Mohamed A. El-Erian: This Political Polarization Is Really Bad for America

As the year comes to an end, dysfunctional Congressional politics continues to dominate the headlines, and rightly so.

Our politicians are scrambling to deal with a mess that they created all on their own -- a fiscal cliff that risks pushing the country into recession. And while a last minute "micro deal" is still possible, there will be little celebration, nor should there be.

Whatever transpires in the next few days, look for politicians to point fingers at each other. By diverting your attention to those in the other party on Capitol Hill, their hope is, of course, to influence your assessment of who is to blame for taking the country so close to the edge.

I argued in a prior post that the fiscal cliff is the result of a monumental Congressional political miscalculation back in the summer of 2011 -- one that a "game theorist" could have predicted based on an analytical assessment of the conditions under which politicians cooperate.

Yesterday, Jon Horne, a PIMCO colleague, pointed me to a column by Nate Silver which takes the analysis an important step further. And Mr. Silver's findings are quite depressing.

An anchor for Mr. Silver's analysis is the view that "one of the firmest conclusions of academic research into the behavior of Congress is that what motivates members first and foremost is winning elections." By combining this with realities on the ground, his analysis makes a strong case for continued political polarization going forward.

Mr. Silver's conclusion is stark: "As partisanship continues to increase, a divided government may increasingly mean a dysfunctional one."

It was once fashionable to argue that a divided government was good for the economy. The view then was that politicians would be too busy with political brinkmanship to get in the way of a dynamic private sector. As a result, unfettered by government interference, the private sector was more likely to invest, hire and prosper.

It is hard -- very hard -- to make this argument today; and for at least three reasons.

First, even diehard conservatives would admit that, since the 2008 global financial crisis, the country still has to overcome certain market failures. And for that, enlightened government policies are needed, including in clarifying property rights in segments still suffering from post financial bubble disorder.

Second, it is hard to deny the extent to which America has experienced a worsening in the distribution of income, wealth and opportunities in recent years. If we are not careful, this will tear at the social fabric that underpins a dynamic and prospering private sector.

Then there is the international evidence and related comparisons.

America has fallen behind several other countries when it comes to enhancing our human and physical capital. In many cases this is not something that the private sector can (and will) -- remedy fully. In particular, some of the slippages in education and infrastructure need (and should be solved via) public-private partnerships; others involve (indeed, urgently require) more active government reform efforts.

The bottom line is simple and consequential: Our self-inflicted fiscal cliff drama may be the most visible illustration of Congressional political dysfunction but it is unlikely to be the last one or the most challenging.

Judging from Mr, Silver's analysis, we could well experience several iteration of the analytical equivalent of the fiscal cliff in the months ahead. And we would do so with declining policy flexibility.

If left to fester, the related inability of Congress to step up to economic responsibilities would risk being associated with more than just sluggish growth, persistently high unemployment, and a growing sense of financial discomfort.

It would also undermine the country's longer-term growth potential and, with that, the ability of many citizens to realize the American dream.

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Source: http://www.huffingtonpost.com/mohamed-a-elerian/political-polarization-fiscal-cliff_b_2379060.html

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