History is Still Over
How capitalism survived the crisis.
How capitalism survived the crisis.
Francis Fukuyama
Newsweek
Rahm Emanuel, President Obama's chief of staff, supposedly once remarked that you should never let a crisis go to waste. While one shouldn't be flippant about an economic downturn that's thrown millions out of work, Emanuel was right to suggest that leaders often fail to make tough decisions unless forced to by imminent dangers. In the depths of the Wall Street crisis last winter, the danger was evident everywhere: credit markets froze around the globe, companies couldn't get access to overnight financing to pay workers and suppliers, and stock markets were in free fall. A problem that started in the U.S. subprime-real-estate market quickly metastasized, spreading to the largest investment banks on Wall Street and from there to the rest of the world. In the fourth quarter of 2008, global growth abruptly went into reverse, and the enormous edifice of globalization itself seemed to teeter. The Financial Times even published a series of articles portentously titled "The Future of Capitalism"—as if all of the foundations of the global system were in question.
But if there was plenty of danger, there was opportunity as well. The collapse of Lehman Brothers and the insurance giant AIG came in the midst of a heated U.S. presidential campaign—and helped to elect Barack Obama. The crisis underscored many of America's longstanding structural problems, including its unsustainably high levels of debt-fueled consumption, its unfunded long-term entitlement liabilities, stagnating middle-class incomes, and a poorly regulated financial sector that had turned Wall Street into a giant casino. A new Democratic president and Democratic majorities in both houses promised a different sort of politics: a decisive end of the Reagan era, the beginning of a long-term progressive realignment of U.S. voters, and a refounding of America's relations with the rest of the world. There was a clear model for how Obama might proceed after the election: like Franklin D. Roosevelt, who had come to power during the last great economic crisis and had permanently reshaped the country through the New Deal.
Today, around the end of Barack Obama's first year in office, both the danger and the opportunity seem to have evaporated. What is striking is how little about the pre-crisis world has changed. Deft handling of economic policy by the Federal Reserve and the Treasury Department under both Bush and Obama prevented the crisis from degenerating into a 1930s-style meltdown. (Even the decision to allow Lehman Brothers to go bankrupt, attacked by many, probably helped prepare the ground for the broader finance-sector rescue to come.) Although unemployment remains intolerably high, signs of recovery abound, and confidence is returning both to consumers and businesses. Globally, the recovery has been even faster, with China, South Korea, Brazil, and others enjoying an amazing rebound in exports.
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But hold the applause. Even the good news isn't all good. In an odd way, the recovery may have come too soon—since it's meant that the crisis never got bad enough to force the kind of lasting solutions the United States, and the world, badly needed. A sad reality of human affairs is that people will not change deeply entrenched attitudes or habits except under the most dire circumstances. And our dire circumstances may have passed too quickly.
The most obvious example of this is the legislation Congress has considered that would tighten regulation on Wall Street in order to prevent big banks from taking the kind of risks that brought the whole economy down. No one has addressed the "too big to fail" problem that was at the core of the crisis. Meanwhile, Goldman Sachs, JPMorgan Chase, and a host of hedge funds have already gone back to their old ways of making money, and have used their resources to hire legions of lobbyists to block new regulation they don't like. Now that the stark fear of last winter has passed, so too has the popular anger that's necessary to overcome their behind-the-scenes clout.
But if there was plenty of danger, there was opportunity as well. The collapse of Lehman Brothers and the insurance giant AIG came in the midst of a heated U.S. presidential campaign—and helped to elect Barack Obama. The crisis underscored many of America's longstanding structural problems, including its unsustainably high levels of debt-fueled consumption, its unfunded long-term entitlement liabilities, stagnating middle-class incomes, and a poorly regulated financial sector that had turned Wall Street into a giant casino. A new Democratic president and Democratic majorities in both houses promised a different sort of politics: a decisive end of the Reagan era, the beginning of a long-term progressive realignment of U.S. voters, and a refounding of America's relations with the rest of the world. There was a clear model for how Obama might proceed after the election: like Franklin D. Roosevelt, who had come to power during the last great economic crisis and had permanently reshaped the country through the New Deal.
