Just a month into our current economic crisis, the New York Times reported that
Fed officials increasingly talk about the challenge they face with a phrase that President Bush used in another context: ‘regime change.’ This regime change refers to a change in the economic environment so radical that, at least for a while, economic policy makers will need to suspend what are usually sacred principles: minimal interference in free markets, gradualism and predictability.1
Thus, while the Constitution will endure—no one is talking about that kind of regime change—the whole intellectual and institutional edifice of economic policymaking now seems to be up for grabs.
No one knows how long this “market correction” for free-market ideas will last, or how deep it will go. But there is little question that the collapse of the American economy last autumn will be remembered decades from now as sounding the death knell for a governing regime of political economy: the overridingly conservative set of economic arrangements, ideas, interests and political institutions that has structured American governance over the past thirty years. While that regime’s death is now beyond question, the character of the one that will replace it is not.
James Galbraith’s The Predator State is a rousing call for the entombment of the conservative regime. Having written his book before the electorate summoned an undertaker for that regime in November, Galbraith has a more than reasonable claim to prescience. Having accurately predicted the imminent collapse of the nation’s financial system, he can no longer be so easily dismissed, as he was before this year, as an unreliable eccentric far out of the professional mainstream. With the recently departed Republican Administration having nationalized much of the country’s financial system and dusted off industrial policy with a bailout of the auto industry, and the new Democratic Administration preparing for a massive stimulus plan and universal health coverage, a book that sets out an argument for a more aggressive governmental role in the economy now seems altogether sensible, even suddenly orthodox.22. Galbraith is not the only author plying such seas these days. Jeffrey Madrick’s The Case for Big Government (Princeton University Press, 2008) is another, but it is relatively shallow and altogether less interesting than The Predator State.
Galbraith goes beyond simply criticizing what he believes to be a set of wrongheaded ideas and identifies the regime that gave those ideas power: The Predator State. His book also advocates a new regime to take its place. Galbraith has more to offer us in this latter task (of which more below) than in his description of the Predator State itself. While he identifies all the right actors and powerfully describes the consequences of conservative predation, his story of the rise of the Predator State has the causal arrow turned in the wrong direction.
Galbraith’s Predator State is the creation of “reactionary business leadership, in those sectors most affected by public regulation . . . [who] directed their lobbies—the K Street corridor”—to seize control of the state through the Republican Party. The Party thus “became the instrument of this form of corporate control.” Unlike the original Reaganites, with their touching faith in smaller government, the interlocking forces of reactionary corporations and their tools in the post-Reagan Republican Party seek only to “make money off the state—so long as they control it.” For Galbraith, conservative policies as disparate as education vouchers, No Child Left Behind, Medicare Part D, Social Security privatization, and permitting the securitization of mortgages were never even intended to serve public goals. These policies and others, he argues, were simply devices for corporate “predators” to enrich themselves at the public trough.
It may be that the effect of conservative policymaking has been to facilitate corporate predation. The massive subsidies for private providers of prescription drug coverage, to take one example, are convincing evidence of such a claim. But Galbraith wants to argue something more: that an irresponsible “new class” of businessmen “set out to take over the state and to run it.” Business is the principal in Galbraith’s story, while conservative policy entrepreneurs, intellectuals and politicians were little more than “the instrument of this form of corporate control.”
In the main, Galbraith has this backwards. A more persuasive story of the same shift in corporate position would present it as the consequence—partially intended, partially unintended—of decisions made by the conservative political actors Galbraith sees as mere water carriers for business. It is worth recalling just how frustrating conservative politicians and policy entrepreneurs found business back in the days of the Reagan Administration. Paul Weaver summed up the widespread belief of many on the Right when he declared back in 1988 that the corporation had become “suicidal”, incapable of serving what he believed were its real interests in freedom and competition, succumbing instead to the siren song of governmental regulation and subsidy.33. Weaver, The Suicidal Corporation (Simon & Schuster, 1988).
