https://www.project-syndicate.org/onpoint/democratic-dysfunction-neoliberalism-energy-economics-william-h-janeway-2022-09
What’s Breaking Democracy?
Sep 16, 2022WILLIAM H. JANEWAY
The internationalization of economic and
financial relationships has undermined the authority of the nation-state and
created the conditions for today’s confluence of global crises. Worse, the
unraveling of neoliberalism has led not to a progressive revival, but to
something more politically contingent and uncertain.
- Gary
Gerstle, The Rise
and Fall of the Neoliberal Order: America and the World in the Free Market
Era, Oxford University Press, 2022.
Helen Thompson, Disorder: Hard Times in the 21st Century, Oxford University Press, 2022.
CAMBRIDGE – My colleagues Gary Gerstle
and Helen Thompson share an academic home at the
University of Cambridge, and their new books share a common purpose: how to
understand the dysfunctionality that has beset Western democracies. They
explore that question in very different but complementary ways, offering deep
insights into the disequilibrium dynamics of democratic capitalism. When read
together, one sees clearly how the dissolution of Gerstle’s Neoliberal Order
has stoked the disorder that Thompson analyzes.
The contrast between the two books owes much to
the authors’ backgrounds. Gerstle, a historian of political ideas, ideologies,
and cultures, writes from an American perspective. In The Rise
and Fall of the Neoliberal Order: America and the World in the Free Market Era, he tracks how initially radical
political programs become institutionalized as all-encompassing “orders” when
the opposition accepts their terms. Thus, the New Deal Order was established
when the Republican Eisenhower administration chose not to try to repeal the
Democratic Roosevelt administration’s central institutional reforms.
Similarly, after its failed attempt to renew
the New Deal Order through health-care reform, the Clinton administration
embraced the liberated markets of the Reagan Revolution and thereby extended
the Neoliberal Order until its demise in the post-2001 “forever wars” and the
2008 financial crisis. Gerstle presents Donald Trump’s ethno-populist appeal as
signaling the exhaustion of the Neoliberal Order, the disintegration of which
has left the United States polarized and paralyzed in the face of longstanding
racial issues and the inescapable challenge of climate change.
By contrast, Thompson’s perspective is
Eurasian, and her account in Disorder:
Hard Times in the 21st Century is driven by a granular analysis of the geopolitics of energy.
Once oil began to supplant coal at the start of the twentieth century, the
political economy of energy became international, and securing access to oil
became a high priority for most countries. Thompson focuses presciently on
Germany, which chose to become existentially dependent on Soviet and then Russian oil
and gas. Strikingly, her book was completed just prior to Russia’s invasion of
Ukraine.
Basing her analysis on the interplay of
transnational energy flows and their financing, Thompson argues that the
internationalization of economic and financial relationships has undermined the
authority of the nation-state. By retracing how democracy (both the concept and
the institutionalized system) emerged within the frame of the nation-state, she
establishes a compelling link from lost national authority to the faltering
democratic legitimacy that we see today.
THE RISE AND FALL OF THE NEW DEAL ORDER
In Gerstle’s brief but insightful account,
Franklin D. Roosevelt’s New Deal filled the void that had been left after the
Great Depression liquidated the political viability of laissez-faire economics. Roosevelt not only maintained
democratic institutions but also mobilized state power to underwrite unstable
economic and financial markets. He thereby restored private-sector
profitability while also extending the public sector to ensure minimal levels
of economic and financial security for all Americans.
Gerstle is correct that Roosevelt adopted a “vernacular”
Keynesianism when he rolled out debt-financed
public works in
response to mass unemployment. But he might have noted that the New Deal’s
explicit commitment to deliberate deficit spending did not come until the “Roosevelt
Recession” of
1937-38, when a premature return to fiscal rectitude and monetary restraint
killed the recovery and generated a huge spike in unemployment. By then, the
New Deal had already managed “to implant its core ideological principles on the
political landscape,” as Gerstle puts it.
