United States Country Update

Health-care Reform Light on Political Benefits…

The Democratic Party administration headed by President Barack Obama scored a major success in March, when both houses of Congress approved final changes to a massive overhaul of the nation’s health-care system, successfully fulfilling one of Obama’s key promises during the 2008 campaign. Whether that will improve the outlook for the governing party at the November 2010 mid-term congressional elections, at which the Democrats will almost certainly suffer a significant erosion of their large majorities in both the House of Representatives and the Senate (and possibly the loss of their majority in the lower chamber), remains to be seen.
The content of the health-care reform remains poorly understood by the most of the electorate and the administration has done a poor job of explaining its benefits, most of which will not come into effect until 2014. For its part, the opposition Republican Party has managed to convince its base and a sizeable portion of the key bloc of independent voters that the reform amounts to a government takeover of the health-care system that will inevitably result in a decline in both the availability and quality of health services. At the same time, the left flank of the Democratic Party has criticized the health-care package as a “sell out” that will enrich private insurance companies while failing to provide adequate coverage to the estimated 40 million Americans who currently have no health insurance.
President Obama’s approval rating has barely moved at all since plummeting to slightly less than 50% in the summer of 2009, amid a furious public backlash against what many perceived to be a dangerous expansion of government power (a perception vigorously and skillfully promoted by the Republicans). But even in the unlikely event that the president manages to nudge his favorability rating above 50%, there has been scant evidence to date that his coattails are long enough to improve the re-election prospects of his many vulnerable party colleagues in the Congress.
Indeed, Gallup poll data indicates that less than one-quarter of Americans believe that the US is “on the right track,” well below the 40% historical average over the 31-year period that the question has been put to voters, and the lowest level recorded in a mid-term election year since 1982. Ahead of the three sea-change elections in the last three decades (in 1982, 1994, and 2006), the Gallup satisfaction rating was below 33%.
…But Election Outcome Still Uncertain
Ironically, the same anti-government sentiment that has stirred fears among Democratic leaders of catastrophic losses at the mid-term elections could turn out to benefit the governing party as much as, if not more than, the opposition. Public anger over the alarming increase in government spending since late 2008—including huge bailout packages for financial houses and automakers, more than $1 trillion in fiscal stimulus expenditures, and the projected costs of the health-care reform—is being harnessed by new political organizations that have emerged independently of the party system. The so-called “tea party” movement (a reference to a seminal event in the lead up to the American Revolution) has demanded a significant downsizing of the federal government, a sharp reduction—if not the abolition—of federal taxes, and, in general, the reduction of the government’s role in social and economic affairs to maintaining security and ensuring the free-play of market forces.
The Republicans have attempted to co-opt the Tea Party movement, the largest elements of which are being bankrolled by prominent business leaders and former politicians linked to the GOP. To their dismay, the Republicans have discovered that anti-establishment sentiment is not so easy to corral, which is not surprising, given that the Republican Party is no less a fixture of the political establishment than the Democratic Party.
Numerous Republican incumbents and party-anointed contenders for seats that are either open or held by a Democrat have faced primary challenges from candidates backed by the Tea Party movement, and in a number of instances the candidates favored by the Republican leadership (including three incumbent senators) have been defeated by the upstarts. Even more alarming for the Republicans, some Tea Party favorites are planning to compete as independent candidates in November, creating the distinct possibility that the conservative vote will be split to a sufficient degree to clear a path to victory for Democrats who might otherwise have gone down to defeat.
Obama Reluctant to Embrace Populism
The outcome of the elections will not greatly affect the outlook for investment and trade policy, as a reduced congressional majority will limit what Obama and his party can accomplish, even if the Democrats manage to retain control of both legislative chambers. Even with their current large majorities, the Democrats have proven to be more bark than bite when it comes to business regulation.
Despite their protests to the contrary, both the insurance and financial industries got off much easier than free-market advocates worried might be the case. The health-care reform does not include a “public option” that would have established a state insurer competing directly with private firms. A finance-reform bill—which is expected to achieve final approval by early July—likewise does not include many of the restrictions most feared by the banks and trading houses, such as tight regulation of derivatives, the forced down-sizing of the “too big to fail” banks, or the restoration of a ban on single firms engaging in both commercial and investment banking.
