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The Political Economy of the US State
ABSTRACT: The policies of the US state emanate from tightly-knit sectors of wealth and power. This essay lays out the precise mechanism through which the interests of the powerful are translated into policy.
Above [the market economy], comes the zone of the anti-market, where the great predators roam and the law of the jungle operates. This – today as in the past, before and after the industrial revolution – is the real home of capitalism.
– Fernand Braudel 1
Political campaigns in the United States have been overwhelmed by money. In 2012,
the average House winner spent around $1.6 million, while the average Senate seat
cost $11.5 million. In this era of tele-democracy, money offers a decisive advantage 2
in electoral campaigns. Indeed, the fund-raising advantage of the incumbents is so 3
acute that, despite public discontent, more than 90 per cent of incumbents get re-
elected. White House races now cost a billion dollars apiece.
Campaign contributions are not the only way money saturates Washington.
Political money slushes around the system from all corners. In the 2012 cycle, even
as campaign spending crossed the $6 billion mark, outside political spending
unleashed by Citizen’s United exceeded a billion dollars. Moreover, moneyed
interests spent $8 billion lobbying Congress in the five years from 1998-2002, more
! Braudel, Fernand. Civilization and capitalism, 15th-18th century: The perspective of the 1
world. Vol. 3. University of California Press, 1982.
! All political spending data is from the Center for Responsive Politics unless otherwise 2
specified.
! Television advertising has significantly increased the demand for campaign funds. See 3
Garfinkle, Adam. Broken.
than $12 billion in 2003-2007, and $17 billion in 2008-2012. Total lobbying 4
expenditure outnumbers campaign contributions by a factor of nine.
When the Obama administration moved to support the Volcker rule that
would forbid FDIC-insured banks from speculative trading, Wall Street mobilized a
massive lobbying effort to scuttle the proposal. The proposal died a lonely death
somewhere in the bowels of Capitol Hill. Illinois Senator Dick Durbin quipped:
“they frankly own the place” – ‘they’ meaning the banks, and ‘the place’ being
Congress. Sometimes, ‘they’ simply write the bill themselves. The New York 5
Times Dealbook reported on May 23, 2013, that an amendment to the Dodd-Frank
Act was essentially authored by Citigroup, with entire paragraphs copied word for
word from the bank’s proposal. The financial sector has since doubled its political
spending, with lawmakers who supported the bill championed by Wall Street
receiving twice as much in contributions from financial institutions compared with
those who opposed them. Senator Shelby, the Chairman of the Senate Committee on
Banking, Housing, and Urban Affairs, took $2 million from financial interests, more
than double the contributions from the next leading industry.
The week after the committee vote on the ‘Citigroup amendment,’ House
Democrats’ fund-raising boss, Congressman Joe Crowley, took the freshman
! Even billionaires can prove decisive in electoral battles. For instance, the Koch brothers 4
almost single-handedly bankrolled the successful gubernatorial campaign of Scott Walker, the union slayer of Wisconsin.
! Doster, Adam. “Durbin on Congress: The banks ‘own the Place.’” Progress Illinois. April 5
29, 2009.
Democrats on the committee to meet with bank executives. The lawmakers met 6
with Goldman Sachs CEO Lloyd C. Blankfein as well as Jamie Dimon, the boss of
JP Morgan, the two-and-a-half trillion dollar gorilla on Wall Street. Dimon is
reported to have delivered something of a pep talk. All seven freshmen Democrats
on the committee are already on the payroll of the New York banks. Indeed, each of
them has raised more industry PAC money so far this year than the committee’s top
Democrat. With so many Congressman clamouring to be on the Financial Services
Committee, it had to be expanded to 61 members from 44 in 1980, forcing the
installation of four rows of seats in the room that houses the committee. As Frank 7
Underwood, the fictional Congressman played by Kevin Spacey, dryly remarked in
the House of Cards: “When the tit’s that big, everyone gets in line.”
With corporate coffers overflowing with cash, each industry now has
lawmakers on their payroll. Every new legislation summons a virtual army of
lobbyists. The Financial Times reported that more than three thousand lobbyists
converged on Capitol Hill to influence immigration reform. Many of these lobbyists 8
work for private prison companies such as Corrections Corporation of America and
the Geo group, whose revenues and profits depend on the mass incarceration of
! Lipton, Eric. “For Freshmen in the House, Seats of Plenty.” New York Times. August 10, 6
2013.
! Brad Miller, who was on the Financial Services Committee for years, says: “Freshman are 7
pushed and pushed and pushed to raise money – it’s how they are judged by the leadership and the political establishment in Washington. It’s only natural that it has got to be on your mind that a vote one way or other is going to affect the ability to raise money.”
! Fifield, Anna. “US Immigration Reform Draws 3,000 Lobbyists.” Financial Times. March 8
20, 2013.
illegal immigrants from Mexico. CCA has spent $17 million in the past decade to
promote hardline policies that line its pockets.
