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