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Towards a More Perfect Union?



With liberal democratic governance under pressure—does the current paralysis in the United States and in Europe compel time for a re-think?

Almost two weeks into the US federal government shutdown there are small signs of a possible thaw in the relationship between the White House and leaders of the Republican-controlled House of Representatives. But a resolution to the budget standoff and an agreement on the debt ceiling is far from certain. On Thursday evening, President Obama and House Republican leaders met at the White House, but failed to reach an agreement on raising the debt ceiling limit and re-opening the federal government. The two sides have promised to continue negotiations in the hopes of reaching an agreement before October 17, the date at which the federal government is expected to reach its borrowing limit.

To date, the impact of the shutdown has been muted. With only about 17 percent of the federal government currently affected, estimates of a potential hit to GDP are in the range of 0.10 percent to 0.12 percent for every week the government remains closed. Given that the shutdown occurs at the start of the fourth quarter, there is time for the economy to recoup the lost output if the situation is resolved soon. Treasury bills (T-bills) sold off sharply on Tuesday, with yields rising as high as 0.35 percent, a level not seen since October 2008. There was also a similar increase in credit default swap (CDS) prices on US treasury notes this week, but both rates have declined in recent days as the positions of both sides have softened. But make no mistake, the differences between the two sides of this political divide remain large, and reaching an agreement over the next week is critical to avoid entering uncharted territory.

The effect of the shutdown on the global economy has been less pronounced, but the rise in T-bill and CDS prices indicates a certain skittishness among global investors. Foreign governments, led by China and Japan, have been calling on US government officials to find a solution to the impasse, and major international organizations (e.g., International Monetary Fund (IMF), Organization of the Petroleum Exporting Countries (OPEC), etc.) have chimed in to remind lawmakers of the importance of the US economy to global economic growth, and of the potential fallout from a debt default. Five years after the collapse of Lehman Brothers the global economy is still trying to get humming on all cylinders, and the US economy has been outperforming most of the other developed economies. In fact, many economists now believe that the United States, along with China, represents the best hope of restoring global growth. Europe remains mired in economic malaise—though recent indicators suggest it may be emerging from its difficulties—but is not expected to return to trend growth over the next few years.

But why are we here? What is responsible for the partisanship in Washington and paralysis in Brussels? Did the founding fathers in the United States get it wrong? Has Hobbes won the debate over Locke? What do the political structures in the United States and Europe say about the ability to govern in times of economic and systemic stress? The framers of the Constitution of the United States adopted the principle of separation of powers in an attempt to limit the power of any one of the three branches of government (executive, legislative, judicial), while at the same time creating a system in which powers should be shared. This system of checks and balances has worked well over the past 200-plus years. But as party politics and campaign finance issues have evolved over time, the current stalemate raises questions over whether it works as well as it should. This current episode is characterized by a scenario not likely anticipated by the US founding fathers, where a minority of elected representatives (approximately 40 in the House of Representatives and a handful in the Senate) are largely responsible for the impasse. Most everyone believes that within both houses of Congress there are sufficient representatives from both sides of the aisle who would support a continuing resolution to fund the government, and yet this small minority of the 535 members of Congress are holding the vote hostage. Over in Europe, the various countries and institutions across the European Union seem unable to reach agreement to deal with major economic issues facing the continent. While the governance structure in the European Union is far from identical to that of the United States, they both rely on principles of democratic representation and strong minority protections.

