A State of Enduring Division in the US

By Jacob L. Shapiro


“The Hate Poisoning America.” “Trump’s America is Not a Safe Place for Jews.” “Is the Country More Divided than Ever?” “A Sickness in the Soul.” “The Escalating Crisis of Hate-Fuelled Violence in the Trump Era.” “Trump and the End of American Ideals.” “We’re Not Supposed to Hate Our Fellow Americans This Much.” And my personal favorite: “Is the United States on the Verge of Civil War?” These are just a smattering of headlines in the past month from major American media outlets, including The New York Times, The Wall Street Journal, Fox News and The Atlantic. They come from authors self-described as conservative and liberal, Republicans and Democrats. The only thing Americans seem to agree on today is that something is rotten in the state of their Union. Everything goes off the rails as soon as Americans start discussing what it is and how to fix it – but that something is horribly wrong no one denies.
As a case in point, last Saturday an armed man attacked a synagogue in Pittsburgh, Pennsylvania, during a Sabbath service. By the time police neutralized him, the man had killed 11 congregants and wounded six more. The attack, described by the Anti-Defamation League as the “deadliest on the Jewish community in the history of the United States,” caused many in the U.S. to reflect on the fundamental freedoms on which the country prides itself. In the days since, the U.S. government and leaders across the political spectrum have loudly condemned it, while in the same breath blaming their political opponents for the climate of violence and radicalism that gave rise to such a grisly attack. The arguments on both sides of the aisle have reached the point of mutual unintelligibility, exacerbated by a fractured media environment in which people follow only those sources that best confirm their preconceived views.
Across the media, the incident in Pennsylvania and the subsequent political debate in the U.S. became the latest evidence of the extraordinary times in which we seem to be living. This Deep Dive takes a look at the data and the arc of American history to determine just how exceptional they are.
Hate by the Numbers
The attack in Pittsburgh raises an obvious question: Have crimes targeting particular religions, ethnicities or races in the United States become more frequent since President Donald Trump’s election? Since 1992, the FBI has tracked hate crimes incidents, offenses “against a person or property motivated in whole or in part by an offender’s bias against a race, religion, disability, sexual orientation, ethnicity, gender, or gender identity.” The most recent data available is for the year 2016, and it suggests that the number of hate-related criminal incidents in the United States has indeed increased – by 12 percent since 2014. According to the FBI, the largest uptick in violence since 2014 was registered against people of mixed race (reported incidents doubled), followed by Latino or Hispanic people (a 15 percent increase) and gay men (a 13 percent rise). Reported incidents against blacks, Jews and transgender people, on the other hand, actually decreased marginally over the same time period. In addition, though reporting of hate crime incidents in the U.S. has increased since 2014, it is down significantly since 1996, which, besides 2001, is the most violent year on record according to FBI data, with 44 percent more hate crimes reported than in 2016. (A spike in anti-Muslim incidents after the 9/11 attacks helped drive up the numbers for 2001.)

On the surface, the numbers seem comforting. Whether they should be is less than clear. The data on which the FBI bases its hate crime statistics come from participating agencies throughout the United States – 15,254 agencies in 2016, representing 89 percent of the U.S. population. That means the data doesn’t account for 11 percent of the population – a not-insignificant chunk. Furthermore, the reporting agencies are not evenly or proportionally distributed among states; in 2016, Mississippi had a population of just under 3 million people and 26 reporting agencies (of which only four submitted incident reports to the FBI) – six fewer participating agencies than in Alaska, whose population was shy of 750,000. These discrepancies somewhat undermine the validity of any broad conclusions made from the FBI data. On top of that, a California State University study found the FBI’s data incomplete because of underreporting, not only by participating agencies but also by hate crime victims themselves. According to a report from the U.S. Bureau of Justice Statistics, more than half of hate crimes from 2011 to 2015 went unreported. (The report also found that an average of 250,000 hate crime victimizations – that is, crimes in which victims perceived bias against a particular group as the perpetrators’ motive – occurred among U.S. residents between each year from 2004 to 2015, nearly 50 times more than the number of hate crimes the FBI reported in 2015.)

The Bureau of Justice Statistics report suggests that the FBI data grossly understates the number of hate crimes happening each year in the United States. But even by the BJS figures, hate crimes still represent only 3.7 percent of all violent crime in the United States. The BJS, moreover, found no statistically significant change in the annual rate of violent hate crimes between 2004 and 2015. And though the bureau has not yet released data for 2016 and 2017, the California State University study forecast only a modest increase in hate crimes for last year. (The FBI will release its data for 2017 next month.) It also predicted a “significant national decrease” for 2018, despite warning that the U.S. political cycle could aggravate ethnic and racial tensions in the second half of the year – a forecast that appears prescient in hindsight.

