The economic (and continuing budget) chronicles: End of Act I, beginning of Act II

Act 1 ended America’s AAA credit rating. Act 2 could be the end of both major parties.

The Three D’s — default, deal, and downgrade — have brought us to the end of Act 1. They convinced the American people that the current cast of characters won’t lead, certainly won’t follow, and don’t want to get out of the way.

First, the financial markets. As a friend of mine once said: “the financial market may be made up of idiots, but collectively it’s a genius.”

So what is the genius telling us right now? It hates uncertainty. After watching our collective leadership argue for months about a sideshow; never address our central problems of growth; and agree at the last second to a non-solution, the market now knows that our current political structure can’t, won’t, doesn’t want actually to do anything. And it now expects economic growth to be substantially lower than it had hoped (The CBO projects an average rate of real growth of 2.9% over the next 10 years. My own current estimate is at least one-half a point lower than that — average growth below 2.5%. That’s pretty close to a lost decade. This lower growth will also add around $1.8 trillion to our current debt levels).

But that won’t happen in a vacuum. There is another market — the political market. And in that one, the key number is 18%: 18% of American voters have a favorable view of Congress, a historical low point. President Obama has also hit a new personal low: in the Washington Post’s new poll, 33% of the respondents had confidence in the President. This is very clearly one term territory.

The House Congressional Republicans have taken the worst hit and the Republican brand has incurred long term damage — both deserve it. How can a party possibly pursue with great pride a strategy consisting of asserting that default is a reasonable policy alternative, then when our credit rating is downgraded, blame the President?

And how could anyone not see that the downgrade became inevitable? Just incidentally, the several displays of chair gnawing anger at S&P from senior administration economic officials was beyond dumb and missed an opportunity. In the just-published Washington Post poll, 71% of the respondents said they felt that the S&P description of our economy and politics was fair.

But what is more consequential is that the voters are angry at everyone in office. Only 17% of those polled in the Washington Post poll want their current representative re-elected. And 78% have no confidence in the existing political structure. Moreover the intertwining of the two markets — finance and politics — will, over the next few months, serve to make the economy more unstable and volatile and make virtually inevitable the dismantling of the two current parties that these polls suggest has begun. The economy is not suddenly going to improve, unemployment will stay in the 8.5% to 9.0 % range, markets will be scary, investors will watch their 401Ks go south, and the voters will be madder and madder. We are likely to have a government shutdown drama in the midst of this, and it is close to inconceivable that there will be a grand bargain in six months. Most of this is inevitable.

But what will give this next six months energy is that the two parties are highly likely to continue driving right over the cliff. The Republican Party thinks it won two weeks ago — hell, it did win (and the nation lost). And as all of the after-accident reporting said, the GOP is proud of its tactics and dying to repeat them. There is not a Republican campaign advisor in the country who is going to take any very different course. The Democratic Party thinks it lost because it didn’t hammer away enough against Paul Ryan and his Medicare position. There’s not a Democratic campaign advisor in the country who won’t take that direction. Recent events have served entirely to convince the true believers in both parties that the only flaw in their efforts to date has been that they weren’t ideological enough; we are doomed to repeat the same sterile, played out quarrel that we have already had far too much of.

Act 2’s end result will be to convince Americans, not that today’s leaders aren’t good enough — they already believe that — but that the system can’t work. There is going to be mass desertion from both parties with a growing, but formless independent center larger than the two parties combined. Someone is going to organize that energy.

You might ask, “so what do we do? And what about Act 3?” Which reminds me of the story of the civil defense official who, when asked at a Congressional hearing about what to do if a nuclear attack actually happened, said, “Stand still. Spread your legs very wide. Bend way over. And kiss your ass goodbye.”

Roosevelt Institute Senior Fellow Bo Cutter is formerly a managing partner of Warburg Pincus, a major global private equity firm. Recently, he served as the leader of President Obama’s Office of Management and Budget (OMB) transition team. He has also served in senior roles in the White Houses of two Democratic Presidents. This post originally appeared at New Deal 2.0.