A new dawn, a new day, a new life

Just as the 1970s marked the transition from corporatism to neoliberalism, so the 2010s will be seen in retrospect as marking the transition out of neoliberalism to something yet-to-be-named

“If the ruling class has lost its consensus — that is, if it is no longer ‘ruling’ but only ‘dominant,’ the holder of pure coercive force — this precisely means that the great masses have detached themselves from traditional ideologies, that they no longer believe what they used to believe, etc. The crisis consists precisely in the fact that the old is dying and the new cannot be born; in this interregnum a great variety of morbid symptoms appear.”

- Antonio Gramsci, The Prison Notebooks, 1930

It's a new dawn
It's a new day
It's a new life

- Nina Simone, ‘Feeling Good,’ 1965

In the immediate aftermath of the 2007-9 global financial crisis, Paul Krugman made a comment on TV that has never stopped haunting me. Drawing parallels between the events of 2008, with the collapse of Lehman Brothers and the ensuing financial panic, and the Wall Street Crash of 1929 and the Great Depression that followed, Krugman observed that the Great Depression was “not an event, but an era.” What he meant by that was that we should not think that we were in for a setback followed by a back-to-normal, but rather than we stood on the brink of a long, painful period of recalibration.

The slow “recovery” from the Great Recession that followed, exacerbated by the regnant neoliberal philosophy of austerity, would more than validate Krugman’s observation. Indeed, for many people in the United States, especially the poor and the young, the economic experience of the 2010s was not recovery at all, but rather a long grind defined by stagnant wages, precarious jobs, mounting debt, and growing inequality.

For me, however, the most striking thing about the economic course of the last dozen years was how little about our governing economic model changed after the crash of 2008. Although the crash and its aftermath had completely discredited and delegitimated the neoliberal order, nothing emerged to replace it. Though Obama was elected as a rebuke to the Bush-Clinton years, he proceeded to govern in more or less the same manner, and after eight years of worsening inequality and growing despair, the Democrats turned around and nominated none other than another Clinton. It seemed as if we’d learned nothing at all.

What was neoliberalism?

The tenets that defined the post-1980 American economic order included the idea that free trade lifts all boats; that the economic role of government should be limited to correcting “market failures” rather than pursuing a deliberate industrial policy; that social benefits should be tied to work requirements; that public services should be downsized and/or outsourced (privatized); that industry and especially financial services should be deregulated; that stock market prices accurately reflect all information; that allowing deficits to grow leads to inflation; that an independent central bank should first and foremost focus on fighting inflation; and that top marginal tax rates need to be kept low in order to incentivize the investment and entrepreneurship required to spur economic growth. Although there were many arguments about how exactly to apply these ideas in practice, since the 1990s all of these ideas had been part of the bipartisan consensus in Washington, as well as within the mainstream of the economics profession. Indeed, the application of these ideas to the field of development economics was known precisely as “the Washington Consensus,” a term the late British economist John Williamson coined in 1989.

By the 2000s, this consensus had become so hegemonic among policymakers that when the great repudiating event of the global financial crisis occurred, there was a fundamental failure to use that crisis to make a decisive change. While Democrats like to blame the insufficient stimulus package on McConnell’s stated goal of making Obama a one term president, the truth is that the Obama’s own advisors, like Larry Summers, were themselves opposed to a larger stimulus. Even though Obama entered office amidst an economic collapse, instead of seizing upon the crisis to initiate fundamental reforms to the economic system, he instead focused on pushing through Obamacare. Even though the Global Financial Crisis had mortally wounded the credibility of neoliberalism, the failure of policy imagination meant that the old system continued to stagger forward, minting billionaires and spreading deaths of despair. In the end, it would take dozen years for the new, post-neoliberal order to begin to come clearly into view.

How did the end of neoliberalism happen?

One of the great surprises of the last three months has been just how economically transformational the Biden administration has been. Virtually every one of the shibboleths of neoliberalism listed above is in the process of being repudiated. Deficit spending is back with a vengeance; industrial policy again in vogue, not just with liberals, but also with conservatives; instead being considered a bogey, inflation is being treated as tolerable; unemployment related stimulus checks are going out to working people and families with minimal concern for reducing work incentives; government-funded public works projects are back, this time with an environmental twist; top marginal tax rates are set to rise, and a global corporate tax accord is in the works, backed by the IMF, the United Nations, and the U.S. Treasury itself.

Epochal shifts between different eras of American capitalism don’t ever happen overnight, but almost always involve a decade-long period of confused transition. The reason for this is both straightforward and subtle. The straightforward reason is that every era is defined by a mainstream consensus about fundamental questions like the role of government in the economy, the appropriate level of taxation, the role of monetary policy, and so on. An era consolidates when alternative views atrophy. When the shock that kills those assumptions arrives, by definition the players are initially unable to imagine an alternative. They know that their assumptions are not working, but they can’t conceive of how else things could operate.

The subtle reason is that when a crisis arrives that discredits the old system, it takes time for people (typically academics and policy nerds) to imagine alternatives, and then more time yet for those alternatives to percolate out. People first need to accept that the old system has definitively failed, that is, that it cannot be saved with the existing policy tools. Then they need to theorize an alternative set of tools. Then they need to convince policymakers to take a chance on these newfangled instruments. All this takes time, especially because there are always some people who continue to try hanging on to the old paradigm. In short, overcoming decades of policy momentum is hard.

