Daily Archives: October 17, 2013

A tea-party supporter protest outside the US Supreme Court©AFP

For the past 20 years, American politics has been defined by Republican revolt. The rightwing radicalism that now worries the whole world first emerged in response to Bill Clinton’s election in 1992. It is not that Republicans were never extreme before that time; their challenge to the legitimacy of federal authority traces back to proslavery attempts at nullification and segregationist assertions of states’ rights. But it was 20 years ago that the Congressional wing of the Grand Old Party, led by Newt Gingrich, adopted belligerent non-co-operation as its defining stance.

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It was Mr Gingrich who turned bipartisanship from Washington’s greatest virtue to its most reviled vice. Under his leadership, congressional Republicans refused any quarter on healthcare reform and supplied no votes for the economic plan that spurred the long boom of the 1990s. In their new mode, Republicans refused to vote on presidential nominations and buried the White House in investigations and subpoenas. It was Mr Gingrich who, in 1995, invented the tactic of refusing to raise the debt ceiling as a cudgel to get Mr Clinton to agree to outsized spending cuts. It was Mr Gingrich who invented the tactic of shutting down the government for the same end.

Mr Clinton’s view was that the Republican refusal to be reasonable was all about him. Because he was elected in a three-way race without an absolute majority, he thought Republicans never accepted him as legitimate. An alternate view is that the radical Republican style was largely a matter of incentives and rewards. Abandoning traditions of responsibility and civility won the GOP control of both houses of Congress in 1994. Rejecting any compromise brought Republicans the perks and power of majority control for the first time in 40 years. Thus did the politics of total resistance become their path of least resistance.

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In subsequent years, the conservative movement built up an elaborate incentive structure to favour extremist views and tactics by individual politicians. State Republican parties redrew maps to create safe congressional districts where appealing to swing voters would no longer be required. Groups such as The Club for Growth and Americans for Tax Reform targeted Republican moderates for political extermination, recruiting primary challengers to run against them, scripting their attack ads and funding their campaigns. (No Koch brothers showered their millions on moderates.) The Tea Party emerged partly out of inchoate anger at social and economic change, and partly in response to these incentives.

In his first term, Barack Obama did his part to encourage the GOP hostage-taking. When Republicans demanded lopsided budget cuts in exchange for a debt-ceiling increase in 2011, the president was too willing to negotiate, giving them a victory in the form of the budget sequestration that took effect this year. By the time of his 2012 re-election campaign, however, Mr Obama had learnt the lesson that compromising with bullies only fuels their aggression. This time, he refused to negotiate, sending a message that the debt ceiling could not be used for leverage.

The unconditional surrender by John Boehner, the GOP speaker of the House of Representatives, was a watershed because it points to a change in the incentives that have favoured two decades of Republican recklessness. The party’s Senate elders are embarrassed. Mr Boehner’s unwillingness to stand up to the Tea Party has made them look ridiculous. It has a driven a wedge between the GOP and Wall Street, which was appalled by the calculated flirtation with default. It has reduced Republican chances of recapturing control of the Senate next year, which looked like a real possibility before the latest crisis. They are not going to try this tactic again.

But for many Republicans, the incentives remain unchanged. Texas senator Ted Cruz has done great harm to his party by instigating the showdown over “Obamacare”, the Affordable Care Act, but he made himself into a celebrity and the darling of the right. Many House Republicans will be home in their districts this weekend, bragging that they voted against the sellout. In the midterm election of 2014, no ultraconservative Republican is likely to face a moderate primary challenger with interest group support and outside funding.

What the GOP needs to become a serious governing party again is a set of countervailing incentives and rewards to support what were once its cardinal virtues: respect for tradition and process, aversion to radicalism and willingness to compromise. For the moment, however, the Tea Party remains its dominant force – soundly beaten in this round to be sure, but unbowed, unrepentant and still deliriously irresponsible.

The writer is chairman and editor-in-chief of the Slate Group

Can you hear the sound of cans being kicked down the road? The US disaster scenario has been avoided, for now. But given the deep disagreements between Democrats and Republicans and the even deeper divisions within the Republican party, we may end up going through the process all over again early next year.

