14.01.2021
American Drama: Act I
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Vlad Ivanenko

PhD in Economics, Ottawa, Canada.

“If you have to forecast, forecast often”, said Edgar Fiedler in 1977. To see how preposterous long-term forecasts could turn out, have a look at historical records of any institution, including the most respectable organizations, that shows complete irrelevance of its forecasts made, say, in 1990 about the expected state of affairs in seemingly distant — at that time — year 2020. Having learned the hard way to avoid extrapolating the emerging trends in his previous paper, Invisible global revolution, the author of this comment has listed only signs of growing uncertainty worldwide without attempting to predict what would happen next.

The dramatic events that unfolded in the US capital in the beginning of January 2021 have added suspense to the narrative of tread towards the ‘new brave world.’ By and large the popular uprising in support of outgoing President Trump represents a finishing touch in setting the scene where the Covid-19 pandemic continued to form the background. America is likely to be preoccupied with the domestic turmoil for some time and, now, major actors across the globe will be emboldened to make aggressive moves on the international chessboard. But, first, it is expedient to discuss a theoretical structure that explains why the American political machine has come to an abrupt stall.

 

General Stability of the Two-Party System

 

In 1929 Harold Hotelling came up with a novel explanation why competing stores are often located next to one another. He reasoned that if the distance is all that matters to consumers living along a line, they would always attend the closest shop. Under this condition the owner of each store is better off setting the business right in the middle of line in order to maximize the number of coming customers. That is why the shops end up located next to each other.

This simple logic proved to be easily applicable to other fields of study including the political science. Imagine that the voters’ preferences are arranged along a line — that is that are focused on a single issue — the two-party system, in which both parties define their platforms as close to one another as possible, emerges. Then, the wishes of radical voters can be safely ignored because even if marginal voters on both ends are never happy with both parties, they will choose the candidate of party closest to them.

Such system is remarkably stable, but this stability depends critically on two conditions that must hold. First, the political field should be populated by only two ‘official’ candidates. All the rest of competitors have to be somehow eliminated from the sight of radical voters. In modern political campaigns this task is routinely performed by the mainstream media that portrait the presumed outsiders as ‘freaks’ for whom only ‘sore losers’ would vote. Second, each voter must believe that even if he or she dislikes both main contenders, one of them needs to be voted for because, otherwise, “a worse candidate will prevail.” If there is a third candidate or voters’ dislike borders on indifference and the voter turnover plunges, the opening appears for a third political force to enter with subsequent collapse of the two-party system.

When the two-party system maintains stability, the actual election results do not upend the political equilibrium. The actual election is like a competition between the two very similar platforms, the victory in which is defined by the median voter. After the election is over, the winning party retains its political stance whereas the defeated party repositions its professed policies within the central stage.

Thus, while political platforms gradually evolve after the loss, they never experience a complete break with the past maintaining stability.

In this setting the most difficult task for any aspiring politician is to pass the qualification round — the primaries. During the primaries the party candidates differentiate among themselves trying to find the winning slogan appealing to the median voter. In normal circumstances, the voters’ preferences are weak and diffused over a set of disjoint issues making their aggregation problematic. Thus, all candidates find optimal to only marginally diverge from the already established party platform hoping to get the nod from its leadership. Allegorically speaking, they all offer the same meal but choose a different sauce.

 

Core Problem of the American Political Class

 

The U.S. two-party system worked rather smoothly until the financial crisis of 2008 but it has run into trouble afterwards. The problem was related to the economic model introduced in the U.S. about 40 years ago. Since the initial cause of the problem is now largely forgotten, a historical exposition would be appropriate.

In 1980s the U.S. was engaged in a high-stakes rivalry with the Soviet Union for the role of a global leader. The protracted competition had already consumed significant resources on both sides since the end of 1950s and required even more. Facing the problem of mounting public debt, the American leadership came up with an ingenious solution of how to assure that it would not hinder their efforts. Some smart economists in the government explained that if the debt holders were interested only in financial gains, they would agree to roll over their debt holdings indefinitely under proper conditions (that is accounting for inflation.) Thus, it sufficed for the government to assure the lenders (mostly U.S. pension funds at the time) that the accrued interest would always be paid (for which it would be enough to have AAA rating on its bonds) to get virtually unlimited access to credit.

