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The Consequences of the Global Financial CrisisThe Rhetoric of Reform and Regulation$

Wyn Grant and Graham K. Wilson

Print publication date: 2012

Print ISBN-13: 9780199641987

Published to Oxford Scholarship Online: September 2012

DOI: 10.1093/acprof:oso/9780199641987.001.0001

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The United States: The Strange Survival of (Neo)Liberalism

The United States: The Strange Survival of (Neo)Liberalism

(p.51) 4 The United States: The Strange Survival of (Neo)Liberalism
The Consequences of the Global Financial Crisis

Graham K. Wilson

Oxford University Press

Abstract and Keywords

The consequences of the Global Financial Crisis (GFC) in the United States have differed significantly between the short and longer terms. The initial consequences were to strengthen the center-left (nowadays synonymous with the Democrats) politically and to discredit faith in markets and other neoliberal nostrums. The longer terms consequences have been to strengthen the center-right (the Republicans), to leave little legacy in terms of financial reform, and to open up the possibility of a major shift to the right in public policy more generally. The chapter attempts to explain these apparently contradictory consequences.

Keywords:   Global Financial Crisis, American politics, Democrats, Republicans

Short-Term Consequences

A significant number of Americans—about a third—believe that unidentified flying object (UFOs) visit the earth (Associated Press/Ipsos Public Affairs Poll, October 2007) and abduct people from it. Were an American to have suffered this fate in March 2009 but to have been returned to earth in 2011, he might well have been astonished by the outcome in the United States of the Global Financial Crisis (GFC). The fall of 2008 had seen what looked like a critical turning point, a punctuation in the equilibrium of both public policy and politics, one of those rare moments when decisive change is possible. The GFC provided immediately two of Kingdon’s three criteria (1984) necessary for policy change. People recognized that there was a problem (the GFC) and the 2008 elections seemed to provide the necessary political context for change by creating large Democratic majorities in the House and Senate in addition to holding the Presidency.

The most important changes, however, appeared to be in public policy and public policy discourse. Even before the Bush Administration ended, the extent of the GFC had compelled a number of policy developments that were astonishing not only in terms of expectations about how a conservative Republican Administration would behave but in terms of what types of policy were possible in the American “variety of capitalism.” These surprising policy developments included the nationalization of one of the world’s largest insurance companies (AIG), the acquisition by the government of a huge automobile company (General Motors), the government-sponsored takeover of another (Chrysler) by a foreign manufacturer (Fiat), and the government-sponsored mergers of (p.52) major investment banks. The Federal Reserve Board not only pumped vast quantities of money into the economy in a program of “quantitative easing” but bought vast quantities of “toxic assets” from banks as well; the Fed’s program was about ten times the size of the better known and controversial similar program carried out by the US Treasury under the controversial Troubled Asset Relief Program (TARP) approved by Congress in the last months of the Bush Administration. The Fed in theory is independent but in taking these steps worked extremely closely with the Bush Administration (Sorkin, 2010). This policy package of nationalization and deep involvement in restructuring finance and the auto industry conflicted sharply with Republican rhetoric about free markets and the dangers of government control. It also conflicted with the conventional wisdom in political science that, in what some term the “Anglo Saxon” and others the market-coordinated variety of capitalism, the role of the state is minimal and noninterventionist (Hall and Soskice, 2001). The American “liberal state” in particular was not expected to behave in the manner just described. Those who subscribe to the view known as American exceptionalism have argued that the United States differs from other advanced democracies because the role of government in the United States is smaller and more restricted than in most democracies (Lipset, 1996). That was emphatically not true in the aftermath of the GFC.

The perceived necessity for these policies prompted reconsideration of the policy nostrums that had been accepted by both Democrats and Republicans in recent decades. The nostrums included beliefs in the “efficient markets” doctrine supported by many economists which argued that markets set prices and values appropriately and effectively and the belief that government regulation had been excessive and should be scaled back. It was a Democrat, Senator Schumer of New York, who was most prominent at the turn of the century in opposing more government regulation of trading in the derivatives that lay at the heart of the origins of the GFC. It was under the Clinton Administration that New Deal restrictions on the ability of banks to engage in speculative activity were swept away and the decisions were made not to regulate trading in derivatives. The Clinton Administration as well as the Bush Administration accepted that excessive government regulation was burdensome to the economy. In the immediate aftermath of the GFC, these beliefs were questioned even by those most closely linked to them such as the former Chairman of the Federal Reserve Board, Alan Greenspan. Given the important role that toxic assets had played in causing financial instability, it was hard to argue that, as the efficient market credo held, markets always valued assets appropriately. The collapse of the financial sector raised awkward questions about whether deregulation had been a success. Indeed, the entire “neoliberal project” of deregulation and faith in the efficacy of market forces was in question.

