Gourevitch paper, APSA 2010
Back to Basics: Power in the Contemporary World
October 1 & 2, 2010
Princeton University
Robertson Hall, Room 015
Friday, October 1
9:30am
Session 2:
The Great Contraction of 2008 in historical
perspective: macro/micro, unit/system
Peter Gourevitch (University of California, San
Diego)
1
2
Gourevitch paper, APSA 2010
“The Great Contraction of 2008 in historical
perspective :
macro/micro , unit/system”
Peter Gourevitch
School of International Relations and Pacific Studies
University of California, San Diego
La Jolla, Ca. 92093
August 2010
Prepared for the American Political Science
Association, Washington DC, Sept. 1-4, 2010
(An earlier version of this paper prepared for conference honoring Stephen
Krasner, December 4-5. 2009, Stanford University, Stanford, CA.)
Not for quotation or attribution
without permission of author.
Gourevitch paper, APSA 2010
3
The economic crisis of ‘07—’10? , has been grist for our various mills.1 We
feed on crises to argue about interpretation of world events. Crises present
opportunities for change in policy and for change in our causal theories: “A crisis is
too valuable to waste“ in social science as well as public policy.
The Panic that followed the bankruptcy of Lehmann naturally invites
comparison to the October Crash and the Great Depression of 1929, as it is the
most severe downturn in the economy since that time; Reinhardt and Rogoff (2010)
call it the Great Contraction. That event produced a flood of analysis because it
produced a hurricane of outcomes— dictatorship , critical realigning elections,
breaks from economic orthodoxy, a great world war, the Holocaust. We are in the
equivalent of 1931 (two years since the collapse of Lehmann Brothers and the
bailout of AIG) or 1932 by which time most of these dramatic outcomes had not
happened. Economically we may experience a long period of slow growth or
stagnation something like the 1863-96 period , or a modest recovery, or another
collapse as various chickens come home to roost : if demand falls from the return to
balance budget orthodoxy as in 1936-37 , or deflation sets in as with Japan in the
1990s, or the exposure of weaknesses as prices readjust (as with the Greek crisis
of 2010. It will take time to settle on whether this is a panic (like the one of 1907) ,
an acute business cycle downturn (like 1929), or a deep structural adjustment in the
world economy (like 1873-96). While people are suffering from unemployment,
insecurity and inequality, we do not have as yet the cataclysmic political outcomes
Gourevitch paper, APSA 2010
4
that made earlier crises such compelling topics (world wars, regime change,
rebellion, migration, genocide).
Despite the uncertainties about the endpoint, it is irresistible for the author
of Politics in Hard Times not to engage reflections on this major event. In terms of
this the work of Stephen Krasner, it is all the more engaging because it raises some
important questions about the unit and system, about macro and micro, and about
the status of the national state in the global economy, issue about which Krasner
has been a major voice, with whom I have engaged in friendly debate and
disagreement. The nation state is hardly dead as a unit, pace Kindlebergers’
comment a number of years back, but its role is more clearly than ever understood
as positioning a country in a global economy by internal “balancing”, policy
behavior that situates it in the world. The specific pieces are interactive with the
world economy
Everyone is affected by the crisis, in that sense it is global. How countries
respond varies considerably, in that sense the nation remains a hugely important
unit. Policies centered in nations caused the crisis, and policies centered in nations
shape the way they variously respond. International coordination remains
constrained by a number of nationally centered policy behaviors, the ways it did 8
decades ago.
Part I : Unit/System and Macro and Micro
Any one familiar with unit -system debate will find themselves well
prepared for the micro-macro controversy in explaining the Great Contraction As
the literature on the financial crisis pours out, the interpretations of cause can be
Gourevitch paper, APSA 2010
5
sorted into “ Macro” and “Micro.” Macro means policies that shape general
economic conditions in which all actors in the system operate (primarily fiscal and
monetary ). Micro refers to policies specific to units within the system: corporate
governance banking , labor relations, education, etc. This distinction resonates
with those in the international relations field concerning unit and system, and the
autonomy of each in shaping outcomes. Just as the boundary has eroded in IR, it is
under stress in economic policy making: macro variables operate through units , so
the micro foundations of behavior to macro policy becomes a major issue, as the
rational expectations critique of Keynesianism has charged. Did the crisis happen
because of poor macro policy (low savings rates, too much capital flowing into
countries getting into to debt) or did it magnify because of poor regulation of
banking, mortgages, credit ratings, financial instruments, and weak supervision of
managers?
The Macro View: This interpretation of the crisis stresses the excessive
spending by governments, especially but not exclusively the United States : big
budget deficits, low savings rates, huge trade imbalances, extensive borrowing other
countries. This produced a large flow of money into the country, and it is that which
led to the rest: excessive borrowing at the micro(individuals, banks, lending
agencies, firms) creating the bubble of overleveraging which led to the collapse. The
Strong Macro argument downplays the much discussed flaws in the micro –system
of regulation as details the larger force of the macro policy “errors.”
