Political Elites in the Transatlantic Crisis

H. Best, J. Higley, H. Best, J. Higley

• Publisher: Palgrave Macmillan
• Year: 2014
• Print ISBN: 9781137345745
• eBook ISBN: 9781137345752
• Topic: Politique et relations internationales
• Subtopic: Macroéconomie

Beliefs held by US and European elites about unregulated markets and a currency union without fiscal union led to a transatlantic crisis unmatched in severity since the Great Depression. Leading scholars of elites analyze how elites have responded to the crisis, are altered by it and what this 'hour of elites' means for democracy.

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Introduction

Heinrich Best and John Higley

The paralysis of financial institutions and credit flows in the United States and United Kingdom during the second half of 2008 ushered in an economic-political crisis unmatched in severity since the Great Depression. The crisis discredited the neo-liberal thesis of a nexus between free markets and unending economic growth; it created much public hostility toward governments; and it reversed the shift of power from political to economic elites that occurred during pre-crisis decades. A bottom-up view of the crisis depicts it as stemming from publics grown accustomed to living beyond their means on the basis of ever-increasing debt. A top-down view sees it as resulting from political and economic elites pursuing fanciful shibboleths and the chimera of a currency union unaccompanied by fiscal union.

No matter how blame for the crisis is apportioned, it is obvious that elites – principal decision-makers in powerful public and private organizations at national and supranational levels – have been pivotal actors. Elite interactions of unprecedented intensity and scope have been impelled by the crisis, while elites’ actions and inactions have been main inflection points. This volume investigates the roles of elites before and during the trans-Atlantic crisis. It asks what their primacy, especially the primacy of non-elected elites heading central banks and supranational institutions and that of elites commanding mammoth international financial firms and corporations, means for democratic politics.

The crisis had not ended when this volume was completed in late 2013. Greece was in its sixth year of economic recession with an economy 23 percent smaller than in 2008, with 28 percent of its workforce unemployed and housing prices falling by 12 percent during the second quarter of 2013 alone. Portugal was in similar straits, and additional bailouts of both countries appeared to be unavoidable. Italy and Spain were mired in their deepest economic recessions since World War II; France was struggling with a heavy load of public debt and had not recorded significant economic growth for years; Ireland was in its fifth consecutive year of economic decline; Germany had experienced two successive quarters of negative GDP growth during 2012 and its economy was expected to record only one percent growth during 2013.

More widely, the GDPs of the European Union’s 27 member states (28 after Croatia’s accession in July 2013) had contracted an average 0.6 percent during 2012 and those of the 17 euro-zone countries (18 after Latvia joined in July 2013) an average 0.9 percent, with only faint signs of recovery visible a year later. Eurostat, the EU’s statistical office, reported in July 2013 that during the 12 months to March 2013 euro-zone countries’ gross domestic debt increased by 4 percent to a record 92 percent of total GDP, while debt in the entire EU increased to 86 percent. Across Europe in late 2013, 26 million men and women, including 6 million young people, were unemployed and 12.1 percent of the euro-zone workforce was jobless. Europe’s banking system remained vulnerable to bank failures, with euro-zone banks holding government bonds totaling $7 trillion and equivalent to 70 percent of the zone’s annual GDP. Cross-border bank lending and investment was exceedingly hesitant. Many observers feared that the euro zone was not viable without shifting to a more federal structure, but nearly all believed such a shift is politically unthinkable.

On the Atlantic’s western side late in 2013, US economic recovery remained anemic, partly because of indiscriminate cuts in government spending produced by a deadlocked and polarized Congress, whose more radical members shut the federal government down for 16 days during October and limited additional government borrowing to the next three months. Residential construction and housing prices were fairly robust, but this was due in largest measure to quasi-government agencies, Freddie Mac and Fannie Mae, guaranteeing an unprecedented 87 percent of new mortgage loans. Likewise, stock market prices, which reached record highs in November 2013, owed much to the Federal Reserve’s third round of ‘quantitative easing’ (QE-3), whereby ‘the Fed’ was purchasing $85 billion of Treasury bonds and mortgage-backed securities each month. This enabled investors to obtain cheap loans with which they bought stocks and pushed their prices up. Between September 2012 when the Fed began QE-3 and November 2013, it purchased bonds totaling nearly a trillion dollars, and since 2008 it had pumped approximately $3 trillion – almost a fifth of a year’s GDP – into the economy. Yet 7.1 percent of workers – some 12 million people – remained unemployed and another 8 million held part-time, mostly low-wage jobs that doubled in number after 2008.