(p.53) The political developments of 2008 were less surprising although also dramatic. The election of a comparatively liberal northern Democrat to the Presidency for the first time since 1960 (and the first nonwhite President for good measure) was accompanied by the election of large Democratic majorities in the House and Senate. In theory, the Democrats had a sufficiently large majority in the Senate to overcome the numerous opportunities such as the filibuster provided in that chamber for minorities to control public policy. Although these political developments were striking, they were easily explained. The Republicans had held the White House and Congress during the onset of the GFC and subsequent recession; the party in power is usually punished for poor economic conditions. The unpopular war in Iraq with which the outgoing Republican President was so closely associated seemed ever less easy to justify, and other policy missteps such as the slow, inept response to Hurricane Katrina may also have contributed to the Republicans’ heavy losses. It seemed reasonable to assume that as with the Republican defeat in 1932, it would be long before they recovered. Some of the interest groups that had been associated with the Republicans ran for cover; Wall Street invested strongly in Obama in 2008 with Goldman Sachs, for example, giving him nearly three times as much money as it gave the Republican candidate, John McCain (data from Opensecrets.org). Both bankers and automobile executives were very unpopular with the general public, both being derided for arrogance while depending on handouts from the taxpayer.

That was Then, This is Now: Longer Term Consequences

Our notional UFO abductee would notice one enormous change when returning to the United States a mere two years’ later. In politics the Republicans had bounced back almost unbelievably strongly. Their gains in the 2010 midterm elections, the largest gains in a midterm election since either the 1930s or 1920s depending on the measure used, gave them a large majority in the House of Representatives (Campbell et al., 2011). The Republican recovery was associated with a resurgence of conservative political energy. In particular, a movement known as the Tea Party received considerable attention. While its membership—predominantly older, white, self-identifying conservatives—was scarcely a new phenomenon, it provided a degree of passion and ideological commitment to Republican politics not seen for some time. Conversely, Democrats were much gloomier about their prospects and as his approval ratings particularly on the handling of economy were low, President Obama’s prospects for reelection were uncertain. Interests weakened politically by the GFC also staged a remarkable recovery. In particular, banks, which had been everyone’s favorite whipping boy in the immediate (p.54) aftermath of the GFC proved politically effective shortly thereafter. In June 2011, for example, banks were able to secure a clear majority (fifty-five) of Senators to support a resolution preventing the Fed from limiting the high “swipe charges” levied on retailers for debit and credit card transactions. The charges in the United States are very high by international standards and normally retailers, a presence in every state and district, could be expected to be politically effective. Thus, the banks demonstrated political strength in winning majority support in the Senate, strength that seemed unlikely in the immediate aftermath of the GFC. (The limit on charges survived because as is so often the case in the Senate, a supermajority of sixty Senators was required for it to take effect.) By the summer of 2010, President Obama himself was courting Wall Street trying to reestablish ties with supporters endangered by his support for Dodd–Frank and some unkind words about bankers’ large bonuses (Nicholas Confessore, “Obama Seeks to Win Back Wall Street Cash,” New York Times, June 13, 2011). Thus, in as little as two years, the political landscape has been reconfigured.

