America can fix its inner workings

Less big vision and more humdrum pragmatism needed

At a moment of renewed financial market turmoil, a historic downgrade of US government debt and gathering signs that the recovery has stalled, the capacity of Washington to act with deliberation has seemingly collapsed. This convergence is no accident. Washington’s performance in recent months – reaching its nadir in the phoney resolution of the debt-ceiling fiasco – is one reason why confidence is so depressed. Can this circle of anxiety and incapacity be broken? Yes. Bad as the position may seem, it is not hopeless.

In the short term, instruments are available. The Federal Reserve will have to take up more of the US policy burden than it would like – not for the first time since the recession began. The balance of arguments for and against another round of quantitative easing has shifted: downward revisions to growth in the first part of the year, a weak job market, cratering confidence and worsening fiscal paralysis all point to the need for action. Fears of rising inflation should be set aside. The prospect of moderate inflation would help at this moment more than it would hurt. The sooner the Fed commits itself to QE3, the better.

Fiscal policy should not be written off. The Obama administration is right to call for an extension of payroll-tax relief and unemployment benefits. These temporary stimulus measures should have been in last week’s debt-ceiling deal. This can still be put right.

Republicans are not public-borrowing hawks: they want to cut spending and taxes. Even if it increases the short-term deficit, they might support another payroll-tax cut, with extended unemployment benefits as part of the package. The debt deal does not preclude this.

More ambitious action may be asking too much of a broken system. Still, you never know: the public’s outpouring of disgust over the debt-ceiling quarrel, last week’s financial market eruption, and the S&P downgrade could focus minds.

Maybe, just maybe, the “super committee” of Congress charged to find another $1,500bn of long-term deficit reductions within the next few months will announce a breakthrough on tax reform. If there was ever a free lunch in fiscal policy, this is it. As countless panels and commissions have pointed out, the US income tax code is such a mess that a simpler, flatter system could raise revenues and cut tax rates at the same time, giving both parties a win. This would go a long way to stabilise the medium-term fiscal outlook and would lift one main source of uncertainty.

The larger and more demanding challenge is to restore confidence in Washington itself. The parties are now in pre-election mode, with the Republicans scenting blood and the Democrats for the first time seriously contemplating defeat. Every dispute is cast as a battle in the larger war for America’s soul. This is bad for the country, because it militates against compromise; and it is delusional, because the final resolution of the parties’ grand ideological debate – which both sides hope the election of 2012 will deliver – simply will not happen.

Many Democrats thought the election of 2008 marked a lasting realignment of US politics. Finally, the underlying liberal preferences of US voters had expressed themselves. The party had a mandate and was effectively unchallenged: there would be no going back. Nice theory. Republicans now have similar ambitions for 2012. Whatever regime that election installs, it will be good for two more years. The election campaign for 2014 will start before 2012 is over.

It is a good thing for a democracy to set big competing ideas about the proper role of government in contention, so long as it does not cause mutually-assured paralysis. Lately the US has tended in that direction. Vision needs to be dialled down a little, and common sense dialled up.

This, I think, would especially help the Democrats. Their vision often causes them to lose arguments they would otherwise win. The fight over taxes is a classic instance. Democrats are right that revenues must rise to balance the long-term budget. Voters understand this – or could be made to understand. But instead of reluctantly calling for higher taxes as a sensible way to curb borrowing, Democrats have come to champion higher taxes on households making more than $250,000 a year as a vital principle in its own right – a position from which many Americans recoil. Mr Obama, the supposed pragmatist, has fallen headlong into this trap.

Moreover, set aside the question of how conservative a country the US really is. Whatever view you take on that, the Democrats’ vision of an ambitious and expanded role for government puts them at a perpetual tactical disadvantage. Under constitutional arrangements that demand consensus, Republicans win merely by refusing to co-operate. See, we told you Washington makes a hash of everything. The debt-ceiling farce is a perfect instance. It was chiefly a Republican production, but it made Washington – whose role the Democrats want to enlarge – a national joke. Obstinacy in defence of core principles pays no such dividends for Democrats.

That calls for a tactical adjustment. Less big vision and more humdrum pragmatism, preferably all round, would make Washington more effective. But even an unreciprocated step in that direction would serve Democratic interests as well as the country. Something for a beleaguered president to consider.

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