In the macro view, the US roots of the crisis lies in years if low savings rates,
deficit spending by the government, import of capital and goods have dominated US
Gourevitch paper, APSA 2010
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practices for several decades. Spending has gone up, while taxes have been While
Japan ran large budget deficits, it had trade surplus and high domestic savings rates.
The US by contrast had large deficits national budget and trade, and low savings
rates. It imported huge piles of capital, largely from China and other Asian countries,
which allowed many things to happen: interest rates remained low, a housing boom
developed, US debt contributed to grow, huge imports added to job losses, . Simon
Johnson (2009, 2010) noted the pattern reminded him of what he saw during his
years he saw as chief economist of the IMF when developing countries that had
overleveraged and came for aid. Frieden and Chinn (2010) see US behavior as a
repeat of a classic debt crisis; big trade deficits, big fiscal imbalances at home, low
savings rates, overleveraged firms, consumers and financial institutions. Rogoff and
Reinhardt’s title capture their argument Perfectly: This Time its Different: Eight
centuries of Financial Crisis (2008), noting that the business cycle “has evidently not
been tamed.” (. P. 270. )
These economic conditions arose from government policies from a pattern
that had been building for many years. Spending did not go down under the GOP,
despite campaigning for less government, with more military spending (Star Wars
under Regan, Iraq and Afghanistan under Bush) and the drug plan for retired
Democratic Presidents also spend on military programs ( Vietnam for Johnson) and
on social Programs ( Medicare under Johnson. , Star Wars under Reagan)Major tax
cut plans were pushed hard by Reagan and Bush II.
The big difference between the GOP and Democratic years in the White
House and Congress lay with the bargain in the first years of the Clinton
Gourevitch paper, APSA 2010
7
Administration to close the deficit and the GOP willingness to cut taxes without
cutting spending. The Clinton years produced a bargain, to increase taxes with
some spending cuts. The result was lowered interest rates that encouraged
economic growth, so large that the budget went into surplus. The government was
rapidly paying down the US debt, so fast in fact as to be disconcerting to Greenspan
at the Fed. This posed an important choice point: to increase spending , on
infrastructure (neglected for years), on health care, and/or on education. Or a tax
cut to reduce the income. Greenspan favored the tax cut .
The incoming Bush II government undid the Clinton bargain and set off
another round of growing deficits It considerably lowered taxes, without lowering
spending. It seemed to pursue the “starve the beast approach’: cut taxes , strongly
demanded by its core constituencies, while discounting the growing deficits,
pushing onto to future administration and the Democrats the need to confront the
problem in the future. This would force the Democrats either to cut programs of
importance to their constituencies, or to raise taxes, against which the GOP felt
confident it could run. Difficult to achieve in the 1990s , the Clinton bargain will be
harder to re build now. The sharp cut in taxes without corresponding spending
reductions set up the macro situation that led to the crisis.
At the policy level, Greenspan chose not to “prick the bubble”, as housing and
stock prices rose. We don’t know what is a bubble, he argued, but we know how to
pick up the pieces if one bursts. One justification given was the increase in
productivity: the new technologies were creating capacity that allowed going farther
in judging the risks of inflation from full employment, so the avoidance of limiting
Gourevitch paper, APSA 2010
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the bubble turned on a number of assumptions about macro and micro distinctions
which turned out to be questionable
The Micro View: The micro interpretation stresses the elements of regulation
and practices which made their own powerful contribution to the result. The strong
version of this blames the crisis on the micro incentive of a number of players in the
system to undertake vast risks and generate the hugely leveraged instruments
creating a bubble which then popped (Lewis, 2010) (The idea that incentives for
individuals to make a lot of money could put the whole at risk is runs contrary to the
hegemonic neo classical orthodoxy of the preceding decades, to which we return in
evaluating the role of ideology as a cause of the crisis.) Financial institutions of all
kinds increased the leverage of their basic capital, adding new obligations , creating
new instruments, like the CDOs and many others in the process of securitizing many
aspects of the economy. These earned large fees. As instruments for purchase in the
market, substantially diffused the exposure to other individual , institutions and
countries. The securitization of mortgage and the financial innovation built to do it
was meant to spread the risk, but having many people own smaller portions of any
one piece. Instead , it spread the risk by having many people, and institutions
vulnerable to downturn. A comparative point of some importance is that countries s
differed on this. International institutions and agreements (Basel II) failed to stop
it.