It should also be noted that these figures reflect only violent crimes. The Anti-Defamation League tracks anti-Semitic incidents in the U.S. more broadly, accounting for assaults, vandalism and verbal harassment. Its 2017 survey showed that anti-Semitic incidents in the U.S. rose by 57 percent year-on-year, with most of the increase coming from occurrences at K-12 schools and on college campuses. Nevertheless, the Anti-Defamation League’s own tracking system showed that physical assaults actually decreased by 47 percent. 
A U.S. History of Violence
Regardless of which numbers one believes, statistics offer an imperfect picture of the situation. The issue isn’t so much that hate crime, or violent crime in general, is on the rise. (On the contrary, the FBI estimates that the rate of violent crime fell between 2016 and 2017 by nearly 1 percent.) It’s the public perception of these crimes. The emotional trauma of the attack on the Tree of Life synagogue, combined with the depth of the domestic political divide in the United States, has inflated its significance. The same is true when an undocumented immigrant commits a violent crime: Even though studies by organizations such as the Cato Institute have shown that undocumented immigrants are less likely to commit crimes than native-born Americans, when someone who came to the U.S. illegally commits a crime, like the recent murder of a young woman in Iowa, the incident confirms political biases.

The truth is that like any country, the U.S. monopolizes its fair share of violence. Indeed, violence is as much a part of the marrow of the United States as the Constitution is. Native Americans were slaughtered and removed from their ancestral lands to make way for white settlers and Manifest Destiny. The U.S. practiced slavery for the first 89 years of its existence and killed untold millions of enslaved people in the process, before freeing some 4 million slaves at the end of the Civil War. The Tuskegee Institute estimates that between 1882 and 1968, 4,743 people died in lynchings in the United States – 73 percent of them in the South. Blacks were the primary targets of these crimes, though other minorities were not spared – the lynching of a Jewish factory superintendent named Leo Frank in Georgia in 1915 is as horrific a crime against Jews as any in U.S. history, last weekend included. The Ku Klux Klan is not a Southern outlier but a thoroughly American institution: In 1924, one in seven adults in Suffolk County, New York, and in Denver, Colorado, were Klan members. The Southern Poverty Law Center’s map of hate groups currently active in the U.S. is positively frightening. And during World War II, the United States summarily interned more than 100,000 Japanese-American civilians, as a result of what Congress later called “racial prejudice, war hysteria, and a failure of political leadership.”

With that history in mind, it’s harder to make the case that violence – specifically violence against minorities – has increased significantly since Trump’s election. There’s a much stronger basis for the case that this kind of violence is simply part of the fabric of American life. What has grown is not the rate of these crimes but rather people’s awareness of them, along with social and class divides among the U.S. population. The tragedy last weekend, the proliferation of school shootings, the 19 percent rise in reported rapes in the U.S. since 2013 – being oblivious to the context of these crimes does not make the mourning for their victims more sincere. Union and Confederate armies are not preparing for a war that will eventually kill more than 600,000 Americans. Presidents, presidential candidates and civil rights leaders are not being shot down in the streets. The National Guard is not killing students at U.S. universities, and the United States does not have 500,000 American soldiers deployed in a land war in Asia.

That’s not to say that the U.S. isn’t polarized – it is. It’s also not to say that disturbing acts of violence aren’t happening at the hands of both the U.S. government and madmen like the synagogue shooter – they are. It is merely to remind us that what’s happening in the U.S. is not only far from unprecedented but also hardly a sign that America is terminally ill. If it is, then the U.S. has been suffering from the same disease since 1776, not 2016. The discovery of a cure, if one exists, depends in part on an accurate diagnosis.
An American Always Pays His Debts … or Does He?
To abuse the metaphor, let’s take a look at the patient’s history. The U.S. is the heir to the British Empire. And in its recent history, it seems to be following in its predecessor’s footsteps.

From 1756 to 1763, the Kingdom of Great Britain led a coalition that won the Seven Years’ War. (The conflict started in earnest for Great Britain two years earlier, in what’s known as the French and Indian War.) It was a textbook victory. Relying on the superiority of its navy at sea and on the prowess of its heavily subsidized Prussian allies on land, Britain managed to crush its main rival, France. By the war’s end, its dominance over the world was a fait accompli. Great Britain acquired all French territories in North America east of the Mississippi River in the 1763 Treaty of Paris, along with Spanish Florida, making it the pre-eminent power on the continent. It also eliminated French power in India, paving the way for its unrivaled power in that country. The war had been immensely costly – Great Britain’s public debt almost doubled, from 75.6 million pounds to 133 million pounds, and its ratio of debt to gross domestic product peaked at 157 percent in 1763. But in the end, it got what it paid for: the British Empire. London looked poised to rule the world for generations to come.
What happened next made the cost of the Seven Years’ War look like a trifle. British public debt ballooned from 127 million pounds to 243 million pounds between 1775 and 1784. Great Britain spent some 236 million pounds on a failed campaign to quell a rebellion in the American colonies. (Chief among the revolutionaries’ complaints was a tax hike Britain had levied to help pay its debts.) By 1803, France had so regained its strength that Great Britain felt compelled to go to war once more. It took 12 bloody years and 1.7 billion pounds, but the kingdom defeated Napoleon and restored its position of global dominance for another century. Britain’s debt stood at 226 percent of GDP in 1815 and topped out six years later at 260 percent – a larger proportion than the United Kingdom had at any point during or after World War II.
A couple hundred years later, the United States is taking up similar habits. Washington reacted to the end of a war its main enemy lost with profligate spending and erratic foreign policy. In 1990, as the Cold War drew to a close, U.S. debt was $3.2 trillion. On the eve of the 2008 financial crisis, it had hit $9 trillion, and as of this September, it’s at $21.5 trillion, almost seven times what it was just 28 years ago. Some $8 trillion of that debt has accumulated under Republican and Democratic administrations during a period of economic growth and relatively small military deployments abroad. It doesn’t look like the U.S. is going to tighten its belt anytime soon, either; the Congressional Budget Office predicts that the U.S. budget deficit, currently at $779 billion – up 17 percent since last year – will surpass $1 trillion by 2020. The U.S. debt-to-GDP ratio is now 104 percent – the same proportion Great Britain had in 1757, the year after the Seven Years’ War began.

