Jack A. Goldstone, George Mason University
American politics today are being driven by the Tea Party Movement – why? Because the Tea Party expresses some very real and wide-spread grievances among the American people. Yet Tea Party politicians are being completely wrong, even dangerous, in their political demands, to the point of feeding some very un-American tendencies.
America and the world are facing a genuine crisis. Since the market collapsed in 2008, we have entered a period of lengthy and sustained deleveraging of excess debt, what Robert Schiller and Carmen Reinhart call the “2nd Great Contraction.” Choking on years of 9% unemployment, with almost 15% of Americans on food stamps, and tens of millions of people who worked hard to buy a home having seen the value of their homes collapse, people are understandably angry. What should government do?
If government gives help to businesses in trouble, or to homeowners stuck with or losing homes that fell in value, it has to raise that money by taxing (or by borrowing now and later taxing) those who still have earnings and assets. But most of the latter people are now struggling to get by or afraid of losing what they have. So both groups tend to blame the government for their fears – the former for doing too little to help them while bailing out Wall Street banks and big corporations (true, but necessary to prevent an even deeper collapse), the latter for spending what, sooner or later, is their money to help others. Either way, the government is blamed for bailouts that have not helped most Americans. It is this anger that has fueled the mass base of Tea Party voters.
Yet that anger and energy is being coopted by a much older anti-government movement. Tea Party politicians are claiming to advance the Tea Party agenda, when in fact all they
are doing is using its grievances to gain support for an older and largely unrelated set of goals.
Since Lyndon Johnson’s “Great Society,” Democrats have favored government action to fight poverty, protect minorities, save the environment, and regulate business to protect worker and consumer health and safety. Republicans have wanted to free business from regulation and resist activist government action on social problems.
There is no right or wrong here. This blog believes that a pluralist and democratic free-market capitalism is the best system for ordering social life for human societies, and that in practice the best way to sustain that system is through a multi-party government, with parties advocating for different views and forced to compromise on those views to operate a government.
Republicans are of course right to defend freedom of the market — but if taken too far (as early 20th century progressives realized), a total lack of regulation is self-destructive for markets, as private actors will tend towards speculative excess and pursuit of market power. The result is orderly market operation being overtaken by monopolies, boom and bust cycles that waste and destroy wealth, and abuses of worker and consumer safety that lead to backlashes against corporations and promotion of more government. Democrats are of course right that protecting minorities is vital to increase and integrate the labor force and preserve democratic liberties for all, and that poverty and environmental decay, if not addressed, undermine the quality of life and the stature of the nation. But if taken too far, a controlling and overgrown government can itself be a threat to freedom and a drag on economic growth. So in practice having both parties in government, with both effective, produces a constant give and take and compromise, producing a balance that sustains both free-market capitalism and democracy.
The genius of the U.S. Constitution, and the reason that document has allowed America to become the richest and freest nation in the world, is that the various compromises that went into its formation (and let it never be forgotten that the Constitution was itself a product of major compromises) resulted in a government whose design forces compromises. It was intended to frustrate both arbitrary government (too much executive power) and factional government (the ability of powerful minorities to act against the general interest).
Yet today this principle of balance and compromise is being threatened by factional government, as the Tea Party movement is being used to propel an extreme anti-government agenda. That agenda embraces a wide range of sometimes oddly-matched groups. Libertarians hate any government action to interfere with individual actions, but especially adopting laws or raising taxes that interfere with the actions and decisions of
private businesses. Moral conservatives DO want to use government action to interfere with individual actions, but they want to stop government from supporting or even allowing things they disapprove of (abortion, gay marriage). But both groups agree that the government (and especially liberal elites who they fear are controlling government) is doing things that they want it to stop doing — so much so that they favor passing constitutional amendments (to balance the budget or ban abortion or gay marriage) to make sure that government can NEVER do those things even if a majority of popularly elected officials should be chosen to do them.
In the 1990s, these groups fought under the banner of New Gingrich against Bill Clinton and Al Gore (who were seen as the embodiment of the conspiratorial liberal elites). The
battle was ugly and nobody won. Except, that is, the American people – for by the time Clinton left office, welfare had been fundamentally reformed, the Federal budget was balanced, and despite higher taxes than today the economy and stock market enjoyed a lengthy period of stable growth. The Constitution worked, and produced a balanced, compromise outcome that was good for America.
