Super Committee Failure: Is The U.S. Political System Broken?

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by: James A. Kostohryz

The Super Committee has failed to propose even a token back-end loaded $1.2 trillion deficit reduction package over a ten-year period. Many people are citing this as proof that the U.S. political system is "broken."

While the failure of the Super Committee is certainly disappointing, I do not believe that this is cause for alarm from the point of view of evaluating U.S. national solvency. As explained here, the U.S. is not in any imminent danger of default. Most importantly, for reasons I will explain in this article, I am relatively sanguine about prospects of a satisfactory resolution being reached in the medium term.

I by no means underestimate the enormity of the political challenge faced in the U.S.

In any democratic system, reigning in the growth of public sector deficits is a very difficult task - particularly when so-called "entitlements" are involved.

However, to understand why I am relatively optimistic, it will be instructive to analyze the workings of the U.S. political system in a comparative international context. Comparative political analysis will allow one to see why the U.S. political system may succeed where European political systems have failed.

Awareness Is The First Step Towards A Cure

One may start the analysis of the U.S. political challenge with a simple observation. Considering its own debt dynamics, the U.S. is way ahead of the curve politically relative to the PIIGS in terms of coming to grips with the public debt and deficit problem. Unlike the situation in the PIIGS until very recently (when it is almost too late), all political parties in the U.S. agree on the urgent need to cut the deficit and they are being pressured by the public to do so. This was not the case many years ago when the PIIGS were in a similar stage to where the U.S. is now in terms of credit quality dynamics.

All U.S. parties now agree that deficits must be brought under control and that the task is urgent. Today, U.S. political parties are only arguing about how to cut the deficit, not about whether cutting the deficit is a major priority. Indeed, the next nation-elections in the U.S. will probably be decided on exactly this issue. This is a testament to how far ahead of the curve the U.S. is with respect to various European countries that are only belatedly waking up to the urgency of their predicament.

U.S. Political Task Is Currently Comparatively Simple Politically

The fact that the U.S. is dealing with its fiscal situation at this particular time constitutes a major comparative advantage not only from an economic point of view but from a political point of view.

Because the vast bulk of the U.S.'s problem relates to payouts to future entitlement holders that have not yet begun to receive benefits, it will be comparatively easier to rein in the growth of those benefits.

By contrast, the Europeans by and large, did not begin to seriously address these problems until deficits and debts were so out of control that viable solutions required payments to current entitlements holders to be slashed.

Thus, the U.S. still has time to address its fiscal problems before it becomes truly painful to do so. Cutting future benefits is politically much easier to do than cutting current benefits.

The real question is whether the U.S. political system is up to the challenge of implementing deficit control before it becomes too late. In that regard, the U.S. political system possesses structural advantages and disadvantages relative to the political systems in Europe.

The Nature Of The U.S. Political Challenge: Comparative Politics

Let us first review the relative advantages and then consider the disadvantages created by the structure of the U.S. political system.

The first thing that must be understood and appreciated is that the U.S. has a de facto two-party political system. This de facto condition emerges from its system of legislative representation that is determined through a "first-past-the-post" electoral system within distinct regions (states and districts). This constitutes a major advantage of the U.S. legislative process relative to multi-party parliamentary systems of the European kind.

European legislation emerges from multi-party parliamentary systems in which representation is generally determined in whole or in part on the basis of extremely complex formulas in which parties that garner only tiny amounts of nationwide popular support - despite being unable to win outright in any sub-national jurisdiction - nonetheless gain significant representation in the parliament. In a first-past-the post system such parties - typically with idiosyncratic and/or extremist views - would never gain significant representation in the national legislature.

As a result of Europe's system of parliamentary representation, extremely complicated coalitions must be cobbled together to enact any sort of meaningful legislation. The more meaningful the legislation, the more likely a governing coalition is likely to splinter and the government to fall. Thus, in order to hold together coalitions, transcendent legislation will often be avoided - until it can no longer be avoided (and it may be too late).

In fact, the difficulty of putting together a multi-party governing coalition constitutes a structural obstacle to fiscal discipline that is built in to European multi-party parliamentary systems.

In the U.S., due to the relatively dichotomous nature of solutions under two party system, the only real question is how major problems will be solved - not whether it is politically possible to solve them.

For example, the two major parties in the U.S. each have pretty clear contrasting proposals for containing the deficits. Democrats favor raising revenues; Republicans favor cutting spending. And because the overwhelming number of U.S. elected representatives position themselves near the center of the ideological spectrum (for reasons described below), both acknowledge the need to do some of both.

A fact that further simplifies the political task in the U.S. is that, unlike European parliamentary systems in which crossing party lines is anathema, crossing party lines is a well-established tradition in U.S. politics. This makes it somewhat easier to establish large legislative majorities that enhance the perceived legitimacy of decisions taken with respect to issues of national importance.

What is responsible for this "cross-over" characteristic of U.S. legislative politics? First, due to the nature of the "first past the post" electoral system in the U.S., a large number of politicians from both parties tend to be "centrists" in terms of their political ideologies. Unlike what occurs in the parliamentary systems in Europe, in a "first past the post" system of regional election such as in the U.S., politicians must inexorably move towards the ideological center in their respective districts and/or states in order to capture the majorities and/or large pluralities required to be elected.

By contrast, the political structure of European parliamentary systems encourages political atomization and extremism (which proponents of such a system like to refer to as "diversity") as parties can gain parliamentary seats by appealing to minority ideological and/or special interest niches. Furthermore, the European system in which members of parliament stand as part of a party list also insures rigid party discipline. U.S. politicians owe relatively little to their own parties, by comparison.

