The Tea Party tsunami and the welfare showdown - FT.

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January 3, 2012 7:14 pm

The Tea Party tsunami and the welfare showdown

By Alan Greenspan

The failure of the super committee last year to reach a budget deal underscored the underlying wedge in US politics. For most of the post-1945 years the electorate has been slightly to the left or right of centre, spread around a dominant middle ground. This enabled compromises in legislation to be reached with ease. But a political tsunami has emerged out of our past in the form of the Tea Party, with its ethos reminiscent of rugged individualism and self-reliance. That was a dominant force for more than a century but has faded since the New Deal. The Tea Party has yet to obtain sufficient traction to forge majorities for new legislation. But its influence beyond its numerical strength has created an effective veto of new legislation before the current heavily Republican House of Representatives. It has so Our exclusive online section featuring agenda-setting altered the distribution of votes within the Republican Partys commentary from leading House caucus that the partys centre has moved closer to the Tea contributors on global finance, Party. Moreover, the heavy House Democratic losses of economics and politics moderates in 2010 shifted the centre of gravity of its caucus to the left. This has created something of a bimodal distribution leaving a much diminished centre. The Senate, although less affected by the 2010 election has not been immune from this shift. The days of Senators Pat Moynihan, Howard Baker and Lloyd Bentsen seem a long time ago.
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The emerging fight over the future of the welfare state, a paradigm without serious political challenge in eight decades, is accentuating the centres decline. The welfare state has run up against a brick wall of economic reality and fiscal book-keeping. Congress, having enacted increases in entitlements without visible means of funding them, is on the brink of stalemate. As studies by the International Monetary Fund have demonstrated, trying to solve significant budget deficits mainly by raising taxes has tended to foster decline. Contractions have also occurred where spending was cut as well, but to a far smaller extent.
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The Tea Party tsunami and the welfare showdown - FT.com

1/4/12 10:28 AM

The only viable long-term solution appears to be a shift in federal entitlements programmes to defined contribution status. The assets of private defined benefit pension plans, confronted with the same economic forces, have already fallen from 67 per cent of private pension plans at the end of 1984 to 37 per cent at the end of September. But the political problems of such a switch can be seen in state and local governments attempt to trim public defined pension plans. Public sector unions have fought mightily to avoid having their pensions shrink, as they have in the private sector. Cutting back on benefits that are entitled is going to be a far harder political task than curbing federal discretionary spending. We have created a level of entitlements that will require a greater share of real resources to fulfil than the economy seems likely to be able to supply. Not only is the labour force starting to lose its most productive workers (the baby boomer generation) to retirement, but also the generations scheduled to replace it will be the same individuals who in 1995, shocked us by scoring so poorly on maths and science in international competitions. Americas students had slipped badly after a long tenure at the top of the global educational ladder. The cohort of people aged 25 and younger is suffering the consequences in lower earnings and productivity when compared to earlier generations. Fortunately the statistical weight of the erosion in overall productivity growth is still quite small, but it will mount if our education system does not improve and we dont increase immigration quotas of skilled workers. With rising concerns about income inequalities, it is a disgrace that these quotas continue to protect upper income groups from competition. Such a slowdown in productivity growth will create, with slowed labour force growth, the slowest 20-year rise in real per capita GDP in American history, says Professor Robert Gordon of Northwestern University. I do not pretend to be able to forecast how this will turn out but we face a true revolution, not so much in the streets but in the fundamental choices the American people will have to make to secure our fiscal future. Arithmetic demands it. The writer was chairman of the US Federal Reserve

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