This article appears in the August 2022 issue of The American Prospect magazine. Subscribe here.
Thinking Like an Economist: How Efficiency Replaced Equality in U.S. Public Policy
By Elizabeth Popp Berman
Princeton University Press
By David Gelles
Simon & Schuster
The Meddlers: Sovereignty, Empire, and the Birth of Global Economic Governance
By Jamie Martin
Harvard University Press
The Lords of Easy Money: How the Federal Reserve Broke the American Economy
By Christopher Leonard
Simon & Schuster
For half a century, bad economics has provided intellectual cover for bad government. Those in charge preferred economists who would validate free-market fantasies, even though they had been disproven by events. The dominant policies served large banks and multinational corporations at the expense of working people. This was not only unjust; it was catastrophic. Markets mispriced carbon and generated global climate disaster; they mispriced financial securities and produced the collapse of 2008; they deregulated labor, stagnating wages even as GDP more than doubled.
John Maynard Keynes demolished the premise of perfect market efficiency, revealing it to be a theoretical and empirical fraud, and the Great Depression provided the exclamation point. Keynes’s economics combined a rich understanding of the role of money, the banking system, risk and uncertainty, and the failure of markets to price accurately, as well as his most famous insight—the related failure of the macroeconomy to equilibrate at a point that realized its potential.
But “Keynesianism” was soon watered down by mainstream interpreters into little more than a formula for using deficit spending to temper recessions. This was known as the neoclassical synthesis: a bit of Keynes grafted awkwardly onto the classical model of efficient markets. Keynes’s great radical protégé Joan Robinson termed this bowdlerization “bastard Keynesianism.”
Politically, hyper-market economics ruptured the New Deal coalition and paved the way for Trumpism. If Democratic presidents (notably Clinton and Obama) were mainly serving Wall Street, and the activist state no longer advanced living standards of working families, then the bond between ordinary people and the Democratic Party was sundered.
ELIZABETH POPP BERMAN, a University of Michigan sociologist and student of organizations, provides extensive details about how this reversion in the economics profession infected the deep state in her new book Thinking Like an Economist. Many of the instruments were pseudo-technical but deeply tilted in favor of the class status quo. She describes the influence of the RAND Corporation, a Pentagon spin-off, in promoting a brand of spuriously precise planning and budgeting, with a subtle bias against public outlay. The Johnson administration, otherwise progressive in domestic economic matters, embraced this model, known as PPBS (Planning-Programming-Budgeting System). The BS part of this technocratic model insidiously undercut the political commitment to social spending.
In succeeding chapters, Berman shows how resurgent orthodox economics, with its central premise that markets are efficient, eviscerated the entire arsenal of the New Deal order, including antitrust, health care as a right, environmental and financial regulation, safe workplaces, and much more. And she demonstrates how centrist economics differed from its fundamentalist Chicago school cousin only in degree. She explains how nominally neutral metrics such as cost-benefit analysis, rigged to exaggerate costs and understate benefits, were insinuated into the bowels of the policy process. Free-marketeers insisted that enforcers of clean air and worker safety legislation were wrong to prohibit some substances outright with no regard to the cost-benefit calculation. In fact, some chemicals such as DDT and polyvinyl chloride are too toxic to allow in any quantity.
For more than a century, one of the strongest state institutions has generally been an ally of financial capitalism: the Federal Reserve.
Berman repeatedly refers to “the economic style of reasoning,” which prizes “efficiency, incentives, choice, and competition” over “rights, universalism, equity, and limiting corporate power.” That’s a good description of market fundamentalism, but while free-market economists treated efficiency and equality as a “trade-off,” others never accepted that premise. I published a book in 1983 titled The Economic Illusion: False Choices Between Prosperity and Social Justice, demonstrating that in several areas of public policy (education, health care, full employment, job training, honest financial markets) equality and efficiency worked in tandem, and I was in good company. Berman is mistaken to attribute free-market views to economists in general, as she does at points throughout the book.
