US Politics Analysis: A Progressive Problem for Obama; A "Downgrade" Problem for America

Last Thursday in Cleveland, Ohio, President Obama delivered a speech designed to answer criticism of his lacklustre economic performance in his first term. The address offered nothing new in policy, but repeated the familiar theme that the Democratic Party is the best hopes of an economic revival for the American middle classes.

Despite the prior billing from the Obama campaign staff that this was a major statement by their boss, the supposed economic vision failed to stoke fires of support among his followers. On the left of his party, the reception was muted and lukewarm. At the Campaign for America's Future, a vocal progressive critic of the Presidency, more attention was paid to the ideas, "Bury Austerity With The Bernie Budget", of Independent Senator Bernie Sanders.

This disinterest is the latest sign of progressive apathy over Obama, and it continued Monday at the Take Back the American Dream Conference in Washington. The rally was ostensibly publicising the importance of winning a progressive majority in the forthcoming Congressional elections, but an article by Robert Borosage that accompanied the conference revealed the long- term agenda of progressives, dismayed at the politics of the current Democratic Party:

The progressive task --- which we will explore at the Take Back the American Dream Conference --- isn’t only to repel the Republican effort to dismantle the social contract, it is to build an independent movement that can challenge the interests that corrupt both parties, elect progressive champions, and hold politicians accountable. This will take more than one election or one administration. It will take more than simply defeating Romney and taking back the Congress.

Borosage does not explicitly call for the formation of a Progressive Party, but the suggestion was more than implicit when he continued:

At the beginning of the 20th century, robber barons dominated our economy and our politics. Labor unions were illegal. Politicians were openly bought or rented. It took a populist movement, progressive reformers, left parties and labor strife to curb the power of money and eventually build the broad middle class that made America exceptional.

The possibility of a leftist movement in the US, large enough to impact the national two-party electoral balance, is slim --- but it exists. And on the other side of the political spectrum, there is the similar chance that some conservatives will leave the Republican Party to establish an organisation devoted to ideological purity. Even if the dual nature of American politics remains intact, partisans within both organisations will ensure the confrontational nature of American politics continues.

That is democracy, and normally it would not merit much concern beyond the consequences of competing electoral interests: higher taxes v. lower taxes, more Medicaid v. less Medicaid, and so forth.

But these are not normal times. Partisanship in politics, and the resulting stalemate in policy changes, was the primary reason for the downgrade of the US credit rating last year. Earlier this month, Standard and Ppors affirmed its long-term appraisal of America's creditworthiness and reiterated its conclusion that the United States is in danger of a further downgrade.

The first downgrade was not the disaster many had feared, but if another lowering of America's rating could unleash the financial chaos, then the latest S&P assessment makes sobering reading. It calculates "only" a 33% chance of a downgrade in the next two years, but that is only if certain scenarios play out as expected, and the cases where S&P would re-evaluate this baseline estimate are just as numerous.

S&P argues argues about the political process:

Although the 2012 elections could resolve the U.S. fiscal debate, we see this outcome as unlikely. If, as commentators currently expect, the election is close, the race could, in our view, reduce bipartisanship from its already low level as each side strives to rally support by more clearly distinguishing itself from the other.

One thing we do expect Republicans and Democrats to agree on--given an unemployment rate of about 8% and continued risks to the U.S. economic recovery--is avoiding sudden fiscal adjustment. We expect that a sudden fiscal adjustment could occur if all current tax and spending provisions, set to either expire or take effect near the end of 2012, go forward in accordance with current law.

The warning is clear. If there is a “sudden fiscal adjustment” in January 2013 --- and Bloomberg reported on Monday that there seems little political will in Washington for the urgency required to avoid the fall from this cliff --- a downgrade is likely. A failure to extend the tax cuts of 2001 and 2003 would cause concern; at the same, S&P assumes that the spending cuts of the 2011 Budget Control Act will be implemented as planned. That means either Republicans accept the stringent reducation of the defence budget, or they replace those automatic cuts with reductions in spending elsewhere, such as food stamps.

These are the immediate economic and political threats to the US credit rating. There are other fiscal concerns: GDP growth is expected to average 2-3.5% through 2016, but S&P --- warning of the effects of the Eurozone crisis --- sees a 20% chance that the US will enter another recession. S&P also noted that, while government debt as a share of GDP has not increased as much as their worst-case scenario last year, it has rise more than estimated, “keeping the US at the high end of our indebtedness range and highlighting the deterioration in our expectations since last summer".

There is some leeway for Obama/ S&P recommended a medium-term strategy for fiscal consolidation, as the President Obama also stressed in his speech in Cleveland: “We believe the fiscal challenges of the US are more structural and recognize that abrupt short-term measures could be self-defeating when domestic demand is weak.”

The problem for Obama, however, is that to enact the plan he needs a landslide victory for both him and his party. The same can be said for Mitt Romney and Republicans. Neither of those outcomes are likely, nor is a return to bipartisan compromise.

Quite what that means for the elections of 2012 is unknown. What it means for the aftermath is clearer, if ominous: if there is no reconciliation of political divisions at the start of the new Administration and new Congress, another American "downgrade" becomes likely rather than possible.