Assertions of the Anglo-American liberal economic order deflect attention
away from the domestic politics within the United States which underlie the
promotion of financial liberalization. Disaggregating the national unity
implicit in notions of the "Washington consensus" is important because it
helps to reveal the domestic level winners and losers in globalization. A
review of America's post-war economic development trajectory and changes in
the supporting financial and political arrangements helps to clarify why
liberalization has been as successful as it has. For while the basic
structure of finance has not changed dramatically in the post-war era,
market activity has intensified and significant deregulation of finance
overall has occurred-changes which have had generally destabilizing
economic effects. One result is that state intervention has been hamstrung
in some areas of economic management while its capacity has grown in other
arenas.
This type of analysis is generally consistent with research that identifies
changing economic conditions as affecting the balance of societal interests
which then has implications for the imperatives of the state.
Specifically, I would argue that in the American context discussions of
limited state capacity that derive from its particular mix of arm's length
finance and government do not take us far enough in understanding change.
Rather, interpreting state capacity through the orientation of its policies
and the interests it accommodates are more illustrative of the changing
role government plays in economic management.
I. The Fiscal State Imperiled: Post-War Growth and Slow-Down
In John Zysman's typology, the defining characteristic of the
Anglo-American model is that corporate finance is raised largely through
capital markets. Absent are the relational ties produced through
long-standing, repeated interactions of commercial banks and their
corporate loan customers that predominate in other capitalist forms. Arm's
length financing of equity markets enables business corporations to
maintain managerial decision-making prerogative and prevents state
direction in industrial management to the extent that is possible in
systems where the state either controls or works with banks to direct
credit allocations. In the case of the United States, state incapacity is
reinforced by the degree of political fragmentation produced through the
country's particular combination of federalism, separated institutional
powers, and a two-party system frequently resulting in divided government.
According to Zysman, the result is that business is particularly powerful
vis-a-vis bankers and the state, which is unable to micro-manage
development and lacks a coherently articulated industrial policy.
Zysman's argument, first and foremost, is a structural one in which the
nature of the financial arrangements of the country set the parameters for
state intervention in economic development. Yet the shape of state
direction was not a foregone conclusion at the end of World War II.
Following world depression in the 1930s, New Deal planners experimented
with a wide variety of programs which, some argue, left policy routes open
to more developmentalist routes (either state-planned or corporatist) as
well as to the fiscalist route which eventually prevailed.
Not to overstate, but this element of multiple routes and historical
contingency is important for two reasons. One, the financial arrangements
of a country are endogenous to the political process; as with any
structure, once created they may solidify and become difficult to dislodge,
yet they are not immune to politics. As such, there is no inherent logic
or "natural" progression with regard to current arrangements. Two, state
capacity may materialize in different forms under different conditions.
While not disavowing the fiscal state or the extent to which the U.S. has
practiced a de-facto industrial policy, Zysman argues that a state's
control over credit allocation is the key to state capacity because it
allows the state to directly influence individual business decision
(whereas a state's regulatory or tax authority does not). Because the
Anglo-American financial structure has intensified over the post-war era,
it would follow with Zysman's logic to suggest that the American state has
only become further incapacitated. Yet this is misleading because it
obscures important changes in state-market and state-society relations that
have occurred over the past fifty years. So while Zysman provides an
important starting point in considering recent American political economy
development, it is necessary to expand upon his notion of state capacity in
order to fully flush out domestic winners and losers in the process of
liberalization.
To best characterize the deregulatory reforms of the 1970s it is helpful to
briefly outline the financial structure in place previous to that time, the
origins of which are to be found in New Deal legislation. Following the
failure of the stock markets and the larger economy of which their failure
was symptomatic, the state imposed a rigid financial regulatory structure.
The Glass-Steagall Act separated commercial from investment banking;
supplementary regulations ensured additional institutional heterogeneity by
type of service and geographic location; the Securities and Exchange
Commission was established to oversee controls set up by self-regulatory
organizations (e.g., stock exchanges); financial disclosure requirements
were established; interest rate ceilings were imposed on deposits and some
types of loans; and federal deposit insurance extended the scope of federal
oversight into state-chartered financial institutions. Additionally, the
Federal Reserve Act of 1913 had established a politically independent
central bank system with twelve regional banks and a seven member board of
governors. The effect of these myriad initiatives was to produce a highly
regulated financial sector, one in which the suppression of domestic
competition was sought as a way to reduce the instability of the previous
laissez-faire economy.