Our imaginary UPFO abductee would have had much more difficulty on his return in seeing what changes had taken place in public policy as a consequence of the GFC. This at first glance may seem a harsh and incorrect judgment. Congress passed a voluminous piece of legislation, the Dodd–Frank Act in 2010. The Act has some far-reaching provisions many of which seem to address core issues in the GFC. Some of the most important are as follows. First, the Act creates a Financial Stability Council that pulls together the heads of the major financial regulatory agencies (the Fed, the Treasury, the OCC, SEC, CFTC, FDR, FHFA, NCUA, and the new Bureau of Consumer Financial Protection). The Council would enable regulators to share information and identify gaps in regulation. Institutions creating securities (Securitizers) have to retain 5 percent of the product and therefore the risk. In general, “swaps” (e.g., Credit Default Swaps or CDSs) have to be cleared, that is, sold on exchanges rather than “over the counter” (OTC), thus ending the possibilities for excessive profits based on limited information as described by Morgan (this volume). Significant exemptions to this requirement were included in the Act, however. Important sections of the Act address the problems of imperfect or inadequate information that contributed to the GFC. The SEC was empowered to issue regulations on fiduciary standards and separate legislation (the Credit Rating Agency Reform Act) was required to reveal their methodologies, changes to ratings and must separate rating activities from their marketing departments. These reforms reflected the belief that inadequate work by the credit rating agencies and their attempts to win clients by issuing overly favorable evaluations had caused overconfidence among investors in risky financial instruments. Very controversially, Dodd–Frank banned banks from trading on their own behalf (“proprietary trading”) (p.55) in securities and derivatives. This reflected both the belief that the GFC had been caused by banks speculating wildly and also resentment that taxpayers had been obliged to pick up the tab when this speculation failed because the government guarantees banks. This provision is known as the Volker Rule after the one-time chair of the Federal Reserve Board who proposed it. Finally, Dodd–Frank required the Federal Reserve to set capital requirements and impose other safeguards (e.g., conducting stress tests) on larger banks and other financial institutions that pose risks to the entire system (systemic risk) if they fail.

Even the brief summary above of Dodd–Frank’s major provisions indicates that it is an ambitious piece of legislation. Why then is it possible for critics to contend after its passage that little change has occurred in the US financial system? For example, Wall Street Journal reporters recently remarked in passing that the United States has “a financial-regulatory system that is in some ways largely unchanged since the 2008 financial crisis” (Deborah Solomon and Jamila Trindle “New Financial Rules Delayed,” Wall Street Journal, June 15, 2011, A1). As Solomon and Trindle reported, part of the problem was that Dodd–Frank required a multiplicity of rules to be adopted but that “Regulators are so mired by the process of writing rules triggered by Dodd–Frank that some of the most vulnerable areas of the financial system haven’t been addressed.” By June 2011, regulators had missed twenty-eight crucial deadlines for writing rules under the Act. Whereas part of this failure was due to the enormous complexity of financial issues, the delay also resulted in part from industry opposition and an eagerness to delay the process in the hope that a more sympathetic Republican President would be elected in 2008. Thus, it was unclear what effect the Act would have because its implementation required the adoption of over 200 regulations that could be challenged politically (as with the “swipe charges” described above) before taking effect. Meanwhile, the industry could be adept at finding its way around new regulations. The process of developing regulations in the United States is a highly political and complicated process, a second chance for interests that dislike the initial legislation to reshape it generally once the glare of publicity has subsided. The balance of power in the process of drafting regulations is generally more favorable to well-organized, well-financed interests with specialist knowledge; financial interests obviously fit this description. Even if effective and strict regulations were developed, their practical consequences might be slight. For example, while Dodd–Frank required trading in derivatives to be conducted in exchanges rather than “OTC,” most observers thought that the financial industry in which innovation is constant would soon find ways around this limitation.

A more fundamental criticism is that for all its scale, complexity, and the irritation it caused banks, Dodd–Frank did not resolve the deeper structural (p.56) issues connected to the origins of the GFC. While many held that the GFC illustrated the dangers of having relatively few banks that were “too big to fail,” in the aftermath of the GFC the failure of some firms (Lehman) and mergers (Bear Stearns, Wachovia, Wells Fargo) meant that the financial system was composed of even fewer banks than before the GFC. Presumably, the failure of these even bigger banks was even less allowable. Proposals to break up the banks into units small enough not to cause systemic problems if they failed were soon discarded. Although Dodd–Frank brought together the heads of the numerous regulatory agencies in the Financial Stability Oversight Council, the legislation did not end the problems that resulted from having numerous weak, often competing regulatory agencies. These under-resourced regulatory agencies compete with each other in persuading financial institutions to choose them as their regulator—and pay them the associated fees as often minor legal changes can shift corporations from one agency’s oversight to another’s. A politically resurgent industry continues to face relatively weak and divided regulators. The Republican majority in the House remained implacably opposed to Dodd–Frank, seeking its repeal, hindering its implementation, and making impossible what all agreed were necessary detailed amendments to correct the inevitable flaws and errors in such a complex statute. Republicans’ opposition to the reforms complicates the creation of the regulations required to give it effect and emboldens obstruction from the financial industry.