Although Gerstle does not touch on it, when
“Dr. New Deal” yielded to “Dr. Win the War,” the public-private
partnership that
FDR sponsored mobilized
resources on
an unprecedented scale, enabling the Allied victory. Then came the Cold War,
which created the conditions for the Republican Party’s acquiescence to the New
Deal. The threat of communism, Gerstle argues, legitimized Eisenhower’s
defiance of hardline Republicans such as Senator Robert Taft of Ohio.
Gerstle also emphasizes US economic and
financial dominance after Roosevelt’s 12-year presidency and victory in the
war. As Eisenhower appreciated, the postwar decades of rising living standards
across the board made any attempt to repeal the New Deal exceedingly difficult.
In the event, the only central elements of the New Deal to be rolled back were
its labor-market
reforms, undermined
by the Taft-Hartley
Act of 1947, which
opened the door for state-level, anti-union “right to work” laws.
As Gerstle notes, when Lyndon B. Johnson
succeeded John F. Kennedy, he intended “to secure his place in American history
as FDR’s foremost heir” by filling the most glaring holes in Roosevelt’s
legacy. LBJ did this with the Civil Rights of 1964 and the Voting Rights Act
and 1965. In parallel, he extended the principle of social security through
Medicare. As he anticipated, this “Second Reconstruction” delivered the solid
Democratic South to the Republican Party. It also divided the working-class
base of his party.
Johnson also sought to channel Roosevelt in US
foreign policy. But Johnson’s misguided analogy between Roosevelt’s
determination to confront Hitler and his own response to the threatened Communist takeover of
South Vietnam ended in tragedy. After the decade-long escalation in Vietnam,
riots in American cities, the collapse of the dollar-denominated international
financial order in 1971, the 1973 OPEC oil shock, and the onset of traumatic stagflation, the New Deal Order lay in ruins.
To be sure, Gerstle reminds us that some key
New Deal institutions survived and continued to mitigate the extreme inequality
of outcomes that capitalism produces. But as the twentieth-century economist
Hyman Minsky observed, the most stabilizing legacy of the
New Deal was the institution of Big Government itself. Owing to the combination
of the welfare state and the warfare state that was born with World War II and
sustained by the Cold War, the federal government came to represent around 20%
of the national economy – up from 2% in 1929. That was large enough to offset
swings in private investment more or less automatically. Even when the
Neoliberal Order arose, its program of deregulation and privatization was
significantly underwritten by the aggregate economic stabilizer of a Big
Government it could not dismantle.
NEW-OLD LIBERALISM
Gerstle’s account of the rise of neoliberalism
begins with the debates among devotees of classical, laissez-faire liberalism
about how to deal with Roosevelt’s successful hijacking of that term to
characterize his interventionist initiatives. The “neo” in neoliberalism was
necessary to distinguish it from New Deal liberalism, but its professed goal
was the same as that of classical liberalism: to deliver on the “utopian
promise of personal freedom.” Neoliberalism thus began with an assault on the
overextended administrative state; though, as Gerstle documents, this attack
was actually initiated by a Democratic president, Jimmy Carter.
Neoliberalism’s domestic agenda was all about
paring down, rather than building up, public institutions. Financial-market deregulation
led to an unprecedented leveraging of obligations on the cashflows underlying
economic life. The withdrawal of federal support for labor unions contributed
decisively to the flattening of real (inflation-adjusted) income growth for
most workers. Both changes fueled extreme, persistent increases in wealth and
income inequality, which returned to pre-Depression levels.
Neoliberalism also underwrote
climate-change denialism, a distinctively American pathology
that still infects the Republican Party. And in terms of foreign policy, it
could claim as its great triumph the destruction of the Berlin Wall and the
collapse of the Soviet Union.
Gerstle offers a compelling account of how
neoliberalism became an “order” with Bill Clinton’s embrace of its central
tenets. It was Clinton who ended “welfare as we know it” and
instilled fiscal discipline in Washington, DC – going further even than Ronald
Reagan, whose fiscal deficits could be justified by ramped-up military
expenditures intended
to outmatch the Soviet Union.