High pay of individuals at the very top may have incentivized higher risk
taking. The huge bonuses and salaries of the financial and corporate elite may have
worked against shareholder interests and not wit hit, as the orthodox finance ideas
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9
suggested. Having managers own large equity was supposed to align their
incentives with that of shareholders to overcome the problem of managerial agency
costs. But a very big reward to a few at the top creates a gap with the many.(Bolton)
(Lazonick, Bebchuck, etc.) The risk of the big gain seems to have overwhelmed the
prudence one might expect: thus why did people risk their own money , why did the
counterparties Greenspan expected would contain excessive risk not achieve their
assigned role? Excessive gain provides one answer. Mutliple equilibria are possible
and one of then is what happens ( Soros,August 2010).
The rapid spread of new instruments, the CDOs, on top of the US mortgage
system seems to have spread the instability internationally. : weak borrowers
encouraged to make outsized loans with predatory practices. Big firms had strong
motives, from the big mortgage brokers, to banks, to Fannie and Freddie.
Institutions and individuals all over the world purchased these instruments.
Bond rating agencies put AAA ratings without cost to being wrong. Insurance on
derivatives was issued without any capital requirement normally required fo
insurance.
These practices arose from the erosion of law and regulation: formal laws
such as the repeal of Glass Steagal, that separated commercial and investment
banking, one of the major New Deal developments, already gutted by regulatory
edicts and rejected by the mainstream of finance in and out of the academy; And
regulatory moves such as the one allowing a weakening of capital adequacy
standards . In addition there was the failure to pass regulations and laws such as
Gourevitch paper, APSA 2010
10
those separating accounting from consulting, or that would require supervision of
derivatives.
This long list of micro elements of the economy have received considerable
attention since the Great Contraction began (Johnson and Kwan 2010 are
particularly detailed in noting them. Would a different micro regulatory
environment prevented the crisis, or blunted it, given the macro policies being
pursued? To have that capacity we have to imagine the micro elements as a dam,
able to hold back the rising waters of excess spending. The Strong Macro
understanding of the story sees big trade and budget deficits letting in the money,
so that nothing could stop it. The money would seek a way into the economy and
would probe till it found it, like water seeking the lowest level, or the weak elements
of a dam: if not this weakness, that one. The micro variables are lesser details in this
story.
The Strong Micro understanding says the micro variables are decisive, or at
least hugely important in enabling macro variables to have their effect. Stronger
regulation could have weakened the impact of the money flow, it could have
“neutralized “ them the way currency inflow can be sterilized by the authorities.
The weaker version of the Micro view sees the micro variables as enabling , as part
of an interaction between the two. The strong Macro version, in turn sees the
macro conditions as determinative: once that amount of money was set loose, it
would find its way into the system. The micro regulations were the idiom , but not
the basic language.
Gourevitch paper, APSA 2010
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Comparing countries suggests that the two dimensions interact, a
relationship more evident in some treatments of the crisis than others. The US, the
UK , Ireland and Greece seem to have had very large crises of their financial system,
while Germany, Japan much less so. And their macro policy responses have been
strongly shaped by the micro institutions. Reinhart and Rogoff (2010) are careful in
their evaluation saying there is no clear sequence of domestic vs extneral default.
Their chart on the sequencing of crises Figure 16.12, p. 271, notes that fincial
liberalization is generally the start.
This is a central point for us: the macro policy options and responses are
strongly shaped by micro institutions in each country. The tension between the US
and UK on one side and Germany and France over demand stimulus in fighting the
contraction shows this quite well. The former wanted Germany to step up deficit
spending in 2009-10. Germany responded by pointing to the demand impact
provided by its more extensive welfare state: unemployment benefits, health care,
and by its labor market practices. Germany has encouraged firms to sustain
employment by providing tax benefits and a certain jawboning about sustaining
employment. In the first year of the crisis, Germany seemed to be doing worse along
with the other high saver/ exporters, in Asia, but in the mid 2010 Germany is doing
better than the where firms are sustaining profits but cutting employment expenses.
