Unlike Greece, where some of the leaders were caught unawares as to how bad their fiscal situation was, the American Congress and Presidency have known for some time now that it would need an act of will to raise the ceiling in the immediate run, and, at the same time, to tackle the longer run problem of what to do about the debt income ratio.
The profound differences which have surfaced and are proving hard to reconcile are all not ?merely? ideological. There is, of course, a lot of rewriting of history by the Republicans who talk about balancing the budget and cutting Big Government while no Republican President of the post-War years has done either. Reagan, Bush Sr and Bush Jr were all profligate spenders. The only two years in the last 50 that the Budget was not in deficit was during Clinton?s last two years.
But the Tea Party people represent those whom the Democrats used to. These are the squeezed middle class people; in UK voting parlance, the C and D voters. In the 1960?s, these people were in the manual working class?white, male and fully employed in unionised jobs. They could afford a house and a car and good living. But manufacturing has been shrinking in the US and other western countries since the oil shock of 1972. Once manufacturing of standard products fled abroad to Asia, many of these families have had to do service sector jobs, which, for the unskilled and semi-skilled, are badly paying. The average wage in the US has not increased for 40 years now. In the meantime, many new products have been made cheaper and even manufactured goods imported from China and elsewhere are cheaper.
Yet the middle classes have lost out to the better educated people who work in highly paid service sector jobs?finance, law, accounting?or in high tech manufacturing. So, inequality has gone up sharply. The squeezed middle classes were seduced into borrowing to the hilt to maintain their living standards. But then the markets crashed and they are left with unpaid bills.
So also is the government. For 40-plus years since the Kennedy Tax Cuts, the US has had a Keynesian policy framework. There has been a relaxed attitude about government debt. The theory was that debt will be paid back from future growth, and, in any case, the debt was a matter of rentiers versus the rest of the society. Rentiers could be squeezed if need be. The western world as a whole has stumbled into an undersaving crisis as a result. Debts have not been paid back and reduced from prospective income either by private citizens or by governments.
At the same time, ageing has become a big problem. An ageing society needs bigger pensions as the ratio of years of life after work is rising as compared to years of working life. At the same time, their healthcare needs get costlier in terms of both labour and capital. The Tea Party people know in their bones that something drastic needs to be done. Yet they cannot vote for higher taxes to pay for these needs. They do not know what the alternative is if spending is drastically cut as they wish. They believe in the Right wing fairy tale that lower taxes will somehow yield higher revenues and better income growth.
The Democrats used to represent the ordinary folks when they were unionised, fully employed workers. They then used their solid support to extend the welfare state to more needy people; those who were outside the unionised sector or due to race were kept out of good jobs. The bill for these policies were affordable when the baby boom workers were still swelling up the labour force. Now the bills are still there and growing but the working class support for them has evaporated.
No one wishes to tax the profligate consumption of gasoline which, by itself, may tackle the deficit nor is there any stomach for a tax reform which would make tax payments more progressive. Democrats do not wish to cut spending on Medicare and Medicaid and Republicans do not wish to raise revenues from taxation. We have a stalemate.
But even if a compromise is patched up and the debt ceiling raised for one or two years, the longer run challenge of tackling under-saving remains. Western societies have to change their lifestyles whereby in the working years the saving rate is increased sharply either privately or by taxation. There has to be a realisation that simultaneously the western societies will be relatively less rich and need more resources to sustain their living standards.
It won?t be a Tea Party.
The author is a prominent economist and Labour peer