Why hasn’t the 2008-14 shock produced anything like the New Deal?
Ricardo Fuentes gave a staff talk this week on his big new paper (with Nick Galasso) on the links between economic and political power. What struck me was a very serious ‘dog that didn’t bark’. The 1929 collapse and the Great Depression led to profound reform in the US, with the New Deal and a sharp reversal of rising inequality. A series of shocks prompted similar redistributive transformations in Europe (rise of fascism, World War Two) and East Asia (Chinese revolution, World War Two).
Fast forward to 2008-14. This time around, much more timid radical financial reforms have produced absolutely nothing in terms of redistribution – 95% of US economic growth since 2008 has ended up in the hands of the richest 1%. So why is this time so different, and what can be done about it?
In response, Ricardo highlighted a paradox. The very success of Ben Bernanke who, instead of tightening the tourniquet and triggering a massive depression, as in the 1930s, pumped money into the economy, avoided a global financial meltdown. But that in turn eased the pressure for reform. Sounds a bit Trotskyist (worse is better), but also sounds about right. Just as revolutions in Latin America needed both revolutionaries and a really inept dictator to triumph (Cuba/Batista, Nicaragua/Somoza), maybe New Deal style revolutions require a level of economic self harm that no longer exists. Tricky.
So assuming that killing all the economists is not a feasible policy option (sorry to disappoint you), what might be the political elements that enable us to scale the mountain that the financial elites have assembled to defend their privileges, and redirect economic activity towards a greater goal? What might be some countervailing trends?
Overall, this problem seems most acute in the financial centres, where the financial elites are now so deeply dug in, that, like particularly determined ticks, that they may be impossible to dislodge (in the UK Ha-Joon Chang thinks the Labour Party is still under the financiers’ spell).
Outside the US and UK, the balance of forces may be more promising: A surge in levels of democracy, and active citizenship in many countries, (combined with better economic management) underpins the main ray of light in reducing inequality – rapid progress in Latin America over the last 15 years. That message is spreading to other regions.
What about sources of hope nearer the heart of the financial-political complex? Some straws to clutch at:
- Reshaping the elite’s understanding of its self interest. Once inequality starts to risk social breakdown, the logic of further concentration of wealth starts to unravel. A lot of serious, mainstream players get this, including the IMF and the WEF (currently running the Davos gabfest).
- Maybe not enough time has elapsed yet – the New Deal only came four years after the Wall Street crash, and its more radical variant a couple of years after that. Could all the incremental progress since 2008 on transparency, tax dodging, financial transactions taxes, capping bonuses etc reach some kind of tipping point that starts to have a serious impact on inequality?
- Could climate change or other environmental risks supply the kind of existential threat previously provided by war and political upheaval ?
- Some role for digital democracy and accountability (OK, maybe the straw clutchism is getting out of control here)
But I have to say, it feels like the political chips in the UK and US are just not as favourable this time around. Maybe pressure from outside will shift that, as part of the rise of the rest, but I wouldn’t bet on it. As for changing things from within, that probably means spending more time working with elite champions, rather than just pursuing ‘us and them’ narratives (however tempting). In the seminar, Alan Doran suggested two interesting avenues to explore:
– Find champions among 3rd generation plutocrats (1st generation gets moderately rich, 2nd generation gets megarich, then their kids wonder what life’s all about)
– The megarich can’t spend all their money on stuff, so the key is how they invest the rest – why not do the research for what constitutes a distributionally progressive/regressive investment portfolio and lobby them to change accordingly?
Sorry if this sounds too lily-livered and gradualist, but the comparison between 2008 and the 1930s suggests that, absent a war or other major shock, a new New Deal isn’t going to happen any time soon, at least not anywhere near the financial epicentres.
One final thought, connecting with previous posts on complexity and ‘how to campaign when we don’t have the solution’, I think what Ricardo and Nick so brilliantly (85 individuals owning the same as the poorest half of the world’s population – 3.5 billion, is a classic killer fact), is actually the best strategy. It’s what Matt Andrews recommends as the right role for outsiders – focus on identifying and amplifying the problem, because the solutions are likely to be complicated, context specific, and discovered through trial and error by those involved, not lifted wholesale from the recommendations shopping lists of thinktanks and NGOs.