The impact of micro structures on macro policy reopens a debate on Central
banks and CBI: Hall , and Iversen/Soskice have long argued that the role of Central
Bank independence cannot be understood separately from labor market
institutions: in Germany these produced wage restraints which lay at the core of
Gourevitch paper, APSA 2010
12
what the Bank was able to do. (The political foundations of CBI have also been
reopened here : the formal delegation actually is contingent , and depends on
continuing support the strategy of those in charge: the US Fed clearly internalized a
political strategy of what to do that favored finance industry over other groups. It
may not be partisan but it political in the meaning of interest groups. )
The analysis of the Great Contraction by economists vary substantially in
how deeply they delve into micro institutions. Aoki and Rajan pay extensive
attention to a broad understanding of what is involved ( Aoki discusses the Varieties
of Capitalism material directly, while Rajan does not ). Johnson, Frieden and Chinn,
and Reinhardt and Rogoff consider the narrower version of what micro institutions
embrace, leaving out include education, labor markets, distribution systems, and
production processes. More accurately, the latter three make reference to some of
these elements of the economy, but do not treat them as analytically distinct worth
of special treatment, while the first two pay quite a lot of attention to it. Aoki’s book
is not directly about the great Contraction , but rather an extensive analysis of the
functioning of market economies.(Aoki, 2010; Gourevitch 2010). As such he
undertakes careful account of the micro institutions and as well the political process
that brought them into being and sustain them. His analysis resembles the Hall and
Soskice Varieties of Capitalism account, though he seeks to locate his version on a
more game theoretic foundation. That may have advantages, but for our purposes
what matters is how similar they are: the modern economy, at the macro and
international level, cannot be understood, explained, predicted, without
understanding the micro elements of the economy dealing with labor markets,
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education and training, financial institutions, regulation of competition , quality
standards, health insurance, unemployment compensation, shareholder power, and
so on . There is institutional complimentarity among these; they nestle together
into one or another equilibrium. (Gourevitch and Shinn, Herrigel, Roberts and
Milgrom, Agliettera and Jackson.
Systemic interpretations: So far we have looked at both Macro and Micro
interpretations in unit terms , that is the behaviors of each state. The great
contraction can be interpreted in systemic terms, which questions the degrees of
freedom counties have. Rajan , Aoki, Johnson all note that deep patterns have taken
hold among the countries making them dependent on each other, such that each
would have difficulty moving away from their current trajectory. The high savings,
high export countries rely on the low savings, high import countries and vice versa.
We can say the former (China) need to increase domestic consumption, and that the
latter (the US) need to save more .But this is not easy to do, precisely because the
patterns are deeply rooted in the micro institutions of employment , safety nets,
labor market flexibility , in the institutional complimentarity noted above. The LME
countries “ need” the OME’s and vice versa. They have evolved into specializations,
into niches in the world economy, a division of labor. Countries specialize in
savings, investment and export, or in they specialize in consumption and import.
Each makes a big contribution to the economy: the “buyer of last resort” for the US,
the lender of first resort for China to the US.
Many countries have benefitted from this process: China imports vast raw
materials from around the world, and many specialized machine tools and finished
Gourevitch paper, APSA 2010
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products. This stimulates growth , so that while China floods the advanced world
with lower cost products, it stimulates growth in many parts of the world which
then buy from the US and so on, a happy cycle. If the US is wrecking its economy by
the various deficits, well it is up to the US to fix it. But if it did so, who would buy
China’s products and thus pick up the demand side of this relationship? So China is
“stuck” in lending to the US so it can sell, to stimulate domestic growth and avoid
unemployment?
Among the wealthy countries, Germany has similar conundrum: in the early
part of the crisis, it was badly hit by trade contraction, as were the other poorer
country exporters. In mid 2010, as this is being written, German exports are
booming , leading all of Europe, and China seems to be be doing well. It is the LME
pattern which is now doing poorly . Holding on to skilled workers, sustaining high
level investment , seems to work better at this point in the cycle than the high
flexibility approach of the low cost labor approach.
It is not that one model is superior, but that each has strengths and weaknesses but
also that each is part of system. The impact is to constrain choice: the story of
countries “picking policies” implies a sense of choice. Looking at these constraints
gives us pause. The reasoning and the problem echoes that of the dependencia
theory of a couple generations ago, where countries were locked into core
periphery positions, of selling raw materials to the rich industrial countries ,
trapped in a position from which they could not escape.
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International coordination: The other system variable that compels attention
takes us to another major theme from earlier periods: international coordination.
The 1930s remain legendary in our field for the failure to overcome collective action
problems leading to variety of beggar thy neighbor policies, such as devaluation,
tariffs, bank runs. The entire post war policy and intellectual apparatus developed to
prevent a reoccurrence of that failure: the IMF, World Bank, UN at the institutional
level, and in the study of international relations the development of neo institutionalism, hegemonic stability theory.
The Great Contraction suggests some limits in these solutions. International
institutions proved unable to prevent the profound imbalances among countries
noted above in trade and capital. Nor were they able to stop the budget deficits that
generated these imbalances. The regional version of this lay in the EU: at present
the budget deficits in Southern Europe command attention. Despite substantial
domestic pressure against it, Germany came forward with enough funds to prevent
a collapse in Greece, thus showing the domestic foundations of international
cooperation and the sources of its fragility. In Greece there was substantial
hostility to going along with the cut backs required by the deal . This kind of conflict
over international cooperation is familiar to us (Germany and the WW I Treaty of
Versailles is but one searing example. )
Germany has been a major violator of EU agreements on budget imbalances
exceeding the 3% rule often. The EU continues to contend with the tension created
by having a unified currency but not a unified polity or common and enforceable
standards on other issues. The role of the other non –financial variables in a
Gourevitch paper, APSA 2010
16
finance crisis has been noted. It is hard to balance the region with such differences
in the various micro markets on labor, pensions, tax compliance, corporate
governance, etc.