Today, around the end of Barack Obama's first year in office, both the danger and the opportunity seem to have evaporated. What is striking is how little about the pre-crisis world has changed. Deft handling of economic policy by the Federal Reserve and the Treasury Department under both Bush and Obama prevented the crisis from degenerating into a 1930s-style meltdown. (Even the decision to allow Lehman Brothers to go bankrupt, attacked by many, probably helped prepare the ground for the broader finance-sector rescue to come.) Although unemployment remains intolerably high, signs of recovery abound, and confidence is returning both to consumers and businesses. Globally, the recovery has been even faster, with China, South Korea, Brazil, and others enjoying an amazing rebound in exports.
placeAd2(commercialNode,'bigbox',false,'')
But hold the applause. Even the good news isn't all good. In an odd way, the recovery may have come too soon—since it's meant that the crisis never got bad enough to force the kind of lasting solutions the United States, and the world, badly needed. A sad reality of human affairs is that people will not change deeply entrenched attitudes or habits except under the most dire circumstances. And our dire circumstances may have passed too quickly.
The most obvious example of this is the legislation Congress has considered that would tighten regulation on Wall Street in order to prevent big banks from taking the kind of risks that brought the whole economy down. No one has addressed the "too big to fail" problem that was at the core of the crisis. Meanwhile, Goldman Sachs, JPMorgan Chase, and a host of hedge funds have already gone back to their old ways of making money, and have used their resources to hire legions of lobbyists to block new regulation they don't like. Now that the stark fear of last winter has passed, so too has the popular anger that's necessary to overcome their behind-the-scenes clout.
GOOD NEWS FROM ABROAD
Let's stick to the good news first. Little may have changed in the United States. The same can be said about the world beyond America's shores, but I would argue that that's a largely a good thing.
Over the past three decades, market-based growth and globalization have brought prosperity and lifted hundreds of millions of people out of poverty. With that growth came the spread of democratic government. The fact that the crisis began on Wall Street—the heart of global capitalism—posed the risk that it would delegitimize an international system based on markets and openness. This happened during the Great Depression, when panicked governments erected trade barriers, devalued currencies, and thereby deepened and prolonged the suffering. In doing so, they paved the way for Stalin's collectivization and Hitler. This time around, while the legitimacy of the global system may have been bruised, it did not break. China and India, the two largest emerging players, haven't abandoned the openness to markets that helped them to grow so rapidly in the first place. Noisy populists like Venezuela's Hugo Chávez and Iran's Mahmoud Ahmadinejad may rail against globalization and U.S.-style capitalism. But they started these antics before the crisis began, and with the drop in oil prices, they have struggled to keep their own economies afloat. Before the crisis hit, Russia was on a roll. Today the rotten economic foundations on which Russian power rests have been rudely exposed, and Moscow has given up some of its muscle-flexing. Most nations have avoided the beggar-thy-neighbor protectionist policies of the 1930s.
In other words, despite Wall Street's misdeeds, sensible economic ideas still dominate the globe, and the open economic order remains intact. The demons of nationalism and intolerance have, for the moment, been kept at bay.
The crisis has even produced some genuinely positive results. One is the G20, which has replaced the G8. The new body gives voice to big emerging-market players like China, India, and Brazil, and has already provoked new commitments to a larger and less arrogant International Monetary Fund and new financial regulation. Big problems, like the structural imbalances in the global economy (with the Chinese and other East Asians saving too much and consuming too little while Americans do the opposite), are still with us. But we now have a forum where these issues can be confronted This doesn't mean that the global situation is all rosy. The United States still faces what may turn out to be two unsolvable problems: the deteriorating military situation in Afghanistan and the Iranian drive for nuclear weapons. A military confrontation in the Gulf remains a possibility and would send the world into a deep recession. But these problems would have existed—and been just as difficult—without the crisis.