Put in Marxist terms, while business was a class “in itself”, it could not act as a class “for itself.” Lobbyists and K Street interest groups were at best fair-weather friends of free markets; at worst, and much more commonly, they were adjuncts of the activist state. Michael Horowitz stated the matter bluntly, even before the Reagan Administration took office, when he observed “an increasing number of situations where businesses will seek federal support and subsidies to insure survival and to maximize their short-run interests. In such situations, ‘conservative’ positions will often be adverse to those of the businesses in question.”4 On issue after issue, businesses proved eager to cut deals with the activist state, and to use it whenever possible to hobble their competition.
Business supported much of the Reagan Administration’s tax-cutting agenda, but it generally absented itself from its attempts to attack the legacy of the New Deal and Great Society. Whether it was a proposal to cut Social Security, eliminate the Department of Education or roll back environmental regulation, conservatives learned that the interests opposed to government activism were weaker than those that supported it. Even worse, no matter how much the public expressed frustration with big government in the abstract, it supported it in the particular—an odd example of not wanting to have one’s cake yet eating from it anyway. There was no more depressing instance of this than the Reagan Administration’s efforts to cut Social Security benefits—a failure that, as much as anything, ground the Reagan Revolution to a halt.
Conservatives in Washington think tanks and their small group of ideologically literate allies on the Hill drew three lessons from the limited anti-statism of business elites and the repeated failures of Republican attacks on programmatic liberalism. The first lesson was that, at least for the short term, conservatives had to accept popular demands for government activism as a constant, and work instead on changing the character of governmental supply. In practice, this meant convincing the public that conservatives genuinely cared about the ills that liberals bemoaned, and showing the electorate that conservatives could devise policies that used markets to serve public ends as a complement to government, not an alternative to it.
The second lesson, for the longer term, was that conservatives needed to persuade the public that private sources of supply for public goods are more efficient and effective than direct government methods of supplying comparable goods. And the third lesson was that the inclusion of private providers in welfare would build a coalition of private actors to balance the interests of governmental producers. The plan embraced the irony that only by accepting big government in the short term could conservatives could roll it back in the long term.55. See Brian Glenn and Steven Teles, Conservatism and American Political Development (Oxford University Press, 2009). The potential reward was a long-lasting, if not permanent, conservative political majority on a national level.
Pace Galbraith, then, much of the development of Republican governance over the past two decades can be traced to the conservative response to the unwillingness of American business elites to support free markets and small government, and the subsequent Reaganite failure to roll back the boundaries of the state. When Republicans seized the reins of Congress in 1994, they used their power to dramatically restructure the representation of business in Washington. The K Street Project, which put former Republican staffers at the helm of the city’s business associations, sought precisely to transform business from a “class in itself” to a “class for itself.” K Street interest groups had to “pay to play” (where “paying” meant turning those groups into adjuncts of the Republican Party), and this process only accelerated under the Bush Administration. Contrary to Galbraith’s account, it took politicians like Tom DeLay and Newt Gingrich to make business into a collective actor, an “it” rather than a “they.” Party politics and ideology, not business and raw cash, occupied the driver’s seat.
At the same time that Republicans were remaking business into an instrument of conservative power, they launched several policy initiatives that garnered little if any support among businesses themselves. The most striking of these was the Bush Administration’s audacious effort to privatize Social Security. Galbraith repeats the well-worn canard that this project was little more than a Wall Street power grab. In truth, the financial industry’s interest in Social Security privatization was always sharply limited. Most mutual fund companies generated huge profits throughout the quarter-century equity boom by catering to better-off investors and servicing 401(k)s and IRAs. They showed little interest in Social Security individual accounts that would be unprofitably small in a great many cases and likely to generate large new regulatory burdens. The two firms with the longest and deepest support for the project were Charles Schwab and State Street Bank, whose interests were far from congruent with the rest of the industry, since they made money by taking a small cut of assets under management (Schwab by charging mutual funds for participation in its mutual fund supermarket, and State Street as a custodian of mutual fund assets).
When push came to shove, it turned out that Social Security privatization was an ideological and especially a partisan project designed to weaken the Democratic Party. Conservative Republicans hoped that privatization would transform the financial industry into a lobby for further privatization, and thus weaken support for “big government.” It was conceived as something done to business, not something done for it—a very far cry from a business-led conspiracy. Indeed, the transformation of business that Galbraith bemoans, and its rapacious efforts to use government as a piggy bank for undeserved profit, was the effect of conservative governance, not its cause.