The efforts to coordinate once the crisis unraveled seem quite mixed. There
was a lot of conferring among central bankers, finance ministers and chief
executives , but it Iis not clear how much coordination, bargaining, peruasion and
imposition there really was. Did each country play the card it wanted given its
various incentives? Did it submit to pressure? Did it do what it wanted to do,
whatever that might mean?
The occurrence of the Great Contraction itself suggest failure of international
coordination: getting countries to fix the trade, and financial imbalances known to
be putting the global economy at risk, a failure which occurred at the macro level
(budget and trade deficits ) but also at micro level, with imbalances at the firm and
financial level.
Overall the series of financial crisis at least since Mexico in the early 1980s
show the growing importance of non state micro issues to national financial health:
Where analysis of country instability had focused on the obligations of the national
government, the Mexican peso crisis of 1994 showed exposure from bank
obligations. The Asian Financial Crisis of 1997 showed commitments by private
firms destabilized the currency in Thailand . (Gourevitch, 2008, 2008) The Panic of
07-08 takes it even deeper: bank reserve requirements, already on the agenda with
discussions of Basel Accords, but just what kinds of holding would fulfill these.
The mechanisms for determining mortgage credit worthiness, the regulation of
Gourevitch paper, APSA 2010
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derivatives, the behavior of bond rating agencies – as local and domestic as one
could imagine, now enter the realm of international negotiation.
Part II . Explaining policy and the role of politics. : So far the discussion has
focused on sorting out causes into macro and micro distinctions, and in thinking
about unit and systems.
We see the role of policy in all these interactions. But what explains the
policies that are chosen? As political scientists, that should be our major task, to
push at what a what political explanation could be. The politics of the macro polices
and the politics of the micro regulation – are these different? I will argue here the
deep drivers are similar, because the micro gave reality to the macro.
By a political interpretation I mean the acquisition of the power to prevail:
how a particular policy is able to beat out alternative policies. There are always rival
recommendations presented, usually by knowledgeable people. One
recommendation wins out. Politics is the process of that victory, and of the defeat of
the others. argument. Theory may tell us this or that policy is the best, or optimal,
but often optimal policies are not followed. Policies need backers. Max Weber ,
famous for analysis of ideology, assumed at that same time that ideology needs
supporters, that we need therefore an account of who supports them. He thought of
a sociology of ideas: he wanted to know who were the “idea bearing classes,” that is
groups that had the power to articulate ideas and have them prevail.
The challenge in the current crisis is to understand the politics of excess.
William McChesny Martin , former chair of the Federal Reserve , said the job of the
Fed was”to take away the punch bowl when everyone is having a good time.” Why
Gourevitch paper, APSA 2010
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did this not happen in the late ‘00s, not just on monetary policy but more broadly on
the range of macro and micro issues noted in the preceding pages?
The challenge lies in finding something which changed within the past dozen
or so years. The US ran a reasonable political economy for many years , a balance of
spending and taxes, of regulation and markets. The conservatives stressed fiscal
prudence, savings, investment and individual incentives to drive growth. The
liberals stressed social investment, education, health, infrastructure, a public goods
logic to spending, in addition to redistribution. A dynamic economy needed both:
public investment, but prudence. Indeed the Clinton years bargain years marked a
major event in that direction.. Something has developed since then which seems to
have made it harder to do this in the US and may have brought other countries with
it. .
What is that? We can look at several classic patterns of answers in political
science.
1.. electoral politics AND PARTISAN POLTICIS , in which money plays a large
role;2 economic structure, the position of finance in the economy, including the
notion of networks ;3) ideology, in which often the role of money is downplayed in
favor; 4; Political institutions.
1)Electoral politics and partisan alignments. These arguments sees the
contending political parties offering alternative policy packages and a political
process picking between them. Focussing on the US, one sees the Republicans have
abandoned the idea of cutting spending when cutting taxes. Instead it has run on
the politics of cutting taxes: “Starve the beast,” provides big benefits to a core
Gourevitch paper, APSA 2010
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conservative constituency while leaving to the future the task of cutting the
spending, presumably on to the shoulders of the pro spending people. How did this
come about? One can look for US specific reasons: the shift of the South to the GOP,
the rise of religious right, the 9/11 crisis and the Iraq-Afghan wars , the ethnic
tensions from in migration and falling employment .
