America’s fiscal cliff is symptomatic of larger failures
As the United States prepares to launch itself over the “fiscal cliff” – despite Washington’s cursory gestures at negotiation – it seems that the fallout of the 2008 financial crisis still looms over the American economy as darkly as when President Obama first took office. What has changed is the political urgency behind the response. Since the Republicans are likely to be blamed for failure to reach a deal, many in the current administration see no reason to work too hard towards a solution.
Obama’s second victory has been a death knell to the Tea Party movement that upended the GOP four years ago, and this latest disappointment will only deepen the confusion in the Republicans’ ranks. This sort of short-term political thinking, coupled with a failure to grasp the depth of the initial crisis, is what has prevented both the EU and the US from addressing its causes and consequences, or even agreeing on a common response. The relative lack of concern about the latest crisis is symptomatic of the larger political dysfunctions in both places, and suggests the difficulty of moving beyond narrow political interests when serious systemic failures need to be repaired.
The steady rise of Wall Street’s influence over American capitalism was vividly described in a 2009 Atlantic Monthly article by Simon Johnson, former chief economist at the IMF. Significantly entitled ‘The Quiet Coup’, the article offered this memorable outline of the amoeba like growth of the FIRE (finance, insurance, real estate) sector of the US economy: “From 1973 to 1985, the financial sector never earned more than 16 percent of domestic corporate profits. In 1986, that figure reached 19 percent. In the 1990s, it oscillated between 21 percent and 30 percent, higher than it had ever been in the postwar period. This decade, it reached 41 percent. Pay rose just as dramatically. From 1948 to 1982, average compensation in the financial sector ranged between 99 percent and 108 percent of the average for all domestic private industries. From 1983, it shot upward, reaching 181 percent in 2007.”
With this ascendancy came a comparable growth in political influence, most notably in the drive for less regulation and an uncritical embrace of freewheeling capitalism. By 2008 this meant that even though the banks had assumed levels of risk that were unthinkable in previous decades, Washington was prepared to do very little to hold them accountable, or even to prevent future excesses. In part this was a failure of nerve by an uncertain and politically inexperienced president, but it was also due to the widely held belief, in both major parties, that Wall Street worked best when left to its own devices, free from meddling bureaucrats.
Even so the Dodd-Frank Bill that was subsequently passed, despite widespread fears that it would cripple hedge funds with onerous reporting, seems to have done little to interrupt the flow of business. Two months ago Businessweek reported that a study of 94 “advisers to private-equity, venture capital, real estate, and hedge funds” found that three quarters said the new regulations “have not affected their investors’ rate of return” and 70 per cent “did not plan a ‘strategic response’” to the new provisions. If subsequent studies confirm these findings, then the fearful rhetoric about the Financial Stability Oversight Council stifling productivity will have proved to be much ado about nothing.
Similarly dire warnings have preceded the onset of the fiscal cliff, many of which will undoubtedly prove equally hollow, but in the absence of genuine bipartisan action on the problem it is almost impossible for the public to separate genuine concerns from the usual political doomsaying. While the financiers who nearly crashed the entire system four years ago have been fully restored to their former prosperity, the public – despite assuming the lion’s share of the ‘socialized’ losses from 2008 – faces several more years of jobless growth. The political theatre which has surrounded the eleventh hour negotiations, and the accompanying absence of action, is yet another example of how badly adrift the political process in the United States has become, and how fragile the tenuous recovery of the American economy remains.