But look around, here go the sound of the wrecking ball
Boom and pound when I shut ‘em down.
– Chuck D
As an analyst and long-only investor, I profit by identifying marketplace trends and changes in the competitive landscape that will play out over a number of years. The goal in this is to own the company with emerging technology and not the one with the mature and increasingly uncompetitive product. By applying the framework of business analysis to the debate in Washington, we can see that the political system is being disrupted. The debate is being framed as Democrats versus Republicans, but if you look through the lens of “Disruption Theory,” we may more appropriately view this as the “establishment” versus "new politicos."
Harvard Business School professor Clayton Christensen developed Disruption Theory to explain how niche products replace incumbents because, by necessity, they develop around a more efficient structure that initially serves a segment of the market not attractive enough for the established leaders to concern themselves with. Eventually, this nimble and efficient structure expands beyond the niche and disrupts the business of the established leaders, which are not built to compete with the new platform. I explained in a recent article, that Microsoft’s
(NASDAQ:MSFT) Windows business is being disrupted because smartphones are replacing PCs, and as that market evolves, iOS
(NASDAQ:AAPL) and Android
(NASDAQ:GOOG) are replacing Windows because “thin client” application-oriented computing is more conducive to the way people use these devices.
In the same manner, our two-party political system is being disrupted by groups that organize and engage certain segments of the fragile political alliances integrated into the two parties. Groups like the Occupy Movement and the Tea Party are not only the current iteration of organized labor and the Christian Coalition, but have taken the game to a new level by openly opposing party leaders that do not reflect the narrow platform their constituency cares about. We also saw this play out in the failed Larry Summers nomination this summer. What is unique about these new groups is that they are “leaderless.” Occupy Wall Street was difficult to disband because there was no “head” to negotiate with, and while John Boehner is the Republican “leader” he does not speak for those pushing this agenda. The “old school” politicians still have faith in compromise and negotiation, which led to the current system of crisis deadline politics, and the new breed is exploiting this weakness to force the capitulation or catastrophe situation we face today. These factions will not be satiated by lip service from party bosses; as Yoda said, “Do or do not, there is no try!”
The Tea Party exploited the lack of cohesion in the Republican Party by asserting Christensen’s three conditions of modularity – specificity, measurability, and predictability – to create a more efficient mechanism to raise money, deliver votes, and communicate messages. While it may be difficult to indentify everything a Republican or Democrat stands for, we know that Tea Party members are Libertarians and fiscal conservatives with a leaning toward Austrian economics. They are narrowly focused, can measure success in elections won and legislation passed, and their stance on issues is predictable. Republicans are traditionally viewed as “fiscal conservatives,” but the deficits incurred during the Bush Administration and willingness of the current House Republicans to increase taxes and pass budgets with trillion-dollar deficits left a major constituency marginalized. The same could be said of environmentalists, labor activists, and others in the Democratic Party.
Game Theory would allow that in a zero sum game, parties act for the best possible outcome, even if that means no one achieves his ideal outcome. In this case however, the Tea Party is not playing by the same rules because they view perpetuating the current system as the worst possible outcome. Its willingness to splinter support for the majority in the House, undermining the platform from which the Tea Party converts its ideology into legislation, combined with a Republican base unmotivated to support “fiscal conservatives” that have already raised taxes this year, have enabled the Tea Party to wield more power than its ranks might otherwise warrant. The Tea Party is disrupting the system by using its efficient mechanism to unite the Republican Party under its platform, offering incumbents funding, votes, and talking points for their reelection. The alternative for incumbent Republicans is a well-funded and full-throated opposition that would erode support for the broader Republican Party establishment.
In addition, political officials have become complacent with brinksmanship politics, which governs through threat of catastrophe, but are ill-prepared for the failure of such tactics. The impact of a US government default will be much discussed over the next few weeks, but our global economy, the government, and the financial system in general all depend on well-functioning debt markets, and a willful default of the US government threatens the stability of all of that. We are still the largest economy in the world and print the world’s reserve currency, so comparing the US to Argentina would not be appropriate, but the events that may unfold have no recent historical parallel.
The political calculus from the Democrat view is that a US government default is so terrible that established Republicans will sell out the Tea Party to avoid that outcome, and if they don’t and fail to raise the debt ceiling, the outcome will be so bad that the Democrats will sweep the House and Senate in the 2014 election. The Republicans on the other hand have nothing to run on in the 2014 election. Killing Obamacare has become the issue that will help them raise money and get their base to the polls. They are calculating that either the Democrats blink, or that the Tea Party political mechanism can deliver cash and voters needed to win in 2014. President Obama himself has already amended and deferred implementation of parts of the ACA (notably the employer mandate), so we can see the grounds on which this gets resolved by pushing out ACA implementation. A settlement requires the Republican Party to risk dismantling themselves to preserve the establishment, or the Democrats to capitulate on ACA implementation, neither of which is an attractive choice. I expect a crisis will be averted by a last-minute settlement that defers ACA implementation for a year, but investors should be prepared for all outcomes.
The media talking points show that the Tea Party is more prepared for this battle, from a communications standpoint, than their opposition. The disrupters talking point in this debate is “fairness,” while the establishment is using the words “hijack” and “distraction.” The establishment is not prepared to fight a battle against this leaderless ideology, and uses words like “fringe groups” or “extremists” in an effort to marginalize them. However, the fact that the president is discussing the Tea Party’s role in shutting down the government refutes that assertion. Rather, these are serious competitors that are succeeding in disrupting the system, and forcing the entire political establishment to either swallow unpalatable changes or scrap the entire system. While identifying supporters of this ideology as outside the establishment may be true, it will likely resonate with an electorate increasingly disaffected by stagnant wages, higher taxes, and political gridlock. Just as Microsoft did not know how to compete with the smaller more nimble competitors in the smartphone operating system market, politics in this country is being disrupted by focused, agile, grassroots coalitions that more efficiently serve the needs of focused constituencies.
No positions in stocks mentioned.
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