WELL BEFORE the summer’s horrific shootings in Norway, many citizens of the Western democracies had the sense that the social fabric was fraying in unexpected places. The Danes restricted immigration in violation of the European Union’s Schengen Agreement. The lower house of the Dutch parliament voted—by nearly four to one—to outlaw ritual Muslim butchers (and, along the way, kosher butchers too). The French banned burkas in the streets. The Swiss banned minarets. In America, we are fighting over whether to build a wall between Texas and Mexico and litigating how far individual states can go in enforcing their own laws that bar undocumented immigrants and deny public benefits to those here legally. Most recently, a swath of cities across Britain exploded in racial violence and riots.

But the tensions on display across so much of the Western world are hardly limited to questions of immigration or race or religion. A dismissively antagonistic, often outright nasty, tone of public debate has become the new norm, in some countries accompanied by outright political paralysis. According to the latest opinion surveys, most Americans were appalled at the U.S. government’s inability to resolve the debt-limit crisis with at least some semblance of order, even if not civility. In Japan, the debate over Tokyo’s response to the Tohoku earthquake and tsunami, and what to do about the resulting loss of nuclear-generating capacity, led to a no-confidence vote that the then prime minister Naoto Kan survived only by promising to resign—on a timetable that, within hours of the vote, spawned yet further acrimonious argument over just when he was supposed to depart (eventually the finance minister took the helm). The prize for the most fundamental stalemate goes to Belgium, where antagonism between the French- and Flemish-speaking parties has prevented the formation of a government for over a year. An end to this ugly process is now in sight, but for a while even normally phlegmatic observers were wondering whether the two regions could continue as a single country.

What has received less attention is the underlying economic cause of these troubling tensions: they are all-too-predictable manifestations of the discontent that sets in whenever most of a nation’s citizens suffer a period of protracted stagnation in their living standards, and lose too their optimism that the material progress they used to enjoy will resume anytime soon. A pervasive economic stagnation has now set in across almost all the world’s advanced economies. Here in America, the family right in the middle of the country’s income distribution earned $64,200 (in today’s dollars) at the beginning of the last decade. Seven years later, the median family’s income was $64,500—less than half a percent greater, not per annum but cumulatively over those seven years. With the 2007–09 financial crisis, the recession that followed and the sluggish recovery since then, by 2010 the median family income fell to just $60,400, down 6 percent from the previous peak and lower than in any year since 1997. The Census Bureau has not yet released data on median income for 2011, but with the continuing weak economy it is unlikely there has been any significant uptick. The majority of American families have now gone nearly a decade and a half with no improvement.

Many countries in Europe have suffered parallel experiences. In Britain as in the United States, the 1990s saw fairly robust income growth, but stagnation set in after 2001. In Italy, the median income remained largely flat through the 1990s and the 2000s until the financial crisis hit. In the Netherlands, both the 1990s and the aughts—up to 2007—saw stagnant median incomes (apparently separated by a large one-year gain in 2001 that may have been an illusion created by a change in statistical procedures). After 2007, the crisis and ensuing economic downturn depressed incomes everywhere. Japan has suffered even worse stagnation: median income fell by 3 percent in the 1990s overall, and then yet another 5 percent between 2000 and 2007. By 2009, median income in Japan was down nearly 18 percent from the mid-1990s peak and back at a level the Japanese last saw in the early 1980s.

Anti-immigrant agitation, racial and religious prejudice, rancorous public discourse, political stalemate and paralysis, eroding generosity toward the disadvantaged—all are the predictable pathologies that ensue from stagnating incomes and living standards. In America, the agricultural depression of the 1880s and early 1890s led to violent labor unrest (most dramatically, the Homestead and Pullman strikes), a wave of religious bigotry, and the rise of Jim Crow (and not just in the South). The rocky economic period that followed World War I, even before the onset of the Great Depression, led to the resurgence of the Ku Klux Klan (again, not just in the South), the end of America’s early attempts to provide government assistance to women and children in poverty, and immigration laws both more restrictive and more discriminatory than anything the United States had seen before, or has seen since. The protracted stagnation from the early 1970s to the early 1990s led to widespread resistance to desegregation in schooling and affirmative action in the workplace, renewed anti-immigrant outcry (California voters approved Proposition 187, but the courts threw it out), and, as Bill Clinton put it, the movement “to end welfare as we know it.” The experience of other Western democracies is replete with similar episodes. This latest round of such pathologies simply reminds us that even those societies whose citizens talk the best game of having advanced beyond caring about further gains in material living standards—the Dutch, the Swiss, even the Scandinavians—are no less subject to this familiar frustration than their more transparently materialistic American cousins.

BUT WHAT if this time the political stalemate we now see also blocks policies that would restore the growth of incomes and living standards? Then the economy, and the society more broadly, would find itself in a trap: absence of growth leading to political paralysis, political paralysis leading to absence of steps to restart growth, absence of growth . . .