In politics, governing parties or party coalitions systematically lost elections. Maurizio Cotta, who analyzes the European elite system in this volume (Chapter 4), has elsewhere calculated that in 30 elections held by 23 EU countries between October 2008 and August 2013 (tiny Cyprus, Luxembourg and Malta are excluded, as well as Austria, where no election was held during the period), the average win/loss for governing parties/coalitions was 12.9 percent compared with an average 5.1 percent in pre-crisis elections between 2005 and October 2008. However, variation was huge: from 2.1 percent in Poland’s 2011 election to 45.4 percent in Greece’s May 2012 election. Wholly different government majorities took over after 17 of the 30 elections, partially different majorities did so after four of them, while the composition of governing majorities remained unchanged after only 9 elections (Cotta, 2013). As we will discuss, US politics were no less turbulent.

This recitation of economic and political ills stemming from the crisis is hardly exhaustive. It must be said, however, that an economic meltdown and a democratic breakdown on the scale of the 1930s were avoided. During 2013, pictures of violent upheavals came from Cairo, Istanbul and São Paulo, not from Athens, Lisbon and Rome. In Germany and several other EU countries crisis management was largely successful, as indicated by modest unemployment rates and debt totals. Despite political deadlock, US economic recovery, powered mainly by the Fed, gained traction. No one could forecast confidently what the next year or two would bring, but as 2013 ended it was clear that Europe’s historic effort to integrate and the health of economic and political systems on both sides of the Atlantic were still at risk.

This introduction sketches a framework for thinking about elites and the trans-Atlantic crisis, we summarize principal elite actions and inactions before and during the crisis, and we preview analyses in subsequent chapters of how elites coped with and were altered by the crisis.

The hour of elites

There is no agreed definition of crisis, which can take many forms and have many different effects (Dogan and Higley, 1998). At a minimum, crisis is an abrupt, momentous event or short sequence of events threatening to injure a society greatly. Its hallmark is pervasive uncertainty about what will happen and, therefore, an inability to calculate political and other risks with confidence. This uncertainty is felt keenly by elites. They are uncertain who will prevail in conflicts and what various leaders and groups will do. Although a crisis often affords elites an expanded latitude for action, uncertainty makes the assumptions on which they act frail. During a crisis, an overriding aim of elites is to transform uncertainty into calculable risks. In this and many other ways a crisis is the hour of elites.

Economic disasters are a distinct kind of crisis (Haggard and Kaufman, 1995). A sharp deterioration in aggregate economic performance harms many people and forces elites to pursue new policies. However, new policies usually alarm those who benefit most from existing policies and who support the elite groups identified with them. If elites are unable to fashion policies that ameliorate a crisis and mobilize enough support for such policies, they risk being replaced. Like defeat in warfare, economic crisis presages elite change.

Three broad elite configurations strike us as relevant to economic crisis. The first is Vilfredo Pareto’s notion of demagogic plutocracy – rule by the wealthy through a powerful business-financial elite that ensures profits flow to the wealthy and losses accrue to governments and taxpayers (Pareto, 1916/1935, paras. 2228, 2255, 2309; see also Pareto, 1921). In a demagogic plutocracy, fiscal and monetary policies result from maneuvers aimed primarily at securing plutocratic interests. An elected legislature or parliament is the forum for these maneuvers. The premium is on protecting rather than creating wealth and on gaining public acquiescence by providing government jobs and limited social benefits (Femia, 2006, p. 110). However, the disjunction between protecting wealth and mollifying the public leads to swelling government debt. Eventually, debt and market distortions become unsustainable, credit dries up, financial institutions teeter on insolvency and economic crisis occurs. The crisis that began in the US and UK during 2008 might be viewed as the culmination of a Paretian demagogic-plutocratic cycle (Higley and Pakulski, 2012).