At the same time, the pattern seems much broader than just the US : Broz
(2010) notes the phenomon in both macro policy and regulatory policy looking at
recent data, and experience , esp. Reinhart and Rogoff. (2010). Broz notes a
“a partisan pattern to financial cycles: right-of-center political
parties enact policies that help fuel the boom while left-of-center parties are elected
as a consequence of the crash.” (p.19)
The conservative governments cut taxes and loosen regulation, allowing greater
leveraging creating the vulnerability. Alessina and Tabellini 1986) and Persson and
Svensson (1989) explored the governments to do this to constrain their successors
. What coalitions produce these outcomes—who likes the Koolaid of less
government, and who pushes the other way? ,and who likes the Koolaid of great
social spending ? The partisan dynamic is powerful : NY Times Columnist Brooks
(2010) : “It is worth noting that the Republicans you knew early in your career did a
lot of losing. Democrats promised shiny new programs and Republicans were
joyless scolds of fiscal rectitude. Republicans started winning too when they
promised fizzy tax cuts.”
IN the US version of this we need to explain the political hegemony of finance
and a broad set of allies that joined in or followed along. Versions of the partisan
electoral argument vary:
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a. Money: Finance has gotten its way because of the sheer quantity of money
it pours into electoral campaigns . Simon Johnson ( 2010) locates the political
causes in campaign contributions and in networks. Wall street buys support, via
massive contributions to all the political parties, but notably to the Democrats who
need the cash. Campaign contributions of finance pour into the coffers of the leading
Congressmen: Senator Schumer, Dodd, Feinstein, and Barney Frank. ) Obama,
Summers, Geithner have resisted populist pressure, coming from the left and from
conservative Main street types, to do something about the Wall Street banker rip off
of the tax payers. Is this because of money, or, the next argument, structure. 2.
structure: The structural argument, says that policy makers need to favor finance to
make sure they invest to as to keep the economy humming, and thus voters happy.
Money gets its way because it is like water and air, the economy cannot live without
it. ‘I want to return as the bond market” in the words of James Carville upon hearing
Rubin speak so often of the bond market in objecting to spending on social
programs. Johnson chastises Obama Administration for not forcing a more severe
haircut on the bank owners and managers, instead of a bailout. In so doing he
suggests the importance of leadership, that Obama had a choice.
b. structure: The structural interpretation would stress the need to reassure
markets, keep banks functioning, prevent another collapse in ’09 and roll the
economy along. This is a return to the European Miliband - Poulantzas debate of
the decades after WWII, and the Lindlbom argument in the US about pluralism :
structural reasons the state worries about capitalism, as opposed to the traditional
pluralist account which looks at interest group action directly, funding etc. , and
Gourevitch paper, APSA 2010
21
argument developed by , Block , O Connor, Domhoff, Mills and others at that time at
the margins of political science The structuralists said “capital “ had more
influence because they determined the health of the economy, thus levels of
prosperity and employment , thus how the voters and interest groups rewarded or
punished politicians. This form of power could not be adequately modeled by
looking only at the more visible, measurable forms of power like votes and
campaign contributions. It can be measure by watching capital flows, investments,
exchange rates, but the impact on politics is more indirect.( Eichengreen, xxxx ,
Simmons, xxx Fisman, xx )
This reasoning is dismissive of the “networking “ approach (It does not
matter who Geithner has lunch with, any Secretary of the Treasury would have to do
what he did) and downplays the role of money. It may downplay the role of
leadership selection: these theorists see more play in the options, more choices for
picking among the constituencies, more leeway to structure the coalitions of
support. ( Tiberghien , 2007; Berger 2010)
In the recovery phase the politics at present centers on how much demand
stimulus, and how fast to move to balancing. The resemblance of this argument to
the 1930s strikes all observers: FDR was pressed to balance after the 1936 election,
a big triumph for the Democrats with his reelection and expanded majority, and he
nonetheless tried to cut the deficit, with bad results, a double dip recession till the
government went back to demand stimulus. .
Gourevitch paper, APSA 2010
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More direct in dealing with politics than most economists, in this case other
than Johnson who is quite direct, Rajan suggests this fault lines reflects a bargain
struck to make up for falling income shares of the middle class in the context of a
weak welfare state in the US. The conservatives drive for universal home ownership,
and the democrats push for housing that helps the poor. THE GOP uses this
argument and the problems Fannie and Freddie to throw responsibility onto
Barney Frank and the Democrats: cheap credit in general and housing in particular
would make up for declining income among the middle and lower class. A better
solution , Rajan notes, would be to have stronger welfare state in the, US , thus
linking different pieces of the political economy together.
The housing bargain is one fault line among three that Rajan explores, the
second being that between creditor and debtor nations in the world economy , and
the third being the interaction of very different financial systems . Rajan ‘s account is
a kind of equilibrium analysis: He observes bargains that have unraveled or are
under stress. He calls them fault lines. We might call them political equilibria that
are disrupted. They comprise bargains from earlier conflicts which unravel because
of new situations They are descriptions of accommodations. Rajan observes one
such , on housing and inequality, We can find others, and explore them.
