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WSJ: U.S. Electorate Is Schizo, Clouding Reform Outlook

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"How can the [U.S.] solve its long-term problems—deficit spending, an underfunded Social Security system, spiraling health-care costs—when voters seem so uncertain which party should lead the charge?"
That's the big question asked and unanswered in an excellent piece in today's Wall Street Journal. The answer to that question is essential to investors trying to assess America's growth prospects -- which depends on its capacity to adapt to reform its economy.
Unable to count on a rising tide of inflating credit to artificially lift all boats for much longer, the U. S. economy will need to generate economic growth the old fashioned way -- by earning it -- as more of the world's growth is enjoyed by countries with good or improving policy and business climates (U.S. Much Less Competitive: Bad for 'Recovery', It's the Business Climate, Stupid, Unconventional Wisdom: Buy Europe. Yes, Europe).
Many are hopeful that the change of power expected after this week's elections will mark a turnaround toward a more attractive business climate in the U.S. The Journal article gives some very good reason to doubt that: 


Voters this week look set to do something not seen since the early 1950s: Oust a substantial number of sitting House lawmakers for the third election in a row. The apparent Republican resurgence suggests the country is caught in a cycle of political volatility witnessed only four times in the past century, almost all during war or economic unease.

In many cases, [voters are] returning to the same candidates they rejected earlier.
"We know what we don't want better than we know what we want," said Steve Ellison, a commercial real-estate broker who hosted a campaign event in his Mishawaka home for Republican challenger Jackie Walorski, who is trying to unseat two-term Democrat Joe Donnelly in the state's Second District. "I suppose that helps explain the schizophrenia."

If Republicans win big on Tuesday, as polls suggest, it is far from clear how firm a foothold they will have. Voters hold unfavorable views of both parties. Republican leaders acknowledge they could easily be tossed in 2012, just as they were in 2006.
An immediate question from all this is just how much gumption Republicans (beyond 2010 and beyond 2012) will have -- if they win, and in the face of the U.S. electorate's schizophrenia -- to push the tough policy changes needed to improve U.S. economic performance. The GOP's current "Pledge to America" election platform is the latest case study in political avoidance of tough economic and budget questions.
In any case, the more basic question is not, who assumes control of Congress this week or who assumes control of the White House in 2012. The basic question is whether the U.S. electorate has matured, become more far-sighted than it has been over the past two decades and accepted that sacrifice is necessary, indeed unavoidable -- whether it's the kind of sacrifice that gets the U.S. economy to a better place, or the kind of greater sacrifice that will be forced on it later if better decisions aren't made and its medicine is taken now. Has the electorate moved beyond "I want to have my cake and eat it too"?

It's unclear whether the electorate will allow to emerge and support the kind of leadership that delivered Eastern Europe from decades of economic ruin after the Berlin Wall fell, that delivered Chile from potential disaster in the 1970's, that over the past decade delivered a now-robust Columbia from the economic damage of the drug war and that led Ireland to become a Celtic Tiger through the early 1990's and that might be, even now, building a foundation for a more robust and dynamic European economy.

The conclusion: Beyond a likely, positive post-election stock-market blip, the U.S. as an investment option represents greater political risk and therefore greater volatility. It's an investment option that should be viewed a bit less than it was before as a developed country and more like what we used to consider an emerging market. That could be very good (untapped potential on its way to being realized), or very bad (banana republic). What's certain is that there is greater  uncertainty ahead.

The outlook will remain unclear for some time, despite all the hoopla, after the midterm elections absent surprising political leadership we have not seen in Washington for some time.

Disclosure: No positions