Then, during the George W. Bush years, the US went too far in freeing finance from regulation. The result was as if we held the Super Bowl but sent all of the referees home, saying the players would referee themselves fairly for the good of the game. At first, everyone enjoyed themselves and had a good time, but eventually things got out of hand and a lot of people were badly hurt.
The intensity of the crisis, and the anger it has produced, have made it easy for Tea Party politicians to blame government for America’s financial crisis. Tapping fears that government spending will take people’s money but not solve their problems, the Tea Party politicians are claiming that government spending itself is responsible for the economic crisis. So the solution is simple – stop the government from spending and everything will be alright! In fact, stop the government from doing anything at all (shut it down!)–
regulating the financial sector, supporting unions, imposing health and safety rules, changing health care – and things will get better!
This easy formula has understandable appeal to angry voters looking for a straightforward answer to their problems. But of course, it is completely wrong – this approach is just a way of tapping Tea Party energies to support the old anti-government agenda of self-proclaimed Republican conservatives that has been around for decades.
As this blog’s central research argues, the global economic crisis has been building for years. In addition to the speculative debt crisis, it is rooted in a deeper shift of economic
activity from aging rich countries to young and fast-growing developing countries. This shift requires a major rebalancing of international labor, capital, and financial flows; it was the failure to appreciate these global changes and adjust the imbalances in those
flows in an orderly fashion that led to – and sustains – the global financial crisis. In order to keep their economies dynamic, the aging rich countries will have to be more open to trade, invest more in education and worker training and competitiveness, adopt incentives to keep investment and jobs at home, and address the inevitably rising health care and pension costs imposed by an aging population. Working on these issues will require hard
compromises to find revenues, cut entitlements, and use market forces and government guidance to find the right measures to provide incentives and limit costs.
But that is complicated! What Tea Party voters want is quick action to solve their economic problems. Yet what they are getting is hare-brained ideas designed to advance political careers and push through an older, unrelated political agenda.
The key to American success has always been compromises that preserved the essence of our system. Yet the ideas being pushed by Tea Party politicians – no compromises; no more revenues for government, period; reduce government spending across the board – are factional, uncompromising, and far from constructive.
There is a huge constituency in America for change – that is what got Obama elected. But by allowing Tea Party politicians to blame government spending for the crisis, and grab the banner of change, Obama has ceded them the power of voter anger, which they are
using to push an old, unrelated, and dangerous agenda. He needs to rethink his negotiation strategy, or America’s core values and economic future will both be in peril.
NewPopulationBomb 
You are correct that there was implicit guaranteed with Fannie and Freddie. What was done is change it to explicit, the word I should have used, but didn’t.
“I know you are a fan of creative destruction. Like free markets, that principle works great in a reasonably controlled and competitive environment. But we don’t always get to act in that kind of environment. Hitler, Mao, and Lenin all believed that they were engaging in creative destruction, too. That is what I want to avoid.” Although I am not a fan of creative destruction, I do recognize it as better than the alternative of propping up failed business models. Resources must be reallocated and markets cleared before real growth can continue. The market is the best mechanism for no one organization, especially a political one, can determine where they should go. Hitler, Mao and Lenin did not grow out of free markets or free societies.
“If one provider gains monopoly power in a market, there is no automatic mechanism that will restore full competition and appropriate market pricing. Free markets are only self-correcting if you have open information, open and reasonably accessible market entry, and the ability of actors to make enforceable contracts.” Free market monopolies are a myth. They are creations of government. The open information you seek is contained in the price. Enforceable contracts were thrown out the window with tarp, auto-bailouts, BP oil spill, Obamacare, and others. I agree enforcable contracts ar good for the market, but most market discipline is enforced not by contract, but by not purchasing from a bad vendor.
“The compromises in the debt-ceiling deal were the lowest-denominator worst kind of compromise — you give me the absolutely least you can live with and I will give you the absolutely least I can live with.” The nature of government is it is quick to increase power (taxes, regulation, authority,) but gives it up begrudgingly.
“The result was a bill that did nothing to address our overall fiscal problem, and led to the stock market dive and credit downgrade. A much better compromise would have been the earlier Obama/Boehner grand bargain, which cut $4 trillion through a 3-1 mix of spending cuts and tax cuts. But that didn’t ‘emerge’ from the process because those negotiations broke down.” This grand bargain was Whimpy Promise, a promise to cut in the future, with tax increases now. This has always led to higher spending.
