By Daniel Archibald | CFA
With Much of Europe and Asia in tatters following 2 generations of global warfare, the last half of the 20th century was dominated by the American success story. The US economy dwarfed that of its nearest competitors by a factor of up to 10-fold, and its influence spread to all corners of the globe. This 20th century dominance culminated with the formation of silicon valley and the resulting tech stock boom. The US economy has also been one of the best performers on the global stage over the past 5 years and now has record low unemployment and a healthy level of GDP growth. This of course has been primarily driven by past money printing (quantitative easing programs) and a ballooning government debt.
While the US economic system seems to be functioning well enough, the same cannot be said for their political system. The federal government has shut down a number of times in recent history and the term 'gridlock' is commonly used to describe inaction from Washington. But why? What geopolitical factors have contributed to the lack of legislative progress?
- Sheer size - The United States of America is big. The federal government that oversees its vast resources has to appease over 320 million people across almost 1 billion hectares. This sheer size comes with a vast array of cultures both within and between its vaguely defined regions (North East, West Coast, Heartland, Bible Belt, Rust Belt, etc) and what's good for one group can often times be at the cost of others. Managing all the interests of every group or individual is impossible in such a large and diverse country.
- Union of 50 states - The states and territories in America tend to have a high amount of sway over local affairs and are averse to leaking powers to Washington. So even when there is some kind of consensus at the federal level, seeing that implemented across the country can be a lengthy process. For example, Alabama still allows, to a great degree, segregated schools, even though the supreme court ruled against such over 65 years ago.
- 2 party fanaticism - The lack of a third party or sizeable number of independents is a result of the imbedded bias most US citizens have towards one party, along with a high intolerance towards the other. This political belief system seems to lead to more extremist policies and lack of a middle ground/bipartisanship.
- Mid-term swings - It is very common for mid-term election to go against the sitting president's party, which usually leads to a lack of majority for any one party in both houses of congress and the executive in 2 years out of 4.
- Corporatocracy - The influence that powerful corporations have over Washington DC should not be underestimated. Most policy changes, though on aggregate may benefit the vast majority, might still disadvantage a small group. If that small group consists of wealthy businesses, you can guarantee that lobbyists will be in full swing in an effort to sway the vote.
So what does this mean? Firstly, there is likely to be more angst with the political establishment, which means more Trump-like phenomena. Secondly, if legislative settings are relatively good, than political discord is not too much of a problem (i.e. if it ain't broke, then at least politicians aren't able to make useless changes). However, lastly, when change is needed, change will be difficult. This has been the US experience over the past couple of decades with inaction on important issues such as gun reforms, universal healthcare and climate change. Luckily, the states still have autonomy over some of these important issues, which means that even if Washington is unable to act, the individual states can.