But where Great Britain’s money went to securing its empire, the U.S. surge in spending has gone to a combination of tax cuts and the military. In August, Congress passed a $686 billion defense budget for the coming year. Among the authorizations are a 15,000-troop increase, 77 new F-35 fighter jets, a new Ford-class aircraft carrier, three littoral combat ships, six polar icebreakers and a 2.6 percent pay raise across the military. The increased defense spending has played a decisive role in bumping the U.S. GDP growth rate to 3 percent, according to the Commerce Department, and it reflects Washington’s changing strategic priorities. In the 17 years the U.S. has been engaged in insurgency warfare, China and Russia have emerged as potential rivals on the global stage, while Iran and North Korea pose threats to stability in their respective regions. The United States is overextended and underprepared to take on any of these countries in a conventional military operation without sacrificing its ability to project power around the world. To rise to that challenge, it will need to enhance its capabilities.
The trouble is that a $686 billion defense budget is just the tip of the iceberg if Washington’s goal is to keep its military edge over Russia and China and still be able to field enough forces for missions abroad. The Congressional Budget Office estimates that over the next 30 years, the U.S. will spend $400 billion to modernize its nuclear weapons arsenal alone – $1.2 trillion in today’s dollars, according to War on the Rocks. The Obama administration made the original plans, but the Trump administration’s Nuclear Posture Review has augmented them, proposing new warheads and missiles that could add tens of billions of dollars to the final price tag. Maintaining nuclear superiority over its foes will be costly for the U.S., particularly if no successor agreement emerges to replace the Intermediate-Range Nuclear Forces Treaty. (At the same time, the mercurial Trump has called for 5 percent spending cuts in all federal departments by 2020, refusing to clarify whether the directive applies to the Pentagon, too.) And unlike Great Britain, which incurred the bulk of its debts during wartime, the United States is using up its credit in times of peace and plenty – a decision that could make borrowing harder in the event of an economic crisis or large-scale military confrontation.
Follow the Money
Of course, the threat of being eclipsed by a rival military power is still a distant one for the U.S. The country devotes more money to its military than the next 10 biggest defense spenders combined. Its most credible future rival – China – would have to keep up its current rate of military development for at least another decade before it could hope to challenge the U.S. in the South China Sea, let alone at the myriad maritime chokepoints it depends on for trade. Of far greater consequence for U.S. political stability, on both the domestic and international fronts, are a financial crisis and the inflexibility that comes with carrying such a hefty debt and deficit.

And those risks don’t stop at the federal level. American consumers have gone on a spending spree of their own. As of the second quarter of this year, U.S. household debt had reached $13.29 trillion – 5 percent higher than it was in the second quarter of 2008. Student loan debt, having more than doubled in that time, stands now at $1.41 trillion. Credit card, auto and housing debt have climbed as well, to say nothing of the stratospheric rise of the U.S. stock market, where the Dow Jones sits at almost three times its value in 2009 even after the recent fluctuations. Anyone looking for a potential bubble in the U.S. economy could reasonably point to any of these asset classes as the tinder that might set off the next major financial crisis. Most American consumers depend on credit to finance the kind of lifestyle they want, and only 52 percent of them have reaped the gains of the stock market’s rally, according to a recent Gallup poll. The U.S. has not recovered from the 2008 financial crisis. It has simply kicked the can down the road.
Behind this binge on loans and credit is a staggering level of income and wealth inequality in the United States. The top 10 percent of pretax income earners make half of all pretax income in the country – a greater share than at any previous moment in recorded U.S. history, including the height of the Great Depression. Income growth has ground to a standstill: From 1978 to 2015, in fact, real cumulative income for the bottom 50 percent of U.S. workers declined by 1 percent. The Pew Research Center finds that, accounting for inflation, wages today have the same purchasing power they had 40 years ago. In the U.S., the lower 60 percent of households by income possess just 2.4 percent of wealth – the lowest figure among any of the 28 countries that report wealth distribution data to the Organization for Economic Co-operation and Development. The wealthy, meanwhile, have turned to the stock market as one of the few opportunities left for those with capital to spend to achieve high yields on their investments. That middle-class earners have more of their wealth tied up in real estate than in stocks – which have recovered better and faster since 2008 than housing prices have – is also driving inequality.