Of course, it is possible that some timely and convenient external force could come along to cut the circle. Seven decades later, for example, economists still debate how long it would have taken America to recover from the Great Depression had it not been for World War II. As late as 1940, with the United States still not at war but producing warships and guns and other matériel to send to Britain and our other future allies, nearly 15 percent of the labor force remained unemployed. It was not until 1942, the first year of full mobilization following Pearl Harbor, that unemployment finally dipped below 10 percent. And not until 1943, with 9 million men and women in uniform and the country’s new defense industries operating far beyond normal capacity, did unemployment fall back to the pre-Depression level of 3 percent.

But at present it is hard to see where such a helpful deus ex machina, or even an internally generated spur to America’s economic growth, would originate. The United States is already engaged in two wars. Most of the economies that regularly buy American exports in large volume—Canada, Mexico, Japan, Britain, in effect all of them but China—are in straits similar to ours. Home building, a traditional leading sector in U.S. postrecession recoveries, remains suffocated by the overhang of too many houses built in the years of rising prices, too many of which are now empty or facing foreclosure. Most consumers who have continued to pay their mortgages see both their home equity and their stock portfolios back where they were a decade ago. Many state and local governments are facing their own budget crises, and most are laying off more employees than they are hiring. Only the corporate sector is flush with cash, but most firms see little incentive to build facilities or expand their workforces, at least not in the United States.

The particular focus of today’s nexus between stagnant incomes and paralyzed policy making is the federal-budget debate. The current budget imbalance is enormous. According to the latest projections for the fiscal year that ended on September 30, 2011, the U.S. government spent $3.6 trillion but took in only $2.3 trillion. The difference, nearly $1.3 trillion, represents 8.5 percent of U.S. national income, well above the Reagan-era peak of 6 percent and nearly as great as the post–World War II record of 10 percent just two years ago at the bottom of the “Great Recession.” A significant part of this imbalance reflects the decline in tax revenues and the increase in cyclically variable spending (unemployment benefits, for example) that occur whenever a business downturn depresses incomes and profits and puts people out of work. But not only is the budget deficit today out of proportion to prior experience; in the absence of significant policy changes, it is unlikely to abate even as the economy gradually returns to full employment.

The ugly process that culminated in a last-minute agreement on August 1—really more an agreement to disagree—was not randomly focused. The U.S. government’s taxing and spending policies are sharply at variance with one another, not just for the moment but over a longer time frame as well. And now that the Federal Reserve System has mostly exhausted its arsenal of tools for stimulating the economy through monetary means (including, to the central bank’s credit under the circumstances, some actions that have stretched the meaning of “monetary”), it is primarily through what the government does in its taxing and spending that public policy is likely to have the greatest impact on the economy’s growth prospects, for good or ill, for some years to come.

The August 1 agreement calls for nearly $1 trillion of cuts in government spending over the coming ten years, but almost none of this saving (only $21 billion) is to take effect before 2013, and the remainder is scheduled to build slowly. The twelve-member congressional panel that the agreement created is to report by December, specifying a further $1.5 trillion in combined spending cuts and tax increases over this period. And if Congress rejects the panel’s proposal, then—at least according to the provisions of the agreement as enacted—additional cuts (but no tax increases) of this magnitude will take place in a mechanical way. Most recently, President Obama has advanced a set of proposals that would preempt the congressional panel’s actions, but they appear to have little prospect of passage. Either way, the potential for further depressing an economy that is already weak, or at least retarding a precarious expansion that may well not display much vigor in any case, is clear.

But continuing on the current trajectory is not an acceptable option either. Former vice president Dick Cheney to the contrary, budget deficits do matter. Although government spending in excess of revenues is helpful when people are out of work and business is underproducing—additional spending, by the government or by recipients of tax cuts or government benefits, creates needed demand for many products—continued deficits once the economy regains full employment do harm. The borrowing that the government needs to do to fund its shortfall absorbs the savings that in a fully employed economy would otherwise go into investments in new factories, new equipment, new office buildings, new research and new houses. Firms seeking to invest, therefore, either do less, in which case the economy’s productivity suffers, or invest anyway but finance it by borrowing from abroad. Either way, the economy’s ability to provide jobs with rising wages, and therefore an improvement over time in Americans’ average standard of living, is impaired.

THE MORE fundamental issue, however, is not simply a generic budget imbalance. There is a reason this problem has become so politically intractable. Although participants in today’s debate rarely acknowledge it—indeed, much of the discussion seems deliberately couched in abstract budget language in order to avoid mentioning the subject—the issue at stake is the livelihood and care of America’s retired elderly.

