US budget books Nov 2012 2
In the past two decades, various sequences of divided government have prevented Washington from performing even basic tasks - such as passing the U.S. budget. Reuters

House Speaker John Boehner, R-Ohio, faces perhaps the biggest dilemma of his leadership of the lower chamber – one with potentially large implications for the U.S. economy and domestic and global financial markets: whether to try to lobby a fiscal cliff deal through his fractious, Tea Party-dominated House Republican caucus – or hold firm against tax rate increases that a bipartisan Senate bill contains.

If Boehner lobbies for the bill, the fiscal cliff will be averted, but he will likely lose support in his caucus, and there is a better-than-decent chance the right wing will attempt to oust him as speaker.

On the other hand, if Boehner refuses to compromise and holds firm against any bipartisan Senate bill that contains a tax increase – one rooted in higher income tax rates at the top end or other tax increases – he’ll retain the support of the Tea Party and other conservatives, but the United States will have fallen over the fiscal cliff – with likely serious consequences for the U.S. economy and domestic and global financial markets.

Under the latter scenario, stock, bond and currency markets -- perhaps as soon as Wednesday -- will likely react negatively to the inability of the U.S. Congress to forge a plan to enable the nation to pay its bills.

In August 2011, the last time Congress signaled to the markets that it might flirt with an interruption in the nation’s bill paying – including its bond payments – stock and bond markets plunged. Congress’ near-failure to raise the U.S. debt ceiling – triggered by initial Tea Party opposition in the House – led to a 635-plunge in the Dow Jones Industrial Average and the unthinkable: a credit downgrade of U.S. debt by a major credit rating agency, Standard & Poor’s.

Further, the amend-the-bill scenario for the package passed at 2 a.m. Tuesday by the U.S. Senate is not much better. If the Tea Party-dominated House GOP amends the bill slightly – for example, slightly increasing the threshold for a tax increase to, say, $500,000 for individuals and $550,000 for joint-filers – the U.S. Senate could make quick work and approve the amended bill, and the markets may only drop temporarily. But if the Tea Party persists in its “No tax increases, ever” intransigence or it otherwise amends the bill with deep spending cuts that would be DOA in the Senate, jittery financial markets will likely interpret the latter as “gridlock city” in Washington, and look out! U.S. and global stock and bond markets could plunge in the days ahead.

Why Do Democrats And Republicans Seldom, If Ever, Compromise?

And as the nation lurches, yet again, toward another fiscal deadline, institutional investors -- and the typical person, for that matter – have moved from disbelief, to exasperation, to anger over Congress’ inability to avoid the imminently avoidable: a politically induced shockwave to financial markets and the economy. Investors outside the Beltway are apoplectic because – regardless of whether one favors primarily spending cuts or tax increases to put the nation on a sound fiscal track – the world’s largest and most technologically advanced economy contains the resources to pay its bills – if the two major political parties find common ground, and compromise on those issues where there is a substantial difference in policy.

So then, with the answer – compromise – a common-sense, obvious one, why hasn’t it prevailed in Washington?

The main reason, as New York Times' Editor Nate Silver incisively outlined, is that too many House seats are not two-party competitive. In the next election, 2014, in about 200 House Republicans' districts, and in about 156 House Democratic districts, the dominant party is all but certain to be re-elected. In fact, in many of the Republican districts, the biggest threat to re-election is from a right-wing primary challenger, most lilley from the Tea Party, than from a Democrat in the general election.

In other words, for many House Republicans, and for selected Senate Republicans, compromise may not only not be viewed positively, it may be viewed very negatively in the home district - resulting in a primary loss and being ousted from office.

The second reason is behavioral: Even those Republican members who feel their district coalition is large/strong enough and won’t face electoral consequences in a Tea Party-backed primary won’t compromise, for ideological reasons.

For these members of Congress – primarily in the House/Senate GOP caucuses, but also in the Democratic caucuses – gridlock is better than compromise.

But the long-term consequences of gridlock -- if no budget deal can be reached by, say, March 1 or April 1 – is another, needless shockwave to the stock and bond markets, and the U.S. economy. Moreover, that shockwave would occur at a time when the markets would most certainly not welcome it. U.S. and global financial markets are still in the process of recovering from the acute stage (2008-2009) of the financial crisis, and another possible downgrade of the U.S.’s credit rating would be another, needless political and economic earthquake. Credit markets would tighten, investor confidence would be jolted, probably resulting in a slowing of both the U.S. and global economies, or even worse economic damage.

Now, the typical, moderate, independent American, assessing the damage that a long-term failure to reach a budget deal would cause, will no doubt reasonably argue that surely the Tea Party faction will compromise - for the good of the nation. I.E. that the Tea Party will approve the current tax/budget bill.

