Green Taxi

Some of the smartest macro-economic guys out there, Gavekal, put out a piece last night on what this health care bill really means longer term. While I am not nearly as bullish as them longer term, they do convince me every so often of the potential for hope.

One of the best parts about Gavekal is that they rarely take political views. In this piece, they follow that line and merely explain that good or bad, US politicians coming to a consensus vote on a tough decision is extremely important for America and the world.

It is one thing that the US has done consistently since the Civil War and what makes the US Constitution one of the greatest documents in the history of mankind. Too many countries get stuck political stalemates that hinder their economy for decades. At least in the US we are able to choose something and move on from there. If it was a wrong choice, we fix it and choose something else. Either way, these consensus decisions lead to change.

“In most European countries it is widely accepted that both tax increases and cuts in public spending will be required to stabilise fiscal positions and the main political arguments are over whether the ratio between tax and spending measures should be 50-50, 40-60, or 30-70. In America, by contrast, roughly half the country opposes any tax increases under almost any circumstances, while the other half rejects any cuts in the only spending programmes that are big enough to matter-the long-term entitlements to Social Security and Medicare. Worse yet, the intensity of feeling in America on these fiscal issues is very high. According to a recently published study by Princeton political scientists, political polarization, as measured by attitudes to the role of the federal government in the economy, is “now at a post-Reconstruction high” (see report here). To put this point more bluntly, the only time Americans were more politically divided than they are today was during the Civil War.

Given that Congressional rules generally require a 60% majority for major legislative changes, a nation that feels so intensely about fundamental economic issues and is divided 50-50, 51-49 or even 55-45, seemed destined for political paralysis. Indeed, the prospect that a Californian-style budgetary gridlock could grip the entire US fiscal system has emerged as one of the biggest risks facing the world economy and especially the bond markets. While last night’s healthcare vote does not dispel the risk of legislative gridlock, it does show that the US political system is still capable of creating coalitions to take tough and unpopular decisions when the chips are down. Whatever we may think of this legislation, it has proved that US democracy is working more or less as the founding fathers intended. Anyone betting that the US was an ungovernable country, incapable of dealing with its fundamental political problems, has been making a losing bet since the end of the Civil War in 1865. Despite the intensity of today’s political polarization and the magnitude of the budgetary challenge, a bet against America will almost certainly remain a losing bet.”

The next step is implementing this power at the State-wide level. Unfortunately, I am not as optimistic there. There is much less loyalty to States and States do not hold the power of managing their own currency and interest rates.

Interestingly enough, from that same Princeton study came a result that California was the most polarized State politically. Not a good sign.

I think States’ futures are much more confusing and depressing. Obviously they pale in comparison to the US economy and have much less world economy impact, but it is important for the underlying infrastructure of the US economy.