contribution status. The assets of private defined benefit pension plans, confronted with the same economic forces, have already fallen from 67 per cent of private pension plans at the end of 1984 to 37 per cent at the end of last September. But the political problems of such a switch can be seen in state and local governments’ attempt to trim public defined pension plans. Public sector unions have fought mightily to avoid having their pensions shrink, as they have in the private sector.

Cutting back on benefits that are “entitled” is going to be a far harder political task than curbing federal discretionary spending. We have created a level of entitlements that will require a greater share of real resources to fulfill than the economy seems likely to be able to supply. Not only is the labour force starting to lose its most productive workers (the baby boomer generation) to retirement, but the generations scheduled to replace it will be the same individuals who in 1995, shocked us by scoring so poorly on maths and science in international competitions. America’s students had slipped badly after a long tenure at the top of the global educational ladder. The cohort of people aged 25 and younger is suffering the consequences in lower earnings and productivity when compared to earlier generations. Fortunately the statistical weight of the erosion in overall productivity growth is still quite small, but it will mount if our education system does not improve and we don’t increase immigration quotas of skilled workers.

With rising concerns about income inequalities, it is a disgrace that these quotas are protecting upper income groups from competition. Such a slowdown in productivity growth will create, with slowed population growth, Professor Gordon of Northwestern University says, “the slowest 20-year rise in real per capita GDP in American history”.

I do not pretend to be able to forecast how this will turn out, but we face a true revolution, not so much in the streets but in the fundamental choices we will have to make to secure our fiscal future. Arithmetic demands it.

The writer was chairman of the US Federal Reserve

I bravely predict more of the same in 2012. By this I mean the following.

First, Mitt Romney will win the Republican nomination after the party has exhausted its one-week-long love affairs with each of the non-Romneys: Michele Bachmann, Rick Perry, Herman Cain, Ron Paul and Newt Gingrich. Mr Romney is the only one of the list that is even plausibly qualified to be president. Somehow the Republican party’s bizarre reality TV-style nominating process, much closer to American Idol than to politics for adults, will actually sort this out.

Second, Barack Obama will win re-election. This will not be a triumph of party, accomplishment or experience. It will not have been earnt by economic recovery, political bravery, or long-term vision. It will not reflect a renewal of the love affair with Mr Obama in 2008. It will occur because his one consistent strategy – to stay one step towards the centre of the rightwing Republican party – will prevail. The Republicans and Mr Romney will have cornered themselves.

Third, the presidential elections will do nothing to reinvigorate American society. Government will remain corrupt, incompetent and shortsighted. Both political parties will remain firmly to the right of centre. The rich will keep most of their existing tax breaks. Loopholes and lack of enforcement will offset any increased taxes that might be enacted on paper. Good jobs will remain scarce for the young, returning veterans and many others. A chronic budget deficit will lead Congress to continue to slash education, family support, health for the poor, infrastructure, and science and technology. American exceptionalism will mean that the US is the only leading country at war with its own teachers and children.

Fourth, the world will become less stable. Though word has not yet reached (drought-stricken) Texas, climate change is real; so too is a rapid increase of population whenever families have no access to family planning and basic healthcare. As a result, our world of 7bn inhabitants (8bn by 2024) will be buffeted by more droughts, floods, food shortages, natural disasters, epidemics and violence. These will turn into more coups, drone missiles, UN Security Council resolutions, but not more common sense to invest in poverty reduction, population control and mitigation of climate change.

Fifth, Asia, Latin America, and now Africa will continue to outpace the sluggish or stagnant economies on both sides of the northern Atlantic. Convergence will remain the dominant macroeconomic force of the global economy.

Sixth, the young generation will increasingly tire of the increasingly turgid baby-boomer politics. The groups that took to the streets this year from Tunis to Cairo to Tel Aviv to Santiago to Wall Street to Moscow will be back. By the next US election in 2016, America will have at least a third, if not a fourth, major political party building on the progressive energies of the millennial generation.

This, then, is the meaning of more of the same: the continuity of change. As the great A-lister of the sixth century BC, Heraclitus, put it much better: “All is flux, nothing stays still.”

The writer is director of the Earth Institute and author of ‘The Price of Civilization’

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