The relative tameness of the finance-reform bill is especially surprising, given the palpable outrage among the US population over the bailout of the financial industry, which has been stoked by the distribution of massive bonuses to the executives of firms that would have failed without the injection of taxpayer money, and the unwillingness of those same banks to provide relief to homeowners carrying unsustainable mortgages or to use the bailout funds to increase lending to consumers and small businesses.
A similar sense of outrage is building amid a looming environmental catastrophe in the Gulf of Mexico. The sinking of an offshore-drilling rig operated by BP following an explosion on April 20 resulted in the rupture of the structure on the sea floor. Various estimates of the volume of oil spewing into the Gulf range from 5,000 barrels to 70,000 barrels each day, and various strategies employed by BP to contain the spill have failed.
Large waves of tar balls have begun washing up on the coasts of Louisiana, Mississippi, and Florida, threatening wildlife, coastal wetlands, and the livelihood of those employed in the fishing and tourism industries. Early estimates by researchers at the University of Central Florida suggest that spill could cost the state close to $11 billion and nearly 200,000 jobs.
Public perceptions of the disaster have clearly been influenced by the fact that BP is a foreign-owned company, which has triggered widespread demands that the government step in and seize the company’s operations and freeze its assets. For their part, the Republicans in the Congress have been complaining that the administration is not doing enough to solve the problem, while blocking attempts by Democrats to raise the cap on the total damages for which BP will be liable.
The situation is ripe for a populist move by Obama, who to date has merely imposed a moratorium on the initiation of new offshore oil operations (pending an assessment of the risks) and assured that his government will hold BP accountable for the damage it has caused. However, the president appears to be neither temperamentally nor ideologically inclined to pursue that course, and as long as most Americans blame BP, rather than the Obama administration, for the oil spill, he is unlikely to significantly revise his position.
What Is at Stake?
None of which is to say that the November contests are not a high-stakes affair, especially given the intense climate of partisan polarization that has been evident during Obama’s term in office. Nearly every piece of legislation approved by the Congress since January 2009 has passed on a party-line vote, a fact that the Republicans wear as a badge of pride and the Democrats have disparaged by dubbing the GOP the Party of “No.” There is no reason to expect that the next Congress will show a greater degree of bipartisan cooperation, particularly if Obama is viewed as vulnerable to defeat in 2012.
Were the Republicans to capture either or both houses of the Congress in November, the implications would extend far beyond the stalling (or dilution) of the Democratic agenda. Numerous Republican lawmakers have refused to discount the claims of the so-called “birther movement,” which asserts that Obama was not actually born in the US, and so cannot legally hold the presidency. Likewise, more than a dozen Republican state-level attorneys-general have filed lawsuits challenging the constitutionality of the recently approved health-care reform. Against that backdrop, it is not inconceivable that a Republican majority in the lower house would use its investigatory powers to conduct drawn-out probes into any number of actions taken by Obama’s administration, in the process making it impossible for White House officials to accomplish much else.
Likewise, were the Republicans to gain control of the upper chamber, the opposition majority could block any executive appointments it chooses. Even if the Democrats retain control of the Senate, the Republicans will be able to filibuster judicial appointments indefinitely, a tactic that would become all the more likely if it appeared that a Republican might be moving into the White House in 2013.
To Stimulate or Not to Stimulate
With the mid-term elections still five months off, there is plenty of time for any number of developments to bring greater clarity to the political outlook, most of them likely to benefit the Republicans. Growing dissatisfaction with the government’s handling of the BP oil spill, a significant setback for the military effort in Afghanistan or the planned withdrawal of US combat forces from Iraq, or a major terrorist attack on US soil could weaken support for the Democrats or discourage the party’s base from turning out to vote.