I don’t long for the Bush years as you Long for the Clinton years. But to say that the wars are unfunded is disingenuous. Money if fungible, and all generally funded programs are partially funded and partially borrowed, but if you point is that government should not borrow for its activities, I agree.
To find the solution, you must first identify the root cause. I believe the root cause is interference in the free market through regulation, introductions of moral hazard, & decline in property rights and the rule of law. I believe we should strive a for a society that encourages mutually beneficial transactions, and that human exchanges should be voluntary. Government should aid in that endeavor and not force results preferred by the politically connected as it has.
Vagabundus — I agree with much of what you argue, and we are not that far apart. A free market – with moderate regulation, enough to curtail cheating, regulate natural monopolies, and promote full information but not so regulated as to limit market entry, innovation, or exit of unproductive firms — is the best economic system. But as social scientists have argued since Max Weber, such a market can only be sustained with the checks and balances of democratic governnment in the long run, because as Milton Friedman argued (and I don’t agree with Milt on much else, but on this I do) freedom and capitalism go together. Even Singapore, the last high income hold out among capitalist societies, is heading strongly toward multiparty democracy based on the election results this year. But I wholly support your view that Government “should not force rsults preferred by the politically connected.”
At the same time, we need to recognize that market actors CAN be irrational, swayed by group loyalties, advertising and political slogans, even to the point of ignoring scientific fact or market risks. That is why we get speculative booms and busts, and why firms persist in doing the wrong things until they become prime candidates for creative destruction, and why consumers eat unhealthy, succumb to addictive substances, and VOLUNTARILY ASK governments to do things like check the safety of planes, whether drugs work with acceptable side effects, establish safety rules for mining operations, etc.
And because people are sometimes irrational and swayed, you CAN get awful political outcomes, especially in a crisis. Sorry to correct you, but Hitler most certainly DID emerge from a free market, free society. Weimar Germany in the 1920s was a model democracy, although polarized between nationalist rightists and leftist socialists, who had drawn up sides in the aftermath of the 1918 revolution. Hitler’s genius in creating National Socialism (Nazism) was to draw from both sides and build his own appeal with calls for national destiny and German greatness, villifying slavs, Jews, homosexuals, and other “lesser races” as standing the way of that destiny. Hitler was (horrible to say) freely elected and chosen as Chancellor before he embarked on turning Germany into a military machine and death camp. I know this well in part because my own family had a nice free-market business in Berlin in the 1930s. So great as free markets and democracy are, we have to remain aware that things can turn ugly. “The price of freedom is eternal vigilance” sounds corny, but there is truth to it.
“Yet today this principle of balance and compromise is being threatened by factional government, as the Tea Party movement is being used to propel an extreme anti-government agenda.” So, give me all your money. You don’t want to? Lets compromise and give me half your money.
We have compromised our way into this mess that is the federal government. It is collapsing too fast to compromise our way out of it.
The tea Party movement began because citizens who new better than to invest in 0 down or 110% equity mortgages were suddenly and implicitly made liable for them by government without their consent. “How many of you people want to pay for your neighbor’s mortgage that has an extra bathroom and can’t pay their bills?”- R Santelli
Maybe the tea party learned to compromise from the Obamacare debate, or Obama himself: “We don’t mind the Republicans joining us. They can come for the ride, but they gotta sit in back.” Since the constitution explicitly gives the house control of the national purse strings, they no longer had to sit in the back.
Furthermore, the Tea Party did compromise, and only got 28 billion in cuts for 2012, a mere rounding error, and that isn’t even set in stone. If they got what they wanted, 600 billion in cuts for 2012 says Rand Paul, we would not of lost the AAA credit rating of S&P. Lets face it, compromise is a looser’s argument.
“the Tea Party politicians are claiming that government spending itself is responsible for the economic crisis. So the solution is simple – stop the government from spending and everything will be alright! In fact, stop the government from doing anything at all (shut it down!)–
regulating the financial sector, supporting unions, imposing health and safety rules, changing health care – and things will get better!”
The Tea Party believes that Government policies caused the crisis and government deficit spending and programs are making it worse, by preventing the creative destruction necessary for a rebound. They also believe in emergent order, which you don’t seem familiar with the concept. I would suggest that you go across the hall and knock on Veronique’s or Russ’s door and ask them to explain it to you.
