The United States has been shaped by three far-reaching political revolutions: Thomas Jefferson’s “revolution of 1800,” the Civil War, and the New Deal. Each of these upheavals concluded with lasting institutional and cultural adjustments that set the stage for new phases of political and economic development. Are we on the verge of a new upheaval, a “fourth revolution” that will reshape U.S. politics for decades to come? There are signs to suggest that we are. In fact, we may already be in the early stages of this twenty-first-century revolution.
The great recession that began in 2008 caused many to suggest that the United States is entering a period of “decline” during which it will lose its status as the world’s most powerful and prosperous nation state. The metaphor of “decline” presumes that the American people will sit by passively as their standard of living and international status erode year by year. That is unlikely to occur: Americans will do everything in their power to reverse any such process of national decline. Thus, what the United States is now facing is not a gradual decline but a political upheaval that will reshape its politics, policies, and institutions for a generation or two to come. There is no guarantee that the nation will emerge from this crisis with its superpower status intact, just as there were no guarantees that it would emerge from the Civil War or the Great Depression in a position to extend its wealth and power. The most that we can say is that, in the decade ahead, Americans will struggle to forge a governing coalition that can guide the nation toward a path of renewed growth and dynamism.
The financial crisis and the long recession, with the strains they have placed upon national income and public budgets, are only the proximate causes of the political crisis now unfolding in the United States. The deeper causes lie in the exhaustion of the post-war system of political economy that took shape in the 1930s and 1940s. One pillar of that system emerged out of the New Deal with its emphasis upon national regulation of the economy, social insurance, expanding personal consumption, and public debt; the second emerged out of World War II with the U.S. dollar as the world’s reserve currency and the U.S. military as the protector of the international trading system. The post-war system created the basis for unprecedented prosperity in the United States and the Western world. That system is now unwinding for several reasons, not least because the American economy can no longer underwrite the debt and public promises that have piled up over the decades. The urgent need to cancel or renegotiate these debts and public promises on short notice will ignite the upheaval referred to here as “the fourth revolution.” There will follow an extended period of conflict in the United States between the two political parties as they compete for support either to maintain the post-war system or to identify a successor to it.
It is not possible to outline in advance the precise lineaments of the fourth revolution. After all, few Americans living in 1798, 1858, or 1928 could have foreseen what was going to happen to their country in the years immediately ahead. The best that we can do is to look for some general patterns in these earlier events that might serve as guides for what is likely to happen in the United States in the next decade or two.
Notwithstanding its reputation for stability and continuity, the U.S. political system seems to resolve its deepest problems in relatively brief periods of intense and potentially destabilizing conflict. These events are what some historians have called our “surrogates for revolution” because, rather than overthrowing the constitutional order, they adjust it to developing circumstances.
There are a few clear reasons why the American system adjusts in this discontinuous fashion. The constitutional system, with its dispersed powers and competing institutional interests, resists preemptive and over-arching solutions to accumulating problems. At the same time, America’s dynamic economy and highly mobile society are constantly creating new challenges to which the political system cannot easily respond. At times, these challenges have built up to a point where the differences between parties and interests have been so fundamental as to defy efforts to resolve them through the ordinary channels of politics.
There are a few superficial similarities in the structure of these earlier events that might provide clues as to what we might look for in any new upheaval. These events—Jefferson’s revolution, the sectional conflict, and the crisis of the 1930s and 1940s—extended over several election cycles before producing a stable resolution; the political settlements that emerged from these conflicts lasted roughly a lifetime—sixty or seventy years—until they began to unravel under the pressure of new developments; and each event ended with the ouster of the political party that had dominated the system during the previous era.
At a deeper level, each of these realignments discredited an established set of governing elites and brought into power new groups of political and cultural leaders. After reorganizing national politics around new principles, these new elites took control of the national government, staffing its departments and agencies with their political supporters. As they strengthened their control over the system, they also gradually extended their influence into important subsidiary organizations, such as newspapers, college and university faculties, book publishers, and civic associations. College and university faculties and our major newspapers today are overwhelmingly Democratic; from the 1870s into the 1930s, they were generally Republican. This is one of the factors that cements any realignment in place and gives it the stability to persist over many decades.
