Political Bubbles: Financial Crises and the Failure of American Democracy.

• Author: Calabria, Mark A.
• Position: Book review

Political Bubbles: Financial Crises and the Failure of American Democracy

Nolan McCarty, Keith Poole, and Howard Rosenthal

Princeton, N.J.: Princeton University Press, 2013, 368 pp.

The majority of books on the recent financial crisis tend to be written either by economies/finance experts or by journalists. While the journalistic accounts occasionally focus on political actors, it is usually in the manner of "bad people doing bad things" rather than with a theoretical framework. The economic accounts, with some exception, rarely incorporate the polities of finance. It is this vacuum that Political Bubbles attempts to fill.

The authors are three prominent political science professors whose work will be familiar to many Cato Journal readers. Poole and Rosenthal's previous joint works have made significant contributions to the Public Choice literature on economic legislation. All three authors can rightly be called pioneers in the modern academic literature on ideology. Readers of Poole and Rosenthal's Congress: A Political-Economic History of Roll Call Voting (1997) and Ideology and Congress (2007) will recognize much of that work here. Chapters 2, 3, and 4 of Political Bubbles are largely an introduction to the authors' previous work. Those 'already familiar with this work can either skim or skip these chapters.

The framework outlined in these early chapters focuses on what the authors call the "Three I's": ideology, institutions, and interests. That framework is used to explain the development of "political bubbles," which are defined as "a set of policy biases that foster and amplify the market behaviors that generate financial crises." It should be clear from this definition that the authors begin with the premise that financial crises are the result of markets. By relying on this definition, the authors rule out the possibility that government itself can be a generator of financial crises. From this starting point, the authors ask which ideologies are likely to constrain government from controlling financial markets. Not surprisingly, the authors quickly conclude that free-market conservatism is the "belief structure most conducive to supporting political bubbles." The rest of the book is spent trying to show how Congress became more free-market oriented and adopted deregulatory policies that contributed to the recent bubble.

The foundation of the analysis is a spatial model of voting, which the authors developed in previous works. Based...