Vagabundus — While I believe in emergent order in some situations (and I learn about it from the best, Elinor Ostrom), it doesn’t always work, and certainly doesn’t always emerge fast enough or effectively enough to deal with a crisis. Yes, there is good and bad compromise – you are right. The compromises in the debt-ceiling deal were the lowest-denominator worst kind of compromise — you give me the absolutely least you can live with and I will give you the absolutely least I can live with. The result was a bill that did nothing to address our overall fiscal problem, and led to the stock market dive and credit downgrade. A much better compromise would have been the earlier Obama/Boehner grand bargain, which cut $4 trillion through a 3-1 mix of spending cuts and tax cuts. But that didn’t ’emerge’ from the process because those negotiations broke down.
As far as the Tea Party and knowing you had ‘signed up’ for what the government does, I didn’t know I had signed up to bail out Goldman Sachs if they made an error in their risk estimation; I sort of DID know I had signed up to have the Federal governement back up mortgages because I, like about 80% of all Americans who have a mortgage, knew that the rates and notes were purchased and backed by Freddie Mac and Fannie Mae. But most people have no idea that they signed up for GW Bush to fight two wars on completely borrowed money, or that they WERE paying for an SEC to monitor stock trading and it wasn’t doing its job.
At this point, I will agree to leave the blame game behind; we now need to focus on finding solutions to the mess we’re ALL in.
“This blog believes that a pluralist and democratic free-market capitalism is the best system for ordering social life for human societies…” Which do you believe, in free markets or democracy? The two are incompatible as the later allows for tyranny of the majority.
“… defend freedom of the market – but if taken too far (as early 20th century progressives realized), a total lack of regulation is self-destructive for markets, as private actors will tend towards speculative excess and pursuit of market power. ” Nonsense. Although free markets are never perfect, they are always self correcting. You sound like you want to abandon the free market in order to save it.
Vagabundus – If I get more comments like this, I will have to do a post on what is democracy. But you are not clear on all that is going on in both free markets and democracy.
Democracy is not simply majority rule — that is a common misconception. The US Constitution is full of procedures to frustrate simple majority rule, and it is a model of democratic institutions. Democracy has three main elements: A bedrock bill of rights to protect civil and political liberties for all citizens; institutional checks on the authority of any one actor or institution holding power; and open competitive choice among contenders to hold power. If you don’t have all three, you may have voting (to choose who will be the next dictator) but you do not have democracy.
As far as free markets, they give Nobel Prizes for analysis of market failures as well as of emergent order — both are part of the landscape. If one provider gains monopoly power in a market, there is no automatic mechanism that will restore full competition and appropriate market pricing. Free markets are only self-correcting if you have open information, open and reasonably accessible market entry, and the ability of actors to make enforceable contracts. Markets don’t last long, or don’t do what they are capable of doing, if you have no law and no politics in which to embed them.
I know you are a fan of creative destruction. Like free markets, that principle works great in a reasonably controlled and competitive environment. But we don’t always get to act in that kind of environment. Hitler, Mao, and Lenin all believed that they were engaging in creative destruction, too. That is what I want to avoid.
“In order to keep their economies dynamic, the aging rich countries will have to be more open to trade,”
Really. Bush was a free trade fanatic. He gave us the largest trade deficits in U.S (or world) history by several measures. Since “free trade” hollowed out the U.S. economy, he conjured up a bubble (and “supply-side” tax cuts) to offset the weakness that massive deficits entail. How well did that work out?
Like it or not, openness to trade has been strongly correlated with economic decline in recent U.S. history (and 19th century British history).
“invest more in education”
We are already spending around 7.5% of GDP on education. That’s high by international standards (but not the highest). Our kids are already at or near the top in international comparisons. See “The amazing truth about PISA scores: USA beats Western Europe, ties with Asia.” (http://super-economy.blogspot.com/2010/12/amazing-truth-about-pisa-scores-usa.html) for the facts.
Fixing what ails the U.S. economy is going to require addressing “free” trade and Open Borders. Since elite opinion strongly favors both, change is a long way off. Of course, the U.S,. could adopt Warren Buffet’s “Squanderville versus Thriftville” plan (see http://bit.ly/gbQgZV). We could reform our immigration laws as we did around WWI and enforce them as we did under Eisenhower. However, as long as our elites reject real reform, decline will continue.