Berman does acknowledge two of the dissenting traditions: institutional economics and industrial organization theory. Others that Berman doesn’t address include brilliant work in the broad Keynesian tradition such as Modern Monetary Theory (MMT); the research of Hyman Minsky, who demonstrated capitalism’s systematic propensity to financial collapse; and critics of orthodox trade theory such as Dani Rodrik. These prophetic dissenters were an opposition party in waiting. With President Biden’s rejection of neoliberalism, several economists working in these more progressive traditions got senior jobs in his administration. For an excellent discussion on the resurgence of heterodox economics, see Harold Meyerson’s piece from our March/April 2021 issue, “The Berkeley School.”
Berman also errs when she asserts that earlier progressive policymakers simply opted for equality over efficiency. In fact, FDR promoted the New Deal as cost-effective as well as socially just. He insisted that public power was cheaper and better distributed than private power, and he was right. He demonstrated that the economy ran more efficiently when people were working rather than on the dole; that public investment was needed to complement what private markets failed to accomplish. He paid careful attention to the costs and financing of Social Security, knowing that its credibility depended on its solvency.
If one can look past the overgeneralizations, Berman is well worth reading for deeply researched detail on how market-fundamentalist economics colonized the administrative state and thus weakened progressivism. Indeed, she demonstrates that the assault that came to full fruition under the Roberts-Trump Supreme Court began more than half a century earlier. Worse, it was the work of neoclassical economists who worked for Democratic presidents.
THE TRIUMPH OF FREE-MARKET ECONOMICS in the policymaking process not only influenced what government did. It altered the norms of the corporate sector. As late as the 1970s, most large corporations operated as semi-benign paternalists, internalizing a reciprocal obligation to their workers and communities. The strength of the labor movement reinforced this more social conception of the corporation. But Milton Friedman and his Chicago colleagues contended that the only responsibility of a corporation was to maximize profits for its shareholders. By the 1980s, Friedman was pushing on an open door.
Jack Welch, the ruthless CEO of General Electric, epitomized the shift. He was lionized by the business press and became a role model for other executives. Financial writer David Gelles’s new book, The Man Who Broke Capitalism, is a welcome corrective to earlier admiring biographies. Welch became CEO of GE in 1981, the same year that Ronald Reagan became president. Welch’s predecessor, Reg Jones, was his opposite in every respect. Under Jones and previous chief executives, GE had a tacit social compact with its workers. Jones earned a salary of just $200,000 a year, only about 12 times what junior management trainees made. GE was nicknamed Generous Electric. If you did your job well, you could expect to keep it for life. “This was blasphemy to Welch,” Gelles writes. “He found the notion that a company should be loyal to employees to be laughable.”
Welch inherited a basically healthy company. The year he took over, GE booked a profit of $1.5 billion, about $5 billion in current dollars. But in the inflationary 1970s, which had pummeled the stock market, GE’s share price was languishing and Welch was determined to change that. The credo “Move fast and break things” is attributed to Mark Zuckerberg. But literally before Zuckerberg was born (in 1984), Welch was pioneering that business model.
He soon laid off thousands of GE workers, spent $130 billion on mergers and acquisitions, and converted GE from a premier industrial corporation to a financial company. Soon, GE’s financial division was accounting for 60 percent of its profits. During Welch’s tenure, the GE share price increased by about 21 percent per year for 20 years, far faster than the broad stock market. The total value of GE stock rose from $14 billion when Welch took over to $600 billion two decades later. But its people, communities, and contribution to America’s industrial excellence all suffered. He had immense influence on the practices of corporate America. As Gelles writes, “Welch infected a new generation of business leaders with his values.”
Fittingly, the new financialized GE, and its financial arm GE Capital, was part of the collapse of 2008. Welch retired in 2001, just in time. In the years that followed, GE stock fell by 80 percent, making it the worst performer in the Dow Jones Industrial Average, and in 2008 GE needed a $139 billion bailout from the Obama administration.