A second configuration, étatism, is in important respects the mirror image of demagogic plutocracy. Instead of a powerful business-financial elite shaping the directions in which profits and losses flow, political and state administrative elites orchestrate economic enterprises and extract profits and tax revenues that enhance state power (Levi, 1988; Genieys, 2010). A cohesive and self-conscious political class, disconnected from the larger society, forms around elites controlling the state. Whereas in a demagogic plutocracy wealth is protected more than created, in étatism state interests are promoted at the expense of economic growth. Étatist maladies of arrogant state office-holders, excessive taxation, misallocation of economic resources and unsustainable sovereign debt may help explain the vulnerability of many euro-zone countries to an economic crisis that had a more demagogic-plutocratic origin in the US and UK.

A third configuration is elite segmentation. A half century ago, Suzanne Keller (1963) postulated the rise of ‘strategic elites’ located in the political, economic, civil service, scientific and other functionally differentiated sectors of modern societies. She theorized that strategic elites are diversified and specialized, heterogeneous in social composition and relatively autonomous. Keller later worried that strategic elites come to resemble ‘separate and contending islands’ (Keller, 1991, p. xxi), each with its own agenda and beholden to its own clientele. Their actions are propelled by conflicting dynamics, for example, those of economic versus electoral markets. One might speculate that excessive segmentation of political and economic elites and, for that matter, of national and supra-national political elites was an important cause of the post-2008 economic crisis and remains an obstacle to its resolution.

Demagogic plutocracy, étatism and elite segmentation are ideal types against which observable actions and patterns can be compared. No elite discussed in this volume accords pristinely with one type; all are mixtures. Yet features of each type are more prevalent in some countries’ elites than in others, and this variation may shed light on why elites have responded differently to the crisis. It needs to be added that none of the types is antithetical to a practical degree of democratic politics. In Joseph Schumpeter’s well-known formulation, a ‘competitive struggle for the people’s vote’ occurs in all three types, although it is circumscribed and orchestrated somewhat differently by elites according to which type they most resemble (Schumpeter, 1942, p. 269; Best and Higley, 2010, pp. 1–15). Where demagogic plutocracy is relatively pronounced, business-financial elites bankroll competing political parties and set the parameters of ‘acceptable’ debates and policies. Where étatism tends to prevail, democratic competitions produce parliaments that bend to the priorities of state executive, administrative and specialized policy elites. Where elites are quite sharply segmented, the multiplicity of interests they articulate tend to befuddle voters and inhibit clear electoral outcomes. All three elite configurations limit but do not nullify democratic politics, and the pressures that flow through democratic politics constrain what elites can do.

The US and UK crisis

The enormous wealth accumulated by pioneering successive stages of Western industrialization and, since World War II, post-industrialization, coupled with political systems that greatly advantage the wealthy, give the US and UK features of demagogic plutocracy. Myriad studies demonstrate a plutocratic distribution of wealth and income in both countries (for the US see Pikkety and Saez, 2003; for the UK see Hills, 2010). Studies show, moreover, that the decades preceding the outbreak of crisis in 2008 amounted to bonanzas for American and British plutocrats (e.g. Sampson, 2004; Murray, 2012; Noah, 2012). Studies further show the extent to which the US and UK political systems are mechanisms for protecting entrenched wealth (Domhoff, 1990, 2010, and Chapter 7; Dye and Zeigler, 1996; Mount, 2012). In both countries, demagogy is employed to whip up public enmity against persons and projects jeopardizing plutocratic interests: a treasonous plot by an illegitimate president (Obama) to transform the US into a ‘European socialist country’; abject surrenders of British politicians to imperious EU bureaucrats.