Another advantage of the U.S. political system relates to regional differences in ideological tendencies. Subtle ideological differences amongst the populations of various regions in the U.S. means that politicians from a party in one state might be more ideologically aligned with the positions of the opposite party with respect to a given issue than the positions of their own party. Thus, "blue dog" Democrats from the South and Midwest will often vote with Republicans on key issues. Similarly, northeastern and Western Republicans will often cross over and vote with Democratic majorities.

To summarize the advantages of the U.S. political system, because U.S. politicians are overwhelmingly positioned near the center of the political spectrum and because they owe relatively little allegiance to their parties, the U.S. political system is much more conducive in these regards to compromise and consensus building (even across party lines) than the European system. Indeed, due to the way in which the U.S. political system is structured, when it comes to issues of national importance, centrist politicians from either party will tend to cross over to the side where the political winds are blowing. As a result, the U.S. political system enables the formation of large legitimizing majorities for legislation of major national importance in a way that is very difficult to achieve in Europe's parliamentary multi-party systems.

Having said all of this, the U.S. legislative system does have a major disadvantage. The current legislative problem in the U.S. with respect to fiscal deficit control is due to a peculiar feature of U.S. politics: split government. Unlike what occurs in Europe, the executive branch and both houses of the legislature in the U.S. do not have to be from the same political party.

The U.S. currently has a split government. Both houses of congress and the presidency are run by different parties. This means that it is very difficult to pass major legislation on highly divisive issues.

More important than that, there is not yet a discernibly strong majority in the U.S. population in favor of either the Democratic or Republican approach to deficit reduction. This ambiguity has enabled parties to maintain discipline within their parties and prevent cross-overs.

However, this stand-off is unlikely to last long. The issue of deficits is front and center on the U.S. political agenda and the two-party structure ensures that the problem be framed in a relatively clear and dichotomous fashion. U.S. voters are faced with two alternative solutions: A solution that emphasizes expenditure cuts or a solution that emphasizes revenue increases. The make-up of the next congress and presidency will in all likelihood reflect this emerging consensus because the next national election will probably become largely a referendum on this issue.

To the extent that the next presidential and congressional elections result in a clear popular mandate favoring one method of deficit reduction over the other, the deficit problem in the U.S. will be solved.

It is really not difficult at all to come up with the deficit cutting measures required to get the U.S. debt-to-GDP ratio down to 60% or lower within 10 years. I encourage readers to try out an application developed by the Pew Center to see this for themselves. Whether the approach favors spending cuts or whether it emphasizes revenue increases, the changes required to bring deficits under control are not that dramatic.

And quite frankly, given the ratio of government expenditure to GDP in the U.S., when the economy is growing, it really does not matter all that much whether the deficit reductions will come primarily via increased revenues or expenditure control. Sure, some ways of cutting defects are better than others from the point of view of long-term national prosperity for the greatest number of citizens. However, the relative impacts of various deficit reduction policies relative to others have tended to be greatly exaggerated. What is really important is that long-term deficits be brought under control to sustainable levels - one way or another.

If the next elections result in a clear mandate for either party, this issue will be essentially resolved. Most importantly the issue will be resolved well before the U.S. has reached the sort of situation that PIIGS nations find themselves in.

Conclusion

It is my view that financial markets will essentially give the U.S. a pass if the Super Committee fails. Financial markets may or may not react badly in the short-term. In the medium term, I do not think a failure of the Super-Committee will have a major negative impact.

I believe that giving the U.S. a pass under current circumstances actually makes sense. The U.S. does not face any serious threat of default in the short-term. In fact, as long as the U.S. Fed continues to act as a backstop for the U.S. Treasury, the U.S. will never face a serious threat of default.

That is not to say that the deficit issue is not important. It is, because even if the threat of default is taken off of the table by a Fed backstop, monetizing the debt just puts the threat of inflation on the table. Thus, in the medium term, it is critical that the U.S. get a handle on its fiscal situation before it spirals out of control in the longer term.

Unlike what is occurring in Europe, the U.S. still has time and to get its fiscal house in order. Furthermore, since the challenge is to cut future rather than present benefits, the political challenge is much more manageable. In this regard, as long as the next elections provide a fairly clear congressional and presidential mandate to one of the two major parties, the long-term deficit problem will likely be solved before it becomes a real threat to the U.S. economy in the long-term.

Indeed, the structure of the U.S. political system provides distinct reasons for believing that the U.S. will successfully come to terms with this challenge. The first-past-the-post system of regional representation, combined with regional ideological diversity, are factors that decisively favor the formation of functional legislative consensuses (even across party lines) on issues of major national importance.

In the short-term, the U.S. equity market and equity market proxies such as SPDR S&P 500 ETF Trust (SPY), SPDR Dow Jones Industrial Average ETF Trust (DIA) or Powershares Nasdaq-100 Index Trust (QQQ) may suffer declines associated with a Super Committee failure. In the longer term I do not currently see this issue as a major threat to the U.S. economy or stock market. Investors with long-term time horizons should not be dissuaded from purchasing attractive equities such as Apple (AAPL), Microsoft (MSFT) and Pepsi (PEP) on this basis. The reasons that I believe that investors should avoid equities at this time relate to the problems in Europe and their likely deleterious effects on the U.S. stock market in the medium term.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.