What I see happening is this: the public is aware, rather inchoately, that things are going badly wrong and that the life they are accustomed to is under threat, but they have no idea what to do. The parties, by and large, have failed to diagnose the roots of the problem, and instead are reflexively proposing to relive their greatest hits of the past. Since the problems of the past are not the problems of the present, these approaches are not working. This is leading both parties into a cycle of over-promising what they can deliver, thus leading to bitter disappointment.
The country faces massive threats to its comfortable lifestyle:
- competition with a rapidly rising middle class in China and to a lesser extent with India, now getting the benefits of modern infrastructure but still willing to work for cents on the dollar
- built-in dependence on huge amounts of foreign oil, having depleted most of the domestic supply, thus requiring a huge military to project power all over the globe as needed to maintain the supply, as well as handsome payments to the oil producers.
- The resulting trade deficit, and the implied increasing debt, both federal and private.
- The aftermath of a huge financial crisis
- The beginning rumbles of climate change starting to move from an issue in the distant future to a threat to society in coming decades.
The analysis of the left (eg as typified by Krugman) has been that this is like the 1930s, and the solution is a massive injection of fiscal stimulus, together with draconian reform of the banking sector to reduce it's power and influence and ability to derail the economy, and trade sanctions against China to punish it for currency manipulation. The actual Democratic policy over the last two years has been a half-hearted attempt at parts of this approach - some stimulus, but not enough to return to full employment, some reform of the banking sector, but not enough to really rein in the bankers, a little vague preaching about inequality, but almost no actual measures to address it, and basically very little done about international competition. Oh, and a large focus on health reform - a left over piece of the progressive agenda from the 20th century with no particular relevance to the issues of the moment. Thus, they've ended up with: a huge increase in the federal debt, massive ongoing federal deficits, high unemployment, and untouched trade deficits. This was not something they communicated to the country ahead of time was the likely scenario (Change and Hope being the theme of the 2008 campaign), and so voters are now recoiling in horror.
To some extent, you can view them as just unlucky to have come into power before the crisis was sufficiently deep - that is unlucky in their timing (relative to Roosevelt in the 1930s, say). But, on the other hand, while the half-measures of the Democratic party have certainly led to political disaster, I'm not at all persuaded that a full-throated pursuit of Krugmanism would have worked out better in the long term. Massive fiscal stimulus would have revived domestic spending and employment much better in the short term. But that in turn would have caused a much larger immediate run-up in the federal debt, failed to initiate any significant effort at deleveraging by American consumers, and other things being equal, caused a large increase in the trade deficit (since American labor is still very overpriced relative to global competitors, and Americans are still very dependent on foreign oil). Trade sanctions against China might have mitigated some of this, if the Chinese had dutifully agreed to increases in the renminbi, but that would be a very high risk strategy: it might be even more likely to trigger a global trade war and we know how that worked out in the 1930s. And in general, given the deep structural issues that the U.S. faces, and the fact that the globe is always a risky place, I question whether even more massive increases in the federal debt would have been at all prudent.
On the other hand, the Republican diagnosis of the problem looks even more delusional - just as Democrats wanted to replay their greatest hits from the 1930s, Republicans want to replay theirs from the 1980s (taxes/spending are too high and need to be cut). They appear to have learnt nothing from the financial crisis, and most of they things they say they want to do to improve the economy are likely to make it worse in the short term (eg cutting federal spending will tend to cause economic contraction, other things being equal, and getting rid of government support for the housing market will tend to worsen house price declines in the near term). Wholesale removal of government red tape to free up business to create jobs was a major factor in how we got a housing crisis in the first place. You can't claim to be serious about the deficit while holding out for very low tax rates for the highest income brackets and demagoguing Medicare cost containment measures. And of course, on energy and climate, Republicans seem to have completely lost touch with reality.
So now what we are likely to get is two years (or more) of gridlock and extreme partisan bickering, while the country continues to drift along without making serious efforts at solving its problems. It's not at all clear that's what the public wants, but that seems to be what they've voted for.
I think a sign that we are coming to our senses, politically, would be politicians starting to come clean that we face serious long-term problems, that there aren't any short-term easy fixes, and that we need to accept quite a bit of pain in the near term while we put our focus on getting the country on a more sustainable path for the future. And voters being willing to listen to that and accept it.