Midterms: Election Reveals Long-Term Problems for the Economy

Last Updated Nov 3, 2010 2:12 PM EDT

The New Republic's John Judis puts his finger on the real -- and disturbing -- significance of the midterm election results (subscription required):
What this election suggests to me is that the United States may have finally lost its ability to adapt politically to the systemic crises that it has periodically faced. The U.S emerged from the Civil War, the depression of the 1890s, World War I, and the Great Depression and World War II stronger than ever -- with a more buoyant economy and greater international standing. A large part of the reason was the political system's ability to provide the leadership the country needed. But what this election suggests to me is that this may no longer be the case.
And without effective leadership, obviously, we could face a long-term, Japanese-style recession, with high unemployment, low investment levels and droopy animal spirits. The latest remedies certainly don't inspire much confidence. Although the Federal Reserve is expected today to announce another round of quantitative shock therapy, such a jolt is unlikely to jump-start the economy in the absence of a big increase in federal spending.

Of course, that was unlikely even with a Democratic majority in Congress. But with the GOP winning control of the House and Republican lawmakers hell-bent on slashing deficits (and damned the torpedoes!), such fiscal stimulus is now off the table. Republicans could push to make across-the-board tax cuts, especially if that means extending Bush-era rates for the wealthy. But that won't help us much. With the economy looking fragile, people are likely to save, not spend, any additional money.

The longer-term ramifications of the new austerity are equally troubling. Without significant government investment in, say, a new generation of environmentally sound technologies, the U.S. is likely to fall further behind Europe and China in developing high-growth industries. That means our economy will be as dependent as ever on, say, fossil fuels and banking. Writes Judis:

Instead, when the U.S. finally recovers, it is likely to re-create the older economic structure that got the country in trouble in the first place: dependence on foreign oil to run cars; a bloated and unstable financial sector that primarily feeds upon itself and upon a credit-hungry public; boarded up factories; and huge and growing trade deficits with Asia. These continuing trade deficits, combined with budget deficits, will finally reduce confidence in the dollar to the point where it ceases to be a viable international currency.
As for reforming that "unstable" financial sector, Judis cites a telling election-day stat that highlights how the Obama administration's policy failures metastasized into political ones: A plurality of voters yesterday blamed Wall Street for the woeful economy. Yet these same voters supported Republicans by 56 to 42 percent.

In other words, the electorate was eager for aggressive banking reform, even if our political leaders (and banks, of course) weren't. Whatever Dodd-Frank's merits, no one is likely to mistake it for the Securities Exchange Act of 1934. The new law eschewed structural changes to Wall Street -- making banks smaller, for instance, along with rebuilding barriers between commercial and investment banking -- in favor of regulatory solutions. Showing the perils of that approach, Republicans are now preparing to reopen the scar by undoing parts of Dodd-Frank.

As Judis suggests, America has drawn great strength over the years from a political system that finds ways to respond forcefully to economic crisis. That dynamic was key to the country's remarkable renewal after the Civil War and the Great Depression, among other such chapters in our history.

Now we face another. So here's the question: Is politics still a solution to these systemic crises, or is it part of the problem?

Image from Flickr user Mandiberg
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    Alain Sherter covers business and economic affairs for CBSNews.com.