After this scheme was introduced the public debt turned gradually to be considered as a sort of perpetuity — that is a perpetual debt obligation that never retires but periodically pays the interest. The question of what to do when the debt grows above the limit when even the interest payments will become unsustainable was left (as is usual for unplanned economies) on the back burner. Meanwhile, drawings from the newly found ‘eternal’ source of funding continued to go on unabated as new political expediencies required additional public expenditures and the public debt reached the alarming proportions.

The large money stimuli during the crisis of 2008 highlighted the issue and added to the sense of urgency that ‘something needs to be done’.

The two solutions eventually emerged.

The first solution was classical: to achieve budgetary surplus by expanding national tax base and cutting off budgetary expenditures. To that end the expansion of domestic businesses was seen as a key even if it required installing barriers to free international trade or aggressively promoting the sale of U.S. goods and services abroad. This approach appealed to the voters involved in American industry as they would see growth in demand for their wares.

The second solution was somewhat unorthodox for the American classic values: to get on a path to gradual debt forgiveness culminating in the eventual default on a large chunk of U.S. public debt. That solution, when properly explained, would appeal to the consumers crippling under the weight of unsustainable private debt who were seduced, as the U.S. government before, in thinking that ‘paying the interest is all that matters.’

The problem is that the two solutions are complete opposites and their strong points cannot be combined in any realistic policy. However, each of them found strong supporters on one side of the American political spectrum and similarly strong opposition on the other. The classical solution to the problem of public debt was favored by the radical Republican wing but rejected by the left-leaning Democrats. On the other hand, the latter would fully embrace the path towards debt forgiveness but the former would reject such an abhorrent attack on the sanctity of private property. Thus, while each solution was amply discussed on the margins of each party, the political leadership of Republican and Democratic parties alike preferred to take no notice of it.

 

Chickens Come Home to Roost: Divergence of U.S. Political Platforms

 

While every engineer is aware that the proper maintenance of equipment is necessary for its smooth operation, many politicians are genuinely surprised to find that their previously reliable party management tricks suddenly stop working. The Republican Party leadership was first to discover to their dismay that the party establishment favorites in the 2016 presidential primaries were consistently beaten by an upstart. The American time-honored two-party tradition to clean the political stage from outsiders through backstage deals was broken.

The ensuing surprise victory of Donald Trump in the 2016 presidential election marked a turning point, from which the platforms of two parties started to diverge. For all four years of his presidency Mr. Trump pressed with his program ‘Make America Great Again’ (MAGA) to promote the interests of domestic businesses even at the edge of fair play. The implementation of this program went against the staunch opposition not only of the opposing Democratic Party but also against the will of Republican establishment, a significant part of which showed consistent animosity towards Mr. Trump during his term in office. Yet, the President remained popular with the core Republican electorate putting G.O.P. leaders in a dilemma. On one hand, supporting MAGA would enable them to remain popular with rank-and-file voters of their own party. On the other hand, doing so would alienate voters of the center with their subsequent, almost guaranteed loss to the Democratic Party in the national elections.

However, there is a catch: the supremacy of Democratic Party leadership cannot be taken for granted as well. Its resounding victory at the recent elections is likely to bolster the activism of its left wing that already presses President Biden to take a more radical action consistent with the second approach outlined above — to forgive a large chunk of private debt — by calling to cancel the federal student loans in a far greater amount and with much less strings attached than Mr. Biden is willing to promise. If he refuses this and following calls from the left, it is not unconceivable to imagine that, at first, a left-wing analog of the Tea Party will be formed adding stress to the party’s already fragile unity.

***

Whether the leftists prevail in the Democratic Party, as the Trump supporters did in the Republican Party, remains to be seen. However, if they do, the more traditional center-oriented Democratic establishment will find a greater common ground with their center-oriented counterparts in G.O.P. than with their former colleagues on the left.

Thus, we can conclude from the developments that are still taking place in the mid of January 2021 that the U.S. two-party system is under heavy stress and may be in the process of collapsing.

In this perspective the initiation of second impeachment procedure against Mr. Trump should be interpreted not as a sign of vindictiveness but a battle call — to unite against a common enemy — on the part of Democratic establishment facing the prospect of burgeoning revolt within their own ranks.

In the future, if the current trend on divergence continues unabated, the growing gap between the platforms of two parties will create an opportunity for a third party to occupy the center of political spectrum. Then, the U.S. political arrangement will become a three-party system. The latter, however, is inherently unstable and, if it happens, the country will enter a zone of domestic turbulence that will be over only when the problem of unsustainable debt will be somehow resolved.

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