One can also identify in all three cases an abrupt change of policy, a broken agreement, or some perceived violation of faith that poisoned relations between the parties, drove them further apart, and closed off possibilities for compromise. The Federalists’ passage of the Alien and Sedition Acts (1798), which opponents saw as an attempt to criminalize criticism of the Adams administration, provoked all-out warfare with Jefferson’s fledgling party and convinced Jefferson and James Madison that their ultimate goal should be the destruction of the Federalist Party. The Democratic Party’s repeal of the Missouri Compromise in 1854 brought the Republican Party into existence and sharpened the sectional conflict by several degrees. In 1932, FDR claimed (falsely in this case) that the bankers and industrialists had caused the Depression by irresponsible speculation in stocks. Because of this violation of trust, he declared that their activities would have to be supervised more closely by federal authorities.
More fundamentally, each of these realignments was carried out and then maintained by one dominant political party. Following the election of 1800, Jefferson’s (and later Jackson’s) Democratic party defined the parameters of political competition until the outbreak of the sectional crisis in the 1850s. The Republican Party led the nation through the Civil War and maintained its dominant status throughout the post-bellum era of industrial development. In the midst of the Great Depression, FDR’s Democratic Party organized the modern system around the politics of public spending and national regulation. The Democrats completed this revolution after World War II when the United States began to assume responsibilities in the international arena commensurate with those it had already assumed in the domestic economic arena.
The dominant parties in each of these eras might be called “regime parties” because they were able to use their political strength to implement and carry forward the basic themes around which these political settlements were organized. Jefferson’s party pushed forward the themes of localism, democracy, and expansion; Lincoln’s, the themes of union, freedom, and capitalism; FDR’s, the themes of national regulation, public spending, and internationalism. In this sense, the United States has rarely had a two-party system but rather a one and one-half party system consisting of a “regime party” and a competitor forced to adapt to its dominant position. These competitors—the Whigs in the 1840s, the Democrats after the Civil War, and the Republicans in the post-war era—occasionally won national elections, but only after accepting the legitimacy of the basic political themes established by the regime party.
The question today, then, is whether or not the party system formed in the 1930s and 1940s is about to exhaust itself in a new upheaval that will lead to some new political alignment around a new constellation of issues. There is little doubt that many of the political signs present in earlier upheavals are increasingly in play today.
The Democratic Party established itself in the 1930s and 1940s as the “regime party” in modern American politics by building majorities around the claims that it pulled the country out of the Depression and won the war against fascism. Democrats won five consecutive presidential elections from 1932 to 1948, comparable to the six straight ones won by Jefferson’s party between 1800 and 1820 and the six won by Republicans from 1860 to 1880. Throughout the period from the 1930s into the 1980s, Democrats consistently maintained control over both houses of the U.S. Congress. This electoral strength gave the Democrats solid control over the institutions of the national government.
Given the popularity of FDR and the New Deal, Republicans had little choice but to accept the general contours of the new regime. Following their landslide defeat in 1936, Republicans nominated a succession of presidential candidates—Willkie, Dewey, Eisenhower, and Nixon—who did not challenge New Deal programs but promised only to administer them more effectively. Among Republican candidates between 1940 and 1980, only Barry Goldwater sought to roll back the New Deal, and his defeat in 1964 was taken as evidence of the futility of that strategy.
Over the decades, the Democratic Party has built its coalition around public spending and the recruitment of new groups into the political process, often by promises of new public programs. It has displayed a remarkable capacity to renew itself by adjusting its appeals to the ever-changing political marketplace. In the 1930s, FDR built his coalition around urban workers, farmers, and industrial unions with appeals that grew out of the grim realities of mass unemployment and destitution. By the 1960s, John F. Kennedy and his successors succeeded in broadening the Party’s appeal to the middle class and suburban home owners by pushing “quality of life” themes like environmentalism, civil rights, women’s rights, and government support for the arts. Later, as private sector unions began to disappear in the 1970s and 1980s, Democrats replaced them in several key states by organizing public sector unions and mobilizing them into their party. In many states, these unions provide the organizational backbone of the Party by supplying votes and money and serving as well-placed advocates for further public spending. The Democratic Party has gradually evolved into a “public sector party” that finds its votes and organizational strength in public sector unions, government employees and contractors, and beneficiaries of government programs.
Many thoughtful observers argue that the New Deal alignment came apart in the 1960s and was replaced by Ronald Reagan’s conservative revolution in the 1980s. There is something to be said for this view. Since the 1980 election, Republicans have achieved rough electoral parity with the Democrats, winning five of eight presidential elections and winning control of the House and Senate in roughly half of the elections that have taken place since that time. The Republicans, much in contrast to the Democrats, have organized themselves in recent decades as a “private sector party,” winning votes and contributions from individuals and business groups committed to cutting taxes and reducing the size and scope of government.