By now most Americans are aware that the largest parts of the federal government’s spending go to defense and “entitlements.” In the fiscal year that just ended, defense and entitlement programs together accounted for 81 percent of all government spending apart from interest payments on the national debt. The budget for defense (including for this purpose veterans’ and military-retirement benefits) was $829 billion. All nonmilitary entitlements combined added up to nearly $1.9 trillion. Most Americans also have their own views on the value of a larger versus smaller defense establishment. With the U.S. military now scheduled to withdraw at least in part from both Iraq and Afghanistan over the coming few years, some reduction in defense spending is already in the government’s planning. Leon Panetta, President Obama’s new defense secretary, has publicly argued that significant further cuts would harm U.S. national security, and most Republicans in Congress are sympathetic to this point of view. It is easy to understand why the debate over what to do about the government’s outsized deficit and rising debt has therefore centered on entitlements.

But simply referring to “entitlements” is an obfuscation—and one that prevents the public discussion from addressing what is really at issue. The U.S. government has many entitlement programs—ranging from food stamps to foster care to farm supports to retirement benefits for the government’s own civilian employees—but two of these programs together account for nearly two-thirds of the total entitlements budget: Social Security (last year $726 billion) and Medicare ($555 billion). Adding in more than $80 billion of Medicaid spending that pays for nursing-home stays by patients aged sixty-five or older brings the share of the entitlements budget now devoted to the support and care of America’s elderly population to nearly 72 percent.

Worse yet, for three familiar reasons this share will rise over time. Most importantly, the post–World War II baby-boom generation has now begun to become eligible for Social Security and Medicare. This process will continue for another decade and a half. Second, like the populations of other high-income countries, Americans are living longer. The life expectancy for a sixty-five-year-old American man is now another seventeen years; for an American woman, another twenty. Third, ongoing improvements in medical technology turn out, on average, to be cost increasing. While some innovations, like laparoscopic surgery and antidepressant medications, save money compared to prior forms of treatment, most new drugs, internal scanning devices and other such improvements deliver better-quality care and even save lives, but do so at significant added cost. The combined result of these three ongoing forces is that, under Social Security’s and Medicare’s current configurations, the share of the entitlements budget that provides income and medical care for America’s elderly population will rise from today’s 72 percent to 77 percent ten years from now.

None of this is news. But the fact that we have known about these forces for decades yet have done little to address them shows how fundamental are the economic and moral choices at issue. It is now nearly thirty years since the 1983 Greenspan Commission restructured the financing of Social Security to put that program on a firmer footing for what then seemed the foreseeable future. It is no criticism to observe that a change in policy adequately addressed a major national problem for “only” two generations. But those two generations have now largely passed by, and the country has taken no further significant action. Now the question of income support for the retired elderly is on the table again. The issue of medical care for this population is on the table too, right where it has always been. Today’s acerbic political rhetoric notwithstanding, the impediment is not Washington infighting or the search for partisan advantage or the lack of public understanding—although each of those amplifiers is present, and each does make the challenge more daunting. The real point is that this problem is hard to begin with.

IN THE past the American political system has had a pretty good record of coming to grips with major challenges, if not right away then at least in more or less adequate time. Investment in what the early Federalists and Whigs called “internal improvements” (at first on canals and turnpikes, later on railroads) to open up the new country’s interior for economic development; expansion across a huge continent (inspired by the ideology of Manifest Destiny); regulating, on a national scale, an increasingly nationwide economy; constructing a new monetary system to escape the systematic instability of an international gold standard combined with note-issuing banks; alleviating the human misery created by the Great Depression and at the same time arresting the cumulative economic collapse even if not effectively restoring full employment; full-scale military mobilization in response to the Japanese attack on America and Germany’s seizure of most of Europe; mobilization of a different kind to meet the military as well as scientific threat of the Cold War; programs sufficient to make the retired elderly the segment of the U.S. population with the lowest incidence of poverty when it previously had the highest; and the rescue of the nation’s banking system from what would surely have been collapse on a scale not seen since the Great Depression: in every case the debate was intense, usually partisan, often acrimonious and sometimes bitterly personal. But in every case the country made its way to a satisfactory resolution and then moved on. Only once in the nation’s history—the mid-nineteenth-century slavery crisis—did the American political apparatus fail to deliver a solution to a challenge of national scope and first-magnitude importance.

A parallel lesson from this lengthy experience, however, is that this country’s unusual system of governance imposes a need for accommodation and agreement, or at least willingness not to let disagreement stop the government’s basic machinery, well beyond what parliamentary systems require. The familiar “checks and balances” built into the Constitution of the United States preclude the president—or, for that matter, the Congress—from acting in the way most democracies’ prime ministers, backed by their parliamentary majorities, can and regularly do. The U.S. president’s proposals mean nothing without a majority vote of both houses of Congress, a vote the chief executive has no guarantee of getting. Congressional votes, unless they reach a two-thirds majority in each house separately, likewise mean nothing without the president’s approval. The opportunity for stalemate is endemic.