The one factor that could work in the Democrats’ favor is the economy, which has been showing signs of improvement. However, forecasts of a solid rebound in 2010 are clouded by the threat of a significant deceleration of economic expansion in 2011. Moreover, although the recession officially ended in the third quarter of 2009, unemployment has remained stubbornly high, a fact that will make it difficult for the Obama administration to convince the electorate that the Democrats’ policies are having a positive effect, regardless of what the headline numbers might indicate.
Perceptions of the health of the economy will inevitably be viewed through the prism of the looming difficulties in Europe, where a building debt crisis has sparked concerns about the sustainability of the US economic recovery and provided deficit hawks in Washington with a handy example of what can happen to even highly developed countries that fail to keep their deficits under control. However, as pointed out by Nobel economist Paul Krugman, any attempt to compare the situation in Greece, or Spain, or Italy to that of the US ignores that fact that there is no danger that US credit markets will come under speculative attack. Nevertheless, the unfolding crisis in Europe has focused attention on the US budget deficit, which came in at slightly less than $1.5 trillion (10.4% of GDP), in fiscal 2009, and is projected to expand to $1.6 trillion in the current fiscal year.
President Obama has proposed some deficit-reduction measures for the fiscal year beginning in October 2010, but he is pushing an additional stimulus package for the current fiscal year that includes $79 billion for an extension of unemployment benefits and increases in Medicaid funds for states, as well as $26 billion in emergency funds for teachers and firefighters facing layoffs to state and local budget constraints.
There is sharp disagreement over the need for further stimulus, with even some Democrats questioning the prudence of adding to the deficit. However, some prominent liberal economists and policy experts, including Krugman and former Labor Secretary Robert Reich, contend that withdrawing the stimulus too rapidly will trigger a double-dip recession. Krugman, in particular, has warned that the US faces a prolonged period of weak growth similar to Japan’s so-called “lost decade.”
Advocates of continued stimulus spending, pointing to the persistence of tight credit conditions and the heavy debt burden of US households, argue that private consumption, which has accounted for about three-quarters of GDP in recent years, cannot be counted on to fuel a sustained recovery. At the same time, hopes for an export-driven recovery are fading, as austerity measures being implemented across Europe point to sluggish demand for US goods, even as the weakening of the euro threatens to undermine the competitiveness of American goods in other markets.
The chief immediate concern of budget hawks is the danger that high levels of deficit-spending could generate inflationary pressures that might necessitate an aggressive tightening of monetary policy. However, with investors fleeing the euro in favor of US treasuries, the dollar is expected to continue strengthening, providing protection against inflation, which is forecast to remain benign, at just 1.2%, in 2010.
Given the limited inflation risk and the worrisome outlook for unemployment, which even in the best-case scenario will remain above 9% through the end of the year, the administration will have little incentive to make any serious moves to rein in spending ahead of the November elections. However, a new round of stimulus measures will at best be a short-term solution, and will not be sufficient to boost this year’s growth rate above 3%, or prevent a slowdown in 2011.
Moreover, steps to rein in spending will be required eventually, and while the urgency is not as great in the US as in Europe, that merely increases the danger that the tough choices will be put off until it is too late. President Obama has formally asked the Congress to grant him “rescission authority,” which would give him the power to cut spending already approved by the Congress. Deficit hawks on both sides of the legislative aisle have praised the plan as an effective means of reducing wasteful spending, but the proposal has also drawn criticism from both Republicans and Democrats, who view the scheme—more commonly know as a “line-item veto”—as an unlawful transfer of legislative power to the executive.
Even if Obama were granted rescission authority, it is unclear how he could manage to achieve fiscal sustainability without a significant restructuring of the Social Security and Medicare/Medicaid systems, a project that has been dubbed the “third rail of American politics.” The IMF forecasts that the US structural deficit will exceed 6% of GDP in the near term, compared to 4% in the euro zone. Obama has set a goal of reducing the shortfall to 3% of GDP over the medium-term, although the task of determining how that goal is to be achieved has been given to a bipartisan deficit-reduction commission, which is not due to submit its proposals until after the November 2010 elections.

Economic Forecasts for the Three Alternative Regimes