Voter Discontent

Voters are angry and frustrated because in reality austerity versus stimulus is a false dilemma. Keynes' successors point out that the United States emerged from World War II with debt at well over 100% of GDP, but that economic growth cut it to less than 40% of GDP by the mid-1970s. They claim, therefore, that the current debt level is not alarming and that the spike will prove temporary if economic growth returns.

It is a rather big if. After 1945, the U.S. was the world's only industrial power at a time when in Western Europe and Japan there was a huge rebuilding campaign. The U.S. had no meaningful competitors and it was the largest creditor nation in the world. Now, the situation is exactly the opposite. A bout of deficit spending, therefore, may saddle the nation with a crippling debt burden without stimulating growth. As turmoil in Europe shows, slow growth may then lead to a spike in bond yields and a major debt crisis.

Nor is it clear how economic growth can be spurred. Over the past four years, the U.S. economy has suffered adverse structural developments at the demographic edges of its labor force, which will have repercussions for many years to come.

At one end are recent college graduates. The average debt of a 2010 college graduate was over $25,000 in 2010, the highest on record. The debt burden is growing at an accelerated pace as financial aid is cut and tuition and fees are raised. In Iowa and Minnesota, the average debt is closer to $30,000, and many individuals across the country routinely come out of college with debts of $100,000 and more. Yet, the unemployment rate among college graduates is also at a record, rising to over 9%. While according to the National Association of Colleges and Employers, graduates' starting salaries rose last year for the first time since 2008, a large pool of unemployed suggests that wages for recent graduates will stagnate.

Meanwhile, there is trouble for older workers. The U.S. labor force, after expanding by nearly 10 million 2003 to 2008, has been flat in recent years. Laid-off workers have been discouraged from looking for work, with a large number of adults over 55 taking early retirement or retiring earlier, and on less money, than they had expected.

These two trends create a vicious cycle. Younger Americans will delay having families and buying homes, preventing a full recovery in the housing market. Meanwhile, older Americans, the traditional dis-savers, will spend less in retirement and run out of retirement savings earlier, saddling Social Security and Medicare — ultimately, the taxpayers — with the huge bill for their final years.

 Ideological Sclerosis

The voters seem to understand the problems of the economy much better than politicians. The level of pessimism in the U.S. is now unprecedented in a normally resilient nation, cutting across the ideological divide. As The Economist reported recently, some 83% of Americans believe that the country is still in a recession and nearly three quarters are convinced that the nation is on a wrong track. A solid majority fear that their children will be worse off than they are and a third think America's best days are behind it.

There is a pressing need for a technocratic, non-ideological analysis of the economic situation and the development of a set of programs to spur private sector growth. However, the trend in Washington has been exactly the opposite: in the two mainstream parties, ideological positions have become hardened. Each side takes turns implementing its own unworkable solution as voters systematically bring down one incumbent after another.

If such ideological wrangling continues, the anti-incumbent mood will grow and evolve. Stephen King, the chief economist at HSBC, recently wrote a piece worthy of Stephen King, the horror author. He pointed out that recent European elections have seen a strong showing by radical right-wing movements. He then went on to compare the current situation in Europe with that of the 1930s, when a debt crisis and lack of economic growth translated into an ideological divide, in which extreme, radical movements became the winners with tragic consequences for all.