This structure, which stayed essentially intact until the late 1960s and
early 1970s, was complimented in the post-war years by a growing Fordist
economy. Under the Bretton Woods system and with the aid of the Marshall
Plan, the U.S. economy remained robust. While other industrial economies
struggled to rebuild, the U.S. pursued a path of trade liberalization and
internationalization which enabled large corporations and manufacturers in
particular to dominate the international economy. Domestically, war-time
wage and price controls were relaxed, yet policies such as the Full
Employment Act of 1945 demonstrated the state's continued commitment to
economic intervention. Macro-economic management was attempted primarily
through fiscal levers, with less attention focused on monetary policy.
For Zysman, this system facilitated corporate independence. The densely
regulated financial structure, overseen by a host of public agencies and
private organizations, served to stymie any attempt at coordinated state
interference or the exercise of executive authority. In this regard, the
"social pact" brokered between management and labor is an ancillary
component to the state's de-facto industrial policy. What is most
significant is that great latitude is ceded to management in exchange for a
relatively minimal commitment to the collective bargaining process.
Importantly, for Zysman, the state does not directly intervene in corporate
management nor does it have the lever of a strong bank loan credit
allocation system with which to exert influence.
That business, particularly in a system of arms-length financing, should
occupy such a privileged position is hardly surprising. But by focusing
on the U.S.'s comparative lack of a cogent, articulated industrial policy,
Zysman's analysis downplays the role of the state in managing industrial
growth in a way that suggests limited state capacity. An alternative
interpretation is that ceding such great latitude to business required
extensive state activism. Particularly in comparison to the country's past
history of limited government, the New Deal era, including the early
post-war years, represent an unprecedented degree of state intervention
through investment in human and capital infrastructure, development of a
multitude of compensatory programs, provision of subsidies to struggling
(yet politically powerful) sectors such as agriculture, and a commitment to
promoting economic growth through the opening of foreign markets and the
stimulation of consumer demand at home.
That these are typically macro-policies and not micro-intervention should
not necessarily lead to the assessment of a weak state. Nor should the
extent to which these policies were enacted over time in incremental
fashion through a fragmented institutional structure lead to the conclusion
that the de-facto industrial policy of the U.S. was simply an ad-hoc
creation of unrelated policy innovations. Rather, the state was active in
promoting the necessary conditions for growth in its leading industrial
manufacturing sector. While the state did not embrace universal social
welfare policies to the degree found in other advanced capitalist
economies, neither did it face opposition from labor on as widespread a
basis. And while the U.S. did not engage in state-led credit allocation,
it did employ subsidies and regulations to artificially maintain a stable
economic environment.
This type of Keynesian activism was sustained up until the end of the
1960s, when economic conditions and the prevailing system of finance began
to change. In the real economy, growth slowed and inflation grew. Real
GDP slowed from an average annual growth rate of 4.4 percent in the 1960s,
to 3.2 in the 1970s, and then to 2.7 in the 1980s and early 1990s.
Consumer spending, key in a fiscalist orientation, declined similarly. The
average annual unemployment rate rose steadily from 4.8 percent in the
1960s, to 6.2 in the 1970s, and 7.3 in the 1980s (although this rate has
declined substantially in the 1990s). Despite economic slowdown, prices
continued to escalate with the consumer price index rising from an average
of 2.3 in the 1960s to 7.1 in the 1970s, 5.5 in the 1980s and 3.0 in the
1990s.
The persistence of "stagflation" in the 1970s cannot be divorced from the
country's growing trade imbalance, increasing government deficit, and the
growing current account deficit, all of which led to a breakdown of the
previous political economic "regime" in favor of deregulatory and
monetarist solutions. In brief, the growing imbalances in trade,
continued inflation, increasing speculation against the dollar, and the
U.S.'s unwillingness to devalue its currency led to the abandonment of the
Bretton Woods system and the adoption of the floating exchange rate system.
The inflationary effects of deficit financing for the Vietnam war and
domestic programs were further compounded by oil price shocks in the early
1970s. However it was not until the late 1970s that the Federal Reserve
began to aggressively set interest rate targets so as to curb inflation.
Particularly problematic for this era's economic difficulties was that
private capital was increasingly being provided by large institutional
investors and was simultaneously "exiting" from the highly regulated U.S.
system, flowing instead toward unregulated Euromarkets. At the same time,
flexible exchange and higher interest rates made banks more long-term loan
shy, further orienting business to securities market finance. By the
mid-1970s, this internationalization brought pressure to bear on the U.S.
to deregulate its financial structure in order to attract capital back into
the country.
A host of deregulatory acts were set in motion in the 1970s and 1980s.
Among the most prominent were a series of acts which removed interest rate
ceilings on deposits. Restrictions which had previously maintained a high
degree of financial intermediary segmentation began to crumble as well.
