The Malaise

Watching the rise of populist movements such as the Tea Party, and more recently the Occupy Wall Street protests, in the U.S., as well as the party known as the Piratenpartei (the Pirate Party) in Germany, I was tempted to dismiss these phenomena as temporary reactions to uncertain times.

But now that the Wall Street protests have spread across the Atlantic, shrugging them off as incapable of influencing the political discourse would be a grave mistake. Only time will tell whether these movements have staying power. At the moment banks have come under public scrutiny again, because the public has finally realized that the sovereign debt crisis in the Eurozone is also a crisis of the banking sector. This has reignited the widespread post Lehman frustrations with the financial sector.

Still, there are key differences between the U.S. and German movements. In the eyes of many Germans, the banking sector in Germany is effectively represented by one person only, Deutsche Bank boss Josef Ackermann. He leads the only truly global big German bank and has been a lightning rod for those angered by the financial system for years. The Pirate Party is a dash of color in an otherwise dull political landscape that still fundamentally works − it will likely disappear over time. What is happening in the U.S., on the other hand, could be seen as a sign of much deeper concerns about a political system that is becoming increasingly dysfunctional.

Three years after the beginning of the Great Recession, America is suffering from what former president Jimmy Carter once called “malaise.” Using that word cost him the presidency, and no U.S. politician since has dared utter the word again. But the rise of the Tea Party and the Occupy Wall Street movements are clear signs of a growing anxiety amongst middle class Americans, a “malaise” that is deepening by the day.

On the surface, all this appears to be just a new expression of the traditional disenchantment with the nation’s capital and its government. Populism has always been part of the political discourse on the fringes of mainstream America. In fact, many observers have automatically dismissed these movements as “crazy.” Liberals have labeled Tea Party activists as extremists interested only in blindly destroying the government and its first black president. Conservatives tend to paint Wall Street protesters as a “mob” hungry for a good dose of class warfare against the bankers.

But every few decades, populism morphs with sentiments that are part of the mainstream. It happened in the late sixties when the anti-war movement eventually grew to represent the sentiments of a majority of Americans, and it could happen again now.

The reasons this time around are both economic and political. The spectacle of Congress’s inability to agree on anything, from how to deal with the debt ceiling to how to stimulate the economy, has undermined the confidence of Americans in their government.

According to a recent Bloomberg/Washington Post poll, more than half of Americans now think that another financial crisis is likely within the next couple of years. Much of the country doubts that the winner of the presidential race will be able to change the economic situation. These are clear signs of widespread frustration.

Even some Republican presidential candidates, usually the most vocal in their belief in the power of American exceptionalism, now admit to their electorate that upward social mobility in the U.S. lags behind that of many countries in Europe.

A majority of Americans − both Democrats and Republicans − who traditionally had no qualms with the wealthy getting wealthier, now openly support measures that would see the rich paying more taxes, but at the same time believe that Medicare and Social Security benefits should not be cut.

These views echo the typical reaction of Western European countries, where for decades everybody has grown accustomed to the fact that the economy only grows slowly and the pie to share is shrinking. The Germans call it “Verteilungskampf,” which, loosely translated, means the fight over the spoils.

Are these the first signs of class warfare reaching U.S. shores? They could be. The American model is based on economic growth − lots of it. It can take busts, because these are usually followed by even bigger booms. Alois Schumpeter’s “creative destruction” reigns supreme. V-shape recoveries are the norm, long periods of depression or stagnation the exception. In fact, that is exactly what the Federal Reserve Bank, the Bush administration, and the Obama administration have all tried to achieve − accelerate recoveries to avoid disenchantment with the overall model.

But this time the American consumer did not buy it. With the unemploymemt rate stubbornly stuck above 9 %, middle class America was already growing disenchanted, and it continued to deleverage instead of spending. The skepticism has persisted.

Here are a few reasons why pessimism has trumped the traditional confidence in the self-healing powers of the U.S. economy:

-Many economists did not expect the housing market to bounce back while consumers were still deleveraging. In fact, it remained depressed and a drag on the economy

– The administration hoped government spending would offset temporary weakness in private demand. But the lasting effect was for the government deficit to turn from red to deep red.

-The administration was against making the financial sector one of the main engines of growth going forward, because it had caused the crisis in the first place. In fact, Washington pushed for more regulation. After a brief bout of euphoria after bouncing back from the brink, the financial sector has started adjusting to the new regulatory environment and is now resuming its cuts (the Euro-crisis being a huge complicating outside factor).

-The impact of the health care reform on the economy is debatable. At the very least, the bitter fight over the reform only contributed to the general uncertainty.

-The administration hoped that the manufacturing sector would thrive and that a weak dollar would boost exports. However, manufacturing accounts for only about 12 per cent of the gross domestic product. Companies do not relocate their production lines quickly enough for politicians caught in a permanent election cycle to benefit.

Overall, if re-balancing the U.S. economy really is Obama’s ultimate goal, and the reliance on the pre-crisis engines of growth is to be abandoned, a robust and sustained recovery is unlikely to start anytime soon. Making America a bit more like Germany, with a strong domestic manufacturing sector that competes on the global markets, takes time.

Can America afford to wait for this process to gain traction?

For a country without a social safety net broad and robust enough to keep its weakest members afloat, and with the gap between rich and poor widening, the social and economic price to pay could be extremely high. In a country that needs to feed its own myths much more than any European counterpart, prolonged stagnation flies in the face of the “American Dream.” Hence it risks denting the social fabric and, therefore, potentially weakening America’s foundations. If the U.S. economy remains sluggish for a prolonged period of time, the Tea Party and Occupy Wall Street could turn into symptoms of a much wider “malaise.”

---

Alexander Privitera is the Washington based Special Correspondent for the German news channel N24 and is a frequent contributor to AGI publications and events.

This essay appeared in the October 14, 2011 AGI Advisor.