The Democratic Party’s shift was personified by
Clinton’s secretary of the treasury, former Goldman Sachs Co-Chairman Robert
Rubin. Under Rubin’s watch, the US deregulated the financial industry, and
Wall Street duly celebrated with the dot-com bubble of the late 1990s and early
2000s. The digitization of economic and social life accelerated, as did
increases in inequality, owing to the skewed distribution of rewards from
economic growth and financial exuberance.
The Clinton administration also helped
internationalize the Neoliberal Order, not least through the 1994 North American
Free Trade Agreement and
advocacy of China’s entry into the World Trade
Organization in 2001. Moreover, it was during the 1990s that the Washington Consensus (deregulated markets and
fiscally constrained states) became the established doctrine that all
developing and emerging economies were expected to abide by.
The second great globalization of the 1990s and 2000s
surpassed the scale of the first great globalization that had peaked at the
start of the twentieth century, before being destroyed by World War I and the
Great Depression. At home in the US, however, globalized labor markets were
exposing American workers to extreme competition – both directly and indirectly
– and the dictates of neoliberalism were undercutting the government’s ability
to protect constituents from the forces it had unleashed.
Gerstle finds critical ideological support for
the neoliberal project in the work of “originalist” legal theorists, who argue
that a strict reading of the US Constitution’s text would reveal many federal
initiatives since the New Deal to be unconstitutional, by dint of their resting
on an expanded reading of the Commerce
Clause. Originalism
has since become a potent
political force through
the Federalist Society, empowered by Trump to install a right-wing majority
committed to its principles on the Supreme Court.
One missing element in Gerstle’s great work is
a consideration of the economic ideology that was used, even more than
originalism was, to rationalize neoliberalism’s program. By 1980, economists of
almost all political persuasions had been taught that if economic outcomes came
sufficiently close to representing perfect competition, policymakers should
respect “the market” as an efficient allocator of resources and distributor of
rewards. Though this was always an extraordinarily big and counterfactual “if,”
economists associated with the University of Chicago did not hesitate to push
policy proposals that assumed such imaginary conditions were real.
But the Neoliberal Order’s true reach was
confirmed by Rubin and like-minded Democratic economists who completed the work
of liberating financial markets from regulation. Their efforts set the stage
for the explosion of derivative securities that culminated in the 2008 crisis.
Fortunately, Big Government (and an aggressively active Federal Reserve serving
as global liquidity provider of last resort) was still big enough to contain
the fallout and ensure that we would suffer merely a Great Recession, rather
than another Great Depression.
LEGITIMACY LOST
The Neoliberal Order was rendered illegitimate
not only by this colossal market failure, but also by the newly elected Obama
administration’s determination to stabilize the system by privileging the banks over
households. This
resulted in extreme provocations like the decision to honor bonus payments to AIG executives whose
reckless underwriting of financial derivatives had required an $85 billion
bailout from
the government.
Moreover, by this point, neoliberalism’s
positive political mission of bringing democracy to an unwelcoming Middle East
had failed in every particular. President George W. Bush had been determined to
use the horror of September 11, 2001, as a catalyst for liberating the
presidency from institutional constraints. But his success revealed the US to
be the “pitiful,
helpless giant”
that President Richard Nixon had warned about to justify his own expansion of
the Vietnam War into Cambodia in 1970.
In Gerstle’s telling, the Neoliberal Order’s
“coming apart” is as much cultural as political or economic – and his account
is all the more compelling for that reason. An extreme cultural breakdown is
the only thing that could have enabled Trump’s election and complete takeover
of one of America’s two main political parties. Gerstle accurately depicts
Trump as both anti-neoliberal (closed borders to people and goods) and
pro-neoliberal (outsourcing judicial appointments to the
Federalist Society, cutting taxes regressively).
Out of this incoherence, Trump’s most lasting
institutional legacy will almost certainly be his furtherance of the
originalist program to dismantle federal power through the Supreme Court.
