From the late 1970s until the recent near collapse of the global financial system, the American way of political economy or "variety of capitalism" had been steadfastly, even joyously, market oriented. Taxes on the wealthy, rechristened job-creators, stayed well below levels of the early postwar era, regulatory relationships between business and government were broadly expected to be cooperative not antagonistic, and the trend in social welfare policy even when a Democrat was in the White House was in favor of programs that promoted and valorized private-sector employment. By seemingly forcing ideology-challenging stimulus packages and bailouts, the financial crisis posed a grave threat to this set of norms and expectations. For Democratic President Barack Obama, this crisis seemed a remarkable opportunity. The time had at last arrived, or so it seemed, to throw off the shackles of neoliberalism and reintroduce the American people to the virtues of government. It was time, Obama prophesied in his First inaugural address, for Americans to look beyond "stale" debates about the size of government and abandon magical thinking about the self-healing properties of unfettered markets.
By the time Obama took the oath of office to begin his second term, it was plain that the high hopes expressed at his first inauguration were not to be fulfilled. Despite the president's reelection, a cadre of true-believing free-market conservatives within the Republican majority in the House of Representatives exerted enormous influence in setting the terms of debate within the nation's capital, forcing Democratic office holders to argue over how much and where to cut government spending. The president, heading into his second term, fought tenaciously to preserve the life of his signature program--"Obamacare"--but had long since given up the fight for renewed macroeconomic stimulus. On the defensive, he veered between homilies on government as a force for good and me-too attacks on bloated bureaucracy and wasteful government spending.
The purpose of this article is to explain the sources and consequences of the effective reassertion of neoliberal orthodoxy in the aftermath of the financial crisis. The burden of the argument is that the ideological tenor of American politics today reflects not so much ideational "polarization" as a one-sided battle to restore the political authority of an anti-Statist cultural predisposition that remains strong. Anti-Statism, in its neoliberal form, is a core element of a political and policy regime that was shaken, but hardly dismantled, by the recent crisis. Those, like President Obama, who foresaw an opening to move beyond "stale debates" about the relative virtues of the government and the market greatly underestimated the power of anti-Statism within contemporary American politics, and misread the conditions under which paradigm shifts occur in American politics. A comparison of Obama's situation with that faced by Franklin Roosevelt (FDR) in the New Deal era will highlight Obama's limited room for maneuver. In conclusion, we will speculate on whether perhaps more room for maneuver might open up, as it might if "True Believers" on the right place a political burden on anti-Statism that it cannot bear. First, however, we need to establish the chronology of events and explore how and why the greatest economic crisis since the Great Depression gave rise to such a curious response--bipartisan pragmatism followed by overblown hope for a restoration of old-liberal values succeeded quickly by an aggressive reassertion of neoliberalism.
From the Government Rescue of the Economy to the Anti-Statist Backlash
In the earliest stages of the 2007-08 financial crisis, the usual suspects took the usual positions. President Bush said that declines in the housing market should be seen as a natural market correction. As for disquiet among ordinary citizens worried about the value of their assets, "Do you think they feel disquiet now?" asked the president. "Go ahead and run up their taxes and see how they feel" (Weisman 2007). On the other side of the familiar ideological divide, economist Austan Goolsbee, who would later be tapped to head the Council of Economic Advisers for President Obama, derided what he saw as loose talk about allegedly "irresponsible" lending. In fact, Goolsbee said, the mortgage market had become "more perfect" as a result of financial innovations, and more just as well, because innovations in finance had "let in the excluded," a category that included "people without a lot of money in the bank to use as a down payment" (Goolsbee 2007).
