The Economics of Polarization, or: Why the Tea Party Is Magnificently Right

A hard look at the data explains the polarization of American politics: state and local governments are increasing property taxes even while the housing market crashes, and this is killing the middle class. In many parts of the country prospective homebuyers will pay almost as much in property taxes as in mortgage interest! No wonder the residential real estate market can’t come up for air, and why the American middle class feels that it is fighting for its existence. The only solution will be the kind pioneered by Wisconsin Gov. Scott Walker, one of the real heroes of our time: renegotiate the whole relationship between the government and the government unions. But that would mean the end of the Democratic Party as we know it. That’s why the upcoming presidential election will be the nastiest in living memory.

Crunching the numbers, I was gobsmacked by the way in which the tax burden has trickled down to the state and local level and crushed the middle class. The charts and graphs are available in my “Spengler” essay at Asia Times Online this morning:

Has America become irrational? Not since the 1930s have politics been so polarized, from the Tea Party movement on one side of the spectrum to the Occupy Wall Street protesters on the other. Why does the right object so vehemently to government spending? And why does the left attack private capital with parallel passion? The answer lies not in the American psyche, but in the statistics.

America is engaged in class war, but not of the sort one reads about in the mainstream press. The truly indigent — young African-American men, for example, most of whom are now unemployed — have little to do in this war. Large corporations for the most part are bystanders as well; they will make their peace with the victor. This is a war of survival between the productive middle class on one hand, and the dependents of the state on the other.

The Tea Party’s aversion to government spending is as pure an expression of rational self-interest as we have seen in American history. Like any new movement, it attracts more than its fair share of oddballs. The fact that a movement led by amateurs continues to wield so much power proves that it has good reason to be there.


State and local governments, though, have exhausted their tax base, and the continuous rise in property taxes through the crash in property prices has kept the real estate market more depressed than economic conditions otherwise might indicate. A further increase in tax rates would yield less revenue. In effect, the government would have to proceed from taxing private capital to expropriating it, de facto or de jure — for example, nationalizing banks and directing them to make loans to politically-favored projects, after the fashion of Latin American banana republics.

The alternative is to renegotiate pension and health benefits already promised to public sector unions.

In either case, households that considered themselves comfortably middle class, and looked forward to a comfortable and secure retirement, find themselves on the edge of calamity. During the bubble years of 1998-2007, when America imported $6 trillion of overseas capital, the ride was easy.

When the whole world brought its savings to the United States, people of mediocre skills and slack work habits could afford big houses, expensive vacations, and (at taxpayer expense) generous pensions. Why Americans expected to live well indefinitely on the largesse of foreign investors is a question for the psychiatrists, not the economists.

The crisis has called into being a political movement of the exasperated middle class, namely the Tea Party. It has erased the image of the government unions as champions of progressive causes, and exposed them as an “aristocracy of labor” (in Marx’s phrase) parasitizing the public revenue.

The outcome inherently favors the Republicans. Debt — the catchall name for the crushing tax burden — has become a hot button issue even for many Democrats. But this election will be fought more desperately, and nastily, than any other that comes to mind during the past century. This is an existential struggle, a political war of survival for the American middle class. If the government unions go down in the fight, the Democratic Party of Barack Obama will cease to exist in its present form – and that would be a beneficial outcome for the United States.

That explains why the debt issue raises emotions. Republican consultants report that in focus groups, TV commercials about out-of-control debt prompt strongly positive responses even from Democrats. Even Democrats have to live somewhere and a lot of them own homes. And there are a lot more Democratic taxpayers and homeowners than there are government workers. This is a wedge issue for Republicans that won’t quit.

Here’s one result that I found remarkable: It shows the aggregate property taxes paid to state and local governments, against aggregate mortgage payments (the outstanding volume of mortgage debt multiplied by the current mortgage rate). The result is somewhat exaggerated, because about a third of property tax collections are commercial rather than residential, but it’s still compelling: the property tax burden on homeowners is now roughly equivalent to the interest burden on their mortgages!

 Property taxes vs home mortgage interest (mortgage debt outstanding multiplied by current mortgage rate), in $US billions

Source: Census Bureau, Federal Reserve

And the liberal press wonders why the Tea Party is saying, “Enough is enough!”

In 1934, when President Roosevelt devalued the dollar against gold, J.M. Keynes famously wrote in the Daily Mail, “President Roosevelt is magnificently right.” Careful analysis of the numbers leads to the same encomium for the Tea Party.