It will be interesting to see if Galbraith’s vision of the regime to come is more accurate than his mixed record of describing and explaining the past. The answer, of course, remains to be seen, but seekers could do a lot worse than to explore The Predator State for the shape of what may come.
Like the conservative regime of political economy that has now been discredited, the emergent liberal regime will be constructed on the foundation of a new set of ideas shaped by novel political and economic arrangements. For Galbraith, the key to understanding the political economy of both the conservative regime and the regime that will follow it is the role played by financial capital.
In the regime that preceded the era of conservative power, Galbraith argues, capital was allocated primarily by the corporation itself. Given the very high marginal tax rates that preceded the Reagan Administration, corporations had strong incentives to retain earnings rather than recycle them through the financial system. Cutting tax rates struck at the heart of this arrangement, which was the key to what Galbraith’s famous father called the “New Industrial State”—the regime that sought to govern relations between capital and labor so that all could enjoy high and stable growth with low unemployment and low inflation at the same time. With taxes reduced, however, Galbraith writes, corporations were free to
pay out a larger share of net income, in part to shareholders but especially to managers themselves. This accounts in part for the explosion of chief executive pay; intercorporate competition that formerly took the form of flamboyant headquarters of expensive company emoluments (the corporate apartments of 1950s films) can now be passed directly to the CEO as private income without catastrophic tax implications.
The capital previously allocated by the corporation itself—which also led to the emergence of over-diversified corporate behemoths like ITT—now flowed into lavish private consumption and, in particular, investment banks and hedge funds. The new liberal regime, Galbraith argues, will reverse this pattern. By dramatically raising tax rates, it “strongly penalizes financial speculation, [and] encourages wealthy individuals to keep their savings locked up in corporate stock, where they will be used actively by the business firm.” The new regime will favor “business enterprises rather than the individuals who are in a position to control them.”
While the conservative regime was obsessed with encouraging investment by providing incentives for “capital formation” (which mainly meant reducing marginal tax rates on corporate income, capital gains, dividends and individuals), the new liberal regime will turn this strategy on its head. Raising taxes will encourage corporations to invest those profits internally rather than return profits to investors. Real capital investment would rise under a regime of higher taxes, at the same time that government spends its swelling revenues on public goods.
Only part of this surge in investment would be financed by increased taxes, however, since Galbraith argues that the obsession with government deficits—which if anything has concerned Democrats more than Republicans over the past quarter-century—is profoundly mistaken. So the other part of the surge in investment would be financed by debt. The United States, Galbraith argues, is the unchallenged reserve currency of the world, and thus the size of the American deficit is determined by the demand for dollars, a demand that has only increased with the current financial crisis. Unless the euro or the yuan emerges as a reserve currency (and there is no indication of that happening soon), the U.S. government is free to borrow at incredibly low rates. Galbraith is unapologetic that it should do so with alacrity. The new liberal regime he calls for would thus put the Federal government in a much more central role in allocating investment capital than it has played over the past quarter-century.
The shift of power to allocate capital from the financial industry to government is, for Galbraith, far from unfortunate. Galbraith sees higher taxes and more debt as serving political objectives as well as economic ones. He wants to dry up the political power of the financial industry that courses through both parties because he is intensely skeptical of the capacity of financial markets to allocate capital in a way that meets the longer-term needs of society. The real economic issue, Galbraith argues, is where the “true seat of economic power” lies. The new liberal regime will be one that empowers “scientists, engineers, some economists and public intellectuals—who attempt to represent the common and future interest”, and deposes “banks, companies, lobbyists, and the economists they employ—that represent only the tribal and current interest.”
Regime change, therefore, is not simply a matter of altered ideas, but of dethroning one set of elites and elevating another. Galbraith is also refreshingly frank in admitting that the new liberal regime will not be, at least in any direct sense, more democratic or populist than the one that it replaces. It will be the rule of professionals, motivated by the internal norms of those professions rather than by the competitive pressures of either elections or markets. The planner rather than the entrepreneur will hold the position of honor in the new liberal American regime of political economy. Our system of education will be called upon to disseminate the findings of the professions, and, one suspects, to enshrine the new hierarchy of honor.
