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Written by: Tim Pierotti
“In Fitch’s view, there has been a steady deterioration in standards of governance over the last 20 years, including on fiscal and debt matters, notwithstanding the June bipartisan agreement to suspend the debt limit until January 2025. The repeated debt-limit political standoffs and last-minute resolutions have eroded confidence in fiscal management. In addition, the government lacks a medium-term fiscal framework, unlike most peers, and has a complex budgeting process. These factors, along with several economic shocks as well as tax cuts and new spending initiatives, have contributed to successive debt increases over the last decade. Additionally, there has been only limited progress in tackling medium-term challenges related to rising social security and Medicare costs due to an aging population.”
The recent Fitch downgrade of the US Credit Rating may have been a surprise to markets but the reason for the downgrade: “a steady deterioration of governance”, should be a surprise to no one. There are a number of ways to measure this deterioration. For instance, below is a chart illustrating the growth of Filibusters that have occurred in the Senate indicating the lack of bipartisanship.
But to anyone that has been even a casual observer of US politics, the sense of inexorable bifurcation is obvious. Tribalism is of course not new to US politics, but the intellectual level of debate has declined to the point that there is no agreement of facts, no trust and no middle ground.
Perhaps the scariest reality is the structural political bifurcation of the House. In 2020, only 34 of the 435 Congressional districts generated a margin of victory of less than 5% to either President Biden or Former President Trump. That means that, in all likelihood, the party that will win a given Congressional seat is predetermined in over 92% of the country. In other words, the only real risk House candidates face in the vast majority of the country is from the extremist flank of their own party. The result of that is no good deed in the form of compromise goes unpunished in the primaries. Much of the reason for these non-competitive Congressional districts is the practice of gerrymandering. State legislatures in both blue and red states have long concentrated as many likely opponent votes into as few districts as possible, thereby making the majority of state districts “safe seats”.
Bridgewater Founder Ray Dalio recently said, “You start to see the emergence of populism and we see extremism in both political parties. A populist is a politician who will win at all costs…the political system in terms of primaries tends to create polarity.” For years now, Dalio (perhaps the greatest macro investor in history) has been warning that US political polarization is a major contributor to bringing about the consequences of our “Long-Term Debt Cycle” to use his phrase. As he said recently, one immediate consequence is the higher rates we are now experiencing.
Former New York Senator Daniel Patrick Moynihan often said, “You are entitled to your own opinion, but not your own facts”. Unfortunately, we now live in a political world where political hacks espouse “alternative facts”.
All of us suffer from some level of confirmation bias. We tend to dismiss information that doesn’t comport with what we already believe, and we search for information that will support our existing bias. While television news and much of the media in general has blurred the line between journalism and editorial, social media exacerbates our preconceptions allowing the more impressionable among us to mainline all the curated information and disinformation that can be found to feed any bias, without the nagging tether of truth.
We can see the consequences of this phenomenon in the chart below from Gallup which shows how people’s view of the economy has increasingly depended on one’s political affiliation.
Churchill famously said, “Democracy is the worst form of government except for all those other forms that have been tried.” He was certainly correct on that front, but the surging momentum of populism and subsequent polarization is making it harder for our American democracy to accomplish the goal of the prudent stewardship of our current economy and our longer-term economic well-being.
In Federalist paper #9, Madison described factions as, “a number of citizens, whether amounting to a minority or majority of the whole, who are united and actuated by some common impulse of passion, or of interest, adverse to the rights of other citizens, or to the permanent and aggregate interests of the community.” We are a democracy dominated by two factions. The Democrats are unwilling to even discuss the mathematical reality that we are less than a decade away from the insolvency of the Social Security Trust Fund. The Republicans, at least those who control the House, have spent the last two years desperately fighting the adequate funding of the IRS so that the government agency tasked with collecting all the tax revenue that is owed, can actually do their jobs. Sadly, we have arrived at a place where the primacy of the party is greater than the primacy of the country. We can all hope that changes. History is replete with charismatic individuals who changed the course of nations. But we also know, hope isn’t an investment strategy.
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