In principle, the Senate could effectively nullify a presidential election by refusing to approve an incoming president’s nominees for any or even all of the three thousand or so cabinet- and subcabinet-level appointments that any new chief executive needs to make in order to staff his or her administration. In principle, either house of Congress could halt any or all government functions simply by not appropriating the requisite funds. The Constitution does not specify a route out of this kind of impasse. The framers apparently expected the country’s elected officials to negotiate their way. Not so this time around—or at least not yet.

What makes the current impasse over the federal budget seem intractable is not just the fundamental nature of the question of how and at what level to care for the nation’s retired elderly but also the political setting, created by prolonged economic stagnation for so many of America’s citizens, in which it is playing out. In his repeated public remarks, President Obama has highlighted the unwillingness of many congressional Republicans to embrace a spending-cuts/tax-increase compromise along the lines that he and House Speaker John Boehner were pursuing early in the summer. To Mr. Obama’s apparent surprise and frustration, many of those most adamantly opposed to such a compromise have seen their constituents—at least the most active and vocal ones—enthusiastically endorse their entrenched stance.

Wholly apart from the merits of these groups’ views in this particular debate, the unwillingness to entertain compromise with one’s political opponents on the central issues of the day is a phenomenon all too familiar in times when participants in a democratic society lose the sense that that society is delivering any material improvement in their lives. The followers of William Jennings Bryan during America’s populist era, the Klan members of the 1920s (at its peak the Ku Klux Klan was the country’s largest private organization, claiming as members one out of every six eligible Americans), and the volunteers in the “militias” that proliferated across many parts of America during the 1980s and early 1990s all had little interest in political compromise. Each group was born of a deep sense of exclusion from the country’s political process and, once having earned a place at the table, displayed little familiarity with and even less enthusiasm for long-established ways of working matters out. In each case the perception, instead, was that the established way of running the country was what had produced the outcomes that they found so objectionable in the first place, whether falling farm prices or the influx of non-Protestant immigrants or what they perceived as excessive taxes and burdensome regulation. (Other seemingly novel aspects of today’s political landscape, such as the opposition of many libertarians and Tea Party supporters to having a central bank, or the view, expressed by many citizens who now carry copies of the Constitution with them to political meetings, that two hundred years of Supreme Court jurisprudence is irrelevant because any citizen who reads the document is fully capable of knowing what it means, are likewise characteristic of prior periods of ascendancy of new groups to political prominence, not just in America but elsewhere as well.)

What enabled America’s political machinery to move beyond such hurdles was, more often than not, the return of rising living standards. The agricultural depression that incubated the late-nineteenth-century populist movement gave way in the mid-1890s to two decades of vigorous—albeit irregular—economic expansion. The stagnation of middle-class incomes initially triggered by the OPEC cartel’s oil-price increase finally ended in the early 1990s, and incomes then rose sharply throughout the balance of that decade. The story of the 1920s and 1930s is more complicated, in that a new political mood began to emerge well in advance of any significant recovery from the outright depression that had followed four earlier post–World War I downturns. The most likely explanation is that after 1929 the depression was not only so severe but also so sufficiently widespread that Americans had a sense of everyone’s going down together—a condition certainly not shared in the most recent financial crisis, nor in the more general stagnation of incomes and living standards that set in more than a decade ago.

The present threat, therefore, is that the continued absence of economic improvement for the majority of America’s families will block a resolution of the budget impasse—which is to say, it will preclude a satisfactory response to the demographic problem that has been looming since the baby-boom generation began to arrive nearly seventy years ago. If so, the resulting inaction (or action such as it will be) will surely impede any prospects for the U.S. economy to return to a trajectory of sustained growth shared broadly throughout the workforce. Until the bulk of America’s citizens begin to see an improvement in their economic prospects, the political basis for addressing these challenges will remain weak if not perverse.

Hence the “no-growth trap” that we now face. Recognizing a threat is not the same as overcoming it. Nor will merely being straightforward about the economic and moral issues that the support of our retired elderly population entails—important as that political honesty would be—answer the question of what we should do. But if we fail, as a nation, to overcome our current stalemate, and the rising acrimony that comes with it, we will be headed for a long period of not only economic stagnation but moral decline as well.

This essay grew out of conversations with John Olcay. But responsibility for any errors or controversy lies with me.

Benjamin M. Friedman is the William Joseph Maier Professor of Political Economy at Harvard University. His most recent book is The Moral Consequences of Economic Growth (Knopf, 2005).

Image: Pullquote: What if this time the political stalemate we now see also blocks policies that would restore the growth of incomes and living standards?Essay Types: Essay