Politicians behaving like adults: triangulation and tax policy

David Frum is one of the rare Conservatives that I take at face value, especially after his response to the passage of Health Care, Waterloo:

“We followed the most radical voices in the party and the movement, and they led us to abject and irreversible defeat. There were leaders who knew better, who would have liked to deal. But they were trapped. Conservative talkers on Fox and talk radio had whipped the Republican voting base into such a frenzy that deal-making was rendered impossible.”

He wrote another recent essay, after the mid-term elections, in which he meditated on the lessons that Conservatives have failed to learn:

“The U.S. political system is not a parliamentary system. Power is usually divided. The system is sustained by habits of cooperation, accepted limits on the use of power, implicit restraints on the use of rhetoric. In recent years, however, those restraints have faded and the system has delivered one failure after another, from the intelligence failures detailed in the 9/11 report to the stimulus that failed to adequately reduce unemployment, through frustrating wars and a financial crash. The message we hear from some Republicans — “this is no time for compromise” — threatens to extend the failures of governance for at least two more years. These failures serve nobody’s interest, and the national interest least of all.”

Yesterday, President Obama forged a compromise with the GOP on tax policy which extends all Bush era tax rates for two years, but also extends unemployment benefits, adds a temporary payroll tax cut to help the working class and continues tax breaks for parents and students.  He gave up on a promise to end the tax cuts for the richest Americans, in return for gains aimed at the Middle Class.  This is, according to observers, “messy, combustible and painful” bipartisanship, President Obama plunging “headlong into the political calculus known as triangulation.”  What can we make of this?  What does it portend for the future?

Certainly, the President recognizes that the 2012 election is not going to be won through obstructionism and ideological purity, but rather through compromise and policy.  David Frum also recognizes this, and is trying to push the GOP to remove themselves from their closed information systems (FOX), appreciate the power of government safety nets like social security, and move from obstructionism towards clear policy and compromise:

“If Republicans reject Obama-style fiscal stimulus, what do they advocate instead? A monetarist might recommend more money creation, even at the risk of inflation: “quantitative easing,” as it’s called. Yet leading voices in the Republican Party have convinced themselves that the country is on the verge of hyperinflation — a Weimar moment, says Glenn Beck. But if fiscal stimulus leads to socialism, and quantitative easing leads to Nazism, what on earth are we supposed to do? Cut the budget? But we won’t do that either! On Sean Hannity’s radio show, the Republican House leader John Boehner announced just before the election that one of his first priorities would be the repeal of the Obama Medicare cuts.”

How much will the GOP work with the President and Democrats during the next two years, leading up to the Election?  The President campaigned as someone who could cut through the old ways of Washington, and work with Republicans. However for the last two years, as Frum wrote, Republicans “would make no deal with the administration. No negotiations, no compromise, nothing. We were going for all the marbles.”  This tax policy is a compromise won by the White House, and a departure point for both parties going forward.

The Tea Party base of the party demands strict ideological purity, but Independents want the parties to work together.  The 2012 Presidential election will partly come down to how successful each party is in reaching those Independents.  Will the President be able to channel Bill Clinton and win a resounding re-election victory?  The pace of the economic recovery will play a big role in that, but so will the level of leadership that comes from the White House.

 

 

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Is Japan outgrowing growth?

Yesterday in the Times Japanese Professor Norihiro Kato reflected on the news that China recently overtook Japan as the World’s second biggest economy.  Surprisingly, Kato reacted with “relief,” as if a “load [was] off my shoulders.”  In fact, he calls the new Japanese reality a maturity:

“The rest of the world’s population is still exploding, and we are coming to see the limits of our resources.  The age of ‘right shoulder up’ is over.  Japan doesn’t need to be No. 2 in the world, or No. 5 or 15.  It’s time to look at more important things, to think more about the environment and people less lucky than ourselves… Freshly overtaken by China, Japan now seems to stand at the vanguard of a new downsizing movement, leading the way for countries bound sooner or later to follow in its wake.  In a world where limits are increasingly apparent, Japan… may well reveal what it is like to outgrow growth.”

Some economists, those of the ‘right shoulder up,’ neo-classical province, would argue that limitless growth is possible, especially if you remove all regulation and government interference.  These neo-classical economists do not recognize limits, they do not account for the stock of natural resources that is blindly being used.  Of course, Kato points out that in Japan the new 20-somethings are revolting against the old logic of limitless growth.  He calls them non-consumers, frugal, savers.  Will the United States follow Japan?

Inevitably, yes.  Japan is mired in deflation, where “consumer demand has become so weak – and deflationary expectations are now such the norm – that the economy seems no longer to respond to such monetary tools.”  Sound familiar?  Interest rates are at record lows here in the United States, and the economy is responding sluggishly, if at all.  Economists are arguing that the era of inevitably rising house prices is over.  That housing wealth was the engine for the nacent growth in the past decade.  With health care costs continuing to rise, our current economic model is unsustainable.

Of course, when you consider looming resource limits, where oil, minerals, and even fresh water will become more scarce and more expensive, and you have a recipe for a sea change.  The old guard will continue to argue for exponential growth, but sooner or later, the kids won’t buy the same tired argument.