Over the past three decades, market-based growth and globalization have brought prosperity and lifted hundreds of millions of people out of poverty. With that growth came the spread of democratic government. The fact that the crisis began on Wall Street—the heart of global capitalism—posed the risk that it would delegitimize an international system based on markets and openness. This happened during the Great Depression, when panicked governments erected trade barriers, devalued currencies, and thereby deepened and prolonged the suffering. In doing so, they paved the way for Stalin's collectivization and Hitler. This time around, while the legitimacy of the global system may have been bruised, it did not break. China and India, the two largest emerging players, haven't abandoned the openness to markets that helped them to grow so rapidly in the first place. Noisy populists like Venezuela's Hugo Chávez and Iran's Mahmoud Ahmadinejad may rail against globalization and U.S.-style capitalism. But they started these antics before the crisis began, and with the drop in oil prices, they have struggled to keep their own economies afloat. Before the crisis hit, Russia was on a roll. Today the rotten economic foundations on which Russian power rests have been rudely exposed, and Moscow has given up some of its muscle-flexing. Most nations have avoided the beggar-thy-neighbor protectionist policies of the 1930s.
In other words, despite Wall Street's misdeeds, sensible economic ideas still dominate the globe, and the open economic order remains intact. The demons of nationalism and intolerance have, for the moment, been kept at bay.
The crisis has even produced some genuinely positive results. One is the G20, which has replaced the G8. The new body gives voice to big emerging-market players like China, India, and Brazil, and has already provoked new commitments to a larger and less arrogant International Monetary Fund and new financial regulation. Big problems, like the structural imbalances in the global economy (with the Chinese and other East Asians saving too much and consuming too little while Americans do the opposite), are still with us. But we now have a forum where these issues can be confronted This doesn't mean that the global situation is all rosy. The United States still faces what may turn out to be two unsolvable problems: the deteriorating military situation in Afghanistan and the Iranian drive for nuclear weapons. A military confrontation in the Gulf remains a possibility and would send the world into a deep recession. But these problems would have existed—and been just as difficult—without the crisis.
BAD NEWS AT HOME
Despite Emanuel's warning against wasting a crisis, this is precisely what Washington has done. The panic felt last winter produced two big but short-term pieces of legislation: the TARP (Troubled Asset Relief Program) and February's fiscal-stimulus bill. To follow these, the country should have delivered on what Obama promised during the campaign: a calmer, post-partisan effort to deal seriously with the long-term problems that remained. None of America's pressing issues—the need to reform health care, Social Security, financial regulation, and the basic social contract that binds Americans as a nation—are in theory unsolvable. But fixing them will require a general recognition that not everyone is going to get everything they want. The financial crisis should have acted like a dose of cold water that shocked everyone into reality and prepared the way for a real national conversation. What we have experienced instead is a stunningly rapid return to the old polarization that existed before the crisis began.
Both sides deserve blame. The Obama administration took its victory in November 2008 as a broad mandate and proceeded to reinsert government into a wide range of affairs, from Wall Street to the auto industry to health care. These moves may or may not have been right, but Obama was wrong about one thing: it is not clear that he ever had broad popular support for such a rapid a return to big government. Obama did not win election by mobilizing millions of new voters (apart from African-Americans); instead, his victory was due to the disgust many independents and centrists felt for George W. Bush and the Republicans. And this did not translate into support for ambitious new social programs. Obama's rapid decline in poll numbers, as centrists abandoned him, reflects this fact.The right has been even more intransigent. The financial crisis has not induced any serious rethinking of the verities of the Reagan era among Republicans, even though it was the legacies of Reaganism—lax regulation and budget deficits induced by tax cuts—that got the country into this mess in the first place. (Most conservatives who have been rethinking Reaganism have left the party instead.) The Republicans' tactical decision to dig in their heels and oppose virtually all of Obama's new initiatives may pay off for them politically, if it succeeds in derailing his agenda and making his administration seem weak and ineffective. But that's hardly good for the country as a whole. What America needs is not stasis but consensus and decisive action on a whole range of issues.
The conservative hard core that has emerged since the election—the "birthers" who don't believe Obama is a U.S. citizen, the Glenn Becks who think he has an "anti-white" agenda, and the Tea Party attendees who believe the president is a secret socialist (or a fascist)—is even more troubling. Having lost the election, these Republicans seem committed to attacking the person rather than the policies of the president in any way they can. This has made Obama the third president in a row to have his legitimacy questioned by a small but vocal minority of Americans.
THE LONG TERMSince we're still not out of the woods—far from it—it's premature to predict exactly what the long-term impact of the crisis will be. While the lack of change may seem striking today, that doesn't mean change won't come down the line.