Except for an upward spurt associated with the IT revolution between 1996–2000, economic growth in the US and UK, measured by GDP, was lackluster after both emerged in the early 1980s from serious bouts of stagflation (low growth, high inflation). Policy packages that came to be known as Reaganomics and Thatcherism sought to boost growth by rolling back the state, freeing markets and unshackling business. In the US during 1982, the Reagan administration secured congressional passage of the Garn-St. Germain Depository Institutions Act. The Act relaxed regulation of Savings & Loan (S&L) associations and banks, enabling them to, in effect, gamble with taxpayer money because the federal government doubled its guarantee of S&L deposits. When, a few years later, 1,400 S&Ls became insolvent (1,300 banks also failed) the administration headed by Reagan’s successor, George H.W. Bush, had to bail S&Ls out at a cost of $250 billion to taxpayers (Eichler, 1989, pp. 86–146). Despite the S&L debacle, Republican and Democratic elites alike stoked the housing market by having the government-backed Fannie Mae and Freddie Mac guarantee packages of mortgages that banks increasingly issued to home buyers with poor or even non-existent credit ratings. The government-backed packages became the basis of a risk-free and highly lucrative trade in sub-prime mortgage-based securities among US and overseas financial institutions.

In 1999, Congress, pressured by the powerful business-financial elite, passed a Financial Services Modernization Act. This allowed mergers and direct competitions between banks, insurance, investment and securities-trading firms. It also exempted securities-based swap agreements – crucial for enormously profitable hedge funds – from government regulation. Bankruptcies of large energy and communications corporations – Enron, Global Crossing, WorldCom – marred the Millennium’s start, but the business-financial elite succeeded in portraying them as instances of mismanagement, not harbingers of crisis. Pressured by the business-financial elite, in 2004 the Securities & Exchange Commission (SEC) allowed investment banks to triple their leverage ratios of capital assets to debts outstanding. The SEC’s failure to heed warnings about a $60 billion Ponzi scheme operated by Bernie Madoff out of a small store in New Jersey exemplified its hands-off posture vis-à-vis financial firms and markets.

During most of this de-regulatory period, government deficits and gross public debt rose. This was due initially to the Reagan administration’s tax cuts and its large deficit-financed defense buildup. Twenty years later, deep tax cuts by the George W. Bush administration and its deficit-financed military interventions in Afghanistan and Iraq – which absorbed $2 trillion of the $9 trillion debt accumulated after 2001 (Stiglitz and Bilmes, 2013) – made matters much worse. By 2006 the federal budget deficit amounted to 6.5 percent of GDP ($800 billion). Excessive financial leveraging, promiscuous credit practices and swelling consumer debt created huge bond market and real estate bubbles. Members of the business-financial elite and the much larger stratum of wealthy Americans pocketed outsized profits. Top employees of the five largest investment banks, for example, received annual performance bonuses totaling more than $34.3 billion in 2006 and $36 billion in 2007 (New York Times, 27 February 2013). Yet GDP growth remained tepid and between 2000–2008 it actually decelerated at an increasing rate (Financial Times, 23 July 2010 and 11 September 2012). A few economists warned of financial catastrophe, but the prevalent view among business-financial and political elites was that modern monetary institutions and practices were so invincible that ‘this time is different’ (Reinhart and Rogoff, 2009). The collapse of Lehman Brothers on 17 September 2008 and the dramatic events that followed showed this to be delusional.

The Thatcher government’s most dramatic step was the so-called Big Bang de-regulation of financial institutions and the London Stock Exchange in Octobe...

Table of contents

• Cover
• Title
• Copyright
• Contents
• List of Figures and Tables
• Acknowledgments
• Notes on Contributors
• 1 Introduction
• 2 Structure and Agency: Lessons from Pareto on the Study of Elites, Democracy and Crisis
• 3 Is ‘Europe’ the Lesser Evil? Limits of Elite Crisis Resolution in a Limitless Crisis
• 4 Facing the Crisis: The European Elite System’s Changing Geometry
• 5 Central European Elites in the Crisis
• 6 British Elite De-Coupling from Classes
• 7 Why Can’t US Business Elites be Moderate Keynesians? The Issue is Power, not Economics
• 8 Elite Compromise, Crisis and Democracy: The United States, Norway and Italy Compared
• 9 When Political and Financial Elites Clash: Narratives of Blame, Power and Legitimacy in the Transatlantic Crisis
• 10 Conclusions
• Index