The US Tea Party has a simple fiscal message: The US is broke. This is factually incorrect — US government securities remain one of the safest investments in the world — but the claim serves the purpose of dramatizing the US federal budget and creating a great deal of hysteria about the US’ current debt levels. This then produces the fervent belief that government spending must be cut radically, and now.
There are legitimate fiscal issues that demand serious discussion, including how to control growth in healthcare spending and how best to structure tax reform. However, the Tea Party faction of the Republican Party cares more about small government than anything else: Its members insist, above all, that federal tax revenues never be permitted to exceed 18 percent of GDP. Their historical antecedent is the US’ anti-revenue Whiskey Rebellion in 1794, not the original anti-British, pro-representation Boston Tea Party in 1773.
Most importantly, their tactics have proven massively destructive of wealth in the US. Since the prolonged showdown over the budget began earlier this year, the stock market has lost about 20 percent of its value (roughly US$10 trillion). In effect, the Tea Party is working hard to reduce publicly funded social benefits — including pensions and Medicare — even as its methods dramatically reduce the value of private wealth now and in the future.
Part of the Tea Party’s founding myth, of course, is that smaller government will lead to faster growth and greater prosperity for all. Never mind that the eye-popping growth projections in US Representative Paul Ryan’s budget plan, for example, are utterly implausible; these projections matter politically, because, without them, the full sting of Ryan’s proposed Medicare cuts would be readily apparent.
Standard & Poor’s (S&P) has received some justified criticism for the analysis behind its recent decision to downgrade US government debt; after all, there was little economic news that could explain the move’s timing. However, S&P’s assessment of the political situation is on target: By creating a dysfunctional paralysis at the heart of government, the Tea Party has shown that it is willing to impose dramatic costs on the broader economy and to ensure significantly slower growth.
Confrontation and brinkmanship have become the new watchwords of US politics, even when the US government’s legal ability to pay its debts is on the line, owing to the Tea Party’s ideological rigidity. And the tone of political debate, not surprisingly, has become much nastier.
By signing a pledge not to raise taxes, Tea Party representatives have credibly committed themselves not to acquiesce in any middle-of-the-road compromise. If they break this pledge, presumably they will face defeat in the next round of Republican primaries. So, while a budget deal would technically be easy to achieve, it looks politically impossible in the near term.
Indeed, while the US Congress and the Republican Party have become less popular during this year, support for the Tea Party has remained remarkably constant, at about 30 percent of the population. Its tactics thus appear politically sustainable, at least through next year’s elections.
Perhaps the most damaging outcome of these tactics is to take counter-cyclical fiscal policy off the table completely. Regardless of what happens to the global economy in the weeks and months ahead, it is inconceivable that any kind of meaningful fiscal stimulus would get through the US House of Representatives.