Which element of financial deregulation are you referring to? The one law I’ve heard people refer to most often is Gramm-Leach, which occurred under Clinton, and the actual evidence tying it to the recession is extremely sketchy (pure investment/commercial banks didn’t seem to be in much better shape than organizations which combined the two). Also under Clinton (1999) there was an attempt by Brooksley Born to move CDSs under the CFTC’s regulatory umbrella, which was blocked by (among others) Alan Greenspan. Thus it was not actually a change of policy but a failure of policy to change in a way some think desirable. And what this meant in practice is that CDSs could not be publicly traded at all, but were restricted to a small number of big players in the private CDS market under the Fed’s regulatory bailiwick.
The major regulatory change I can recall from the Bush years is Sarbanes-Oxley. Carter & Clinton, despite the hate Republicans direct toward them, were the great deregulators of our time.
The biggest change formal came even earlier, with the overturning of Glass-Steagall in 1999; but the most important changes were not formal. Rather, it was in the pervasive belief that the regulatory authorities could be lax because it was in the interest of financial institutions to monitor and limit their own risks. When regulators rang alarm bells about the volume of derivatives being traded without adequate underly backup, or the huge jump in sub-prime lending, they were told ‘don’t worry, it’s under control.’ You would think effective regulation would have caught scams like Bernie Maddox (whose malfeasance was reported), as well as ensured that major financial institutions could support the contracts they wrote. But regulators were not encouraged to make sure, believing in that all assets were appropriately priced and all regulations worth enforcing would be self-enforced. Then when the time came to pay the piper — surprise! — the requisite capital supports were lacking. That is why the government had to supply liquidity. The current efforts to regulate the financial sector would try to reduce risk by limiting speculation and demanding more reserve capital. All of that limits leverage, which in turn limits the possible returns to capital. That is why Wall Street is fighting so hard against it.
Glass-Steagall was the law amended by the Gramm-Leach-Bliley “Financial Services Modernization Act”. The SEC was alerted to Madoff by Harry Markopolos in the spring of 2000, Bush was inaugurated January 2001.
The President is the most well known political figure, so it is natural for associate him with the fortunes and misfortunes of the country. But if the government largely runs on the basis of the permanent civil service (Belgium has been without a “government” for over a year, without much effect) we are mistaken to focus on them. Foseti works as a financial regulator, and from his perspective the temporary elected officials and their appointees have negligible influence on folks like him. He consults with industry, writes legislation, and temporary figurehead elected officials sign in. Foseti and his colleagues are nearly impossible to remove, we are not living in the era of the spoils system. Instead they proceed automatically and autonomously.
I can’t argue with you. Bush was hardly the main person responsible. Folks from Alan Greenspan to Larry Summers argued that the regulators should have a ‘light touch’ and shouldn’t interfere with the workings of the financial markets. So lots of people from several administrations have to bear the blame for letting the financial system spin out of control to the point where its collapse drove us into the 2nd Great Contraction.
But the US civil service IS different. Unlike almost any other advanced industrial democracy, the US has THOUSANDS (I think over 4,000) executive jobs that are filled by presidential appointment, rather than career civil service posts. In most countries, the career civil servants come right under the Ministers or their assistants, who are political. But in the US we have deputy assistant secretaries, admnistrators, deputy administrators, most key ambassadors, and the like who ARE political appointees. So a lot of blame for what happens has to rest with the person at the top who is reponsible for all those appointees who are running things.
“The intensity of the crisis, and the anger it has produced, have made it easy for Tea Party politicians to blame government for America’s financial crisis. ”
Part of the reason they blame government is because government, when it had the chance, did not place the blame on those truly responsible. The TARP vote was one of the seminal events in the Tea Party’s formation, as was the Fed’s intervention to protect the banking system. These were not “absolutely necessary” in the form they took. FDR saved the banking system, and yet he did not shy from making banks management, shareholders and creditors pay. In fact he made it a point to tell the polity that they needed to be protected from a nefarious financial and corporate system. The earlier Roosevelt also put forward the same argument.
Electing a corporatist President following the financial crisis is one of those unhappy accidents of history. Or perhaps it was the inevitable culmination of technocratic/corporatist power, in that even after they almost destroyed the economy, they were able to get one of their own elected.