Foreign Policy Watch

Geopolitical musings through a progressive lens …by Matt Eckel and Jeb Koogler

Public Sector Equilibria and Inequality

Yglesias notes that part of the reason that countries like Germany and Sweden have had an easier time than the U.S. implementing Keynesian solutions to the ever-unfolding economic crisis (continuing to call this a “crisis” after two years always brings this to mind) is that they enjoy a much greater level of political consensus about the overall size of the public sector. The right wing in those countries, then, is less likely to view temporary increases in government spending as thin wedges for a more state-centric “new normal.” Likewise, the left is less likely to view the trimming of public outlays during heady times as simply an excuse to permanently gut government services. In the U.S. such suspicions run high on both sides because, well, they’re entirely justified. There is very little consensus here on the appropriate size of the American welfare state (and the taxation regimes necessary to support it), and both sides do look to use crisis situations to try to move toward more ideologically favorable equilibria.

I think this is actually worth unpacking a bit further. One of the best pieces of work to come out of American Political Science in recent years is McCarty, Poole and Rosenthal’s Polarized America, which uses sophisticated statistical analysis to document political polarization in the United States over the course of the past century. Their argument is complex and involves a number of factors, but boils down to one major one: inequality. Politics polarize along with income levels, as it becomes necessary to engage in ever-more-divisive tactics to hold together a coalition that, on the basis of pure economic interests, would be politically unsustainable. Interrupting this dynamic is quite difficult. The one period in which it was arrested over the past century – the mid-century period that Krugman calls the “great leveling” – took a decade-long depression combined with a populist assault against the upper classes, followed by a half-decade of total war that made complaining about taxation politically unpalatable. The following quarter century of “liberal consensus” in which most of the American right wing grudgingly accepted the reforms of the New Deal, created an environment in which things like Keynesian economic stimulus could be enacted without becoming caught up in larger ideological disputes about the size, nature and responsibilities of the state.

The point is that the development of the kind of “consensus” that Yglesias envies requires actual material changes in the socio-economic conditions of society. In the United States, it’s unlikely to happen until the interest of the upper classes in maintaining levels of inequality with little historical precedent has been rendered less acute. Of course, that likely can’t happen without government intervention in the first place, and Rahm Emmanuel’s dictum aside, it appears that the initial crisis that could have launched such reforms has indeed been wasted. Under the circumstances, I think we’ll just have to admit that Keynesian economics can’t operate properly in the United States, and look toward mitigating the adverse consequences.

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