The Legacy of the Crash

by Terrence Casey

  Other parts of the US institutional architecture may also have facilitated, and perhaps promoted, fiscal expansion while at the same time curbing or inhibiting the efforts of those who sought restraint or rallied around calls for a balanced federal government budget. It could be argued that the fiscal illusion hypothesis (which suggests that voters do not grasp the tax implications of spending decisions or recognize the effects of fiscal drag as inflation brings individuals into higher tax categories) may play more of a role in a political system that through biennial elections to the US House of Representatives and the direct election of those who the executive branch at both federal and state level offers significantly more opportunities for mass participation than parliamentary democracies such as the UK (Schultze, 1992, p. 26).

  The institutional character of the American state also added to the pressures that opened the way for the passage of ARRA in other ways. Although accounts almost always focus on the barriers facing those who seek legislative reform (particularly in the US Senate), the many openings offered by a relatively fluid, inchoate and often porous state formation facilitate and encourage activity and lobbying by organized interests once opportunities for reform begin to emerge. As towards the end of 2008 it became evident that the incoming Obama Administration and the Democrats’ congressional leadership would seek a large-scale stimulus package, a lobbying process among groupings and constituencies, many of which would gain directly from such a bill, began and quickly intensified. They argued for the passage of the Act while at the same time seeking to secure a significant share of the expenditure programs that it incorporated. The Washington Post noted the intensity of the lobbying processes and speculated on the extent to which these might trump economic priorities:

  The potential for massive new spending has touched off a frenzy among interest groups eager to claim their share of the expanding stimulus pie. The profusion of requests from governors, transportation groups, environmental activists and business organizations is spawning fears that the package could be loaded with provisions that satisfy important Democratic constituencies but fail to provide the jolt needed to pull the nation out of a deepening recession (Montgomery, 2008).

  Although there were tensions between groupings and interests (particularly between environmental campaigns and those who sought traditional infrastructural projects such as road improvements) the coalition made its mark on the character of ARRA in its final form. In contrast, while there are many lobbying opportunities in the British political system, the institutional architecture has a more ‘sealed’ character. Access points are more limited and, as in the 1930s, the Treasury remains hegemonic.10

  The porous character of the American state and ways in which this offered access to elite interests, particularly those tied to business, finance and commerce, has long been emphasized by scholars associated with American Political Development (APD) and historical institutionalism. Accounts have pointed to the penetration of the state through the character of those appointed to senior positions in the administration and the federal bureaucracy (many of whom are drawn from the larger corporations or Wall Street), the ‘revolving door’ between public service and the private sector; the degree of access that influential lobbies have to members of Congress and administration members (a process arguably facilitated by campaign contributions); the extent of ‘producer capture’ within particular departments, agencies and bureaus; the close associations between regulatory commissions and those that are the subject of regulation; and the extent to which the decision-making process (particularly the making of the annual budget) is subject to prolonged periods of uncertainty, instability and doubt. For Stephen Skowronek the American state is ‘a hapless confusion of institutional purposes, authoritative controls, and governmental boundaries’ (Skowronek, 1982, p. 287). Desmond King and Lawrence Jacobs refer to ‘its consistent (though not uniform) lack of independent expertise to independently assess and respond to the behavior of markets and individuals; and multiple and competing lines of authority that stymie even necessary intervention’ (King and Jacobs, 2010, p. 798). In a celebrated phrase, Skowronek spoke of the state as a ‘hapless giant’ (Skowronek, 1982, p. 290).

  There are, however, further considerations. The relatively porous character of state boundaries is a variable rather than a constant. There is greater openness during both the early and closing phases of an administration’s lifespan. This is particularly the case as a new administration takes shape during the transition period and in its first few months.11 James Pfiffner has captured the scale of the challenges facing the President-Elect. An incoming administration, he argues, has to staff the Executive Office of the President, build a cabinet, put forward appointees, establish a policy agenda, construct a relationship with Congress, and frame all of this in ways that can be conveyed to the broader public (Pfiffner, 2009a).

  Furthermore, because the Senate confirmation process has become so slow and fractious, large numbers of political appointees remain unconfirmed during the early stages of an administration. There are often difficulties recruiting appropriate personnel. At the end of February 2009, over a month after Obama took office, Paul Volcker, former Federal Reserve Chairman and head of the Obama administration’s Economic Recovery Advisory Board, noted the absence of support for Treasury Secretary Timothy Geithner within his own department: ‘The secretary of the Treasury is sitting there without a deputy, without any undersec-retaries, without any, as far as I know, assistant secretaries … at a time of very severe crisis’ (quoted in Kamen, 2009).

  Although the Obama Administration was at this point ahead of the Bush and Clinton administrations in terms of appointments (and drew quite heavily on experienced Washington insiders who had served in the Clinton administration), the incoming administration formally nominated only six people during February 2009 and announced the names of 15 others who, it said, it intended to nominate (ibid.). Although it should be noted that there are significant numbers of permanent staff in, for example, the Office of Management and Budget, it has been said with some legitimacy that there is ‘no institutional memory, no predetermined organizational structure, no adopted policies, no outline of their responsibilities, and no manual to show how the place works. In short, they arrive to an empty shell’ (quoted in Pfiffner, 2009b, p. 90).