The bailout of the auto industry shows every sign of being a successful, focused, and, in that sense, limited policy. Strictly, there were two bailouts: one in the last months of the Bush Administration and the second in the early months of the Obama Administration. The second involved the planned bankruptcy of General Motors (GM) and Chrysler as part of a restructuring of the corporations that involved writing down their debts and major concessions by the workforce. Chrysler was sold (largely to the Italian manufacturer, Fiat) and the federal government assumed ownership of a large majority of GM’s stock.

Throughout the period of government ownership, the Obama Administration has emphasized the limited scope of its goals. In particular, the Administration emphasized that it would not use government-owned stock to influence the behavior of corporations it owned and would return them to the private sector as rapidly as is possible. Critics of the automobile bailout focused on whether its terms were tough enough, for example, in terms of wage reductions and whether a dangerous precedent had been set in which the federal government would aid failing businesses. By early 2010, the Obama Administration was able to claim that the policy had been a huge success (Michael D. Shear, “Obama Touts Success of Auto Industry Bailout,” Washington Post, April 24, 2010). Up to a million jobs had been saved, most of (p.57) the money loaned to GM by the government had been repaid and both GM and Chrysler were participating in the revival of the American automobile industry (though not to the same degree as Ford which had escaped government ownership). Perhaps the only detailed interventions in the affairs of the corporations were a Congressional initiative to halt the reduction in the large number of dealerships both Ford and Chrysler had created and to encourage the preexisting initiative to create electric cars. In general, however, detailed political intervention (e.g., to insist on GM using a supplier in a powerful legislator’s district) or to pursue broader industrial policy goals have been avoided. It would be wrong to overlook the importance of federal government ownership of major corporations in defiance of the expectations of both the varieties of capitalism and American exceptionalism schools of thought. However, it is also important to note that these accidental nationalizations have shown no sign of being associated with or resulting in any new general policy goals such as an industrial policy or commitments by the rescued corporations to wider policy goals. The nationalization of the automobile firms was dramatic; its consequences have been minimized.

Making Sense of the Contrast: From Democratic Bliss to Democratic Nightmare

Thus, the expectations that the large gains politically for the center-left would be enduring and that major policy changes would result proved to be ill founded. How had the GFC, a crisis of capitalism, come to hurt the center-left politically so dramatically and have so little impact on public policy? The explanation lies in three factors. The first is the damaging political costs of the GFC for the Democrats once they were in power exacerbated by Obama’s political strategy in 2008. The second is the absence of one of the crucial requirements for policy change identified by John Kingdon (1984). The third is the continuing struggle over whether or not the United States will provide its citizens with an array of services comparable to those enjoyed by citizens of other advanced democracies or will be an “exceptional” nation and fail to do so. We examine each in turn.

The most common explanation of the Democrats’ disaster in 2010 was, to quote of context a famous Democratic campaign manager, “It’s the economy, stupid!” In this scenario, the Democrats were doomed to suffer losses in 2010 because unemployment remained very high just as the poor state of the economy in 2008 had doomed the Republicans. This interpretation portrays the electorate as automatically punishing the party in the White House when times are bad. While it has been common in electoral research to take a dim view of the electorate’s competence, it is still startling to take such a (p.58) mechanistic view that leaves no room for politicians or other political forces to shape interpretation of events. As it is inconceivable that the worst economic crisis since the 1930s could have been resolved in less than two years, it would seem perverse of the electorate to punish the Democrats for the GFC. Moreover, the history of midterm elections shows considerable variation in results including some examples of the party in the White House making gains during adverse economic circumstances, 1934 being the most obvious example. Perhaps the explanation lies in the fact that whereas most political leaders would have emphasized their predecessor’s responsibility for the economic mess that they had inherited, President Obama was precluded from doing so by his commitments to being a new kind of President, one who would rise above the partisan clamor that had come to dominate Washington. This strategy of being a “post-partisan President” worked brilliantly in the 2008 campaign but also meant that once Obama was in office he could not use the partisan device of repeatedly reminding voters of the Republicans’ responsibility for the GFC. Obama did attempt this strategy in the late summer of 2010 as the extent of the Democrats’ disaster became apparent. However, shifting to a partisan attack mode was particularly unconvincing after a long period of affecting to rise above such a tactic. In brief, Obama’s self-presentation in the 2008 campaign left him unable to blame his predecessor for bad economic circumstances. Quite naturally, in consequence, many voters had no trouble blaming him for the economic situation.

