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Voter Discontent

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Several recent elections in Europe were seen as a referendum on fiscal austerity (and fiscal discipline) and their results were presented as a mood shift in favor of more government spending and economic stimulus. If true, this should help Barack Obama’s re-election bid in the United States. However, over the past three years, electoral results the world over suggest not so much a leftward drift as disgust with all incumbents, regardless of their political stripe. This, on the contrary, could sink Obama in November, but it also bodes ill for his successor.

In a parliamentary election in May, Greek voters overwhelmingly rejected public spending cuts and tax increases agreed upon by their government as part of the bailout deal. Both main political parties, which backed austerity measures, got a drumming at the polls. French voters delivered a similar verdict, voting for a Socialist for the first time since the 1980s. Winner François Hollande had campaigned on a platform of tax hikes on the wealthy, more bank regulations and more government spending. At the same time, the governing coalition in the Netherlands fell apart because its members couldn’t agree on budget cuts.

Recent European data have been bleak. Greece is sinking deeper into depression, a severe downturn is now affecting Spain and Italy, and GDP in the euro area is forecast to shrink 0.5% in 2012. Britain, too, slipped into a double-dip recession in early 2012. Unemployment across Europe is severe. Spain takes the cake with a jobless rate of nearly 25%, followed closely by Greece with over 20% and Ireland with 15%. France is suffering from 10% unemployment.

Such performance has given plenty of ammunition to modern-day Keynesians who blame euro-zone deficit-cutting policies, initiated by Germany, for ushering in the second leg of a European economic downturn. An assault on austerity has been led by two Nobel Prize-winning U.S. economists, Joseph Stiglitz and Paul Krugman. Stiglitz, noting the lack of successful austerity programs in large economies, says Europe is headed toward “suicide” with public-sector spending cuts.

Budget cuts, especially at the state level, are slowing the U.S. economic recovery as well. Since bottoming out in early 2010, the private sector created over 4 million jobs through April 2012. Public-sector employment has declined by 1 million from a stimulus-induced peak in May 2010. The U.S. jobless rate remains over 8%, at levels close to those of the mid-1980s.

Nevertheless, it is far from clear that voters want more government spending or put much trust in left-wing solutions. In 2010, the right-of-center party scored an overwhelming victory in Hungary, and a month later the Conservatives in the U.K. ousted the Labour Party after 15 years in office by promising harsh fiscal medicine. In November 2010 the GOP scored one of the greatest mid-term electoral victories in U.S. history. They not only took the House of Representatives in Washington, but devastated the Democrats in many state capitals.

In early 2011, though, the Irish doubled the seats of their Labour Party as they kicked out the center-right Fianna Fáil, and then in November 2011, months before the supposed Europe-wide rejection of austerity, the conservative Popular Party threw out the ruling Socialists in Spain.

The trend is clear: rather than showing preference for any one party or ideology, voters have been systematically punishing those who held power before the election. It so happens that leftist parties were up for reelection first, and then rightist and centrist ones were. Even in Germany, where austerity measures remain popular and where the economy is Europe’s bright spot, the incumbent Christian Democrats went down in defeat in the local elections in North Rhine-Westphalia, Germany’s industrial heartland and most populous state.

This is a grim conclusion for the Obama campaign. The president is facing the voters when the mood seems to be “plague on both your houses,” with those who happen to be in office bearing the brunt of popular anger and frustration.

 Debt and Growth

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.


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