The “ real” economy vs. “money” is long standing political cleavage. The lax
regulation of the financial sector can be seen as another in a long line of conflicts
over the balance between finance and everyone else. Jacksonian America is but one;
Roe ( 199X, and 200x) attributes the breakup of a German style bank led OME in the
US to this kind of populism. The UK fought between free trade finance and shipping
Gourevitch paper, APSA 2010
23
interest on one side , and manufacturers pounded by protectionists Germany and
the US on the other. In looking for the causes of the UKs relative decline , the
MacMillan Commission convoked in the 1920s , of which Keynes was a staffer,
examined just this tension between the real the financial economy. Hilferding’s
famous book Finance Capitalism (1900? written in the late 19th has attracted
renewed interest in many European circles writing on the contemporary period.
Friden and Chinn note the trade cleavage: the support for stable finances
should come, they suggest, from the tradable sector of the economy. The tradables
want strong macro relationships while the non tradables can shelter themselves.
The decline of manufacturing thus reinforces itself, in weakening the lobby for
policy moderation.
A similar argument arises from the military industrial complex cleavage:
industries reliant on defense contracts are less vulnerable to financial problems.
This is both an economic argument, in terms of resources to invest in politics. It is
also a political culture argument: For over 150 years, at least since Bismarck, if not
Napoleon before him, nationalism has been a powerful instrument for social
conservatives in breaking up coalitions of progressives seeking to build more
investment in social causes like education, housing and health. We hear echoes of
the battle over Aussenpolitik vs. Innenpolitik in the revisionist arguments about
Pre WW I Germany (Kehr, 19xx). In our period, Islamofascism rapidly becomes a
trope to replace the Communists in a world of villains, of Evil Empires to combat.
Lieven ( 200x) finds new energy for this demonology in the activities of the
Christian right in the US which has embraced a hard line on Israel and joined the
Gourevitch paper, APSA 2010
24
demonization of the Arab world. Realists of course stress the objective foundations
of those tensions, while the supporters of several other views of IR stress the power
of framing in defining the relationship between subjective and objective threats.
So, in seeking changes in the US that have eroded the basis of moderate
accommodation on issues of finance, taxation, spending and regulation, let the party
go on, we can see: the rapid growth of the finance sector, which gave it vast sums to
invest in politics (money) which gave it more importance in the structure of the
economy, the growth of the military industrial complex, the decline of
manufacturing export sector which removed a piece of the new Deal Coalition,
(Networks).
. A variant of the structure argument is “networks” . To some analysts this
would be distinctively different, a separate argument: Numerous commentaries
make note of Geithner’s involvement in the finance network (even assuming ,
inaccurately, that he has been an investment banker) complaining that he only
speaking to finance people, the very people he is supposed to be regulating.
Paulson and Rubin are attacked as coming from the same firm, Goldman, despite the
difference in parties The regulators come from the world of finance who favor their
brethren, and cannot imagine conceive of the economy apart from favoring the
needs of finance. Rubin, Peterson all come from finance, and many from Goldman
Sachs. Interestingly Geithner is assumed to be a banker, though he is not (NY times
of 20aug 2010). But he might seek to be employed in that world – note Phil Gramm
and many others who go work for industry they regulate: amakadurai in Japanese ,
pantouflage in French.
Gourevitch paper, APSA 2010
25
This network reasoning, showing the interconnections , is something like the
structural argument: people are chosen from this world to occupy the key positions,
and those in jobs like Finance Minister consult them. But this is a description of
political reality.: the government ” needs” the good opinion of that world. So
drawing the links is a way of describing a structural reality, r ather than a cause of it.
It is a way at the same time, of showing the structural influences, more than an
explanation of them: for people on the Democratic Party left, Barney Frank, a
liberal hero in many ways, draws money from the finance sources , so he is Like
Schumer and Dodd. The network argument blurs with the others: its mechanism of
action turns out to be ideology, or structure or money.
3. ideology. A third important frame of political analysis deals with ideas and
ideology. The shift against regulation and in favor of “starve the beast “fiscal policy
reflects philosophical differences on the role of government, the allocation of tax
money, the size and depth of a safety net, market failure, and risk. These can be
seen as differences of “interest” ( as the argument just summarized notes) or as
differences of philosophy, ideas, or ideology. Seeing them as interests leaves large
questions about just what these interests are and how they are seen. we question
how countries see things, and we question how groups see them, and how
individuals do. (Berger, Margalit, Katzenstein) These labels convey a substantial
difference in evaluative judgment, but they can all be seen as part of the same family
of argumentation : They have to do with the framing of a supposed reality, that the
frames shape analysis of causes and policies.