The result, according to Pew, is that only upper-income families have recouped the wealth they lost during the financial crisis. While median wealth for lower-income families fell by 40 percent from 2007 to 2016 – and by 33 percent for middle-income families – it grew by 10 percent for upper-income households. And though U.S. unemployment is currently as low as it has been in almost 20 years, real wage growth has been flat. If the U.S. economy has recovered from the 2008 recession, the majority of the country’s citizens have not. The tales of recovery ring hollow for those hardest hit, and yet all around them is economic euphoria and celebrations of surging stock market prices, low unemployment and more tax cuts to come. When another recession eventually strikes the U.S., inequality will have reached new heights after more than a decade of frustration for those who have not been able to fully participate in what on paper looks like a healthy and humming American economy. If the wealth gap is anything to go on, it’s small wonder the U.S. public is divided.
Know-Nothings of the 21st Century
There’s one more symptom of the current American condition that warrants attention here: the increased animosity in the United States toward immigrants, particularly (though not exclusively) asylum seekers and people in the country illegally. The Mexican immigrant population in the United States surged during the last quarter of the 20th century from 2.2 million in 1980 to 9.2 million in 2000, topping out at 12.8 million in 2013. Although it has since declined – to 11.3 million in 2017 – immigration nonetheless was a key issue in the last presidential election. Trump made illegal immigration a focus of his campaign for the presidency, touting a plan to build a wall between the U.S. and Mexico – and to make Mexico pay for it.
Periods of hostility toward immigrants are not uncommon in U.S. history. In 1798, a Federalist U.S. government passed the Alien and Sedition Acts, afraid that its partisan rivals, the Democratic Republicans, might ally with France against it. The better-known aspects of these laws are their impingements on freedom of the press – but part of their purpose was to make it harder for immigrants to come to the United States and attain U.S. citizenship. Some 80 years later, Chester A. Arthur’s administration signed the aptly named Chinese Exclusion Act, prohibiting Chinese laborers from coming to the United States because Americans who had moved west were worried about competition for jobs.

But there is another chapter of U.S. history that more closely resembles the present, at least where U.S. immigration and its staunchest opponents are concerned: the mid-19th century. That era brought the rise of the Native American Party, or as it is better known to history, the “Know-Nothing Movement.” The Know-Nothings were a group of nativists who feared Catholic immigrants, especially from Ireland and Germany, as a faction they felt would be more loyal to the pope than to the president. The movement emerged as a political force in the 1850s, on the eve of the Civil War, and its rise reflected not so much popular resistance to immigration as a collapse of the traditional political groupings of the time.

The Whig Party, which up until then was one of two major parties in the U.S. political system, was crumbling. Not only had it lost two of its leaders – Henry Clay and Daniel Webster, who died in 1852 – but it was also divided on the issue of slavery. With its origins in opposing what it saw as the authoritarian tendencies of Andrew Jackson, the Whig Party attracted all manner of people, including federalists who advocated a strong legislative check on the presidency and states’ rights advocates who did not recognize strong central government authority, whether that of Congress or of the executive branch. The 1854 Kansas-Nebraska Act – which enabled its namesake territories to decide for themselves whether they would allow slavery, repealing the 1820 Missouri Compromise – split the party for good. Anti-slavery Whigs, such as Abraham Lincoln, joined the Republican Party. The rest of the Whigs diverged, some joining the Democratic Party and others flocking to the new Know-Nothing Movement. In the 1856 presidential election, the Know-Nothing candidate received 21.5 percent of the popular vote. By 1860, however, the Know-Nothings had been subsumed into an umbrella party called the Constitutional Union that garnered 12.6 percent of the vote. They never played a large role in U.S. electoral politics again.

The Know-Nothings were a narrow, almost single-issue party. As the country became increasingly polarized, eventually to the point of war, the two-party system fell apart. The 1860 presidential election pitted four candidates against one other – Lincoln won with just 40 percent of the popular vote, carrying only 18 of 44 states. The Know-Nothings lashed out at a representative democracy they felt no longer represented their views. That kind of disillusionment is the currency on which would-be demagogues thrive.

Like that of the Whig and Democratic parties in the 1850s, today’s two-party system is straining under the changing priorities of its constituencies. The previous electoral bases of the Republican and Democratic parties have become almost unrecognizable. For nearly 40 years, Republicans were the party of fiscal conservativism, free trade, morally based foreign policy and Christian values. Democrats were the party of workers and unions, protectionism, government spending and a more liberal internationalist foreign policy for even longer, going back to the days of FDR. These labels no longer mean anything. The Democratic presidential candidate in 2016, Hillary Clinton, was a typical Democrat on social issues, but on economic and foreign policy matters, she was practically a Republican. The man who almost beat her for the Democratic nomination, Bernie Sanders, is an independent, not a Democrat. Trump, likewise, is a departure from Republican politics as we knew them: He is not a fiscal conservative and has moved the U.S. toward protectionist policies not seen since the Smoot-Hawley Tariff Act.

Much as it did during the watershed 1850s, the immigration issue has seemingly come to a head in contemporary U.S. politics. Trump famously referred to Mexican immigrants as drug dealers, criminals and rapists during his presidential campaign. But in case that statement didn’t make it clear enough, the real issue here is not illegal immigration. Illegal immigration has been a major political talking point in the United States for almost 30 years, since the influx of Mexican immigrants to the U.S. began in the 1980s. Multiple administrations and Congressional line-ups have failed to pass meaningful immigration reform, leaving opponents of illegal immigration feeling understandably betrayed by their government. Trump capitalized on this disillusionment and disenfranchisement and, like any effective demagogue, appealed to people’s fears and prejudices to secure their support. To many of his supporters, it doesn’t matter that former President Barack Obama holds the current record for immigrant deportations, having ejected more than 2 million people from the U.S. during his eight years in office. What matters is that Trump really understands the threat of Mexican rapists and would-be Muslim terrorists trying to infiltrate the United States, and only he has the guts to do what must be done to stop them.
To be clear, not all opponents of illegal immigration think this way. Indeed, the majority don’t. Many Americans who oppose illegal immigration have done so for years as a matter of legal or economic principle. Still, it is undeniable that a certain segment of the U.S. population views not just illegal immigrants but all foreigners with the same kind of fearful disdain that the Know-Nothings felt for Irish and German immigrants.