In the new regime, furthermore, the assumption that the solution to any problem lies in either leaving it to the market to work out (the conservative solution of the old regime), or in regulating or subsidizing markets (the proposed liberal solution during the years of conservative ascendancy) will be superceded by pragmatism about whether to use markets at all. For example, Galbraith argues (with great wisdom) that where the provision of insurance is concerned, private markets have few merits and quite a few devastating flaws. The Federal government knows how to raise revenue (and will be doing much more of it in the liberal regime) and how to cut checks. There is no efficiency gain, and much transactional loss, in asking private markets to do what government can do better than any market: insure against unavoidable risks. The belief that there simply had to be a way to achieve social insurance through the “public use of private interest” will be treated in the new regime as the disproved religious faith of the old regime. Decisions to use or not use market mechanisms will start from a determined agnosticism—though an agnoticism that will be influenced by the recognition that, by putting large swaths of the private insurance business out to pasture, the new regime will also expel from the political arena some of its most determined opponents.
Finally, the new regime, says Galbraith, will take a very different approach to regulation. The old regime nurtured those parts of business most hostile to setting standards of decency in the workplace or with regard to environmental protection. In doing so, they created a growing business constituency dependent on the Republican Party to maintain those low standards. In the new liberal regime, regulatory standards will be raised without regard to their impact on the most marginal firms, who will be happily ushered into Chapter 11, their assets taken over by those most capable of working under the new, more stringent standards. Rather than shutting down international trade and immigration or adjusting our environmental and working conditions to line up with those of our most cutthroat competitors, we will respond by setting our own standards and letting the level of trade and immigration adjust to them.
As ought to be clear from this example, if not also others, Galbraith is no fan of outright dirigisme. While he is open to using markets in many cases, Galbraith is insistent that all markets are politically defined and bounded. In structuring markets, government also shapes the interests that will influence it—policy makes politics. As Galbraith states bluntly, a key objective of the new liberal regime will be to use political means to produce market outcomes that strengthen its allies and weaken its enemies.
This may seem a breathtaking admission, but only to those who haven’t been paying much attention to American politics for, say, the past two centuries. For those of delicate disposition who hesitate even to imagine political power used in this aggressively partisan fashion, perhaps it is sufficient to observe that every regime in American history has done so. The creation of Andrew Jackson’s pet banks provided supporters for the Democratic Party and destroyed those of the Federalists, just as the Republican Party of the late 19th century nurtured the growth of Wall Street and the national industrial conglomerates that helped lock in the Party’s power. FDR’s Democrats nurtured the labor movement, which provided the financial and organizational might of the party over the following half-century. One might even say that this is the American Way. So just as conservatives have used policy to restructure business preferences and political behavior to support their ideological projects over the past quarter century, Galbraith would have the new regime use the tools at its disposal to undergird a different set of principles.
Is The Predator State a premonition of things to come, whether we like them or not? Do Barack Obama, Lawrence Summers, Timothy Geithner and other senior economic officials of the new Administration see the world as James Galbraith sees it? Do they share his unvarnished view of the partisan agency inherent in economic policy decisions, or do they think in terms of what is best for “American society as a whole?” Taken as a whole, the decision-makers of the new regime do not seem the type to deploy economic means for partisan ends, to mimic the pattern of conservative governance for liberal objectives. These are technocrats rather than party strategists.
That does not settle the matter, however. The new regime may adopt many of the measures Galbraith recommends not because it shares his vision, but because crisis will force it to do so. Faced with a full-bore attempt by the deposed regime to reassert itself by obstructing the Administration’s agenda, the new regime may find that it has no choice but to use the economic tools at its disposal to destroy its opponents root and branch. Opposition, history tells us, is always radicalizing. If this turns out to be so, our new rulers could do worse than turn to Galbraith’s ambitious, challenging and at times infuriating book. We are, it seems, destined to find out.