  In such circumstances, there is a greater dependence upon external sources of expertise (including those on Capitol Hill as well as lobbies, think tanks and interest groups), than during periods when an administration has become ‘bedded in’. At the same time, because lobbying relationships, access systems, and lines of communication between the incoming administration and external interests have yet to become solidified or are only partially formed, some of the relationships and structures that were formed during the primary and general election campaigns still remain in place. They are not at this stage displaced or superseded. In short, because of institutional circumstances, the transition team and the new administration will retain the ties and associations with the personnel, organizations and relationships that carried the winning candidate to victory. In particular, ARRA owed much to proposals developed and put forward by the Center for American Progress, a left-leaning think tank headed by John Podesta, who had served as President Bill Clinton’s Chief of Staff and directed the Obama transition team during 2008–2009. Indeed, the Center stressed the extent to which the House of Representatives’ version of the Act drew upon one of its reports, (How to Spend $350 Billion in a First Year of Stimulus and Recovery), which it had published at the beginning of December 2008.

  The Center for American Progress published a report last year setting out ‘How to Spend $350 Billion in a First Year of Stimulus and Recovery.’ Almost all of our proposals were included in the House plan – and many of these with increased funds to sustain spending for two years (Ettlinger and Straw, 2009).

  Conclusion

  This chapter has argued that the fiscal policy differences between the US and the UK during the eco
nomic crisis owed much to underlying variables and the character of the institutional architecture in the two countries. In particular, the relatively fluid, porous and inchoate character of the American state (features emphasized by scholars associated with APD and particularly pronounced during the early months of an administration) opened the way for established interests and constituencies, particularly those tied to the governing party, to secure spending commitments. The more centralized, hierarchical, and insulated character of the British state precluded capture in this way.

  During the 1980s, comparative studies of policy responses to the Great Depression turned away from histories of economic thought and the ‘Keynesian revolution’, descriptions of the intellectual myopia of figures such as Ramsay MacDonald (Prime Minister, 1924 and 1929–35) and accounts of the interest-based blocs and coalitions that emerged in different countries. Instead, they turned to institutionalist explanations and considered, in particular, the character of state structures and the extent to which they permitted or constrained the emergence of policy alternatives. Although there is, as this chapter has suggested, a case for also considering the institutional structures that lie beyond the boundaries of the state apparatus and at the same time incorporating the part played by underlying economic variables, studies of the ‘Great Recession’ should make a similar turn.

  Notes

  1. Lord Young of Graffham echoed words attributed to Harold Macmillan (Conservative Prime Minister, 1957–63) when he told an interviewer that ‘the vast majority of people in the country today’ had ‘never had it so good’ (BBC News Online, 2010).

  2. The realities of monetary policy were however rather different. When they were prepared to make loans available, commercial banks charged interest rates far above the base rate (OECD, 2009c, p. 12).

  3. This chapter considers discretionary fiscal policy. It does not look at the fiscal costs of supporting the financial sector or non-discretionary or ‘automatic’ shifts.

  4. It should be noted that there were also marked differences between the UK and other European countries. Many of the coordinated market economies such as Germany adopted, for example, work subsidy schemes so as to maintain employment levels. Such schemes, some commentators suggested, reinforced labor market rigidities.

  5. The concept of a ‘structural deficit’ is contested because there are measurement problems and methodological difficulties distinguishing between the ‘structural’ and ‘cyclical’ deficits. Indeed, it could be argued that the concept of a ‘structural’ deficit is a political or ideological construct.

  6. This, however, appears to limit the extent to which lower income groupings, which might be expected to have the highest marginal propensity to consume, secure gains (Kenworthy, 2010).

  7. Christina Romer went on to serve as Chair of the Council of Economic Advisers. Jared Bernstein was appointed as Vice President Biden’s Chief Economist and Economic Policy Adviser. There have also been suggestions based upon studies of the interwar years that realized multipliers might be higher in value. (See, for example, Almunia et al., 2009, p. 25.)

  8. John Grahl recorded in 2005 that 90 percent of recorded foreign exchange transactions involved the dollar, and the capitalization of the New York Stock Exchange and NASDAQ amounted to about $11 trillion, half the world total (Cafruny and Ryner, 2007, p. 28).

  9. The forms that balanced budget requirements take, and the roles in the process assigned to the governor and the legislature, differ from state to state.

  10. To an extent, the British state still resembles the description given by Margaret Weir and Theda Skocpol in their account of comparative policy responses to mass unemployment during the 1930s. They argued that the structures governing civil service attitudes were relatively closed to new forms of thinking (and, in particular, Keynesian calls for public works programs). Much of the civil service was subject to the hegemony of the Treasury, the ‘Treasury view’ which stressed the importance of a balanced budget and market forces, and the Bank of England (Weir and Skocpol, 1986, p. 128). In an echo of the ‘Treasury View’, Mervyn King, Governor of the Bank of England, warned publicly against further fiscal expansion in early 2009 (Fidler et al., 2009). Furthermore, his concerns appear to have been backed within the Treasury itself. There were, Andrew Rawnsley argues, serious anxieties about debt levels and concerns that the exchange rate for the pound sterling might continue to fall (Rawnsley, 2010, pp. 601–2).

  11. It would, of course, be a mistake to over-generalize about the character of transitions. There are, as James Pfiffner records, important differences depending upon the point at which preparations began, the size and character of the transition team, and the extent to which strategy is structured around well-chosen priorities (Pfiffner, 2009a). The character of a presidential campaign may also be a consideration. As Sidney Milkis and Jesse Rhodes record, the Obama campaign was, in contrast with Senator John Kerry’s 2004 presidential campaign, a centralized ‘national machine’ largely structured around the Obama ‘brand’ (Milkis and Rhodes, 2009, pp. 8, 18).

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