Rupert Cornwell: A bitter, losing fight against the power of money

The US is a land of extremes: climatic, economic and ideological. But amid the turbulent craziness of American politics, there is one constant: money rules. And never more so than in the closing weeks of this sour and eminently forgettable year of 2010 – when the recession never really went away, the Tea Party marched into Washington, and the presidency of Barack Obama shrivelled before one's eyes.

Right now, the country has a budget deficit equal to almost 10 per cent ofGDP. The official unemployment rate, announced on Friday, rose to 9.8 per cent. Add in the people who would like to work but have given up even looking for a job, and you have an "under-employment" rate of about 17 per cent. And yet politicians can't even get round to extending unemployment benefits for the two million people whose meagre help from the state ran out last week, at the start of the holiday season.

Instead, forget the deficit. Forget the poor souls who had to try to make ends meet on a dole of $320 (£200) per week for a family of four, before that support expired. Congress – or rather the resurgent Republican part of it – is adamant that nothing be done until tax cuts, which also are about to expire, are extended for the very richest in America.

It is the very rich who have done best out of those cuts pushed through by George Bush in 2001. Indeed, real take-home pay has stagnated for most people over that period, while the poor have, if anything, got poorer. But to preserve a veneer of fiscal responsibility, a "sunset" date of 31 December 2010 was included, meaning that Bush would be safely out of office when the moment of decision arrived on whether to renew them. That time bomb is now exploding.

Obama and the Democrats want to extend the cuts for households earning less than $250,000 a year, covering 98 per cent of the population. Republicans, however, are adamant; the cuts (which lowered the top rate of income tax from 39 per cent to 35 per cent) must be extended for the rich and super-rich too. Do otherwise, they challenge Democrats, and you will be forever branded the party that raises taxes. In US politics, there is no deadlier accusation.

The mood on Capitol Hill has gone from bad to appalling, despite the polite words in talks at the White House between Obama and congressional leaders of both parties designed to plot a path forward after the massive Republican gains in November's mid-term elections. The row over the Bush tax cuts now colours everything. But the partisanship and the childish name-calling, where every liberal is a Communist and every conservative a robber baron, obscure the deeper truth. Money rules.

No matter that the country is still reeling from the biggest economic crisis since the 1930s. Inequality continues to grow. Wealth in America is now concentrated to a degree unprecedented since the Great Depression. The top 1 per cent of taxpayers – roughly those making $500,000-plus annually – now receive almost a quarter of all national income, and own more than a third of the country's private sector assets.

The same pattern is visible in the financial sector, whose recklessness was the main cause of the crisis. Since the crash of 2008, the concentration of power in a handful of giant financial institutions has only increased. Attempts to break them up failed. Wall Street bonuses are back in dreamland.

Defenders of the status quo trot out the usual excuses. If the banks are downsized, it is said, they won't be able to compete in this age of globalisation. Give the wealthy more money, it is argued, and the largesse will trickle down to the less fortunate, ultimately lifting all boats. But neither thesis stands up to scrutiny. The truth was laid out in Thursday's New York Times by about as impartial an observer as you get, a top official of the country's central bank. Yes, you've guessed. Money rules.

Last month's mid-term elections cost a staggering $4bn. Any candidate who runs for national office, wrote Thomas Hoenig, head of the Federal Reserve Bank of Kansas City, must now go to New York City to raise money. The big banks, despite being bailed out by the government, now have even more political influence than before the crisis.

Inevitably, the congressional legislation reforming Wall Street was heavily watered down; despite everything, Hoenig complained, "large financial institutions are still in control of our country's economic destiny". Last January, the Supreme Court made matters worse by overturning a chunk of the country's finance laws governing election campaigns – laws already riddled with loopholes – by allowing banks and corporations to pay for political ads, as long as they were "independent" of specific campaigns. Some hope.

So here we are, three weeks before Christmas, with the atmosphere in Washington more poisonous than ever, and Republicans confident they can roll Obama on everything. Recent developments, alas, suggest that confidence is not misplaced. No matter that tax cuts for the rich would add $700bn to the deficit over the next 10 years. Republicans have served notice they will block all business in the Senate until the largesse for millionaires is extended. Only then might they look more favourably on extending unemployment benefits as well. Right now it looks as if Obama will fold, in a spirit of compromise his opponents show little sign of reciprocating.

A deal will be struck. One has to be, otherwise taxes will rise for everyone, even as the economy continues to struggle. And – who knows? – maybe the recommendations last week of Obama's bipartisan deficit reduction commission, slashing $4trn from the deficit over the next decade, will one day provide a basis for an even more important deal on Capitol Hill. But it won't alter the fundamental law of American politics: money rules.