Despite Gelles’s title, Welch did not “break capitalism.” What he broke was a more balanced form of capitalism that was normal for a generation thanks to the countervailing power of the state and of organized workers. When the state switched sides, it became all too easy for capitalists and capitalism to become more predatory.
Was something like Welch-style disruption necessary? The 1970s were a rough decade for American business. The cozy oligopoly capitalism that facilitated a social compact with organized labor in the years of the postwar boom was undermined both by inflation and by the recovery of Germany and Japan providing new competition. Certainly, American capitalism needed some shaking up. But there was a road not taken, one that included industrial policies and partnerships with unions. America’s German rival followed that road. This alternative path was not pursued at home because the White House under Reagan preferred to break unions and let free markets rip. The free-market economists described by Berman provided the intellectual script, and swashbuckling CEOs like Welch served as the instruments.
A PRIME VECTOR REINFORCING this shift a decade later was hyper-globalization. I wrote about this process in our June issue. Reading Berman and Gelles together, you appreciate the synergistic and mutually reinforcing impact of free-market economics and predatory capitalist leaders like Welch. But Jamie Martin brings in the use of globalization to further undermine a social democratic brand of capitalism.
While there has been a great deal written about the post-WWII Bretton Woods era of managed capitalism and its shift into globally enforced neoliberalism, Martin’s contribution is to begin the story a generation earlier. His sly title, The Meddlers, suggests his orientation. The international bankers and globalist institution-builders of the 1920s were meddling with a presumption that had prevailed since the 1648 Treaty of Westphalia: national sovereignty. Except for the boundary resets of wars, nations were supposed to be masters in their own houses.
But as Martin observes, in practice mutual respect for sovereignty applied only to Europe and North America. Colonized peoples had no sovereignty, nor did independent nations of the Global South, whose finances were often seized by multinational debt commissions. “Powerful states,” Martin writes, “had long coerced weaker ones into relinquishing their autonomy and assets. But until this point, there were almost no examples of the government of a sovereign state willingly relinquishing control over vital economic matters to an external body.”
As commerce globalized, so did pressures to set global financial and economic norms. There were harbingers of this before 1914, but with the destruction of the old political order in World War I, the architects of the new order attempted more explicit global rules. There were, however, two practical problems.
One was hypocrisy. Some nations, per Orwell, were more sovereign than others. As Martin notes, Chinese delegates to the 1919 Versailles Peace Conference tried to use the noninterference provisions of the League of Nations covenant to prevent further erosion of Chinese sovereignty. They were blown off. Likewise Latin American diplomats who later hoped the League would constrain U.S. interventionism in the Western hemisphere.
A second fault line was that the new transnational rules operated largely in service of a perverse and deeply conservative brand of economics. This meant promoting a reversion to the deflationary gold standard; priority for debt collection rather than debt relief; and enforcement of budget balance at the expense of economic recovery—this in a decade of deepening recession and unemployment. It all ended with the 1929 crash and the rise of Nazism.
Martin, an economic historian who recently moved from Georgetown to Harvard, explains how the unparalleled economic coordination among the allies during World War I (“a system of government purchasing, price-fixing, distribution and transport”) laid the groundwork for attempted delegations of sovereignty after war ended. Martin recounts in fascinating detail how these institutions in the 1920s imposed austerity disguised as debt relief, and the hapless efforts of smaller debtor nations and Germany to resist. The system’s architects also sought to create a central bankers’ central bank, the Bank for International Settlements (BIS). National central bankers refused to cede much real authority to the new BIS, revealing where the real power lay. Martin also recounts little-known and sometimes successful international efforts to stabilize commodity prices, as well as minimalist development and relief efforts that came with substantial strings.
One of his most insightful chapters compares the efforts of 1944 with those of the interwar years. The Bretton Woods system, the ideological opposite of the one that the meddlers of the 1920s created, was supposed to provide public capital and limit the deflationary influence of private banks and bondholders. The original IMF and World Bank, plus fixed exchange rates, capital controls, and the aid of the Marshall Plan, helped anchor a 30-year recovery.
