The Crisis of Governability in the Industrial Democracies

From Charles Kupchan, at Foreign Affairs, "The Democratic Malaise: Globalization and the Threat to the West":

Globalization has expanded aggregate wealth and enabled developing countries to achieve unprecedented prosperity. The proliferation of investment, trade, and communication networks has deepened interdependence and its potentially pacifying effects and has helped pry open nondemocratic states and foster popular uprisings. But at the same time, globalization and the digital economy on which it depends are the main source of the West’s current crisis of governability. Deindustrialization and outsourcing, global trade and fiscal imbalances, excess capital and credit and asset bubbles -- these consequences of globalization are imposing hardships and insecurity not experienced for generations. The distress stemming from the economic crisis that began in 2008 is particularly acute, but the underlying problems began much earlier. For the better part of two decades, middle-class wages in the world’s leading democracies have been stagnant, and economic inequality has been rising sharply as globalization has handsomely rewarded its winners but left its many losers behind.

These trends are not temporary byproducts of the business cycle, nor are they due primarily to insufficient regulation of the financial sector, tax cuts amid expensive wars, or other errant policies. Stagnant wages and rising inequality are, as the economic analysts Daniel Alpert, Robert Hockett, and Nouriel Roubini recently argued in their study “The Way Forward,” a consequence of the integration of billions of low-wage workers into the global economy and increases in productivity stemming from the application of information technology to the manufacturing sector. These developments have pushed global capacity far higher than demand, exacting a heavy toll on workers in the high-wage economies of the industrialized West. The resulting dislocation and disaffection among Western electorates have been magnified by globalization’s intensification of transnational threats, such as international crime, terrorism, unwanted immigration, and environmental degradation. Adding to this nasty mix is the information revolution; the Internet and the profusion of mass media appear to be fueling ideological polarization more than they are cultivating deliberative debate.

Voters confronted with economic duress, social dislocation, and political division look to their elected representatives for help. But just as globalization is stimulating this pressing demand for responsive governance, it is also ensuring that its provision is in desperately short supply. For three main reasons, governments in the industrialized West have entered a period of pronounced ineffectiveness.

First, globalization has made many of the traditional policy tools used by liberal democracies much blunter instruments. Washington has regularly turned to fiscal and monetary policy to modulate economic performance. But in the midst of global competition and unprecedented debt, the U.S. economy seems all but immune to injections of stimulus spending or the Federal Reserve’s latest moves on interest rates. The scope and speed of commercial and financial flows mean that decisions and developments elsewhere -- Beijing’s intransigence on the value of the yuan, Europe’s sluggish response to its financial crisis, the actions of investors and ratings agencies, an increase in the quality of Hyundai’s latest models -- outweigh decisions taken in Washington. Europe’s democracies long relied on monetary policy to adjust to fluctuations in national economic performance. But they gave up that option when they joined the eurozone. Japan over the last two decades has tried one stimulus strategy after another, but to no avail. In a globalized world, democracies simply have less control over outcomes than they used to.

I like Kupchan, but he errs badly here:

In the United States, partisan confron­t­ation is paralyzing the political system. The underlying cause is the poor state of the U.S. economy. Since 2008, many Americans have lost their houses, jobs, and retirement savings. And these setbacks come on the heels of back-to-back decades of stagnation in middle-class wages. Over the past ten years, the average household income in the United States has fallen by over ten percent. In the meantime, income inequality has been steadily rising, making the United States the most unequal country in the industrialized world. The primary source of the declining fortunes of the American worker is global competition; jobs have been heading overseas. In addition, many of the most competitive companies in the digital economy do not have long coattails. Facebook’s estimated value is around $70 billion, and it employs roughly 2,000 workers; compare this with General Motors, which is valued at $35 billion and has 77,000 employees in the United States and 208,000 worldwide. The wealth of the United States’ cutting-edge companies is not trickling down to the middle class.

These harsh economic realities are helping revive ideological and partisan cleavages long muted by the nation’s rising economic fortunes. During the decades after World War II, a broadly shared prosperity pulled Democrats and Republicans toward the political center. But today, Capitol Hill is largely devoid of both centrists and bipartisanship; Democrats campaign for more stimulus, relief for the unemployed, and taxes on the rich, whereas Republicans clamor for radical cuts in the size and cost of government. Expediting the hollowing out of the center are partisan redistricting, a media environment that provokes more than it informs, and a broken campaign finance system that has been captured by special interests.

The resulting polarization is tying the country in knots. President Barack Obama realized as much, which is why he entered office promising to be a “postpartisan” president. But the failure of Obama’s best efforts to revive the economy and restore bipartisan cooperation has exposed the systemic nature of the nation’s economic and political dysfunction. His $787 billion stimulus package, passed without the support of a single House Republican, was unable to resuscitate an economy plagued by debt, a deficit of middle-class jobs, and the global slowdown. Since the Republicans gained control of the House in 2010, partisan confrontation has stood in the way of progress on nearly every issue. Bills to promote economic growth either fail to pass or are so watered down that they have little impact. Immigration reform and legislation to curb global warming are not even on the table.

Ineffective governance, combined with daily doses of partisan bile, has pushed public approval of Congress to historic lows. Spreading frustration has spawned the Occupy Wall Street movement -- the first sustained bout of public protests since the Vietnam War. The electorate’s discontent only deepens the challenges of governance, as vulnerable politicians cater to the narrow interests of the party base and the nation’s political system loses what little wind it has in its sails.

Kupchan relies less on his globalization variable in the American case than he does on rising inequality and partisanship. And you'd have to code "protests" by leftward or rightward orientation for Occupy Wall Street to be "the first sustained bout of public protests since the Vietnam War." Actually, by that logic it was the tea parties that were the first sustained protests since Vietnam, but if you code "public protests" only as left-wing, one can forget about the tea parties --- a protest movement that dominated all of 2009 and is widely considered to have formed the grassroots constituency driving the GOP to the House majority in the 2010 elections.

Beyond that, I agree there's a crisis of governability in the industrial democracies. I just don't think Kupchan's focusing on the most important causes. The unsustainability of the European social welfare state model is probably a more important factor in the political turmoil in Europe in 2011. Globalization is important as well, no doubt, but the EU nations can only blame themselves for digging the kinds of debt holes in which they found themselves unable to climb out. Kupchan just barely touches on this, and he blames the economic crisis more so than the ultimately flawed social welfare commitments. Governments like Greece and Italy fell not just from economic and social crisis but because leaders lacked independence from EU institutions, which have enforced continued commitments to a continental bargain whose fundamental failures are finally being revealed.

And for the wider systemic challenge facing the Western democracies, Kupchan suggests more statism and accommodation to globalization --- the same variable he posits as the number one factor causing the decline of industrial competitiveness and economic dynamism. In other words, Kupchan's recycling failed theories of a sort of globalist Keynesian bargain: "state-led investment" in the domestic economies and "progressive populism" in the political systems of these states. It sounds fancy. But that's the kind of thing that got these nations into trouble in the first place.