The new age of uncertainty
This note was prepared as the introduction for a special issue on the effects of the financial crisis that will be published by Governance in January 2012 (25.1). Read more about contributors to the special issue here. These introductory comments are the sole responsibility of the special issue editors, David Coen and Alasdair Roberts. Download this article in PDF.
By David Coen and Alasdair Roberts. The papers contained in this special issue were produced as part of a project organized by Governance, the School of Public Policy at University College London, and Suffolk University Law School. The contributors met first at a roundtable in Boston in 2009, and then at a second roundtable in London in 2010. Their assignment was to consider how the financial crisis of 2007-2008 was likely to change policy and institutions in their respective fields of interest.
In the first months of the crisis that began in 2007-08 it was not clear that it would have any significant long-term effect on the conventional wisdom about governance. No doubt, the financial sector had been badly shaken; but there were optimists who thought that it would quickly right itself. Many policymakers thought that the broader economic consequences would also be limited. Prime Minister Gordon Brown believed in 2008 that the British economy would recover in six months, according to former chancellor Alistair Darling.
This early optimism was unfounded. Three years have passed since the moment of panic, and the full consequences of the crisis have still not been realized. Major economies are stagnant, the solvency of major banks remains in doubt, and even countries teeter on default. Public institutions whose solidity was unquestioned in 2006 are now besieged. Trust in major leaders has declined, governments have collapsed, and voter polarization has increased. Protests and riots are once again commonplace in western capitals. The easy consensus on policy which typified the last years of the age of liberalization — roughly, the three decades from 1978 to 2008 — has collapsed. The rationale for delegation to regulatory authorities and state retrenchment has been called into question as governments grapple with a stream of crises.
In the field of economic policy, the pre-2008 orthodoxy was clear. It was taken for granted that monetary policy should be managed by a central bank that was strictly independent and alert to signs of incipient inflation. Regulatory functions were also delegated to autonomous, technocratic, and non-majoritian agencies — and in the case of credit rating agencies, simply left to the marketplace. The bias in fiscal policy was toward budgetary balance, with Treasuries acting as guardians against the natural tendency toward ratcheting expenditure. Governments were also enjoined to be neutral on questions of industrial policy, avoiding state ownership of major enterprises, preferential trade arrangements, and currency intervention.
Since 2008 most of these principles have been cast aside. Major central banks have been compelled to coordinate closely with fiscal and regulatory authorities and undertake actions — such as massive aid to the financial sector, purchase of government debt, and guarantees for commercial bank lending – all of which have raised questions about their de facto independence. The preoccupation with inflation control has given way to concern over financial stability and, increasingly, to worries about short-term economic distress. Policy elites that were once convinced about the need for rigorous price stability targets now suggest that a little inflation might be tolerable in the short run.
There have been reversals in other areas as well. In June 2011 the United Kingdom proposed a substantial reform of its independent Financial Services Authority, integrating some of its macro functions into the Bank of England’s new independent Financial Policy Committee. The proposal emphasized the need, echoing the 2009 Turner Review, for greater coordination of monetary and regulatory policy. In the United States, the independent Securities and Exchange Commission has been criticized for pandering to regulated firms and suffering groupthink about risks of systemic failure.
These reversals are just the tip of the iceberg. Other policy norms are also being suspended or redefined. Once again we see state ownership of blue chip companies, with much of General Motors’ stock still owned by the US and Canadian governments, and Royal Bank of Scotland and Lloyds largely owned by the British government. Currency interventions to protect export industries have become more commonplace. Similarly, talk about the need for tariffs to protect domestic industries from foreign competition has increased.
Prevailing wisdom about fiscal policy has also been challenged. In good times, with a robust economy and healthy tax revenues, it was easy for all parties to agree about the virtues of balanced budgets. After three years of economic contraction this consensus has collapsed. In Europe and the United States there is profound disagreement within expert communities about the virtues of stimulus or austerity. Governments that have attempted to follow the path of austerity find that popular opinion is equally volatile. Mass protests against cutbacks and tax hikes have become a fixture of post-crisis politics on both sides of the Atlantic.