But that system lasted for only a single generation before the power players in the capitalist global economy seized control once again. Soon, IMF aid was made conditional on budgetary austerity. Today’s global economic institutions like the World Trade Organization have enforcement powers to impose neoliberalism, of which the meddlers of the 1920s could only dream.
PROGRESSIVES HAVE LONG COUNTED on the instruments of the state to temper the predations of the market and to constrain raw capitalism. However, for more than a century one of the strongest state institutions has generally been an ally of financial capitalism: the Federal Reserve. And because of its substantial insulation from accountability (except to bankers), the Fed has resisted democratic control.
In past eras, the worst charge that critics could bring against the Fed was that it was too prone to raise interest rates at the first sign of inflation, thus ending recoveries prematurely and triggering needless recessions. The brilliance of Christopher Leonard’s book, The Lords of Easy Money, is that he faults the Greenspan-Bernanke-Powell Fed for the opposite abuse—keeping interest rates too low for too long. Since progressives were inclined to praise Ben Bernanke after 2008 for facilitating the recovery with cheap money and Jay Powell for continuing the policy, one’s first reaction is to wonder whether Leonard is some kind of monetary conservative. In fact, he is onto a deeper and much more astute critique.
Leonard’s basic argument is that the Fed has used ultra-cheap credit to bail out bankers and speculative investors without requiring any structural reforms in return. The result has been a system biased toward insiders at the expense of ordinary people, one that both exacerbates extreme inequalities of wealth and sets the economy up for asset bubbles and periodic crashes.
The process begins with Alan Greenspan ostensibly playing against type and keeping interest rates very low in the 1990s and early 2000s. Greenspan’s main motivation was to rescue speculators in the aftermath of crashes. Wall Street even had a name for this: “the Greenspan put.” A put is a financial term for a guaranteed right to sell a security at a set price, and under Greenspan, the entire financier class benefited from it.
The story continues under Bernanke, who went Greenspan one better, with a new policy under the disarmingly technical name “quantitative easing” (QE). Translated into plain English, QE meant that the Fed would buy trillions of dollars of securities, not just its traditional investment in Treasury bonds but private mortgage-backed securities that were all but worthless in the absence of Fed purchases.
Leonard uses as his guide to the story a traditional honest conservative named Tom Hoenig, then the president of the Federal Reserve Bank of Kansas City. Hoenig had been a critic of the new financial engineering, and as Bernanke kept increasing the Fed’s balance sheet to buy securities, he was often the lone dissenter in 11-to-1 votes of the Fed’s Open Market Committee.
In his telling of the story through Hoenig, Leonard makes one surprising and elementary error. He writes that quantitative easing began in late 2010. But that was when Hoenig began dissenting. In fact, the 2010 round of bond purchases was “QE2.” The initial round of quantitative easing and the introduction of the phrase began in the fall of 2008. Leonard also steps on his own story. His analysis of the dynamics and consequences of Wall Street–friendly easy Fed money is original and important, but it nearly gets buried under far too much biography of Hoenig, who was at most a second-tier player.
With both Obama and Trump failing to pursue other strategies of more balanced economic recovery, the Fed was the only game in town—but at a terrible price. One mystery was why inflation stayed so low for so long, which in turn validated the Fed’s policy of zero interest rates. The main reason turns out to be flat or falling real wages, which are in turn the bitter fruit of both union-bashing and hyper-globalization. The embedded labor costs of China’s repressed wages are reflected in product prices, as more and more of what we buy is made in China. The supply chain crisis ended the low inflation and with it the Fed’s policy of zero interest rates. Now the Fed, with only one tool, is reverting to its old habits of courting recession.
All of these institutions—the architecture of the administrative state, corporations tempered by strong unions, the terms of globalization, and even the Federal Reserve under FDR’s Fed chair Marriner Eccles—once served progressive purposes. And they could again. But in order to reclaim the institutions, we first need to reclaim the politics.