Why political gridlock works for the U.S. economy, but not for Japan or EU

November 7, 2014

U.S. President Obama hosts a luncheon for bi-partisan Congressional leaders in the Old Family Dining Room at the White House in Washington

Is gridlocked government a betrayal of democracy? Or does it allow citizens to get on with their lives and businesses, unencumbered by meddlesome politicians?

This key question obviously comes out of the 2014 midterm elections. America’s founding fathers, well aware of potential tensions between politics and private initiative, deliberately installed big obstacles to overactive government in the Constitution.

That is why divided government in Washington has been the rule, not the exception. Presidents have historically been opposed by both houses of Congress in 32 out of the 70 years since World War Two, and by one house in another 14 years.

Whether the federal government’s deliberately engineered weakness has been causally related to America’s long-term economic success has been debated by historians and economists for decades, and will doubtless continue.

Meanwhile, political paralysis is now the norm in many democracies around the globe — especially in Europe. A big issue prompted by the U.S. midterm elections is how different countries and regions cope with political gridlock.

Draghi, President of the European Central Bank (ECB) smiles as he arrives for the ECB's monthly press conference in Frankfurt

The answer depends on whether significant reforms are needed to achieve acceptable economic and social outcomes? Or whether public policy is already well-positioned — in which case political gridlock is fine. The sharply differing economic conditions today in the United States, Europe and Japan exemplify this contrast.

For the United States, gridlock is not a problem. In fact, another two years of Washington paralysis may be just what the doctor ordered — at least from an economic standpoint.

In an ideal world, of course, Washington could do many things to improve U.S. economic and social environments. The tax code could be reformed, immigration rules rationalized, trade deals negotiated and approved, wasteful healthcare spending curbed and the many other dysfunctions of American society either fixed or ameliorated.

But in a democracy so deeply divided over attitudes toward inequality, religion, immigration, sexuality and even crime and violence, it is probably appropriate, as well as inevitable, that reforms in these areas must await more consensus.

Some significant economic objectives may even be advanced by the election results. Republican senators have generally been far more moderate and willing to strike deals with the White House than their House colleagues. And now that their party is in control of the entire Congress, the Republicans need to show their ability to govern and not just to oppose — especially with the 2016 presidential election approaching.

The implication should be a more responsible attitude toward politics and an end to such economic sabotage as last year’s debt-ceiling confrontation and government shutdown. The first test will come in mid-December, when Congress is supposed to pass 2015 spending bills. There is a second, more important, milestone in March, when the Treasury debt ceiling will need to be raised.

More generally, both Republicans and Democrats are now eager not to do any damage to an economic recovery that is gradually accelerating and becoming more sustainable. As a result, U.S. macroeconomic policy will almost certainly remain unaffected by the election results. The federal budget is in good shape, as confirmed by the unprecedented reduction of the deficit announced this week by the Congressional Budget Office.

As for monetary policy, there is unlikely to be any need for major changes in the next year or two. If unexpected events do call for a monetary response, the Federal Reserve Board will be able to take whatever action it deems necessary without any regard to the election outcome. Washington gridlock guarantees the Fed a genuine political independence that other central banks can only dream of.

In this respect, as in many others, a political stalemate has very different implications for Europe or Japan. Both, in contrast to the United States, desperately need radical reforms in monetary, fiscal and structural policies.

Japan's PM Abe reviews members of JSDF during the JSDF Air Review to celebrate 60 years since the service's founding at Hyakuri air base in Omitama

In Japan, these reforms were impossible for almost 20 years — until the December 2012 election of a strong government under Shinzo Abe. Abe’s “Three Arrows” program of monetary, fiscal and structural reflation started to transform the Japanese economy last year. But then it was paralysed by inter-ministerial bureaucratic conflict — Japan’s equivalent of U.S. gridlock.

Last week, however, the Abe program was dramatically revived with a further big monetary stimulus from the Bank of Japan and a huge stock-market boost from the $1 trillion Government Pension Investment Fund. These actions are only possible under a strong government with a clear sense of purpose.

If the euro is to survive in the long term, Europe requires coordinated policy reforms comparable to Japan’s Three Arrows program. The misguided fiscal rules written into the 1989 Maastricht Treaty, and then aggravated under German pressure during the 2012 euro crisis, will now have to be rewritten by European governments.

The European Central Bank will have to follow the Fed, Bank of Japan and Bank of England in vastly expanding its balance sheet by buying government bonds — despite powerful political pressure, again from Germany, not to. Though the ECB has strict political independence theoretically guaranteed by the European Union treaties, in practice it has been far more subservient to politicians than the Fed or even the Bank of Japan.

In fact, the ECB has recently been frozen like a rabbit in the headlights of German politics — seemingly unable to implement the decisions of its Governing Council or even to control its own balance sheet without German Chancellor Angela Merkel’s consent. Meanwhile, national leaders in France, Italy and Spain must adopt tough structural reforms that can only be implemented and made to work with the help of aggressive fiscal and monetary expansion.

Unfortunately, there seem to be no European politicians able or willing to take controversial monetary, fiscal and structural decisions. Gridlock may be perfectly acceptable in Washington these days. But Europe, like Japan, now badly needs strong political leadership.

 

PHOTO (TOP): President Barack Obama hosts a luncheon for bipartisan congressional leaders in the Old Family Dining Room at the White House in Washington, Nov. 7, 2014. From L-R are House Speaker John Boehner, Obama and Senate Minority Leader Mitch McConnell. REUTERS/Larry Downing

PHOTO (INSERT 1): Mario Draghi, President of the European Central Bank smiles as he arrives for the bank’s monthly press conference in Frankfurt, Nov. 6, 2014. REUTERS/Kai Pfaffenbach

PHOTO (INSERT 2): Japanese Prime Minister Shinzo Abe attends the Japan Self-Defense Force Air Review to celebrate 60 years since the service’s founding at Hyakuri air base in Omitama, northeast of Tokyo Oct. 26, 2014. REUTERS/Toru Hana

2 comments

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“Why political gridlock works for the U.S. economy”

What a silly premise. The author equates the US economy with the stock market, or a handful of corporations…not working class Americans.

Political gridlock does not work for people who actually work for a living.

Posted by LordCavendish | Report as abusive

Can’t understand how a gridlock puts a country in better shape as if it hadn’t gridlocks at all…

Posted by VitorPC | Report as abusive