Saturday, February 20, 2016

Do US Politics Impact Monetary System Change?

Since we are now fully into the 2016 election year here in the US, many people are revved up for one candidate or another for President. Every four years this happens and we get people who really don't pay much attention to politics suddenly believing that perhaps we are about to see major changes. 

The reality however is that in terms of the basic monetary system (and even national fiscal policy) not all that much really changes. We mostly just see some tinkering on the margins. If the Democrats gain full control of Congress and the White House we are likely to see some tweaking of the tax code to make taxes more progressive (higher marginal rates). If  Republicans gain full control of Congress and the White House, we are more likely to see lower marginal tax rates and perhaps less regulation. This assumes one party or the other gets full control which has not happened much in recent years.

Lately, with the US electorate so divided, we get divided control of government with almost no major changes of any kind taking place in terms of national fiscal policy. This ends up disappointing many who were expecting some kind of major change to take place, but don't really understand how our power structure is designed to maintain the status quo. Let's take a quick look at why major change is unlikely to happen as a result of the 2016 US election results.

There are some fundamental reasons why major change in US fiscal policy (let alone any kind of change to the monetary system) rarely takes place no matter which party wins the White House. Here is my bullet point list of reasons why the system as it currently operates tends to inhibit major monetary system change.

- the current US electorate is as divided as I have seen in my lifetime. Moderates from both parties are few and far between now so any kind of compromise is rare these days. In addition, compromise (by definition) rarely brings about major change anyway when it does happen.

-the design of the system itself tends to discourage major rapid change. The US Founding Fathers wanted to divide up the power structure and they did so in several ways. Three branches of government and three levels of government (national, state, local) all with checks and balances on the power of the others. While this system does tend to slow down change, it also makes it much harder for a despot to seize power. Despite the concentration of more power at the federal level of government over time, there are still a lot of checks and balances in the system.

- special interest control of government officials and politicians. Powerful special interests who provide the money to run the system and the campaigns of those will be elected will make sure their interests are protected. Once policies are established, the special interest benefited by the policies will move heaven and earth to keep them in place with only minor changes (the US tax code is the prime example of this). Candidates who try to go against special interests discover they get no money and are vastly outnumbered by politicians quite willing to go along with what special interests want. It's either that or have no chance to win election.

-the current makeup of the US House of Representatives is unlikely to change much the rest of this decade regardless of who is elected President. Because Republicans won a majority of state legislatures in 2010 they obtained the ability to draw the US congressional district lines in most states. They draw those lines to favor their party of course and it is very hard to overturn that in any one election. I saw an article recently that said only a handful of the 435 congressional seats are expected to be in play this year, so virtually everyone expects the Republicans to maintain control of the House. They may lose a few seats in the Senate which will only make it harder to get consensus on anything in Congress. Also, people tend to like their own Congressman even if they dislike the Congress in general.

If the next President is a Democrat, it is very unlikely any major change type of legislation will be passed. If the next President is a Republican, it is possible some bigger changes might be passed, but they still are not likely to be anything more than tweaking the current fiscal system. Democrats will likely hold enough Senate seats to block any kind of major changes they don't like. This will be true even if someone like Donald Trump or Bernie Sanders were elected. I wouldn't expect to see either one of them proposing any radical changes to the current monetary system or even radical changes to US fiscal policy (that could actually pass Congress). I wouldn't view more progressive tax rates as radical change or even a change to a flat tax rate system. The basic monetary system would still be the same and its very doubtful either of those kinds of major tax changes would get passed anyway. You can see all the candidates tax plans here side by side. None of them would cause the kind of major changes we watch for here. 

All the above is why we don't see much real change despite all the hoopla and media hype that we get every four years. I don't see this changing unless we were to get the kind of major financial crisis (worse than 2008) that Jim Rickards and others have predicted. It's only in times of major crisis that we tend to see acceptance of any kind of radical change from the status quo. This is one reason why I really don't cover political news here on the blog. It tends to be divisive and for the most part much ado about nothing in terms of any real major changes like we watch for here. Absent a major crisis in 2016, I don't see this election year as being any different. 

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