End of an Error

by Jonathan Chait | October 22, 2008

Last year, I published a book describing how right-wing economics had come to dominate American politics. Whenever you write a book about something bad that's happening, you get asked for the solution. I'd shrug and admit that I didn't have one. The questioner would usually look slightly disappointed, so I'd add that nothing lasts forever, and eventually something will come along to change things. The financial crisis might be that something.

When liberals talk about turning economic lemons into political lemonade, the usual model is the New Deal. The free market failed, government swept in, and the political landscape was transformed. Of course, the economy has recessions all the time, and most of them fail to result in a New Deal. In 1982 and 1992, to name a couple of examples, lousy economic conditions led to major Democratic victories. But neither led to any major transformation, and each was followed, in 1984 and 1994, by blowout Republican wins.

Why did the Great Depression fundamentally change the nature of government? First, obviously (to quote Rodney Dangerfield in Back to School, when he was asked to characterize The Great Gatsby), it was, uh, great. The current downturn probably won't last anywhere near as long as the Depression. On the other hand, economic analysts are throwing around terms like "calamity" or "total meltdown" with a distressing frequency that we haven't seen in previous recessions.

Second, the Depression--as my colleague John B. Judis put it in The Paradox of American Democracy--"destroyed in one stroke the edifice of wisdom and invincibility that businessmen had erected for themselves." After the stock market crash of 1929, Americans saw rampant speculation and greed as the source of their ills. That kind of reaction generally hasn't happened since. The 2001 recession occurred because the tech bubble burst and terrorists struck; the 1991 and 1982 recessions were caused by the Federal Reserve; etc.

Today, the public is reverberating with revulsion for Wall Street, a sentiment powerful enough to have caught backers of the financial bailout by surprise the first time it came to a vote in the House. The polling firm Greenberg Quinlan Rosner annually surveys the public for its sentiments toward "big corporations." Over the previous five years, unfavorable ratings have outscored favorable ones by an average of eleven percentage points. In the current survey, unfavorable ratings scored 25 points higher. And this is before the financial crisis has even had much impact on most people.

The New Deal ultimately triumphed because even Republican presidents--Dwight Eisenhower, Richard Nixon, Gerald Ford--came to accept its basic premises. And this reflected the fact that corporations themselves grew comfortable with the New Deal, which many saw as a stabilizing force. In 1970, 57 percent of Fortune 500 executives told a poll that they wanted the federal government to "step up regulatory activities." Presidents of both parties enacted progressive tax reforms and major new regulations with nary a peep of protest from business.

Starting in the early '70s, business transformed itself into the aggressive, narrowly self-interested lobby we know today. You can read about how and why this happened in John's book or, preferably, mine. Suffice it to say that business's power has driven the rightward turn in American politics. Just as the New Deal survived Republican and Democratic administrations alike, so too has the era of conservative reaction that followed it. Republican governance has brought orgies of deregulation and upper-bracket tax cuts. Democratic governance over the last three decades has, at most, trimmed some of the wildest excesses.

It's been striking, then, to see corporations express such disgust in recent weeks with the GOP right. After two-thirds of House Republicans voted against the bailout, conservative economics writer James Pethokoukis of U.S. News & World Report noted, "I've heard from plenty of those folks, professional money managers and such, who are furious that the bailout/rescue plan went down to defeat yesterday and claim to be washing their hands of the GOP, at least for this election cycle. (But maybe longer.)"

There's nothing unusual about businesses cultivating support among both parties, or even tilting toward Democrats when they hold the majority. What's novel is that, rather than paying Democrats to leave them alone or cut their taxes or regulations, businesses have started to embrace government activism, just as they did during the heyday of postwar liberalism. Last year, my colleague Jonathan Cohn reported in The New York Times Magazine on how, unlike in 1994, business is now agitating for genuine health care reform. Likewise, writing in The New Republic, James Verini has described a similar movement on environmental policy ("The Devil's Advocate," September 24, 2007).

Meanwhile, conservatives have found themselves casting wildly about for solutions that fit their preconceived notions. Having searched frantically for a big government villain behind the free-market meltdown, the finger of blame settled upon the Community Reinvestment Act of 1977, which requires banks to lend to low-income neighborhoods. (In fact, as economist Janet Yellen has pointed out, banks that are subject to the CRA made subprime loans at a dramatically lower rate than independent mortgage companies, which are not covered by the CRA.)

When asked at the first presidential debate how he would lead the country out of the financial crisis, McCain prattled on about earmark spending, which accounts for less than 1 percent of the federal budget. He gave the air of a man retreating from the world around him into the comfort of old bromides: Hey Grandpa, tell us that joke about bear DNA again.

That sort of dogma can carry the day when it's backed by a solid wall of business support. But corporations may be starting to realize that low taxes and low regulation may not define their long-term self-interest. "I've never seen anything like this," one investment banker told The Washington Post. "You've got two big investment banks saying, 'Please regulate me.'" What do you call it when a conservative gets mugged by rampant laissez-faire? Maybe, just maybe, the end of the era of conservative rule.

 

Watch Jonathan Chait discuss this column with TNR editor Franklin Foer

Jonathan Chait is a senior editor at The New Republic. This article originally ran in the October 22, 2008, issue of the magazine.

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