A guest last week on Lou Dobbs’ show on Fox News claimed that a caravan of Central American migrants seeking asylum in the U.S. had financial backing from leftist mobs and connections to the “[George] Soros-occupied State Department” – information he’d gleaned from the “highest levels of the Guatemalan government.” The conspiracy theory, concerning a top department of the U.S government (a department led by a hand-picked Trump loyalist, no less) and laced with the anti-Semitic insinuation that a billionaire Jew is single-handedly working to sabotage U.S. national security, speaks for itself. Trump has suspended aid to Central American countries to show how tough he is – undermining U.S. influence in a region in which China is trying to curry favor. He deployed 5,000 U.S. troops to the Mexican border to drive the point home. (Mexico, not exactly enthused about the caravan itself, has also deployed its navy to secure its southern border.) But Trump is not the cause of this underlying dynamic. Rather, he is simply one of its more conspicuous symptoms.

The Obama administration was tough on immigration. During its tenure, private companies raked in millions of dollars in contracts with U.S. Immigration and Customs Enforcement to house detained immigrants and asylum seekers when federal facilities ran out of space for them. In 2014, the Obama administration expanded a system for detaining families after a large influx of Central American immigrants, many of them unaccompanied children, tried to enter the United States illegally that year. In that sense, the “zero-tolerance” policy the Trump administration implemented in April, resulting in harrowing scenes of children being separated from their parents at the border, was not terribly different from Obama-era policies, right down to the euphemisms used to describe the detention centers. What was “family-friendly” in the parlance of the Obama administration became “like summer camp” under Trump.

The difference is that where the Obama administration seemed to feel a degree of guilt over its policies and tried to stem the negative press they generated, Trump has fully embraced the tough-guy image. While members of his party scrambled to reunite children with their parents and stop the practice of family separation for fear of embarrassment or negative fallout, Trump was telling anyone who would listen that Mexico was sending rapists and now child smugglers to the border and that he was “100 percent right” the whole time. This kind of rhetoric is attractive to voters who feel they have no party or leader who understands their views. The Know-Nothings won 21.5 percent of the vote in a presidential election doing the same thing, and though it’s impossible to know what segment of Trump’s base is of a like mind, the Know-Nothings are as good a benchmark as any.
Vice Pays Its Tribute to Virtue
Americans believe in the myth of American exceptionalism. The United States, in the words of John Winthrop, is to be “a city upon a hill” – with the eyes of the world watching it. Indeed, it is a virtue of the United States that its people believe its government should be held to a higher standard of justice, a standard defined not by race, creed or sexual orientation but by the U.S. Constitution. That document, and the fervent American belief in it, is what allows the United States to sometimes correct its flaws and to deal with diversity in a way that can be both progressive and, by its own measure, just. It is also what allows me to write such an honest assessment of the U.S. without fear of being thrown in jail and hung upside down by my ankles – a pleasure I might look forward to on publication in a country like China or Russia, where, to quote Lincoln, “despotism can be taken pure without the base alloy of hypocrisy.”

Hypocrisy, as Francois de la Rochefoucauld said, is the tribute vice pays to virtue. And the pretense of virtue is often better than no virtue at all, even if it means one must work harder to unearth the vice. There is hypocrisy in the outcry over the polarization and violence afflicting U.S. society, as if violence in America is something new, and as if the current levels are comparable to those during previous chapters of American history. The U.S. is polarized, true – but not nearly so much as it has been at other, more dire moments in its history. The country’s current divisions are not primarily about race, religion, gender or any other hot-button cultural issue. These rifts have always been present in the U.S., and the country will never be rid of its original sins. (There’s also a case to be made that they have never been less present than they are today.) Pretending a single man is responsible for these demons is not only intellectually lazy, it is simply incorrect.

The deeper malaise in U.S. society stems from class divisions. Economic policies have exacerbated wealth inequalities and, in turn, created political disillusionment that has transformed traditional U.S. political parties beyond recognition into forces incapable of governing for the good of the nation and content to govern for the affirmation of the mob. The United States endured similar periods of polarization and social crisis during Reconstruction and before the Great Depression and became stronger for them. The main difference now is that the country has never dealt with such a large problem while also carrying such high levels of debt and so much international responsibility.

If there is one issue today that calls to mind the darker chapters of American history, it is not a universally condemned lone-wolf attack against a synagogue. It is the United States’ general attitude toward illegal immigration, toward foreigners in general, toward asylum seekers who risk their lives to come to the country precisely because they believe the U.S. is the city on a hill that it claims to be. This chauvinism has reared its head occasionally in American history, usually at times of economic and political upheaval. Its reanimation is just the latest sign that political reorganization at the top is long overdue. In the meantime, if history is any indication, the political polarization in the U.S. will get worse before it gets any better, and until the country has addressed its underlying economic problems, demagogues and political parties on all sides will continue to look for the issues that most inflame the passions to distract from the system’s failings.

