Slow Economy Raises America’s Political Temperature

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J.T. Young Former Treasury Department and OMB Official
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As America’s economy has weakened, its political spectrum has widened. This year’s presidential election shows its furthest expansion yet. Without a release of economic pressure, America’s historically “cool” politics can be expected to grow hotter still.

American politics has long been sui generis. Nowhere has it been more unlike other western democracies than its political spectrum’s narrowness.

Despite the two major parties’ attempted labeling of their opponent, America’s politics has lacked other democracies’ extremes. Rather than their “hot” political conflicts, for generations America has had “cool” ones waged within narrow confines by two marginally right- and left-of-center political parties.

This unique political climate is hardly surprising, considering America’s equally unique economic one.  Its prosperity has been unparalleled. The economy averaged real GDP growth of 3.3 percent from 1946 to 2000, creating far and away the world’s largest and strongest economy.

Economic affluence produced political calm. America’s relatively unlimited economic prosperity created relatively limited political conflict. A growing pie allowed everyone’s slice to increase: limited income redistribution and relatively limited taxes could coexist.

Measured fiscally, America’s federal government was remarkably stable. According to the Congressional Budget Office, the federal government spent 17.2 percent of GDP in 1966; in 2000, it was 17.6 percent. Federal debt held by the public was 33.7 percent of GDP in 1966; in 2000, it was 33.6 percent.

However, America’s prolonged period of economic growth and fiscal stasis has been eroding. From 2001 through 2008, annual real GDP growth averaged just 2.1 percent. Over the last seven years, it has fallen another third – averaging just 1.4 percent from 2009 through 2016. Combined over the last 15 years, America’s economy has averaged an anemic 1.8 percent real annual growth – just over half its average from 1946 through 2000.

With America’s economy going colder, its political conflicts have grown hotter.

Riding slow growth, America voted for “hope and change” in 2008. Obama’s election expanded the political spectrum, as his administration has been decidedly left-of-center. Now having endured even slower growth over the last seven years, 2016’s extending the political spectrum still further in both directions.

America now faces strong anti-establishment populist waves in both parties.  National polling shows it holding roughly 50 percent support in each.

Such strong insurgencies in each party will affect their nominees – even if insurgents are not the nominees. To retain the support of half their base backing their party’s populist wave, each nominee will need to be further than normal from America’s political center.

Unlike 2008, when Obama cast himself as a centrist – even though not governing as one – both nominees will be relatively “off center” in 2016. America’s shift therefore continues and it should not be expected to soon reverse.

Politically, the populism dominating both parties’ presidential races is far from peaking. It is likely just getting started. Having demonstrated its national power, populist approaches can be expected to appear in Congressional and state and local races in 2018.

Economically, the fuel driving America’s broadened political spectrum is hardly spent either. In January, CBO estimated 2016 real GDP growth at 2.5 percent. Hardly strong – well below 1946-2000’s 3.3 percent average – it matches 2010’s, the highest annual rate of Obama’s presidency. As old and tepid as that figure is, it now looks like a pipe dream for 2016 with Q1 GDP coming in at 0.5 percent.

Combining with the economic squeeze is looming fiscal pressure. Again according to CBO, federal spending is projected to increase 64 percent over the next decade – jumping from the 21.1 percent of GDP it is now, to 23.1 percent in 2026. Simultaneously, federal debt held by the public will add to its 140 percent increase from 2008 to 2016 with another 70 percent jump – reaching 85.6 percent of GDP in 2026.

If all the “stimulus” of the last 15 years – ranging from a hyped-up real estate and investment market, to enormous government spending and debt increases, to prolonged historically low interest rates – there is little reason to believe that further significantly increasing federal spending and debt will have any more positive economic impact than it has during this period of well below-average growth.

In short, America is facing a confluence of events that threatens its historically staid political underpinnings. The robust economy that allowed broad fiscal compromise – limited income redistribution and manageable taxes – to buy relative peace between its political parties is now in an unprecedentedly prolonged slowdown – and getting slower.

This economic squeeze pushes out both ends of the political spectrum. At the same time, the economic slowdown applies tremendous fiscal pressure to the political system. As the economy slows, revenue growth does too – just as federal spending increases to levels only formerly experienced in short-term emergencies.

Under these combined and self-reinforcing pressures, it is not surprising America’s uniquely “cool” politics has heated. What will be surprising is America’s politics returning to previously staid state without a return to dramatically higher growth.

J.T. Young served in the Treasury Department and the Office of Management and Budget from 2001 to 2004 and as a Congressional staff member from 1987 to 2000.