What made this vulnerability all the more important was that as the President recognized in his 2010 State of the Union address, the measures essential to containing the disastrous consequences of the misdeeds of the financial sector were bound to be unpopular. The “bailouts” for the “fat cats” of Wall Street and the arrogant if incompetent executives from GM and Chrysler were inevitably resented by average citizens. The large government deficit, in large part inherited from the previous Administration but worsened by the GFC, caused genuine alarm. It was true that in the aftermath of the GFC, the American state did more than ever before to rescue failed corporations and less than since the Great Depression to help unemployed citizens. While the bailouts were almost certainly essential, this was not likely to promote political popularity. Thus, the Democrats suffered politically both from an economic crisis they did not create and from the essential but unpopular measures to contain it.

Another consequence of the GFC that has cost the Democrats support is fiscal policy. Fiscal policy has an unusual character in the United States. In most democracies, the size of the government’s deficit and borrowing is a technical issue. In the United States, promises of balanced budgets always draw applause even though balanced budgets are rarely achieved in practice. The Obama Administration inherited a sizable deficit rooted in decisions to cut taxes without correspondingly reducing spending made well before the (p.59) GFC. However, the GFC added to the deficit by reducing tax revenues and necessitating in the view of most economists a fiscal stimulus to contain the growth in unemployment. Many moderate Americans viewed government budget deficits with concern, perhaps appropriately as it approached 10 percent of GDP which is surely unsustainable. Again, the Democrats paid a political price for a situation that was not of their own making.

Explaining Modest Policy Change

We noted earlier that Kingdon had identified a problem and propitious political circumstances as necessary for policy change. His third condition for change was the availability of a solution. The argument advanced earlier was that the first two conditions were met. The Democratic triumph of 2008 and the economic catastrophe of the GFC seem to meet those conditions clearly. Arguably, the conditions were met less clearly than would appear at first sight. The Democratic ranks included legislators such as Senator Ben Nelson (D. Nebraska) whose political inclinations were often more with the Republicans than his colleagues. The Democrats had a large majority in the Senate but their hopes that they had a reliable “super majority” capable of overcoming the numerous arcane opportunities for obstruction in that chamber proved illusory. Similarly, the degree to which the GFC was an obvious problem might be exaggerated not so much in terms of its catastrophic consequences but its causes. Opinion polls show that Americans blamed a wide variety of people for the GFC including not only greedy bankers but also government regulators, Congress, the President, and irresponsible borrowers. Conservative think tanks rapidly generated arguments that the GFC was not the fault of much maligned bankers but resulted from failed government enterprises (Fannie Mae and Freddie Mac); inappropriate regulation; and other governmental, not market, failings. Both analyses of the causes of the GFC as well as proposals to resolve it became highly politicized. Voters’ partisanship influenced strongly their understanding of who was to blame for the GFC as well as their attitudes to proposals for reform. (Within weeks of his inauguration, a substantial group of Republicans blamed President Obama for the GFC which had started months before his inauguration!) Influenced by partisanship and ideology, Americans gave no clear answer as to who had caused the GFC and therefore no clear, consistent support for proposals for reform; in this diversity, the public echoed the experts.

If there was more ambiguity than appeared at first glance about two of Kingdon’s conditions, there was absolute clarity about the third. There was no alternative vision of economic management or political economy that provided a basis for policy change in the aftermath of the GFC. As noted (p.60) earlier, individual Democrats such as Schumer had been tied closely to the financial industry. More generally, the “New Democratic” strategy followed successfully by Clinton had rested on the idea that the party should foster close and friendly ties to business interest and especially to finance. As with New Labour in Britain, the strategy broadly was to encourage business success and economic growth while retaining a portion of the proceeds to advance a progressive policy agenda. While this strategy had many practical and political advantages while capitalism thrived, it left Democrats ill prepared to provide an alternative economic vision once it faltered. The corporate bailouts had no conditions attached to them such as commitments to youth training or investing in disadvantaged areas that might have promoted progressive goals. Far from using the bailouts for social or industrial policy purposes, the Obama Administration promised not to involve itself in the affairs of corporations the government owned and to liquidate its holding in AIG and GM as soon as possible even if that required taking a lower price for the stock.

