Political Paralysis

Mohammed El-Erian recently provided readers with a very sobering wake-up call by comparing America's present political paralysis to that in Japan during their lost decade, and the implications of continued paralysis in Washington (here). El-Erian recalls that

there was a time when America looked down on Japan for the latter’s inability to deal with its economic problems. No more. Like Japan, America is now realizing how difficult a post bubble economy can be. The fear is that it will also find out that that it lacks some of Japan’s attributes needed to cope with long years of economic stagnation.

The attributes he is referring to are a higher level of social cohesion (and the concomitant social safety net), and Japan's net creditor status (ie the sectors of the economy are savers in aggregate). El-Erian figures that these attributes made Japan more capable of dealing with a prolonged period of stagnant economic growth and that as a result urgent action from American policy makers is necessary in order to prevent an adjustment even more painful than that experienced in Japan.

However, El-Erian did not discuss the likelihood of the urgent policy he is calling for being enacted. I consdier the probability of anything substantive being passed before the presidential elections to be effectively nil. The Republicans are convinced that they will win both houses in 2012 and are content to torpedo anything the Democrats table until then. Whether this is on purely ideological grounds (as they proclaim) or a tactic to weaken the economy in the hopes of improving their chances of winning the White House is not entirely clear, but it is of no real consequence. The Democrats for their part are refusing to let the GOP dictate the agenda, and why should they? They have a majority in the Senate and control the White House.

So then what do I expect in 2012? I think the Dems are closer to the mark in terms of economic policy (my views are very much in line with Cullen Roche at the Pragmatic Capitalist - here) than the Republicans, so a Democratic majority in both houses would be my preferred outcome, but I do not consider this particularly likely. A Republican majority in both houses would be a nightmare - too much austerity at precisely the wrong time. Thankfully I consider this quite unlikely as well, as the Tea Party simply scares too many independents (and rightfully so). My base case is for another stalemate in Washington, with split houses and a Democrat in the White House (because the Republicans won't field a candidate with mass appeal). Hopefully at that point, the Republicans will be in more of a compromising mood. I for one am not holding my breath.