Despite their electoral successes since the 1980s, Republicans never managed to reverse the flow of political power to Washington and failed to eliminate or substantially reduce any of the New Deal or Great Society social programs. Federal spending on domestic programs grew nearly as quickly under Republican as Democratic administrations. Republicans have on occasion tried to balance the budget or tinker with Social Security and Medicare but were rebuffed by Democrats who accused them of trying to destroy these popular programs. Republican governors and mayors, like their Democratic counterparts, continue to make their pilgrimages to Washington in search of grant money and subsidies for their states and cities, just as members of Congress from both parties run for reelection by pointing to the federal funds they have brought back to their states and districts.
Nor have Republicans had much success in penetrating leading cultural and educational institutions on behalf of ideas that have wide support among voters. College faculties and editorial boards are more resolutely Democratic and liberal today than they were in the 1960s. Republicans have so far been unable to parlay their considerable electoral success into commensurate influence over cultural, journalistic, and educational institutions. Conservatives, in fact, have done something altogether different: they have created their own newspapers, magazines, think tanks and research institutes, and colleges and schools to circulate their ideas. They have, in effect, formed their own “counter-establishment” through which they communicate with their supporters and wage ideological warfare against Democrats. The two parties increasingly live in their own political and philosophical worlds, a fact that obviously drives their members further apart and makes compromises between them ever more difficult to achieve.
This evolution has now produced a volatile and potentially destabilizing alignment between the two major parties, with one rooted in the public sector and the other in the private sector, and with each communicating mainly with its own supporters. In the past, political parties were coalitions of private interests seeking influence over government in order to facilitate their growth within the private economy. This was true of early party conflicts that pitted commerce against agriculture or the later splits between slavery and free labor or business against organized labor. The regional and sectional conflicts of the past were also of this character. This was in keeping with the small government bias of the Constitution in which the government itself was never supposed to emerge as a political interest in its own right.
The conflict today between Democrats and Republicans increasingly pits public sector unions, government employees and contractors, and beneficiaries of government programs against middle-class taxpayers and business interests large and small. In states where public spending is high and public sector unions are strong, as in New York, California, Illinois, and Connecticut, Democrats have gained control; where public sector interests are weak or poorly organized, as in most of the states across the south and southwest, Republicans have the edge. This configuration, when added up across the nation, has produced a series of electoral stand-offs in recent decades between the red and blue states that have been decided by a handful of swing states moving in one direction or the other.
This impasse between the two parties signals the end game for the system of politics that originated in the 1930s and 1940s. As the “regime party,” the Democrats are in the more vulnerable position because they have built their coalition around public spending, public debt, and publicly guaranteed credit, all sources of funds that appear to be reaching their limits. The end game for the New Deal system, and for the Democrats as our “regime party,” will arrive when those limits are reached or passed.
This point will arrive fairly soon for the following reasons: (1) unsustainable debt; (2) public promises that cannot be fulfilled; (3) stagnation and slow growth; and (4) political paralysis. The last point is important because it means that the parties will fail to agree on any preemptive solutions to the above problems until they reach a point of crisis.
1. Everyone is aware of the accumulated U.S. debt: $16 trillion by the end of 2012, which amounts to more than the nation’s Gross Domestic Product of about $15.5 trillion. Of this debt, about $11 trillion rests in public hands and the remainder is in government accounts. This year, the federal government will pay about $275 billion in interest payments on the debt, or about 6 percent of a federal budget of $3.8 trillion. The interest on publicly held debt (which comes to another $200 billion annually) is paid with government “IOU’s” that will be redeemed in the future out of tax revenues. Interest rates are at a historically low point, a condition that is unlikely to last much longer. It is possible that within a few years, if creditors demand higher rates to purchase our debt, our government could be spending as much as 20 percent of its revenues on interest payments. Those payments must be made at the expense of existing programs, including defense, Medicaid, Medicare, education, and Social Security. No one can foretell when credit markets may decide that our debt is too risky to hold at these interest rates. Since foreign governments hold more than a third of our public debt, they could decide as a matter of policy to sell U.S. debt and invest their resources elsewhere. Such an event in and of itself would precipitate a crisis in our public accounts.
