December 2, 2012 4:25 pm

America’s Thelma and Louise moment

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Congress will still have to confront the ‘fiscal abyss’ that lies beyond the cliff
Thelma and Louise©Matt Kenyon

“Let’s keep going,” said the Democrat. “What do you mean?” replied the Republican. “Go,” the Democrat replied pointing at the precipice. “Are you sure?” asks the second, an insane smile dawning. They clasp hands. The Republican steps on the gas and they zoom over the cliff.

This is Washington’s real-life take on the closing scene of the movie Thelma and Louise. It does not take much to imagine it running on December 31 with a recession instead of the Grand Canyon. Yet whether or not Washington takes the US temporarily over the fiscal cliff is almost beside the point. Prominent figures in both parties have been flirting with the idea for months as a way of getting concessions. Their leaders are conniving to ensure that the best outcome is if they swerve off-track at the last minute. Either way, the US will head into 2013 with the same nagging question hanging over its future: when will it be governed sensibly again?

The quality of US governance has been deteriorating over many years. Given the poor regard in which the US public now holds its institutions – and Congress in particular – any deal to avert the cliff is likely to be drowned out by bipartisan self-congratulation. It is unlikely to be deserved. The real test will come during the course of 2013. Having averted or temporarily gone over an entirely self-created cliff, Congress will still have to confront America’s long-term outlook – the “fiscal abyss” that lies beyond the cliff.

By this time next year we are likely to have an answer to the nagging governability question. Either Washington will have reached a deal about the size of government and the purpose of the tax system that is helpful to US growth prospects. Or the parties will have hit a stalemate and agreed to postpone the day of reckoning. There are three reasons to suppose they will kick the can down the road.

First, the immediate stakes are lower than many people think. In contrast to the eurozone, which is facing at least another two years of flat growth, the US economy is back on its feet. It may be limping and unlikely to be running soon – most economists, including Ben Bernanke, believe America’s sustainable growth rate has fallen since the Great Recession.

However, even if the US were to dip briefly off the cliff, the economy would probably still grow by between 1 per cent and 2 per cent in 2013. Polls say the public would chiefly blame the Republicans for whatever slowdown ensued. But it is not as though the country would be in depression. And Republicans might bet the damage would have occurred early enough into the new Congress for the electorate to have forgotten it by the 2014 midterm elections. It would be a surprise if they could hammer out a sensible grand fiscal bargain in between.

Second, the gap between the parties – the chief cause of the last bout of brinkmanship in August 2011 – has grown wider. According to voting patterns, the outgoing 112th Congress was the most polarised in modern US history. According to studies of the new intake, the 113th is even more split. It is not just a story of conservative Republicans replacing moderates – though that has been the chief driver of America’s polarisation. Democrats are also becoming more liberal. The once powerful centrist Democratic Blue Dog coalition has nosedived from 54 members as recently 2008 to just 15 next year. The term moderate Democrat is becoming almost as rare as its counterpart. Nor is the divergence confined to ideology. The parties also look different. According to Bloomberg, the share of white male Democrats in the 113th Congress is 47 per cent – it fell below half for the first time. Meanwhile, 90 per cent of GOP lawmakers are white male.

Third, the election on November 6 offered only a brief pause in America’s permanent electoral campaigning. With a short break for Thanksgiving, lawmakers on both sides have begun fundraising in earnest for 2014. Moderates need to build up war chests now in order to pre-empt primary challenges. The jockeying for the 2016 Republican nomination has also begun.

Among the big hopefuls is Paul Ryan, Mitt Romney’s former running mate, and the chairman of the House budget committee. Mr Ryan is the current darling of the anti-tax wing of the GOP. If he opposes a tax increase, it is probably dead-on-arrival. If he gives his blessing, he would damage his presidential chances. Mr Ryan could end up being the most pivotal figure in the game of chicken over the coming weeks.

Franklin Roosevelt once said America had nothing to fear but fear itself. Now he might say it has nothing to fear but itself. Relative to Europe, US short-term growth prospects are good although the measure is much stingier nowadays. Compared to almost everyone, except Canada and Australia, the US energy outlook is rosy. Yet relative to its own standards of governance, the US has rarely been less capacitated. There is little reason to believe the election results of November 6 have changed anything fundamental. Politics is a bit like stock market investment. It is hard to predict the next gyration – but always safer to trust the longer-term trends. It would be a surprise were Congress to avert the cliff in a sensible manner in the next few weeks. It would be a shock – and a very positive one – were it to follow that up with a year of working productively.

edward.luce@ft.com

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