Pearlstein: Broken politics will wreck hot US economy

Even as a bitter and partisan impeachment trial plays out in Washington, the signals emanating from the economy continue to be amazingly positive. The unemployment rate is at record lows, the stock market is near record highs, corporate profits remain strong, and growth, at around 2%, is the highest among advanced economies.

At some level, this disconnect between economics and politics reflects the underlying strength of the U.S. economy - the innovation, the efficient use of labor and capital, the quality of management - that existed long before Donald Trump became president. Business and economic fundamentals don't change overnight.

But Americans should understand that there will be a significant, long-term economic cost to our polarized politics and dysfunctional government, which has now reached the point of near-total breakdown of comity and cooperation between the parties, between the houses of Congress and among the various branches of government.

In the modern era, there are few if any examples of a country with a healthy, thriving economy and a broken political system. What distinguishes a successful economy from a failing one - what distinguishes Denmark from Italy and South Korea from North - is not how much capital it has or technology it produces but the quality of its institutions - the laws, rules, norms and policies that create the framework in which any economy operates. And there should be no doubt that as a result of broken politics, the quality of the United States' institutions is already on the decline.

We can see such deterioration in our inability to adapt to changing conditions - the rise of China as an economic superpower, the influx of economic and political refugees, and the threat from global warming. People will inevitably disagree about how to deal with these serious economic challenges, but a country with a working political system would rather, after a modest debate, embrace the obvious compromises, building on what works and fixing what doesn't.

In the United States, by contrast, our approach has been to deny the problem, demonize those with whom we disagree and ostracize anyone who dares to compromise. As a result, we now have millions of blue-collar workers who are idle or underemployed, millions of immigrants without the skills we need who entered the country illegally but too few of the skilled immigrants that we do, and an unending series of devastating floods, wildfires, droughts and other extreme weather events. The cost, in terms of lost output and economic damage, runs to tens of billions of dollars every year.

We see our institutional decline in the persistence of a health care system that continues to cost twice as much as in other countries while delivering some of the worst health outcomes in the industrialized world. The reasons are not seriously in dispute: (1) too much care that is unnecessary and too little of the kind that keeps people healthy, and (2) corporate profits and medical salaries that are higher than necessary to attract talent and incentivize investment and innovation. For decades, opposition from special-interest groups prevented anything from being done. When it finally was - Obamacare - most of those same interests used everything within their power to make sure even this modest reform would not succeed.

Economists Anne Case and Angus Deaton recently calculated the direct cost of all this overspending at about $1 trillion a year, or $8,000 for every household in the country. The indirect costs, in terms of lost output due to preventable death and illness and lost sales on global markets because of excessive labor costs, surely add hundreds of billions more.

We also see the effects of political dysfunction in the inability of Congress to come anywhere near balancing the federal budget, even when the economy is seemingly operating at capacity.

In reality, our current economic boom is a Keynesian mirage. The only reason our economy is growing at all is that because of extravagant tax cuts and undisciplined spending, the federal government last year spent $1 trillion more than it brought in in revenue, even as the Federal Reserve injects an additional $60 billion a month into the financial system. As the International Monetary Fund warned in its annual economic outlook last fall, such a level of fiscal and monetary stimulus is not sustainable, creating risks of inflation, a spike in interest rates or a sharp decline in the value of the dollar, any of which in turn could lead to a recession or financial crisis. In the longer run, this addiction to living beyond our means will also have the effect of making us ever more beholden to the foreign lenders and investors who make it possible.

It would be one thing if we were productively investing all this borrowed or freshly printed money - rebuilding our crumbling infrastructure, providing effective job training to displaced workers or improving educational outcomes of our children. These are the kinds of high-payoff public investments that a functioning political system would be making. Instead, we are essentially throwing the money down the drain by using it to finance runaway defense spending and farm subsidies and extravagant tax cuts for businesses that have mostly been passed on to shareholders.

But perhaps the greatest threat to the U.S. economy is the deterioration in the rule of law that has become a hallmark of the Trump presidency and now lies at the heart of the unfolding impeachment process.

Global companies do not invest in countries with autocratic leaders who arbitrarily impose economic sanctions or punitive tariffs on longtime allies who fail to perform political favors or take a different approach to unrelated foreign policy issues.

And the experience of other countries tells us that households and businesses do not pay their full share of taxes where leaders boast about paying no taxes at all, and do not adhere to immigration rules when leaders are seen to flagrantly violate them. This is other countries, right?

We know that competition does not thrive in countries where leaders threaten criminal prosecution of political opponents and fire diplomats and civil servants who expose their corruption. Nor do markets flourish in countries where tariff waivers are handed out to political allies, government contracts are withheld from political critics, government regulations are not enforced against campaign contributors and companies are subject to antitrust investigations for lobbying against government policies.

Rule of law is eroded when judges who rule against the government are dismissed as political hacks, when journalists who report the truth are deemed “enemies of the people” and any investigation of corruption is labeled a “witch hunt.”

It will be further undermined when a president who has done all of these things is acquitted and vindicated by a deeply partisan and feckless Senate majority.

Deterioration in the rule of law. Reckless fiscal policy and lack of public investment. Failure to fix a costly and underperforming health care system or address the challenges of globalization and climate change. Like the impeachment process now playing out at the Capitol, each is both a consequence of and contributor to our broken politics. And like the impeachment process, each will have negative long-term impact on the quality of our institutions and the vibrancy of our economy.

“Trump Impeachment Trial Begins. Stocks Hit New High.” If the headline sounds too good to be true, that's only because it probably is.

Steven Pearlstein is a columnist for the Washington Post.

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