The third factor has been the continuing struggle in the United States over whether it should be an “exceptional” country in which the role of government is substantially different—smaller and more limited—than in other advanced democracies. American conservatives have never fully accepted the legitimacy of policies going back to the New Deal that have provided the basis of the modest American welfare state. The aftermath of the GFC provided the American right with its best opportunity in years to roll back the modest extent of the American welfare state. This was a surprising development. After all, there is an assumption based on the Great Depression that widespread hardship is likely to result in an expansion of the welfare state. Certainly, the GFC produced considerable hardship. The official unemployment rate of around 10 percent masked its full extent, at least 17 percent using internationally accepted measurements. Reductions in the American welfare state in previous years including the “welfare reforms” of the Clinton era left the unemployed with meager support. And yet ironically, political debate has been dominated by discussions of cutting government programs, especially those such as Medicare at the heart of the American welfare state.

This apparently surprising development is a result of a combination of the impact of the considerable deficits, partly the result of the GFC and partly the fact that the American right had never accepted the legitimacy of the expansion of the role of the state since the New Deal. Conservative organizations such as the Federalist Society accentuated discussion of American exceptionalism suggesting that the founding traditions of the United States required a less extensive role for the state. In the view of nearly all serious economists, the GFC required extensive government deficit spending in order to halt economic collapse; it also reduced government revenues as the economy sagged. Appropriate concern over the extent of government deficits provided (p.61) the right with a long-awaited opportunity to demand severe cuts in even the most popular of welfare state policies such as Medicare. The conservative strategy of shrinking the American welfare state had been evident since the Regan years; known as “starving the beast,” it encouraged tax reductions in full knowledge that unsustainable government budget deficits would result. In theory, the Democrats could have countered with proposals to shrink the deficit by raising taxes, as President Obama did to a modest degree with proposals for higher taxes for those earning over $250,000. In general, however, Democrats were unwilling to demand serious tax increases and were therefore trapped into a political debate focused on the precise extent of budget cuts required. Only the ability of President Obama to veto (if he was prepared to pay the political price) and of the Democrats in the Senate to obstruct (if they were willing to pay the political price) stood in the way of a major shift to the right in public policy.

A Comparative Dimension: The Crisis of Capitalism and the Downfall of the Left?

The story so far has been cast in purely American terms. It might be familiar, however, to people in several other countries including the United Kingdom. A crisis of capitalism resulted in a crisis for the center-left. The extent of the crisis was dependent in part on local circumstances, especially the degree (as in the United Kingdom, the United States, Spain, and Greece) to which fiscal mismanagement produced large government deficits before the effects of the GFC were felt. There were, however, connecting themes. Few voters in any country have been enthusiastic about bailing out banks. The recession caused by the GFC made governments unpopular everywhere. Perhaps most importantly, center-left parties have faced the same conundrum as the Democrats. Saving capitalism has required unpopular measures and large increases in government deficits and debt. These increases imposed severe limitations on the ability of center-left parties to pursue their traditional goals through government programs that required increased expenditures. In general, the center-left parties of Europe have been as incapable of generating alternative approaches as have been the Democrats. The “Third Way” generated interest in several countries in the 1990s precisely because it was a seemingly coherent and promising response to problems that were widespread including popular resistance to high tax rates and the perceived need to offer a favorable business environment in a era of globalization.

