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Saturday, February 07, 2009

Hold on to your hats

Alex says: It’s probably inevitable that the shift from months of electoral politics to a new era of governance is a jarring one. During the ritual of democracy, day after day we are appealed to by politicians from the highest level to the lowest for our support. We are told that we are the ones who matter, that the politicians are less concerned about putting forward an agenda than listening to the public will, that bickering is a thing of the past and a new era will emerge when, if elected, we will be truly included in the process of running the country.

Then the elections are over and we discover that a new world isn't born so easily. Suddenly there’s too much to do in D.C. to worry so much about communing with the public all the time. The election returns show that the people are actually pretty divided about a whole lot of things. Vague promises start to turn into concrete agendas, some of which divide even the original supporters of the promises. Soon enough, the political bickering restarts: party politics, yes, but to be fair politics based on real divisions in belief and interest amongst the electorate. The politicians disappear from our streets and parks. We hear a lot less about listening, and a lot more about talking. And we’re left watching events unfolding and wondering what the outcome is going to be.

This is standard for any election, but with the scale of the changes being proposed now, and the huge amounts of money involved, the contrast between the rhetoric of inclusion and the reality of government is particularly marked. Not that I’m complaining, necessarily: politicians spending all their time on stumps is not something that should really be encouraged: there’s a certain fantasy about elections that the cold light of day is a welcome antidote to, and politicians talk too much anyway.

Moreover, in the midst of all that voting and moving from one administration to another, the economy was busy tanking and millions were losing their jobs. As the big man said in his recent hard-ball speech, the public made its will clear; now it’s time for action. But it’s still a feeling I have: suddenly millions of people who were actively and directly involved in the process of government – getting out their chequebooks, trudging the streets, handing out flyers and knocking on doors – find themselves watching on the sidelines, hoping that their side gets its way in the negotiations between a few dozen people huddled together in a few rooms in Washington. Suddenly we realise that we are just the fans at the football match.

So goes the stimulus negotiations. Deals led by a couple of floor-crossing senators, Susan Collins and Ben Nelson, seem to have got something in shape in the Senate that could pass the magic sixty next week, although the question of reconciliation with the Dem-dominated House remains. (A preliminary list of what’s been cut from the bill can be found on CNN.)

If it passes it will be a miraculous achievement, even with the cuts. As a marker of a new approach to governance, the scale of the spending being proposed is truly gob-smacking. Even if the tax breaks get expanded, the vast majority remain payroll tax based, so they’ll produce a rapid, effective and persistent improvement in average Americans’ take-home salaries. Sitting in the stands, I’m cheering: my side is running with the ball. But it’s still a long way to touchdown. (For the purposes of this metaphor, astute readers will note, I’m deferring to that strange, American form of football! He he.)

So, some reasons to be nervous:

First, the left wing economists, marshalled by Paul Krugman, say this bill isn’t enough. Krugman wants roughly twice the spending, though he accepts that a half-sized bill is better than no bill at all. If this bill doesn’t work as quickly or comprehensively as people hope, then the Republicans will say it’s because it was badly designed, partisan, and focused on spending rather than tax cuts. This may well make it harder for Obama to put through any second measure that might be necessary.

Second, we’re still going to need action on banking – on the toxic asset question and in regulatory reform – before the credit markets really unfreeze and people start to trust the financial sector again. And third, whilst there is some material in the bill to encourage people to buy houses sooner rather than later, this bill isn’t going to solve the housing crisis, so more money is going to have to go on that one. This spending spree is suddenly getting bigger and bigger...

Fourth, a lot of these major long-term investments, whilst long overdue, are going to take time to produce quantifiable improvements in the quality of life of average Americans, and because we’re going from famine to feast there’s going to be a lot of wastage, whether we like it or not. Since 1997, the Labour government in the UK massively increased national spending levels on health care, and it’s been incredibly difficult to turn this into improvements that can be demonstrated to the public: it’s taken more than a decade, and we’re still a long way behind where we should be. (Indeed, a huge amount of the new spending was eaten up almost immediately by pay settlements that only just began to adjust the low-level of salaries for public sector workers. Then another enormous chunk went on replacing the buildings that were falling down with new ones. And whilst that meant that patients saw slightly happier doctors in slightly newer buildings, waiting lists and drugs and a whole series of other things were not affected very much at all.)

You just can’t deal with decades of decay in a few years: it takes serious commitment for the long haul. Ideally, you keep spending at a reasonable but sustainable rate in the long haul by shifting the public perception of the norm, so these dramatic shifts from one era to another aren’t necessary in the first place.

Fifth, even if the tax cuts vaunted by Republicans were a more effective way of stimulating the economy than spending (debatable, but let's just accept the proposition for the moment), they are not going to produce the effect we might expect under different conditions. Right now, most people are realising painfully just how chronically indebted they are, and are furiously attempting to pay down their credit cards. Just as macroeconomic measures that normally would have dramatically improved bank lending practices have actually only had a marginal effect easing credit (because bankers lost the will to lend), so the public has lost the will to spend. Indeed, it’s fair to say that a lot of people probably think that returning to the era of debt-driven consumption is not really what they want to see, anyway.

None of this means we should attack the bill. In fact, it all makes it more necessary than ever. But, to switch my metaphors at the last minute, it does mean that the roller-coaster ride is just beginning. Hold on to your hats!

Alex Goodall
Papamoka’s European Contributor
From A Swift Blow to the Head


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