Gourevitch paper, APSA 2010
26
Greenspan’s aversion to regulation and intervention is thus linked to his
connection to Ayn Rand . That may help “explain” Greenspan “frames” or framing, a
It cannot be a satisfying overall explanation because it avoids asking why Greenspan
was so widely supported. His institutional position was surely important, but overall
Greenspan’s ideas were widely applauded and it is that broad support which
requires explanation.
We could turn to the broader base of the ideology ( anti regulation, anti
activism) : that in turn offers both an interest version and an ideational one. The
interest version suggests people support ideas which favor their interests --- largely
financial. The ideational one suggest people believe in certain ideas, apart from
their interests. The terms ideology and ideas express the difference : ideology means
justification for your interests, ideas are taken at face value.
The acceptance of a particular financial view of the economy has surely been
quite deep in the US over several decades. It commands the highest status in the
academy; departments of finance, economics and law schools most notably; The
great awards, leading departments, journals, editorships all subscribe largely to
notions of efficient markets, the ability of markets to evaluate risk, the celebration of
financial innovation , the measurement of economic success via the size of the
financial sector, and the broad ideas Greenspan represents.( Stiglitz 2010 ) The
power of elegance and the dominance of parsimony over “understanding” is surely
familiar to people in universities. But it neglects the self0 interest in the promotion
of those ideas; people trained in these methods pulled down big jobs and salaries, as
did their teachers. (A recent NY Times article on Quants is interesting in this regard,
Gourevitch paper, APSA 2010
27
19 August 2010). Large sums to promote these ideas poured into universities and
think tanks from them from conservative foundations, and donors ( the Olin
foundation chairs in Law Schools are but one example).
Like many economics writers, Krugman often turns to a strong ideational
turn of phrase in his interpretations. Attacking the resistance to the demand
stimulus deficit spending , he often refers to “the grip of ideas “So here’s the
question I find myself asking: What will it take to break the hold of this cruel cult on
the minds of the policy elite? When, if ever, will we get back to the job of rebuilding
the economy?” Aug 19, 2010. Indeed it could be seen as a “cult” of ideas, but
Krugman avoids suggesting an answer . A political sociology of ideas might ask who
is for or against different kinds of spending and taxes, so that cult has strength
because of the battle of interests surrounding the policy. It may not , in this respect
be so separate. The grip of ideas and ideologies certainly has great power, but it
could use some “political sociology” , some Weberian questions. This certainly is a
familiar argument in IR between constructivists and other types of theorists.
4. Political Institutions. Given the power of institutional analysis in political
science and its attraction to many economists, it is interesting how little appears in
the writing of many analysts of the Great Contraction. Aoki considers it in a
broader evaluation of the political foundations of his understanding of the
OME/LME distinction , but it does not appear widely in the other books. By this I do
not mean issues about institutional details of regulation: did the US Fed have the
authority or not to intervene with failing banks? . This is a secondary variable: the
rules are written loosely enough that the Fed could have done anything: regulators
Gourevitch paper, APSA 2010
28
escape responsibility in saying they lacked formal authority. Many things have been
done by interpretation of the rules: Glass Steagal was undermined by SEC and FED
Reserve interpretation s long before its formal abolition in the Gramm Bill. Formal
regulatory authority will not fix problems if there is no political will to enforce the
rules by strict standards. This pushes the institutional regulatory story back to other
meanings of politcis: political interests, ideology, partisanship.
Institutions have a political meaning , rather than a regulatory one: how do
the political institutions of society impact the specific outcomes? Does the
majoritarian/consensus distinction (Rogowski , Liphart, Persson and Tabellini) get
traction in Explaining the great contraction ? In the short time horizon , not a whole
lot :; several countries across the institutional spectrum pursued loose policies:
twenty years ago Sweden and Norway had their own crises. . Anyone can be
profligate. But in a longer horizon there could be an impact running through the
causal channel of the OME/LME distinction. The OME’s run tighter bank systems,
and these have not allowed the kind of financial innovation which led to the spread
of the derivatives that in turn made the crisis global. The countries that have
developed or sustained OMEs and a more regulatory system has been linked to the
arrangement of formal political institutions: OMEs correlate with Consensus
systems, while Majoritarian sytems correlate with LMEs. The mechanism lies in the
logic of producer coalitions over consumer ones: the former require commitment to
the bargain , and that seems more likely in Consensus systems.
Conclusion: The Great Contraction has both micro and macro sources. It will
be easier to establish those relationships than it will to settle arguments about the
Gourevitch paper, APSA 2010
29
political foundations of the policies that produced them. There is certainly an
element of discretion and choice in what leaders did, so the search for cause has to
allow some leeway of interpretation- a challenge to our search for parsimony. And
our appreciation of complexity is challenged by the occurrence of patterns which
compel theory and testing.
Gourevitch paper, APSA 2010
30
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