Tea Party Faction: Epitome Of Obstruction

Unfortunately, however, if that independent American is thinking reasonably, i.e. views a compromise as a rational, prudent stance, he/she is not thinking like a Tea Party member of Congress. Pressured by their extremist supporters, Tea Party members of Congress have shown no inclination to compromise and agree to a fair deal, no matter how much damage that obstruction and intransigence causes to the credit markets and the U.S. and global economies. Obstruction, driven by an extremist conservative ideology – no matter how much financial and economic destruction it triggers – has been the Tea Party’s preferred strategy, if the alternative is a compromise that leads to increased income taxes and an agreement that includes support for the liberal social safety net.

The evidence of obstruction is overwhelming. Consider:

-The Tea Party obstructed and opposed President Barack Obama’s jobs bill that would have injected at least $500 billion in Keynesian economic stimulus into the U.S. economy – an act that would have created millions of infrastructure and spin-off jobs, and substantially lowered the high U.S. unemployment rate.

-The Tea Party has opposed passing an extension of the 2001-2003 Bush income tax cuts for 98 percent of the American people, which the Democratic-led U.S. Senate approved in 2012, because voting for it would not have extended those tax cuts for upper-income and uber-rich Americans, and because it would have meant being party to a deal with Obama and congressional Democrats.

-And most egregiously, the Tea Party obstructed and held the nation hostage in the summer of 2011 during the debt ceiling negotiations - the faction made its support for a debt ceiling increase contingent on dollar-for-dollar cuts in federal spending - and its obstruction and delay triggered the unprecedented: the first downgrading of the U.S.’s credit rating in our nation’s history. And, incredibly, most recently, Senate Minority Leader Mitch McConnell, R-Ky., boasted that the GOP might use the debt ceiling again as a weapon in 2013!

-And now add to the above, the tax/budget crisis of 2013 – the fiscal cliff crisis. Once again, despite polls indicating that a supermajority of Americans want taxes on upper-income groups increased, with only modest cuts in selected social programs, and NO cuts to Social Security or Medicare, the Tea Party faction appears willing to tip the U.S. economy into a recession, and destabilize financial markets, by not approving a bipartisan, compromise tax/budget bill that has already won the support of almost all conservative Senate Republicans. If you think the current impasse looks a lot like the Tea Party-based impasses that occurred in 2012 and 2011, you’re correct.

Clearly, obstruction and a willingness to say “No” to any deal containing liberal policies backed by Obama or the congressional Democrats - even if it damages the U.S. economy, increases unemployment and triggers a U.S. credit downgrade or default - is not exactly thinking reasonably and viewing compromise as a rational, prudent stance, from a macroeconomic standpoint.

Obama And The Democrats: Ideological, Too

To be sure, the above is not to deny that Obama and congressional Democrats have been ideological or liberal: they have been. Liberal Democrats worked for and enacted the biggest social safety net change in the nation’s history since the passage of Medicare, the health insurance program for senior citizens, in 1965: the 2010 U.S. Affordable Care Act, commonly known as Obamacare, that will achieve universal health care coverage in the United States. It is a liberal, social welfare state program that asks the rich and upper-income groups to help subsidize the health insurance of the poor, the working poor, and others. And of course, Obama and congressional Democrats passed the more than $786 billion economic stimulus package, and other interventionist programs, in 2009, to help end the Great Recession.

Also, in the current fiscal cliff bill that the Senate unanimously passed, Obama also backed a one-year extension of unemployment benefits, tax credits for families of modest income, an expanded earned income tax credit and a one-year Medicare doctor compensation adjustment or “Doc fix” that prevents a scheduled cut in Medicare payments to physicians.

Without question, Obama and congressional Democrats have passed several liberal programs. Clearly, to say that liberals in Congress and the nation’s chief executive have not been ideological and have not contributed to gridlock would be inaccurate.

But the liberal programs of Obama and congressional Democrats hardly blot out the obstruction and intransigence of the extremely conservative Tea Party faction.

How To Fix This Mess

One party-dominant districts, the retirement (extinction, really) of moderates in both parties, and ideologues have led to a condition of divided government and perpetual gridlock. Is there any way to fix this?

Indeed there is, but it’s not easy. As hard as it is, the American people have to elect a majority in Congress and a president from the same party.

Given the Democratic advantage in national elections – the Democratic Party has won five of the last six presidential elections (if one counts Vice President Al Gore’s disputed loss to George W. Bush in 2000 as a win), and the Republican Party advantage in sure-win House districts – it’s going to take some trigger event or overwhelming issue to unify the U.S. government.

Further, history shows us the above resolution can take time – decades even. During the Gilded Age (1877-1893) after the Civil War, it took about 12 years for the nation to decide definitively which party had the stronger argument to address the nation’s many, worsening problems. The nation finally did in 1904 with the election of President Teddy Roosevelt – which ushered in the Progressive Era and it major eceonomic and social reforms.

And that’s the analysis and the view from here regarding our current age, which is the last stage of the modern Gilded Age: It will take another election or two, but the nation will end gridlock and choose one party again, ushering in a new Progressive Era.