Consider the transition from the “corporatist” New Deal Era, which started under Franklin Roosevelt in the 1930s, to the Neoliberal Era. The corporatist paradigm was clearly beginning to unravel by the early 1970s. (That the corporatist era started to be formally historicized at this very moment was a sign that Minerva’s Owl had detected the coming sunset.) The corporatist had suffered severe ideological blows in the late 1960s as the government found itself increasingly unable to perform. Both the quagmire in Vietnam and the perceived failures of Lyndon Johnson’s Great Society had generated growing skepticism about the efficacy of technocratic approaches to governance problems. In the economic realm specifically, the U.S. switched from trade surpluses to deficits, the Bretton Woods system of fixed exchange rates collapsed in 1971, and the ensuing “stagflation” seemed unresponsive to Keynesian demand management strategies.

As this crisis of the New Deal Order was unfolded and deepened, it remained difficult for most contemporaries to imagine a viable alternative. People had lived for so long within the corporatist paradigm of the New Deal that it was hard to break away from its assumptions. Even the Republican President at the time, Richard Nixon, for example, continued to insist that, “we are all Keynesians.” As a result, the 1970s became an era of drift and malaise, when the corporatist beliefs about the economy were clearly failing, but a clear alternative had yet to emerge. The sense of national decline was palpable, within President Carter describing it as “a loss of confidence.” In retrospect, we can now see this decade for what it was: an interregnum between two eras.

It was only in the late 1970s that the hints of what the parameters of the new order began to heave into view. A key moment was the so-called Volcker shock of 1979, followed by the election of Ronald Reagan in 1980 on the promise to restore American competitiveness on the basis of so-called supply-side economics. While “Reaganomics” was politically contested in the 1980s, the effect of three consecutive lost Presidential races for the Democrats was to open the door for a new generation of so-called “neoliberals” led by Bill Clinton and the Democratic Leadership Council. Indeed, it was the ratification of Reaganite policy ideas by this new breed of right-wing Democrat that consolidated the era that we now refer to as neoliberalism. Clinton “ended welfare as we know it,” ensured the ratification of NAFTA, ushered the U.S. into the WTO, and signed off on the repeal of Glass-Steagal regulations of the financial services industry in ways that would contribute directly to the eventual global financial crisis of 2008. (A similar process unfolded at the same time in Great Britain, where Labour’s long season in the wilderness during the rule of Margaret Thatcher was brought to an end by Tony Blair’s “New Labour,” which succeeded in displacing the Tories only by embracing Thatcherism. Indeed, Labour Party operator Peter Mandelson would intentionally echo Nixon in 2002 by declaring, “we are all Thatcherites now.”)

The emerging contours of post-neoliberalism

The argument I’m making here is that the 2010s have been, in essence, a kind of replay of the 1970s — an interregnum between eras, beset by a great variety of morbid symptoms. Just as by the 1970s the New Deal order was a dead man walking (and Keynesianism a zombie theory), but what would replace it was not yet clear, so neoliberalism has been a zombie since 2008 (staggering along, eating the brains of the living), but what would replace it has been unclear. Just as the 1970s interregnum produced an era of “malaise,” so the 2010s interregnum has been characterized by a sense of ambient economic crisis, beset by a great variety of morbid political symptoms.

But the parallels don’t just end there. For today, just as in 1980, a new President has come in at the head of party buzzing with ideas for reform and scornful of the the nostroms that defined the previous forty years of economic history. While the comparison of Biden to Reagan will probably not sit well with partisans of either of these two presidents, their structural role in driving a transition from one era to another seems likely to be highly parallel. Both are coming into office at the end of a terrible decade in American history, inheriting a rotten domestic and geopolitical portfolio from a predecessor widely seen to have failed catastrophically, but also armed with a bold, indeed transformational agenda. That both were characterized as an amiable dunce is probably not a coincidence.

Crucial for Biden’s transformational turn has been a decade of radical innovation in economics. While on an overt policy level the 2010s were a time of policy drift and political recrimination, it was also a time of tremendous intellectual growth of post-neoliberal economic ideas. Empirical work by economists like Emmanuel Saez of UC Berkeley and Thomas Piketty of the Paris School of Economics returned the question of inequality to the center of the economics profession’s agenda, while repudiating the neoliberal commitment to low taxes on the rich. Neo-institutionalists like Carlotta Perez and Mariana Mazzucatto at University College London developed arguments for much more activist government investment strategies, repudiating the neoliberal contempt for industrial strategy. An environmental economists like Kate Raworth of Oxford and Cambridge pioneered new economic models focused on balancing the pursuit of essential human needs with the need to respect planetary boundaries. Stephanie Kelton of Stony Brook University has been the driving force behind Modern Monetary Theory. As in the 1970s and 1980s, much of this new heterodox thinking has been attacked by the old guard as dangerous nonsense, but it has unquestionably fed the Biden administration’s radical change of economic policy direction.

If this comparison of the 1970s and 2010s turns out to be right, it also clarifies the economic significance of the Trump presidency. It means that Trump will end up having played the same role in the transition out of neoliberalism that Jimmy Carter did in the transition out of New Deal corporatism and into neoliberalism. While Carter’s political enemies on the right have long preferred to cast him as the last of the perfidious and foolish New Deal Democrats before the arrival of Saint Ronnie, the truth is that many of the policies today associated with neoliberalism began under Jimmy Carter, including deregulation and the commitment to fighting inflation at any cost. Likewise, when future historians write about the transition out of neoliberalism, many will note that while the decisive break took place with the coming of the Biden administration, it was in fact under Trump that some of the key shifts began, including the embrace of deficit spending and the rejection of free trade.

So what will this new era be called?

Well, at Berggruen, we have a proposal for what we might call this new era, and what policies we should be pursuing to realize it. We call it “mutualism.” More on that in an upcoming newsletter.

Credit: Ralph Zabel