That's especially true on the question of American power. The U.S. recovery has been notably slower than that of emerging-market countries like China, India, and Brazil—and no wonder, given the size of the U.S. debt. Americans have not ceased to spend recklessly or depend on the willingness of foreigners to hold dollars. All the crisis did was shift the debt burden from private individuals to the U.S. government. Indeed, government debt as a proportion of GDP increased by 50 percent from 2007 to 2009, and is expected to get even higher in the coming years. In the long run, that threatens both U.S. growth and the stability of the dollar as a reserve currency.
Important as these economic considerations are, they may in the long run be far less important than ideas. A critical underpinning of U.S. power in the past has been the attractiveness of American society—not just its material wealth, but the health and vigor of its democracy and its ability to solve problems. Americans have traditionally taken pride in the fact that they are a pragmatic people, especially compared with Europeans, bedeviled by ancient beliefs and ideologies. But the fact of the matter is that it is Americans who have become remarkably ideological and rigid in the way they see the world. The financial crisis, which might have been expected to shake loose some prejudices, does not seem to have made much of a difference in this regard. That spells big trouble for the United States down the road. And unless it changes, then the Great Recession will prove to have been a wasted crisis indeed.
Both sides deserve blame. The Obama administration took its victory in November 2008 as a broad mandate and proceeded to reinsert government into a wide range of affairs, from Wall Street to the auto industry to health care. These moves may or may not have been right, but Obama was wrong about one thing: it is not clear that he ever had broad popular support for such a rapid a return to big government. Obama did not win election by mobilizing millions of new voters (apart from African-Americans); instead, his victory was due to the disgust many independents and centrists felt for George W. Bush and the Republicans. And this did not translate into support for ambitious new social programs. Obama's rapid decline in poll numbers, as centrists abandoned him, reflects this fact.The right has been even more intransigent. The financial crisis has not induced any serious rethinking of the verities of the Reagan era among Republicans, even though it was the legacies of Reaganism—lax regulation and budget deficits induced by tax cuts—that got the country into this mess in the first place. (Most conservatives who have been rethinking Reaganism have left the party instead.) The Republicans' tactical decision to dig in their heels and oppose virtually all of Obama's new initiatives may pay off for them politically, if it succeeds in derailing his agenda and making his administration seem weak and ineffective. But that's hardly good for the country as a whole. What America needs is not stasis but consensus and decisive action on a whole range of issues.
The conservative hard core that has emerged since the election—the "birthers" who don't believe Obama is a U.S. citizen, the Glenn Becks who think he has an "anti-white" agenda, and the Tea Party attendees who believe the president is a secret socialist (or a fascist)—is even more troubling. Having lost the election, these Republicans seem committed to attacking the person rather than the policies of the president in any way they can. This has made Obama the third president in a row to have his legitimacy questioned by a small but vocal minority of Americans.
THE LONG TERMSince we're still not out of the woods—far from it—it's premature to predict exactly what the long-term impact of the crisis will be. While the lack of change may seem striking today, that doesn't mean change won't come down the line.
That's especially true on the question of American power. The U.S. recovery has been notably slower than that of emerging-market countries like China, India, and Brazil—and no wonder, given the size of the U.S. debt. Americans have not ceased to spend recklessly or depend on the willingness of foreigners to hold dollars. All the crisis did was shift the debt burden from private individuals to the U.S. government. Indeed, government debt as a proportion of GDP increased by 50 percent from 2007 to 2009, and is expected to get even higher in the coming years. In the long run, that threatens both U.S. growth and the stability of the dollar as a reserve currency.
Important as these economic considerations are, they may in the long run be far less important than ideas. A critical underpinning of U.S. power in the past has been the attractiveness of American society—not just its material wealth, but the health and vigor of its democracy and its ability to solve problems. Americans have traditionally taken pride in the fact that they are a pragmatic people, especially compared with Europeans, bedeviled by ancient beliefs and ideologies. But the fact of the matter is that it is Americans who have become remarkably ideological and rigid in the way they see the world. The financial crisis, which might have been expected to shake loose some prejudices, does not seem to have made much of a difference in this regard. That spells big trouble for the United States down the road. And unless it changes, then the Great Recession will prove to have been a wasted crisis indeed.
Fukuyama is Bernard L. Schwartz Professor of International Political Economy at the Johns Hopkins School of Advanced International Studies.
© 2009
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