As we’re all being reminded, 1996 was the last time the Federal government was forced to shut down, the result of a budgetary dispute between then House Speaker Newt Gingrich and President Bill Clinton. It didn’t last that long, was economically inconsequential and was generally believed to have worse consequences for the Republicans than the Democrats.
Politics has become generally more partisanship since then and at least according to many participants far less collegial. Disputes over the budget have become more frequent in recent years, with the last crisis over raising the debt ceiling in 2011 causing investors to contemplate the unthinkable, that the U.S. might miss a debt payment. The Federal government is currently operating under automatic sequestration, the result at the end of last year of the calculation by both parties that automatic spending cuts were preferable to a negotiated agreement.
In fact much of what the rest of us regard as dysfunction in Washington DC can be traced to the power of incumbency and the reduced turnover of elected officials. The House of Representatives in particular is increasingly unrepresentative of mainstream Americans and more reflective of the more liberal and conservative wings of each party. Gerrymandering, that process by which congressional districts are drawn as if by a blind chimpanzee, are intended to create electoral districts full of like-minded voters. While an original intention was to assure that racial minorities would be represented by one of their own, an unfortunate consequence has been to steadily reduce the number of Congressional seats that turn over. In last year’s election 90% of the House and Senate were re-elected.
While that might sound as if our legislators need not care much about what voters think given their success at retaining their seats, a great many of them are acutely tuned to the elections that really matter; the primaries through which each party selects its candidates to run in the general election. The polarized politics we watch is because of the increasingly powerful role played by primary voters. House seats that will reliably return a Congressman of a certain party are uncompetitive in the general election and therefore the primary of the dominant party becomes ever more consequential. It forces House members of both parties to be ever more sensitive to their party activists or risk being outflanked by an even more extreme candidate that better appeals to the “party faithful”. As a result, the centrist voter is increasingly marginalized. There doesn’t appear to be anything to reverse this trend, at least for now. In fact, if anything there’s some evidence that it’s further exacerbated by internal migration of Americans to districts and states that they perceive to be “red” or “blue”. I write about these developments in my book, Bonds Are Not Forever – The Crisis Facing Fixed Income Investors.
This analysis is intended to be non-partisan. For investors of either party or no party, the future is likely to include more frequent disputes that require one side to blink as the protagonists perform for their hard-core constituency. America’s challenges require compromise, and regrettably we are electing representatives for whom total victory is all that counts. It will become a more familiar landscape.