The above does not begin to address all of the unstated or “unofficial” liabilities of the U.S. government, such as promises made to Social Security and Medicare beneficiaries and sums needed to back up federal mortgage guarantees. Some estimate that these liabilities could run as high as $50 trillion. In addition, many state governments have had difficulty balancing their budgets, and some have been able to do so only because of large transfers from the federal government in the 2009 stimulus package and increased payments for education, transportation, and social services in recent federal budgets. State employee pension programs are notoriously underfunded because states have deferred annual payments in order to meet other pressing obligations and the returns on these funds have been well below actuarial assumptions. A recent study suggested that the real value of these obligations across the country is more than $5 trillion while states have put aside only about one-third of this amount in current trust funds. What will the states do when employees line up to collect payments to which they feel they are entitled?
2. In addition to such debt and credit issues, the finances of federal entitlement programs are similarly approaching a point of crisis and insolvency. The most expensive entitlement programs are for old age pensions (Social Security) and health care (Medicare). Currently the U.S. government spends about $725 billion annually on Social Security and $650 billion on Medicare, or about $1.4 trillion on the two program combined, or more than one-third of total federal expenditures. There are now about 45 million people eligible for Medicare and 44 million for Social Security. These numbers are about to explode due to the impending retirement of the “baby boom” generation, or those born between the years 1946 and 1963. There are currently between 75 and 80 million baby boomers, the leading edge of which reached age 65 in 2011. By the year 2025, there will be close to 80 million Americans, and perhaps several million more, who will be eligible to receive benefits under Social Security and Medicare. Given their likely longevity, they will be collecting benefits for years into the future. Meanwhile, they will be retiring from the work force almost as quickly as new entrants are joining. There are now about 125 million people working on a full-time basis in the United States, a number that is expected to grow far more slowly each year than the number of new retirees. In a dozen years or so, we may have as many as 80 million people collecting old age benefits against a working population of 130 or 135 million, and in a fiscal situation in which the federal government is already deeply in the red. These promises cannot be fulfilled without bankrupting the government or the taxpayers, or without strangling the private economy with excessive taxes. This situation by itself has the potential to create a political upheaval.
One might ask why our government has not made preparations for a development that has been in the making for the past
sixty-five years. Far from making preparations for this event, the political authorities have done several things in recent years to make the problem even more acute. In 2001, the Congress passed an expensive prescription benefit program for seniors without providing the funds to pay for it. Many blame President George W. Bush and the Republican Congress for this, but it was not entirely their fault alone, since the Democrats in Congress proposed an even more expensive program than the one that was eventually passed. In 2009, President Obama, with a Democratic Congress, passed a new health care entitlement program to guarantee coverage for the 40 million or so Americans without health insurance, but paying for it by taking $50 billion per year from Medicare, thus further stretching a system that was already on the path to insolvency. In addition, the U.S. government has taken annual surpluses from the Social Security Trust Fund and applied them to deficits arising in the overall federal budget. This accounts for a large share of the $5 trillion or so in debt held internally by the government. Beginning in 2009, the Social Security Trust Fund began to run a deficit, and will remain in deficit for at least another twenty years until the baby boom generation passes through the system. What this means is that the U.S. government will have to make up the funds it has borrowed from the Trust Fund from annual tax revenues.
3. Then there is the problem of stagnating economic growth. The United States needs a rapidly growing economy to produce the income and wealth to pay for these expensive government programs. After all, tax revenues have to be taken from the private sector; the public sector does not generate wealth on its own. Yet, decade by decade, growth has been slowing down in the United States. During the 1950s and 1960s, real GDP grew by an average of 4.3 percent per year, but during the decade of the 1970s, that rate fell to 3.7 percent. It fell further in the 1980s to 3.5 percent, and during the 1990s to 3.2 percent. Following the technology “bust” and recession of 2000, GDP grew from 2000 to 2008 by a rate of 2.6 percent per year, but if we factor in the recession of 2008 and 2009, GDP grew at a rate of 1.7 percent per year for the whole decade of 2000 to 2009. Now, in the past three years, we have bounced out of a very steep recession with only tepid rates of growth of around 2 percent per year. Forecasters expect this trend to continue for years into the future, partly owing to the burdens of debt and the need to pay it down.
There are many possible reasons for this slowdown in growth. A mature economy tends to grow at a slower rate than an emerging economy. Some suggest that the rate of technological progress has slowed down over the past thirty or forty years, contributing to the slowdown in growth. Whatever the cause, long-run stagnation will make it impossible to pay off the promises the federal government has made.