The United States has played a mixed role in relation to the generation of new approaches to economic management. Roosevelt famously experimented with what became known as Keynesian demand management without (p.62) understanding the economic theory underlying it—or even liking Keynes himself. However, Republicans remained very dubious of Keynesianism until ironically it was in its twilight. It was in 1970 at the opening of the decade that undermined Keynesianism that Richard Nixon proclaimed that everyone—including himself—now accepted Keynesianism. The radical changes in policy that were prompted by the governance and economic crises of the 1970s had less impact in the United States than, for example, in Britain, precisely because the policy paradigms established in the 1980s—privatization, deregulation, cutting taxes, etc. constituted a move toward the American model of capitalism. The neoliberal turn therefore reinforced strong traditions. The contribution of the United States was to pioneer the “New” center-left strategy as in New Democrats, New Labour, and ultimately the Third Way. As is well known, Tony Blair was an avid student of this strategy as set forth by Bill Clinton. While the “Third Way” is now a phrase of limited historical interest and is seen by many as discredited, no alternative strategy for the center-left that addresses these issues plausibly has been developed. There have been calls for reviving manufacturing (including from President Obama) with some proposing achieving this through renewed use of industrial policy. However, industrial policy, widely seen as discredited in the 1970s, is also subject to significant constraints that WTO rules and, for member nations, EU competition policy impose. Industrial policy alone, however, is not a strategy for pursuing equality, redistribution, environmental policy, or any of the other traditional goals of the center-left. Indeed, industrial policy historically has been practiced successfully at least as much by center-right governments (the Japanese Liberal Democrats, the French Gaullists) as by the center-left. There is nothing intrinsically left-wing about selectively subsidizing either industry in general or specific enterprises.

The GFC is often said to show the limitations of the “third way.” The “Occupy” movements that swept through US cities in the fall of 2011 had limited policy impact because they did not have clear policy demands or goals. In practice, however, the GFC has shown the left to be bereft of ideas on how to respond. The ideas of American conservatives such as Sarah Palin with a longing to return to a simpler era of small government, the gold standard, and unfettered markets are easily mocked. However, they constitute a bolder, clearer vision than anything advanced by the center-left in the United States—or elsewhere.

Some Wider Implications of the GFC for the United States

The focus of this chapter so far has been on the policy areas most closely associated with the GFC, particularly financial reform and on its consequences for the political balance of power. The GFC and the subsequent recession have raised more fundamental questions about the United States and its position in (p.63) the world. The United States had enjoyed a period of ascendancy and triumph in the last decade of the twentieth century. The collapse of the Soviet Union left the United States as the world’s only superpower. Thinking about public policy and good governance internationally could be read as an affirmation of the value of the American way. The United States had long practiced policy approaches such as central bank independence, reliance on market forces to steer economic development, and a preference for private sector provision of goods and services. These policy approaches were now widely accepted internationally as hallmarks of good governance and were propagated by international organizations such as the World Bank and IMF as part of the appropriately named “Washington Consensus” on public policy. The 9/11 terrorist attacks challenged this triumphalist mood but the aftermath in some ways also demonstrated American might—the capacity to fight two wars simultaneously while maintaining military supremacy in unrelated areas such as the waters off China and Japan.

The GFC also displayed in some limited respects the power of the United States. The role of the Federal Reserve in propping up not only American corporations but those from other countries (e.g., Barclays Bank) was unmatched by any other central bank. In general, however, the GFC dealt a major blow to American self-confidence. The proportion of Americans thinking that their children’s future will be better than their own has fallen substantially. The argument that the American approach to economic policy is a model that other countries should emulate has taken a severe blow. As Grimes (this volume) notes, the GFC has strengthened the skepticism and self-confidence of those countries that thought that the American approach placed too much faith in markets. The GFC illuminated the dependence of the United States on other countries, most importantly China for purchases of US Treasury bonds to cover its budget deficit. The apparent inability of the American political system to make long-term plans to address the budget deficit through either drastic expenditure cuts or through higher taxes gave an unflattering picture of the capacity of the United States for self-government. The willingness of some American politicians to score political points by taking huge risks with the global financial system most notably by arguing that it would be acceptable for the United States to default on its debts undermined confidence in US leadership. The only part of the US government that came out of the GFC well was the least democratically accountable agency involved in economic policy, namely the Federal Reserve whose chair, Bernanke, consistently showed a capacity for calm, pragmatic action.

It has long been possible to make a good living in the United States predicting American decline. So far, the predictions of these Cassandras have not been borne out by events. The United States has shown a capacity to recover from periods of apparent decline, most obviously after the economic stagnation and political scandals of the 1970s. In consequence, predictions of (p.64) decline have seemed ill founded. One of the most successful contributions to the decline literature, Paul Kennedy’s Rise and Decline of the Great Nations, appeared shortly before the period of extraordinary US dominance in the 1990s (Kennedy, 1987). Presumably, at some point in time, the United States, like all previously dominant powers, will decline in relation to other powers and the GFC has seemed to many Americans to signal that moment. Aided by a tendency in the United States to exaggerate China’s power (and to underestimate Europe’s), it has been common to anticipate the United States ceasing to be the world’s largest economy.

