In my last piece I argued that the burgeoning national debt threatened the supremacy of the United States (see, Reducing the National Debt Before it Reduces the Nation). Here I explore how an economy hanging in the balance explains much of the polarization of national politics and sense of social angst. In short, we are beginning to act like a nation of debt holders in a credit workout.

First, some history and context. For much of its history the United States has benefited from and projected the economically-inspiring vision of the American Dream. At its core, this vision holds out a promise of equal opportunity: If the grandson of Russian immigrants can grow up to become the billionaire mayor of America’s largest city, then any one of its citizens can as well. However, critics have often labeled the American Dream as the American Myth because the odds of any of its citizens actually growing up to become a Mike Bloomberg are very low, yet the chance to become Mike is held out as a reason we should tolerate very wide distributions of outcomes in terms of education, healthcare and, of course, wealth.

Closely related to faith in the American Dream is a venture capital-like disregard for business failure. For example, we do not stigmatize bankruptcy in the way Europeans have traditionally done, instead emphasizing the opportunity for a fresh start. I believe that it is this sense of boundless optimism, this deeply-felt notion of American exceptionalism, that gave the early settlers the courage to populate the American West and still inspires the entrepreneur to start the company of her dreams despite the overwhelming odds of failure. Thus, the United States has always been an equity culture — a society convinced that the pie is always expanding. If this is your view of the world, it is easy enough to understand why you would create or at least tolerate a culture with few limits on the rewards that accrue to the winners. At the core of equity ownership (think common stock) is the right to participate in the uncapped upside of the enterprise once the fixed obligations of the firm (think debt) have been satisfied.

Now what happens if enough of the population lose faith in the American Dream; if they begin to look at the data of personal experience (job loss, stalled growth in family income, loss of homeownership) and come to believe that their children will not live as well as they did? I submit that under these conditions, we begin to act like a nation of debt holders all claiming our piece of a pie which is no longer growing. In the capital structure of the nation, debt holders have given up their claim to the upside of the enterprise in return for a fixed (they hope) share in the pie. And, if the nation has issued too much debt (say almost $14 trillion) there is not even enough pie to satisfy the fixed entitlements. Welcome to the workout nation.

If I am accurate in my depiction of the national balance sheet, and if the American Dream truly lies in the balance as we relinquish the mindset of stockholders for debt holders, then much of the heat and noise of the Tea Party and their leftwing equivalents can be understood as the sound of an angry and confused nation struggling to come to terms with the waning of its long-cherished exceptionalism. It is not wrong to be angry, and the urgency is welcome; we just need to channel it towards restoring a growth-oriented, job-creating, equity culture.

It is not too late to rebuild the City on the Hill, but we must begin by paying-off the mortgage.