Great Britain was an undisputed global superpower in the last quarter of the 18th century and almost squandered its position through a series of expensive missteps. Though the U.S. eschews the trappings of empire, its global power over its rivals is no less significant than Britain’s was a couple hundred years ago. What’s more, its missteps share striking similarities with those of the British at the end of the 18th century. The most likely scenario is that, like the British Empire before it, the United States muddles through and comes out more powerful than before for a long stretch until it enters a secular decline – all the while believing it is truly exceptional, right up to the very end.

What goes up

Strong growth data obscure a probable slowdown to come

America’s economy is being pulled in many directions

FINANCIAL MARKETS may have wobbled in recent weeks—the S&P 500 fell by 7.3% in October. But America’s real economy still seems to be in rude health. Figures released on October 26th showed economic growth of 3.5%, at an annualised rate, in the third quarter of 2018. Most economists had expected a sharper slowdown after the 4.2% expansion recorded in the preceding three months. On just one other occasion since the financial crisis, in 2014, has America clocked up two consecutive quarters of such speedy growth. Can it last?

Some fear not. The economy has been given temporary fizz by President Donald Trump’s tax cuts. Though these will be in place for some time, the impact on growth may not last. Together with February’s budget bill, they will boost annual GDP growth by 0.6-0.8 percentage points by the end of 2018. But the impact will fade to 0.3 percentage points in 2019 at best, estimate Karen Dynan and Jason Furman of the Peterson Institute for International Economics, a think-tank. Most forecasters expect America to return soon to a growth rate close to 2%, with the main legacy of the tax cuts being weaker public finances.

Boosters retort that the tax cuts will unleash permanently higher growth and investment. Although an ageing population is a drag, a hot economy could enable productivity to grow faster. That would provide the recovery’s final missing ingredient and support growth even as the immediate effect of fiscal stimulus wears off.

At first glance the growth data do little to settle this debate. Over the first half of 2018 taxes on personal income were lower as a share of GDP, compared with the same period in 2017, by around 0.4 percentage points, and those on corporate income by around 0.7 percentage points.

In the third quarter government taxation and spending contributed around 0.7 percentage points of the overall 3.5% growth rate, according to estimates by the Brookings Institution, a think-tank (see chart). Though this is the government’s biggest contribution to real GDP growth since 2010, the economy would probably still be enjoying an uptick in growth without it.

Yet a closer inspection offers more support for a pessimistic view. Consider two components of growth: investment and trade. Non-residential investment was disappointingly weak in the third quarter, particularly given the economy’s broader strength. Just 12% of 116 businesses recently surveyed by the National Association of Business Economics reported that they had increased their investments in response to the tax cut. Investments take time to plan and the data are noisy. But Mr Trump’s tax cut was supposed to lead to a sustained investment bonanza. There are few signs of that so far.

There may be trouble in the housing market, too. Private investment in housing, including spending on equipment by landlords, fell for the third consecutive quarter. Explanations include demand constrained by affordability, as well as supply constrained by pricier land, a shortage of immigrant labour for construction and tariffs that have driven up costs. Changes in the tax treatment of housing and interest-rate rises may matter, too.

Meanwhile Mr Trump’s tariffs are buffeting trade. A surge in soyabean sales has gone into reverse. Businesses have stocked up on inventory—enough to add more than two percentage points to growth in the third quarter. But this may be because they were preparing for dearer imports after tariffs on Chinese goods came into effect. If so, then those inventories represent spending brought forward rather than genuine growth. Trade worries may be behind the investment slowdown. The latest edition of the Federal Reserve’s Beige Book, which gathers anecdotal evidence on the economy from the private sector, includes repeated mentions of uncertainty about the trade environment.

If investment continues to sag, growth will depend more on consumption, which in turn depends on rising employment, working hours and real wages. “The resiliency of the expansion rests purely with the labour market,” says Julia Coronado of MacroPolicy Perspectives, a consultancy. So far this seems to be holding up. Private-sector wages are growing faster than in a decade; figures due to be released on November 2nd were expected to show another month of strong employment increases, as well as enough wage growth to push the year-on-year change above 3% for the first time since 2009.

Another risk looms as a result: that the Fed might raise interest rates too fast. It is the central bank’s job to respond appropriately to the application and withdrawal of fiscal stimulus. It is not expected to raise interest rates at its next meeting, which ends on November 8th. But investors do expect another rate rise in December, and three more in 2019. As markets have swooned, these expectations have barely shifted. That might change if data on the real economy took a sharp turn for the worse. (Higher rates may be another explanation for the investment slowdown.)

The pessimists are surely right that, even if there is scope for productivity to grow faster, growth will slow as fiscal stimulus fades. And it is easier for the Fed to manage a downturn that it knows is coming than one that comes out of the blue. Still, excessive monetary tightening often precedes recessions. Growth may look good for now. But policymakers need to be ready to turn on a dime.

Angela Merkel’s departure will not salve Germany’s angst

Voters and business leaders betray a similar ambivalence about an uncertain future

Philip Stephens

You have never had it so good. Harold Macmillan’s famous observation is usually misremembered. The then UK prime minister’s boast about a booming British economy during the closing years of the 1950s was qualified: “Let us be frank about it. Most of our people have never had it so good.” Then came the oft-forgotten caveat: “What is beginning to worry some of us is ‘Is it too good to be true?’ Or perhaps I should say, ‘Is it too good to last?’”