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If it had been any other country than the US, we’d all have had a good laugh before putting our money elsewhere. The guilty nation would have faced a much higher cost of credit and a much weaker currency.

Because, however, the US dollar and Treasuries provide the anchor for the global financial system, we merely breathe a sigh of relief and keep our fingers crossed that, next time, a deal will be struck without too much blood being spilt.

Russian roulette

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That may be a forlorn hope. Many Republicans voted Wednesday night in favour of default. Some, it seems, are prepared to play a financial version of Russian roulette, thinking that a default need not lead to disaster – in the same way that, five times out of six times, pulling the trigger does no harm. Others have regarded the recent federal government shutdown as a way to demonstrate the case for small government. They might be willing to do the same thing all over again in a few weeks’ time.

There are also some more serious undercurrents. One is the persistent absence of decent economic growth. During the 1980s and 1990s, the US economy happily chugged along at 3-3.5 per cent per year. Since 2000, the pace has slowed to an annual rate averaging around 2 per cent. Even though, this year, the budget deficit has ended up lower than expected, the longer term fiscal arithmetic is, to say the least discouraging. Unless Congress grapples with this challenge now, the fiscal debates will become even more protracted in years to come. The US will end up being either a high tax or low spending economy. Reaching agreement on which will be, to say the least, difficult.

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The second, related, issue is the incredibly high level of income inequality in the US. John F Kennedy used to claim that “a rising tide lifts all boats” but, in modern-day America, that aphorism no longer seems to work. The gap between ‘haves’ and ‘have-nots’ has become ever larger, and the number of ‘haves’ has got ever smaller: even wages for university graduates have, in many cases, struggled to keep pace with productivity gains. What role should government play in this story?

Some think it should be more than happy to redistribute slices of the economic cake. Others take a more 19th century view, arguing that, because the rich tend to save more, they are better able to provide the funds for long-term investment that might, otherwise, be squandered to buy votes.

The third issue is America’s financial relationship with the rest of the world. The battles witnessed in Washington over the last few weeks suggest that at least some US politicians have lost sight of the fact that the US is heavily indebted to the rest of the world.

Reserve currency status helps keep the creditors at bay – the costs of walking away from a dollar-based global financial system are possibly greater for America’s creditors than they are for the US itself – but reserve currency status also allows Washington to slip into bad habits that no other country could ever contemplate.

Even if the debt ceiling is raised, even if further shutdowns are avoided, there is a danger of a growing mismatch between America’s own fiscal ambitions and the interests of its creditors.

Vietnam War

It’s not quite the same story but the early-1970s break-up of the Bretton Woods system of fixed but adjustable exchange rates provides an intriguing precedent. The mounting costs associated with the Vietnam War led US authorities to crank up the printing of dollars in the late-1960s.

While this helped alleviate domestic fiscal pressures, the extra dollars in circulation threatened the dollar’s supposedly fixed link with gold. Foreign central banks began to fret, swapping their dollar reserves into precious metal, leaving US gold reserves precariously low.

Eventually, the growing inconsistency between US political ambition and global financial need led to the Bretton Woods system collapsing altogether, paving the way for the financial chaos of the 1970s.

Ironically, the current budgetary mess has also encouraged the printing of dollars. The Federal Reserve’s decision in September not to taper seems, in hindsight, to have been remarkably prescient. With the countdown to another potential debt ceiling stand-off already under way, it may even be tricky for the Fed to contemplate tapering in December.

The extra liquidity associated with quantitative easing has already triggered financial upheaval elsewhere in the world – most obviously in some of the more fragile emerging economies – but a further attachment to quantitative easing in a bid to mask Washington’s fiscal dispute may only encourage further problems down the road.

It may often seem that there is no alternative to a dollar-based international financial system. There is. It’s called financial chaos. The deal struck this week is more than welcome. The risk of financial chaos, however, has not yet gone away.

The writer is HSBC’s chief economist

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