Pragmatism Has Its Moment
Once the crisis began to take shape, however, the Bush administration took strong actions, both unilaterally and in cooperation with Democratic majorities in Congress, to forestall a threatened paralysis of the global financial infrastructure. In doing so, the president put aside his own instinctual mistrust of "Big Government" solutions and delegated decision making to two highly pragmatic appointees, his Treasury secretary, Hank Paulson, and the chairman of the Federal Reserve Board (the Fed), Ben Bernanke. Paulson, a former managing partner at Goldman Sachs, had on his staff philosophically minded defenders of the free market. In seeking help during the crisis, however, he valued experience at the top levels of private finance over conformity to principle, and had little respect for those, such as Securities and Exchange Commissioner Richard Cox, whom he thought prone to engage in "holy war" over government interventions (Sorkin 2011, 185, 368, 425). Paulson's deputy, another former Goldman executive, had earned a reputation as a free-market crusader. In the crisis, he rushed to embrace the pragmatism of his boss, becoming a "convert" to regulation in the eyes of the New York Times (Thomas 2008). As for Bernanke, he had made his career as an academic economist before joining the government. His approach was that of a classic technocrat, tempered by a historically grounded appreciation for the policy benefits of democratic legitimacy (Stewart 2009, 75). (1) Despite the fact that Bernanke had published extensively on the often divisive issue of the causes of the Great Depression, the former Fed vice chairman, Alan Blinder, says it took four years of working with him closely before he "realized" Bernanke was a "libertarian leaning Republican" (Bullock 2009).
With the president's acquiescence, the Treasury and the Fed cooperated first to prevent the collapse of Bear Stearns investment bank. Two months later, in a move soon overshadowed by Obama's more extensive and politically fraught steps in the same direction, the president further strayed from neoliberal orthodoxy and signed legislation for a macroeconomic stimulus, sending rebates to taxpayers, delivering bonus checks to retirees on Social Security, and extending tax credits to businesses large and small. In summer of 2008, as the crisis deepened, the president backed further ad hoc interventions designed at Treasury and the Fed. In September, the executive branch nationalized, via a "temporary conservatorship," Fannie Mae and Freddie Mac, government-sponsored giants in the secondary mortgage market. The next month, the president agreed to move beyond piecemeal efforts to stabilize the financial sector and signed off on Paulson's and Bernanke's urgent request to appeal to Congress for a massive bailout of the entire U.S. financial sector. In the "Toxic Asset Relief Program (TARP)," the government pledged $700 billion to assure the solvency of financial institutions. It was, acknowledged Bush, "a breathtaking intervention in the free market" (Bush 2010, 458).
The pragmatism of the Bush administration's crisis response reflected a number of factors, including the close association of the administration's top economic principal, Paulson, with Wall Street. Paulson, effectively the acting president for the economy during the crisis, was in constant contact with his successor at Goldman, as well as the heads of the other major banks, and consistently interpreted events affecting Wall Street through the prism of his personal connections, in which all roads led back to Wall Street (Sorkin 2011; Stolberg 2008). He and Timothy Geithner, the president of the New York Federal Reserve Bank--the direct regulator of the Wall Street giants--initially attempted to respond to the evolving liquidity crisis by fostering personal cooperation among the banks' presidents. Paulson even attempted personally to find a buyer for Lehman Brothers before deciding to step back and permit it to fail (Sorkin 2011, 248-49, 273, 368). His decision to let Lehman fail was itself highly personal. Though he was surely concerned with the problem of moral hazard, he was additionally exasperated with Dick Fuld, Lehman's CEO, who stubbornly held out for a better deal until there was no hope of a private deal at all (Markham 2011, 14, 528). And when Paulson decided to move toward a systemic response, he once more consulted narrowly within a small circle of former and current bank executives.
As for Bush, the president did not want to do any of these things, but he saw his choices as being either ideological apostasy or systemic collapse of the financial sector, with unspecified but presumably horrific consequences. The president recalled in his memoirs that he was well aware that his former neighbors in Midland, Texas, might think he had lost his philosophical bearings (Bush 2010, 460). But when Paulson and Bernanke told him that a massive systemic bailout of Wall Street was necessary and that it had to be done virtually overnight, he gave his blessing to the effort--knowing that his own help lobbying Congress would be, if anything, counterproductive--and asked merely that Paulson and Bernanke explain to him at some later date how the country had gotten into such a mess in the first place. Other Republicans...