Too good to last. Success suffused with doubt. Macmillan would have recognised Germany’s present temper. The other day I heard an elder statesman remark that the country had never been so prosperous. And yet. Chancellor Angela Merkel’s coalition was unloved, the public mood was fractious and politics was splintering. Germans struggled to recognise their good fortune.

Business leaders betray a similar ambivalence. Germany has a whopping current account surplus. It makes high-quality products commanding premium prices. In cities such as Stuttgart, the wealth this generates hits you in the face. Yet corporate chiefs fret that a play-it-safe culture stifles innovation and risk-taking. Over-regulation does the same. The future belongs to the digital worlds of machine learning and artificial intelligence. They could soon be the sole property of the US and China.

Ms Merkel, everyone in Berlin has known for a while, is in the twilight of her chancellorship. Now she has mapped out a path for her departure. The heavy losses suffered by her Christian Democratic Union in state elections in Hesse were the latest in a series of blows. The CDU’s sister party, the Christian Social Union, had already stumbled badly in its Bavarian stronghold. Her MPs had rejected the chancellor’s choice to lead them in the Bundestag.

Things end badly when politicians overstay their welcome. It happened to Ms Merkel’s predecessors Konrad Adenauer and Helmut Kohl. Her decision to surrender the party leadership in December is an admission that 13 years as chancellor has been too long, as well as an effort to depart with dignity. Her intention to remain as chancellor until 2021 looks like one of those things leaders feel they have to say but do not really believe. If the centre-right CDU and CSU have taken a battering, support for their Social Democratic party partners in the grand coalition is in freefall.

The rise of the xenophobic populists of Alternative for Germany, particularly among disgruntled left-behinds in the country’s east, has caught international attention. But the party making more of a political running has been the Greens. Drawing in both small “c” conservatives worried about the environment and left-leaning liberals who favour open immigration, the Greens have a chance to displace the SPD as the second party.

Oddly, Ms Merkel is still the most popular politician. She sits just about on the centre point of the national political spectrum. For some, that is the problem. Her decision in 2015 to open the borders to 1m refugees enraged the right of her party and opened a flank for the AfD. Yet it also drew support for Ms Merkel personally from the centre-left.

There is a theory among political boffins in Berlin that once Ms Merkel has gone, national politics will revert to comfortable normality. The CDU will shift rightward, at once drawing away support from the AfD and leaving space for the SPD to reoccupy more of the centre-left. This yearning for business as usual sounds to an outsider like the wishful thinking of an establishment with its head in the sand.

The political landscape has been redrawn. Politics used to be a three-party game (four if you count the CDU and CSU as separate). The liberals of the small Free Democratic party provided the swing vote in coalition building. Those days are over. Six (or seven) parties are now represented in the Bundestag. Even if recent poll ratings of 20 per cent and above overstate their national support, the Greens have joined governing coalitions in more than half-a-dozen states. Their pitch is to affluent professionals with a social conscience.

The far-left Linke has a solidly loyal following in the east, where nostalgia for the old communist order — Ostalgia, it’s called — is a reminder of just how short are political memories. The AfD scoops up support from neo-Nazis, as well as those caught up in the scares about refugees.

Left unexplained is why an economy that is doing so well has so obviously lost its political balance. Part of the explanation must be that the riches are unevenly shared. And for all that the government is awash in money, politicians find it curiously difficult to refurbish a crumbling national infrastructure. Bridges and roads go unmended, airports unbuilt. No one should expect to get a decent WiFi connection or mobile phone signal.

Mostly, though, Germans seem to be echoing Macmillan: “Is it too good to last”? The answer may well be yes. The old order is crumbling. In Donald Trump, the US, once Germany’s vital protector, now has a president who represents everything Germans stand against: crude nationalism, the primacy of power and disdain for the rule of law.

Europe, Ms Merkel says occasionally, must rise to its own defence. People nod in agreement and then show no enthusiasm for the cause. The chancellor has never been a passionate European in the mould of Kohl. She does know that German prosperity rests on Europe’s security and stability. But who now will guard the continent’s peace?

A Blueprint for Gridlock in the Markets

By Randall W. Forsyth

A Blueprint for Gridlock in the Markets
Michael Nagle/Bloomberg

Stocks enjoyed a relief rally on wednesday, mainly because of the great relief that the midterm elections were finally over. By week’s end, however, that relief faded, and the agita resumed.

Friday’s 202-point drop in the Dow Jones Industrial Average wasn’t enough to wipe out Wednesday’s 545-point leap, however, and the blue chips ended up 718 points, some 2.8%, for the week. Over the past two weeks, the Dow tacked on 1,301 points, or 5.3%, for its best fortnight in two years. That, of course, came after October’s 5.1% shellacking.

For the financial markets and the economy, the as-expected election result of Democrats gaining control of the House of Representatives and Republicans retaining the Senate makes possible a variety of outcomes. Most depend on whether the new Congress cooperates or clashes with President Donald Trump. What can be confidently predicted is continued massive budget deficits.

Democratic control of the House probably means no further middle-class tax cuts, according to Fitch Ratings, although fiscal “consolidation” also isn’t apt to be a priority for the Dems. The taxing and spending policies are likely to continue, Northern Trust economists add, which bodes poorly for the fiscal outlook. “Despite strong growth and exceptional corporate profits, government receipts were flat in the last fiscal year, thanks to tax reform,” they observe. And with the loosened spending curbs, the federal deficit may reach $1 trillion this year.