The last period in which Americans feared decline was followed by the election of Ronald Reagan. The current period of anxiety also gives a great opportunity to the American right including the Tea Party. An understandable response to anxiety is to favor a return to tried and tested traditions including balanced budgets and a shift away from social welfare policies that are portrayed as alien, even worse, European, intrusions into American government. The anxieties about American decline combine with the practical need to address the budget deficit to create a potential moment for fundamental policy decision in the United States. Arguments that the United States is an exceptional nation that should eschew a larger role for government had seemed quaint echoes of the past as government expenditures and regulations increased even during Republican Administrations. George W. Bush was responsible for a significant expansion of the American welfare state, the Prescription Drug benefit of Medicare. It is now possible, however, that key elements of the American welfare state such as Medicare, Medicaid, and Social Security could be cut back significantly. The American political system with its numerous veto points always makes fundamental policy change unlikely. While generalized rhetoric about smaller government plays well, substantial support remains for specific policies such as Medicare. Proponents of balancing the budget through expenditure cuts face formidable challenges in overcoming the opportunities that the American system provides for blocking change and the popular support for policies such as Medicare. Whether the conservative surge evident in the prominence of the Tea Party in 2011 can be sustained long enough to effectuate massive policy change can be doubted. Moreover, even Tea Party supporters support many government benefits such as Social Security and Medicare that they believe decent, hardworking citizens have earned (Skocpol and Williamson, 2011).

It is, however, remarkable, that the GFC has had such a potential for a populist conservative shift in public policy. Many Americans believe that the GFC has shown the results of undemocratic collusion between “big government” and “big business.” Fear of such collusion has a long history in the United States and was a key component in the Jacksonian politics in the nineteenth century. Jackson’s emblematic policy was abolition of the Bank (p.65) of the United States but the underlying message—that big government would collude with big business to the disadvantage of the common man—has had more general and lasting implications for US politics (Meyers, 1957). In the United States, in contrast to Europe, opposition to the expansion of the role of government has had a democratic flavor to its appeal. Part of the resentment of government in the aftermath of the GFC is a revival of the fear that big government and big business colluded not only in the policies that caused the GFC but in policies to tackle its aftermath. Whereas the banks were rescued at the great cost to the taxpayer, ordinary home owners facing foreclosure received almost no support. One response is to return to the Jacksonian view that the interests of the average citizen are better served by restricting the size and scope of government.


The Democrats in the United States have paid a high price for the GFC. It obliged them to take unpopular measures, produced a recession that lowered their support in the electorate, revitalized their opponents, and resulted in large government deficits that will constrain policy choices for years to come. In common with center-left parties in other advanced democracies, the Democrats have no set of policy ideas available to them allowing them to generate attractive and coherent alternatives to the right’s calls for cutting back the state. For Democrats in November 2008, “Joy was it to be alive”: the joy was fleeting. More generally, the GFC prompted unease and uncertainty among Americans about their country’s future and opened up the possibility of a major move to the right in public policy. Surprisingly, the GFC brought about no significant change in public policy relating to the regulation of capitalism. To the degree that thinking on economic policy changed, it changed in the direction of reviving American traditions on limited government.


Bibliography references:

Campbell, J. E. et al. (2011) “Postmortems of the 2010 Midterm Election Forecasts,” PS: Political Science and Politics 44: 1–6.

Hall, P. and Soskice, D. (eds.) (2001) Varieties of Capitalism: The Institutional Foundations of Comparative Advantage. Oxford: Oxford University Press.

Kennedy, P. M. (1987) The Rise and Fall of the Great Powers: Economic Change and Military Conflict form 1500 to 2000. New York: Random.

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(p.66) Lipset, S. M. (1996) American Exceptionalism: A Double Edged Sword. New York: W. W. Norton.

Meyers, M. (1957) The Jacksonian Persuasion: Politics and Beliefs. Stanford: Stanford University Press.

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