Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
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 6 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 8 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 Gourevitch paper, APSA 2010 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 11 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, Gourevitch paper, APSA 2010 13 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 14 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. Gourevitch paper, APSA 2010 15 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 17 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 18 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 19 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: Gourevitch paper, APSA 2010 20 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 22 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 Bibliography Krasner PAPER Aoki, new book 2010 Alessina and Tabellini 1986) Agliettera and Jackson. Bebchuck Berger, Margalit, Katzenstein Bolton, Patrick Broz, L, new hard times conference paper, 2010 Cioffi, 2010, new Cornell book. Freiden and Chinn, the Lost decade, Manuscript, 2010 Gourevitch on AOKI 2010. Gourevitch “Containing the Oligarchs: the politics of corporate governance systems in East Asia, “ in A. McIntyre, TJ Pempel, J. Ravenhill ,eds. East Asian Crisis Ten years Later.” Cornell University Press, 2008 ; Gourevitch "Politics, Policy and Corporate Accountability " in Richard W. Carney (ed.) Lessons from the Asian Financial Crisis. New York: Routledge Press. 2008. Gourevitch and Shinn, 2005 Hall and Soskice, Herrigel, Hilferding, 1900?? Finance Capitalism. Iversen/Soskice, QJE, APSR Simon Johnson, Atlantic Monthly article spring 2009.; Johnson and Kwan book, 13 Bankers 2010 Katzenstein Kehr, Eckhart, 19xxx Krugman, august 19, 2010 Gourevitch paper, APSA 2010 31 Lazonick, Lewis ,Michael the Big Short, NY :Norton, 2010. Lieven ( 200x) Margalit Morgenson of the New York times is among the sharp business press critics who assert shareholder rights over managerial agency costs and the failure of Geithner to administer a stronger haircut. McNollgast; Cox and McCubbins. New York Times, see NY times article on QUants on WS 19 aug 2010) Rajan, Fault Lines, 2010 and Persson and Svensson (1989) Roberts and Milgrom, Roe, Mark, strong mangers Rogowksi and MA Kayser, “Majoritarian electoral systems and consumer power: price-level evidence from the OECD ,” American Journal of Political Science, 2002. … Liphart, Persson and Tabellini) Soros, in NY Reivew of books on the Euro)>2010. Shinn, 2010 new hard times conference Stigliz FT article 19aug10). .(Bolton) (Lazonick, Bebchuck, etc.)