The ongoing budget stalemates, at both the state and federal level, are just the most recent demonstration that American political institutions are in decline. As far as such institutions go, they are still pretty good; however, we can only expect them to become an increasing burden on our society. These institutions are committed to maintaining the status-quo, yet they have made so many implicit promises over the past decades that they cannot realistically fulfill all of them, let alone face new challenges. They will continue to devise band-aid solutions to mounting problems, and continue to prop up other failing institutions (e.g. banks), thereby draining an ever increasing amount of our economic produce.
In contrast, many developing countries (e.g. Brazil, India, China) are ambitiously reforming their core political and economic institutions, which may soon be just as good as America's. While nationalists present this as some sort of threat, we should be thankful for the rise of these other economies that will provide alternatives to our own ailing institutions and pick up the slack for our own decreasing ability to innovate. With our institutions becoming increasingly parasitic, the only opportunity for economic growth will come from technological advances and disruption of our lethargic economic institutions (despite political backing) by way of new competitors. America will continue to contribute to some advances, but not enough on our own to maintain our standard of living in a world with fewer natural resources per person.
This is really our only path forward -- to replace our current bloated institutions with new ones. The hope of reform from within the political system is dead. President Obama was elected on the hope that he could bring this reform, and revive the legitimacy of the state. Two years into his term, there's no sign of success. Obama and his allies dedicated their political capital to major initiatives that changed everything but solved nothing. All they did was reallocate the spoils of power among various special interest groups.
Obama hasn't even done much to increase the transparency, efficiency, or lawfulness of the state. Treaties are still negotiated in secret (e.g. ACTA and such), without public comment, but with plenty of input from corporate bosses. Government departments (e.g. Treasury) still cover up mistakes and corruption. We've actually seen a startling increase in harassment of political opponents under Obama, as Wikileaks was systematically crippled the state-corporation cartel, and Private Bradley Manning has been threatened with exaggerated charges and mistreated prior to his trial.
The end fact is that the state is the enemy of the people. It's officials constitute a class with separate interests and ideology than the public at large. They act to increase the power of their offices and their own wealth. They are co-opted by various wealthy interests (e.g. big corporations) who help them acquire power through elections, exercise power once in office, and reward them with plush jobs after retirement -- as long as these officials manipulate the markets to increase the profits of their benefactors.
There is no real hope of reforming the state. It is evil by nature. We can try to restrain it by political means, but our best hope is to directly break its economic grip on our lives, while we build institutions that actually do serve our needs.
Update: Another good essay on this topic at C4SS: The Last “Political” Essay