The overall effect has been to promote a greater degree of competition,
expansions of the types of services and activities permissible by different
institutions, and conglomeration among large institutions. Moreover, the
resulting increase in flexible prices and international capital flows has
brought with it greater economic instability. One of the most notorious
examples of the effects of deregulation can be witnessed in the removal of
deposit ceiling and the granting of power to diversify assets for savings
and loan associations. These thrifts had long been compelled to function
as a provider of mortgage finance, but deregulation set in motion risky
loans, speculative ventures, fraud, and the agency capture which eventually
resulted in collapse and bail-out.
As the savings and loan crisis demonstrated, in a deregulated environment
characterized by greater financial innovation, increased investment
opportunities, and a greater degree of risk and instability, the U.S.
state, too, has shifted its functions and orientation. This is
particularly interesting in light of Zysman's analysis of America's arm's
length financing and consequent de-facto industrial policy. With regard to
U.S. industrial decline in the 1980s, he argues that the structure of
finance limits government's ability either to promote competitive
adjustment or to intervene to prop up particular sectors. Lacking the
necessary tools to implement a national purpose, the only available options
for the state are acquiescing to free market competition or promoting
protection, the choice of which will be determined by whether or not
interests favoring free trade, such as export-oriented and multi-nationals,
prevail (though, writing in the early 1980s, he seems to suggest that a
return to protectionism could well be the strategy pursued).
Zysman's explicit assumption is that the internationalization and
elaboration of financial markets will not alter distinctive domestic
arrangements. What this seems to miss however is the extent to which
these forces have fostered the strength of finance as a sector in its own
right, not just as a structural impediment to industrial policy. In other
words, liberalization has been central in strengthening the economic and
political influence of financial and related sectors, and in a structure
that keeps financiers separate from corporate industry, divergent interests
may place different demands on the state.
In this interpretation, protectionism and market acquiescence are seen
differently than in Zysman's account. His analysis portrays these
alternatives as the result of ad-hoc reactions by a pluralistic state that
bounces back and forth between interest group pressures because it lacks
the firmament of a national industrial policy. However, an interpretation
more sensitive to the systematic orientations of the state might explain
the maintenance of free trade (despite massive pressures for restrictive
legislation) as reflecting, in part, the growing strength of finance and
its myriad attendant services. Because financial and related business
services have prospered with the overall increase in world trade activity
and internationalization in general, this sector benefits from the
maintenance of open economic system. This is reinforced by the extent to
which financing has shifted away from the traditional manufacturing
interests, central actors in Zysman's story, and toward internationally
competitive sectors of lighter manufacturing and high tech industries.
This does not contradict Zysman's basic argument. Rather, the point being
made is that the effects of internationalization are not just filtered
unaltered through the domestic financial structure. Because liberalization
has strengthened the power of the financial sector, these interests have
helped to restructure the economy and alter the terrain of politics. If
American state capacity with regard to economic management could once be
defined by its accommodation of business via a commitment to Keynesian
fiscal policy and an implicit social compact, by the 1980s, this was
largely redefined. Monetarism and control of inflation became more central
in policy-making at the price of increasing unemployment and recession.
Keynesianism and state activism in stimulating economic growth through
social spending were discredited, and this served as justification for
slashes in these types of expenditures along with greater consideration of
privatization of services. However, the state continued to maintain an
activist function through its "military Keynesianism" and its willingness
to borrow on international markets in order escalate expenditures on
defense contracts, high technology research and development, and general
military preparedness. The U.S. also expended considerable political
capital in aggressively promoting the opening of foreign markets and
financial liberalization abroad to accommodate its own internationalists.
In sum, the argument being made here is that while the Anglo-American
system of finance limits state capacity in terms of direct credit
allocation and industrial policy, the state has used its capacity to
actively promote the conditions for company-led development, whether those
companies be heavy manufacturing, high technology, or financial services.
Economic crisis in the late 1960s and 1970s prompted a regime change which
included the liberalization of finance. The new order not only reflects
the increased power of finance and capital, but also reflects the state's
attempts to accommodate this pressure with restructurings in the broader
economy.
Future Directions
With the final comparative paper, my thoughts at this point are to
structure an argument around the debates over convergence in the areas of
economic performance and political institutions. Because significantly
different political institutional arrangments and methods of credit
allocation existed in Japan and the U.S., one question that could be
explored is to what extent have these arrangments been sustained in the
face of financial liberalization? To what extent has liberalization
promoted pluralistic bargaining over economic management and how have new
interests been accomodated by political elites? Further inquiry into very
recent economic changes and the politics entailed would also be interesting.
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