4. But isn’t it possible for Congress and the President to step in now to formulate a strategy to deal with these problems before they reach a crisis point? Various proposals have been set forth: the Bowles-Simpson plan, for example, and other plans to reduce the budget deficit over a ten-year period. To their credit, Republicans in Congress have stepped forward with a plan to reform Medicare and Medicaid and to re-write the tax code so that it encourages economic growth. Thus far, the Democrats have been silent. In any case, such proposals are unlikely to be adopted. For one thing, the problems are too large to be dealt with in any preemptive fashion. The prospect of cutting the federal budget by more than a third is hard to contemplate for politicians who have grown up in an environment of affluence and abundant resources. In addition, it is unrealistic to look to our political process to solve a problem that it has been instrumental in creating.
The regime of public spending has at last drawn so many groups into the public arena in search of public dollars that it has paralyzed the political process and driven governments to the edge of bankruptcy. These groups are widely varied: trade associations, educational lobbies, public employee unions, government contractors, ideological and advocacy organizations, health-care providers, hospital associations that earn revenues from Medicare and Medicaid programs, and the like. These are what economists call rent-seeking groups because they are concerned with the distribution of resources rather than with the creation of wealth. They consume rather than create wealth. These groups are highly influential in the political process because they are willing to invest large sums in lobbying and election campaigns in order to protect their sources of income. While rent-seeking groups can be found in both political parties, the largest and most influential of them (at least on the spending side) have congregated within the Democratic Party. To expand on what was said earlier, one might describe the Democratic Party as a coalition of rent-seekers.
Rent-seeking coalitions have little interest in moderating their demands in the interests of the broader economy because, as their leaders reason, the economy will be little affected by the small share of it to which they are laying claim. In addition, they calculate that if they do not take the money, then someone else will—and so they are not inclined to be “fools” for the public interest. But since the leaders of all rent-seeking groups think this way, the interest group system as a whole operates with little concern for the requirements of economic growth and wealth generation. This is one reason why, in times of crisis, rent-seeking coalitions demand tax increases to pay for their programs instead of recommending policies to accelerate growth.
The late economist Mancur Olson has argued that economies tend to grow more slowly as rent-seeking coalitions become pervasive and ubiquitous, since they divert resources from wealth-creating to wealth-consuming uses. This is one reason, he argues, why the United States grew so rapidly in the nineteenth century, and why West Germany and Japan grew so rapidly in the two or three decades after World War II. At such times, these economies were open to investment and entrepreneurship, and, as a consequence, they enjoyed historically high rates of growth. With the passage of time, all of these systems were gradually encumbered by coalitions seeking benefits through the state. Political paralysis and slow growth, Olson argues, are by-products of political systems captured by rent-seeking coalitions. These groups, operating collectively, can block any overall effort to cut spending or to address the problems of deficits and debt.
The political problem is compounded because the two political parties have diverged to a point unknown in our lifetimes and not seen in America since the upheavals of the 1850s. In the post-war era, during the 1950s and 1960s, it was possible to pass bipartisan legislation with majorities or near majorities of both parties. The Civil Rights Bill of 1964 was passed with a coalition of northern Democrats and Republicans against the opposition of Democrats in the south. Medicare was likewise passed with bipartisan majorities. During the 1970s, the two parties began to diverge into liberal and conservative wings in a process that has continued to the point where, today, there is no ideological overlap between the two congressional parties—that is, the most conservative Democrat is more liberal than the most liberal Republican. Thus the two parties must increasingly bargain like foreign adversaries who fundamentally distrust one another, rather as the pro- and anti-slavery forces bargained during the 1850s. Because of this divergence, there will be no “grand bargain” or preemptive solution to America’s fiscal crisis.
What, then, is likely to happen? The United States will lurch forward for a few years yet, borrowing still more money to finance our public programs and putting off, for a time, any serious measures to address the problems of spending and debt until some event intervenes to force our hand. The United States has placed itself in a position in which it is vulnerable to any number of unforeseen and uncontrollable events. The bond markets could revolt against increasing levels of debt. Interest rates could rise to ruinous levels. A major bank or two might fail, precipitating a new financial crisis. A war or revolution in the Middle East could cause a spike in oil prices. Terrorists might strike again. We could face a new recession before we have fully recovered from the last one. Europe could go into recession as a result of its own debt crisis, thereby curbing the demand for American exports. Because the United States is already skating on thin ice with little room to maneuver, any or all of these events would bring the current system to a point of crisis where Congress would have to slash spending and renegotiate promises it has made. At this point the United States wou