With differing views seemingly further apart than ever, these systems make it almost impossible to enact any bold ideas on either side of the pond. To pass a piece of legislation in the United States today requires 60 votes in the Senate and a majority of opposition-controlled Congress. This has led to promising attempts to deal with issues such as immigration, gun control, and climate change fizzling out because of a lack of sufficient support. The Europeans have labored to reach agreement on how to deal with the debt burdens of several struggling countries, with Germany leading a group of countries insisting on a path forward that many others in the union consider unduly harsh. With the structural challenges facing both the United States and Europe in coming years, does the current system of governance provide the tools for facing such challenges? The system of government in the United States, with a bicameral Congress and an independently elected president, was designed for making small, incremental changes. Is such a system still appropriate in the 21st century when the issues are larger and the world more complex and globally interconnected? Between 1900 and 1968, one party controlled the entire federal government for 54 of those 68 years, or 80 percent of the time. Since then we have only witnessed one-party control for 14 of 44 years, or less than a third of the time. The gridlock of recent years in Washington could get worse before it gets better. The current system has no mechanism for self-correcting, which would force the parties or representatives to alter their behavior or continue to see inaction. Though it is hard to quantify the exact impact on the economy over the long run as a result of political dysfunction, it is certain that over time the costs of gridlock add up and subtract from economic growth. Any perception that the United States is unwilling or unable to properly manage its affairs could also lead to a rise in the cost of borrowing, an additional impediment to growth.

When one looks at some of the other structures of governance in various countries, one cannot help but question whether the existing systems within most liberal democracies can be improved. But alternatives to liberal democracy, while appealing at one level, pose enormous risks and challenges as well—some of which are known and many of which are likely still to come. In particular, some argue that China has avoided the pitfalls of the US and European liberal democratic systems and should be viewed as an alternative model of governance. China has experienced fantastic economic growth over the past few decades, which has allowed it to move around 500 million people out of poverty. Its one-party system allows for its leaders to more easily enact bold initiatives to respond to and anticipate both domestic and global issues in a much more strategic way than the slow consensus building of Europe or the paralysis of the United States. But the known costs of such a uni-party system are large, and predictions of China's straight line trajectory to global leadership and vindication of its political system are far too rosy and premature. Individual freedoms, rule of law, transparency, and basic democratic values have more than just passing appeal. The interplay between democratic liberalism and market capitalism is difficult enough. The relationship between market capitalism and one-party rule could well prove to be far more difficult over time, as society's expectations about government and their individual rights potentially come into greater conflict with decisions taken by the political elite with little to no recourse to change things.

One cannot count on dictatorships to always be benign, and protections—like those in the United States and across Europe—are there for a reason. While the strategic vision, speed, and efficiency of policymaking in China is impressive, it is still early days in the reemergence of China as a major global power and too early to declare victory for the political directives coming out of Beijing. The leaders in China over the past 20 to 30 years have been able to orchestrate one of the most impressive episodes of economic transformation in the history of the world. But in coming years, it is likely that major changes to the political system in China will be required as the population becomes wealthier and more eager to have a say in determining their future. What this might look like and how ready China's elite is to accept this inevitable need for change remains an open question. It is one that needs to be answered before the world decides to embrace the so-called Chinese model.

Less change is likely to take place in the governance structures in the West, but the idea of incremental change is not outside of the realm of possibility, as a perceived decline in the influence and authority of both the United States and Europe on the global stage could lead to a movement to systems that allow for faster, bolder modes of governance. With major issues such as immigration, tax reform, entitlement spending, climate change, financial services regulation, and education still to be addressed in the future, the United States requires a system of governance that allows it to respond in an effective and timely manner, not one that appears resolved to continue to self-inflict wounds. Calls for a parliamentary system in the United States have no chance of being adopted, but parliamentary rule changes to the way the legislative branch operates are certainly possible and could result in a more efficient governing structure without the need to change the entire system.

Since the late 17th century, the United States has been fantastically prosperous. The founding fathers were wise men who designed a system of democracy that allowed the country to navigate the treacherous path along which the country has travelled for over two centuries, including the Civil War period. While the extent to which Washington has become dysfunctional could be exaggerated, it is hard to argue that the system is without flaws and is working as the framers intended. But crisis often serves as a catalyst for change. Perhaps that is all that is needed to reestablish liberal democracy as the governance structure of choice for the world to emulate. Unfortunately, the current environment exposes the worst of open and transparent governance and raises uncomfortable questions about whether they are, indeed, the ideal many have sought to portray them as for centuries.

Note: This article was originally published on the World Economic Forum website and is reposted here with permission.

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