The pre-crisis orthodoxy was built on assumptions which have proved to be fragile. We had too much confidence in our understanding of how the global economy worked. We believed that we knew the risks which it created, and that those risks were manageable in character and scale. Because we had this confidence it was possible to contemplate the delegation of authority to autonomous bodies, such as independent central banks or regulators, and to reduce policy to rules embedded in law. The big questions about policy seemed to be resolved. The remaining questions were technical, and could be safely entrusted to experts, each working their own fields in relative isolation. Because times were generally good, we also had too much confidence in the durability of the array of institutions — independent central banks and regulators, statutory or treaty-based fiscal rules, new supra-national coordinative mechanisms, new European Union structures — that embodied the pre-crisis orthodoxy.
We now seem to know better. We can see, first of all, that the global economy was more complex and fragile than we had imagined. Governmental actions in different areas were more tightly connected than we had imagined: what happened in one place, or in one field, often had unanticipated effects elsewhere. And as economic conditions deteriorated, and the banking crisis was followed by sovereign debt crises, austerity drives, and falling consumer confidence, elite and popular support for key institutions of the pre-crisis orthodoxy quickly weakened. In the United States, for example, the Federal Reserve came under assault from left and right. In Europe, the sovereign debt crisis has placed a huge shadow over the future of the euro, and raised heated debates on fiscal coordination, redistributive mechanisms and ultimately economic integration in the European Union. .
If the old orthodoxy has been shaken, what is likely to replace it? It is too soon to tell. History shows us that periods of paradigmatic shift can be long and difficult. Fifteen years passed between the crash of 1929 and the entrenchment of a new orthodoxy about economic policy in the period immediately after the Second World War. There was a similarly long period between the end of the post-war boom and the consolidation of the neoliberal order (following the re-election of Thatcher and Reagan) in 1983-84. There is no reason to expect, three years after the panic of 2008, that the outlines of a new order should yet be visible. In 1932, Franklin Roosevelt was only a presidential candidate and was campaigning against federal deficits which he said were “contributing to economic disaster.” And in 1973, the incumbent Republican president was a self-professed Keynesian and advocate of wage and price controls. The toppling of old certainties takes time.
Although we cannot anticipate the new orthodoxy, it is possible to say something about the period of transition itself. We know from prior experience that is likely to be prolonged and marked by the intensification of political conflict. This will be true in conference rooms, as experts disagree more sharply about the content of policy; in voting booths; and also on the streets, as protests become larger and more strident. The economic crisis will therefore mutate into a political and social crisis, distinguished by concerns about the dysfunctionality of political processes and the decay of public order.
The intensification of political conflict will produce a larger degree of uncertainty about the trajectory of policy within any one country, and also variability in policy between countries. It may also imply a shift away from delegation, and toward a reconcentration of policy authority — partly because of the collapse of expert credibility; partly because politicians, uncertain about the effects of any policy intervention, want to preserve their capacity to reverse course; and partly because contending parties have a shared and increased interest in preserving the capacity to execute their preferred policies. We may also see resurgence in the significance of national decision-making within international affairs, as distressed polities recoil from supranational arrangements that appear to threaten their immediate economic interests. (Worried by this trend, IMF managing director Christine Largarde warned in October 2011 that “there is a path to recovery, much narrower than before, and getting narrower. To navigate it, we need strong political will across the world – leadership over brinkmanship, co-operation over competition, action over reaction.”)
In the mid-1970s, John Kenneth Galbraith was asked by the BBC to produce a television series that would explain the history of economic ideas. Conscious of the tumult that typified that decade, he called the series The Age of Uncertainty. Galbraith himself believed that the crisis of the 1970s would produce an even stronger commitment to interventionist policies. In this respect he was completely wrong. But Galbraith’s characterization of the transitional phase was apt then, and also today. After a period typified by delegation and technocratic decision-making, we are entering a new phase that is distinguished by the reconcentration of authority, intensified conflict over the ends and means of governmental action, and volatility in policy outputs. The critical point today is not that one paradigm has been replaced by another. Rather, it is that — for the time being — there is no dominant paradigm at all.
David Coen is Professor of Public Policy, Head of the Department of Political Science, and Director of the School of Public Policy at University College London. He is also a co-editor, with Wyn Grant and Graham Wilson, of The Oxford Handbook on Business and Government (Oxford University Press, 2010). Alasdair Roberts is the Jerome L. Rappaport Professor of Law and Public Policy at Suffolk University Law School. His most recent book is The Logic of Discipline: Global Capitalism and the Architecture of Government (Oxford University Press, 2010).