Infrastructure investment may be one area of agreement between the parties, although Fitch notes that there is no clear consensus on the details, notably funding. In a paper released last February, the Trump administration recounted a proposal made a year earlier to use $200 billion in federal spending to seed $1.5 trillion in projects paid for mainly by state and local governments. Little has been heard of this recently. In contrast, Rep. Peter DeFazio, an Oregon Democrat who is set to become chairman of the House Committee on Transportation and Infrastructure in the next Congress, has proposed bankrolling projects by issuing $500 billion in 30-year bonds and indexing federal fuel taxes to inflation.

Court Street Group, a municipal bond advisory, argues that Democratic control of the House increases the chances of reviving Build America Bonds, which were taxable munis with a federal subsidy that were issued to fund capital projects in 2009 and 2010. If the ideas of issuing more long-term Treasuries and reviving Build America Bonds for infrastructure sound familiar, they were proposed by Barron’s in December 2016. (For other ideas for fixing the budget, see this week’s Streetwise.)

In the meantime, the only certainty is that the national debt will continue to climb. Northern Trust points out that a new deal to raise the debt ceiling will be needed when the present suspension ends on March 1. In the meantime, gridlock is the most likely outcome, according to Greg Valliere, chief global strategist for Horizon Investments, given the probability of the House focusing on investigating Trump, who will fight back by demonizing Nancy Pelosi, the California Democrat who may well return as Speaker of the House.

For the markets, Federal Reserve policy and China remain “huge wild cards, but economic fundamentals will dominate—and those fundamentals look solid,” he concludes. For now, anyway.

 New York City Joins The “Imminent Bankruptcy” Club

The “public pension crisis” is the kind of subject that’s easy to over-analyze, in part because there are so many different examples of bad behavior out there and in part because the aggregate damage these entities will do when they start blowing up is immense.

But most people see pensions as essentially an accounting issue – and therefore boring – so it doesn’t pay to go back to this particular well too often. Still, New York City’s missing $100 billion can’t be ignored:

New York City Owes Over $100 Billion for Retiree Health Care

(Bloomberg) – New York City faces future health costs for its retired workers of $103.2 billion, an increase of $40 billion over a decade. It has about $5 billion set aside to pay the bill. 
The so-called “other post-employment benefits” liability was disclosed in New York’s comprehensive annual financial report released by the city comptroller’s office Wednesday. The city’s $98 billion unfunded liability for retiree health care exceeds the city’s $93 billion of bond debt and $48 billion pension-fund shortfall. 
“The numbers are huge,” said Maria Doulis, a vice president at the Citizens Budget Commission, a budget watchdog group funded by the business community. “If you’re looking at the big three liabilities, this is the one that’s problematic, because there’s nothing set aside to address this and there’s absolutely no strategy on the part of the city.”
New York, the most populous U.S. city, has almost 300,000 current employees and is responsible for more than 230,000 retirees and their beneficiaries. City employees with 10 years of service qualify for free retiree health care. 
The city’s post-employment benefits include health insurance, Medicare Part B reimbursements, and welfare fund contributions. Medicare Part B covers doctors’ services that are received from a federally approved facility or a medical practice. Welfare funds are administered by unions and provide supplemental benefits such as prescription drug, vision and dental coverage. 
New York City should address its retiree health-care costs by requiring beneficiaries to share the cost of premiums for health insurance, eliminating the reimbursement for Medicare Part B and reducing contributions to the welfare funds, according to the CBC. 
“Forget the private sector, this free retiree health insurance is not a benefit offered in the public sector,” said Doulis. “They’re not taking up that challenge. Limiting the growth and cost of retiree health insurance has not been on the agenda.” 

Unlike debt, which is limited by statute, nothing restricts the level of retiree health liabilities. 
Money set aside for retiree health benefits has been used as a rainy-day fund by mayors during times of fiscal stress, said Doulis. The $5 billion the city currently has set aside is projected to last until 2026. After that, the city will fund benefits on a pay-as-you go basis. The city paid $2.6 billion in retiree health benefits last year.

Let’s look at the highlights:

“The city’s $98 billion unfunded liability for retiree health care exceeds the city’s $93 billion of bond debt and $48 billion pension-fund shortfall.” Which means the retiree health care deficit is in addition to the pension shortfall. These are separate problems totalling nearly $150 billion – for one city.

NYC’s retiree health care unfunded liability rose by $40 billion in the past decade. But, “It has about $5 billion set aside to pay the bill.” So two years of just the increase in this liability wipes out the money on hand to pay it. That sounds like a cash flow rather than an accounting issue.

“New York … has almost 300,000 current employees and is responsible for more than 230,000 retirees and their beneficiaries.” There must be a ratio of employees to retirees where the numbers stop working and the system breaks down. 1-to-1, which NYC is approaching, has to be near that boundary.
“City employees with 10 years of service qualify for free retiree health care.” That has to be a typo, because if it’s not, public sector workers have cut themselves a deal that we in the private sector can only dream of. Historians will have a field day with this one.

The point? While Chicago and California hog the “unfunded pension liability” spotlight, it turns out that good old New York City has quietly been accumulating unfunded liabilities sufficient to make them members in good standing of the “imminent bankruptcy” club.