Gerstle’s emphasis on this strand of neoliberalism is particularly interesting
now that the originalist project appears to have created a legitimacy crisis
for itself through its decision overturning Roe v. Wade. In the
name of constraining the power of the federal government, the Supreme Court
has reopened the
door for state
governments to intervene in the most intimate issues of personal autonomy.
Gerstle concludes with the wrenching
observation that “political disorder and dysfunction reign.” Even though
President Joe Biden has managed to wrest a set of legislative victories from a deeply polarized
Congress, neither Trump nor his multidimensional assault on democratic
institutions has gone away. Trump’s extreme narcissism and intellectual
incoherence may be unique to him; but his brand of ethno-nationalism resonates
globally, from Brazil to Hungary. Recall that his election in 2016 was
immediately preceded by the United Kingdom’s Brexit referendum.
A HISTORY IN THREE ACTS
By demonstrating that the US is hardly alone,
Thompson provides cold comfort to readers of Gerstle’s book. Disorder tracks
three interlinked histories in great detail: the geopolitics of energy since
before World War I; the international financial system since the breakdown of
the US-designed Bretton Woods system in 1971; and the more recent erosion of
democratic institutions across the capitalist West.
Energy’s central position in Thompson’s account
arises not only from its direct economic role in powering economic growth and
raising living standards, but also from the inconvenient fact that oil and gas
have usually been found far from the centers of industry that need them most. From
Britain’s dependence on Middle Eastern oil following the Royal Navy’s shift from coal in the 1910s, to Germany’s reliance on
Soviet gas beginning
in the 1970s, Europe has long run on imported fuel.
While America’s distinctive domestic energy
endowment certainly helped its rise to economic supremacy in the first half of
the twentieth century, it has not been completely spared from global energy
politics. As Thompson shows, US power has often been tested and found wanting.
After the US guaranteed European access to reserves in the Middle East, where
it initially deployed no military assets, it discovered that it was critically
dependent on access to the same reserves. Thus, in Thompson’s account, the oil
crisis of 1973 becomes the hinge between the New Deal and the Neoliberal Orders
central to Gerstle’s work.
When Thompson turns to the history of
international finance over the past two generations, she begins with the rise of
Eurodollar markets in
London in the 1960s. The volume of dollar-denominated deposits held in banks
not subject to US regulation rose with the American balance-of-payments
deficit, which in turn increased as a result of US sponsorship of the defeated
Axis powers’ industrial recoveries and Johnson’s stealthy financing of the
Vietnam War.
Thompson correctly asserts that Bretton Woods
was doomed from the start, owing to the US delegation’s refusal to accept John
Maynard Keynes’s appeal for symmetry in the treatment of creditors and debtors.
Instead, the Americans hubristically insisted that the burden of adjusting
payments imbalances between countries should fall exclusively on debtors. After
that, America’s position as the world’s overwhelmingly dominant creditor lasted
less than 25 years. The dollar’s devaluation in 1971 was followed by OPEC’s
radical revaluation of oil two years later.
AS AMERICA GOES…
A major strength of Thompson’s book is its
documentation of the complex process through which Europe came to define itself
institutionally. She meticulously describes the European Common Market’s
emergence and transformation into the European Union, the eurozone’s
construction following German reunification, and all the strains and conflicts
endemic to such complex processes. From this history, it becomes clear that the
Neoliberal Order had relatively limited purchase on continental Europe, apart
from German labor-market reforms in the early 2000s.
Thompson repeatedly links the world economy’s
financial and political evolution to the central role of energy. For example,
she cites the need for “easy access to dollars to pay for larger oil import
bills” as a powerful, direct incentive to deregulate international capital
markets. Thus, in describing the global financial crisis, she focuses on the
often-neglected role played by the 2006 oil-price spike, when surging Chinese
demand fueled a huge increase in short-term dollar borrowing by ostensibly
sound banks in northern Europe.
