U.S. Political “Short-Termism” and National Economic Strategy
Why does it take a crisis to get the U.S. power structure to rethink economic stewardship?
April 25, 2011
The Great Crisis of 2008-09 was, by far, the worst financial and economic crisis in modern history, and yet U.S. authorities were asleep at the switch as it all unfolded. America’s once-disciplined system — its financial markets as well as its economy — had been hijacked by a reckless mind-set of self-regulation.
Seduced by an unprecedented boom, a broad consensus of Americans came to believe that ever-powerful markets — operating through the all-knowing invisible hand — could handle anything and everything.
While the “Maestro” (a.k.a. former Federal Reserve Board chairman Alan Greenspan) played a key role in all this, I would be the first to concede that isn’t the real point. Yes, Greenspan personified the ideological tilt toward self-regulation. As an apostle of novelist Ayn Rand, a leading laissez-faire objectivist, he believed that markets always know best.
While markets could make mistakes from time to time, Greenspan advocated a Humpty Dumpty-like role for central banks — sweeping in after disruptions and crises and putting the broken pieces of a damaged system back together again.
But the far deeper question is why did the body politic need to lionize a Maestro and condone such excesses in the first place? The answer can be found in the inner sanctum of America’s culture of excess — the interplay between power, prosperity and politics.
It starts with politics. By definition, there is a pronounced myopia to a political system with a two-year election cycle. Election campaigns are waged on the basis of results that have been delivered — or not delivered — over a very short period of time.
Meanwhile, there is a powerful inertia to the U.S. political power structure: Since 1980, fully 95% of all incumbents who stood for re-election in the House of Representatives have been returned to office. It follows that short-term results — in the U.S. economic sphere for next quarter’s GDP and unemployment — are all that matter for reelection and maintaining a grip on power. An analogous perspective applies to equally myopic financial and corporate power brokers — next quarter’s earnings are the only things that seem to count.
Yet in an increasingly complex and interconnected world, the lack of adult supervision was a recipe for disaster. America’s bubble-dependent economy was an accident waiting to happen. When the bubbles burst — as they always do — the ensuing implosion, and the economic carnage it unleashed, did not escape the wrath of the American electorate. Just 87% of the incumbents who stood for reelection were returned to office in the House in the midterm elections of 2010 — still an amazingly high percentage, but in fact, the lowest incumbency-return ratio since 1970.
Notwithstanding this unusually strong message from the electorate, political myopia remains an enduring feature of the post-crisis climate. Washington rushed in with a classic quick fix timed to placate voters before the midterm elections of November 2010. In one of the more glaring disconnects in recent history, the U.S. Congress passed the Dodd-Frank Bill — a major re-regulation of the financial system — before it heard back from its own Financial Crisis Inquiry Commission as to what actually caused the crisis of 2008-09.
Surely there must be a better way for the power structure to exercise responsible stewardship of the American system. The short-term spoils of political and financial power have instilled a deep reluctance to take up vitally important items on the long-term agenda — challenges such as meaningful deficit reduction, competitiveness, educational reform, climate change and retirement income security.
Instead, ever-myopic and increasingly polarized U.S. politicians are far more inclined to focus on the here and now and “kick the can down the road,” leaving the heavy lifting of solving tough problems for the proverbial next generation of leaders and citizens. As America clamors more and more for instant gratification, the value proposition that has long underpinned the U.S. political system gets turned inside out. And by electing representatives with false promises, the insidious nature of this self-delusion only deepens.
The U.S. political economy of power is in need of a fundamental realignment. Significantly, this realignment would entail a reworking of the social contract that lies at the heart of this nation’s culture of power. The economy and financial markets might have to forsake some portion of short-term gains as a cost for insuring longer-term sustainability.
For a growth-fixated power structure, such a reprioritization could result in the ultimate comeuppance: the need to accept a growth sacrifice as a cost for maintaining stability. Yet how else can an otherwise undisciplined system avoid the temptations and risks of a false prosperity?
A deeply entrenched political system will undoubtedly resist. After all, tough medicine — and the growth sacrifice it might entail — is tantamount to incumbency risk for a nation with a two-year election cycle. For the Washington power structure, that could well be a very bitter pill to swallow.
That underscores one of the most troubling aspects of the current post-crisis climate: Unlike in earlier periods of major economic and financial stress, when a sense of shared sacrifice was both understood and accepted, today’s America seems to be lacking in the political will that is needed to face up to its toughest challenges.
The Great Crisis suggests it is high time for the United States to start taking its medicine. As the results of the 2010 midterm elections imply, a lingering post-crisis carnage means that incumbents finally need to confront their myopia. Otherwise, they will be confronted with a succession of ever-deepening crises. And the powerful will then become the powerless.
This feature is adapted with the permission of the author from a longer essay, “Rethinking the Political Economy of Power,” published on April 12, 2011.
Short-term results — in the U.S. economic sphere for next quarter's GDP and unemployment — are all that matter for reelection and maintaining a grip on power.
There must be a better way for the power structure to exercise responsible stewardship of the American system.
By electing representatives with false promises, the insidious nature of this self-delusion only deepens.
Tough medicine is tantamount to incumbency risk for a nation with a two-year election cycle.
Stephen S. Roach
Former Non-Executive Chairman of Morgan Stanley Asia Stephen S. Roach is a senior fellow at the Jackson Institute for Global Affairs, Yale University, and a member of the Yale School of Management faculty. He was previously the Non-Executive Chairman of Morgan Stanley Asia (a position he held after serving as managing director and chief economist […]