But after the Fed had put a floor under the
2008 global financial crisis by establishing currency swap
lines to other
central banks, Europe’s halting recovery was compromised both by energy
economics and a neoliberal transposition of power. In 2011, the European
Central Bank, under Jean-Claude Trichet, raised interest rates when Chinese demand again
drove oil prices above $100 per barrel. Yet by
then, the Troika – eurozone finance ministers,
the International Monetary Fund, and the ECB – had been established to provide
credit to weak southern member states, and it approached its task by bringing
the Washington Consensus to Europe. Financial support duly became conditional
on fiscal discipline (austerity) and market liberalization.
Even after Trichet’s successor, Mario Draghi, proclaimed that the ECB would “do
whatever it takes” to save the euro, this neoliberal assertion of supranational
authority persisted. And though it was devoid of democratic legitimacy (other
than reflecting northern constituencies’ refusal to accept direct fiscal
responsibility for their southern neighbors), northern banks’ massive exposure
to their weaker neighbors’ pseudo-sovereign debt eventually forced a
compromise.
ANXIETIES OF DEMOCRACY
Thompson’s intensive analysis of energy
politics and financing sets the stage for addressing today’s democratic
anxieties in the US and Europe. Her starting point is the gradual,
multigenerational expansion of the franchise within the states that
collectively make up the capitalist “West.” She shows that tensions between
institutions that privilege “one person, one vote” and those that privilege
“one dollar [or pound/euro], one vote” were inevitable.
Within the nation-state, then, there is always
the potential for either “democratic excess,” as when a populist electorate
expropriates the rich, or “aristocratic excess,” as when concentrated wealth
dominates the democratic distribution of votes. Thus, in her own distinctive
way, Thompson echoes Gerstle’s contrast between the New Deal Order and the
Neoliberal Order. She notes, correctly, that under both the gold standard and
the neoliberal regime of free capital movement, democratic excess is always
constrained by the threat and occasional reality of capital flight. “By the
mid-1980s,” however, “it was the risk of aristocratic excess … that threatened
individual democracies’ future.”
Neoliberalism succeeded in elevating open
markets above national polities. But now, we are witnessing a backlash in the
form of nativist populism. Trump’s election and Brexit were the opening shots,
but ethno-nationalism has since surfaced just about everywhere. (Though
ethno-nationalists have not yet gained power in Europe outside of Poland and
Hungary, they could soon do so in Italy). And so, like Gerstle, Thompson
must leave open the question of whether democracy can survive.
That brings us to a final issue that warrants
mention. Both Gerstle and Thompson identify climate change as an existential
challenge to the political regimes they consider. While Gerstle avers that the
“New Deal never faced an existential question of this sort,” Thompson,
similarly, is skeptical about our ability to move rapidly beyond fossils fuels
to a green future. She foresees deep “distributional conflicts” over how the
shift to renewable energy will be financed and incentivized. For now, she
notes, the world remains dependent on high-priced fossil fuels, and the “wager
on yet to be invented technology” has not delivered a winner.
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Yet Roosevelt did see Europe’s war as an
existential challenge to the US, even before the Japanese attack on Pearl
Harbor in December 1941. Following his unprecedented re-election in 1940, he
instituted a peacetime
draft and
approved lend-lease
support for
Britain and the Soviet Union. Thompson would remind us that in Western
democracies, high taxes on the rich and state sponsorship of a larger share of
labor have been sustained only in the context of war. The question, then, is
whether our political leaders can frame the accelerating climate crisis as what
William James called a “moral equivalent of war.”
Now that Russia’s war in Ukraine has caused
severe spikes in fossil-fuel prices and critical energy shortages – and this
against a backdrop of mounting climate-driven disasters – it is plausible that
today’s deteriorating conditions could lead to a renewal of progressive
policies and programs. America’s ludicrously misnamed Inflation Reduction
Act represents one small step in that
direction. Will others follow? It would be nice to think so.
Writing for PS since 2013
18 Commentaries
William H. Janeway, a special limited partner
at the private-equity firm Warburg Pincus, is an affiliated lecturer in
economics at the University of Cambridge and author of Doing
Capitalism in the Innovation Economy (Cambridge University Press, 2018).