The pharmaceutical industry has spent nearly three billion dollars lobbying
lawmakers in Washington in the past fifteen years. In return, Capitol Hill ensured
that Medicare would not directly negotiate prescription drug prices with
pharmaceutical companies. Dean Baker estimated $308 billion in savings in the next
decade if American seniors paid Canadian drug prices and $726 billion if they paid
the much lower Danish prices. Meanwhile, the largest pharmaceutical companies 9
made $711 billion in profits in the past decade.
In the summer of 2012, a cache of emails between administration officials
and the drug lobby surfaced, exposing the secret deal through which the idealist-in-
chief sold out to the very same interests he had attacked on the campaign trail. The 10
deal included explicit commitments on a range of policy desiderata of the
pharmaceutical industry. Obama agreed to kill this provision that would’ve allowed
the US to import cheaper prescription drugs, as well as the proposal to give the
government the power to negotiate drug prices for Medicare recipients. In exchange,
the pharmaceutical industry promised political support for the healthcare bill,
including a $150 million advertising blitz coordinated with the White House
political shop. PhRMA negotiator Bryant Hall informed the CEO of Pfizer that the
White House was “working on some very explicit language on importation to kill it
! Baker, Dean. “Reducing Waste With an Efficient Medicare Prescription Drug Benefit.” No. 9
2013-05. Center for Economic and Policy Research (CEPR), 2013.
! ObamaCare's Secret History.” The Wall Street Journal. June 13, 2012.10
in health care reform. This has to stay quiet.” Obama also directed all his criticism at
the insurance industry, ignoring the role soaring drug prices play in driving up
overall healthcare costs.
Big Oil had a fantastic year in 2012: $118 billion in profits. In the past ten
years, the six oil majors together made a neat trillion, with Exxon alone making
nearly three hundred and fifty billion dollars. This powerful industry has almost
single-handedly sought to contain environmental legislation. In 2010, the energy
industry spent $453 million on K Street. In the period 1990-2013, the industry
handed out $91 million to the Republicans and $23 million to Democrats – amounts
which appear low, as they indeed are, due to legal limits on direct contributions.
Total lobbying in the much shorter period 1998-2013, was a more respectable $4
billion. The industry has been a stalwart supporter of the Republicans in the
neoliberal era. However, it was recently reported that the oil lobby has sought to
work with Obama, now that the environmentalist-in-chief has shown a more
favourable stance on hydrocarbons, in light of the shale boom. 11
Bank bonuses totalled $66 billion in 1998-2002, surged to $117 billion in
2003-2007, declining only slightly to $100 billion in the five years after the onset of
the banking and financial crisis. In the same period, the 5-year-totals spent on
lobbying by the financial sector were 1.1, 1.8, and 2.4 billion dollars respectively.
Compensation is the biggest component of operating costs for big banking firms, so
this provides another relative measure of political spending. Total corporate profits
! Fifield, Anna. “Oil Lobby Seeks to Work With Obama.” Financial Times. December 26, 11
2012.
after tax in 30-year-period 1983-2012 amounted to $20 trillion. Yet, total political
spending was only around $50 billion, a quarter of a percentage point. Even by
extrapolating the heightened current rate of, say, four billion a year over thirty years,
we only get 0.6 per cent. 12
Let me not belabour the point. Such levels of political spending are pocket
change for big firms. There is reserve firepower, an excess capacity, in the war
chests of US firms and moneyed interests. This is certainly puzzling. Lawmakers on
your payroll are surely a good investment. Here, the House Finance Committee
shenanigans around the ‘Citigroup bill’ hint at a potential resolution to this puzzle.
Since political entrepreneurs are just not competitive without the money to
pay for advertising and campaigning, they have no choice but to compete in the
market for corporate patronage. The competition of the lawmakers with each other
depresses the price of policy. This dynamic reduces the required amount of
investment by a bloc to control policy, unless it is opposed by other blocs of deep-
pocketed interests. This is an important qualification: one must distinguish between
highly-contested and relatively uncontested subsets of the policy spectrum.
Suppose there is a decisive constituency over a policy space. That is, a bloc
of deep-pocketed investors with a vital interest at stake, facing limited opposition
from other blocs. Examples that immediately spring to mind are military firms for
the Pentagon budget, banks over financial regulation, oil majors over environmental
! Note that by using corporate profits after tax we are estimating a lower bound for this 12
capacity. A more appropriate measure is perhaps corporate revenues, since political investments compete with other investments that a firm can make from its revenue pile.
legislation, pharmaceutical companies over prescription drug prices, and so on and
so forth. Facing little competition from other major investors, such decisive
constituencies will enjoy ‘market power’ against lawmakers. The price of policy will
be low and the policies themselves will be consistent and predictable as long as the
bloc remains dominant.
Over highly-contested policy space, where major blocs of deep-pocketed
interests find themselves pitted against each other, we will observe balancing
behaviour akin to great power competition. Coalitions will form between blocs to
secure policies in their interests, and defend them against their rivals. The price of
policy will tend to rise, along with policy uncertainty. The larger the policy space
that is contested, the more instability we will observe in a party system. The analogy
to great power competition is not as far-fetched as it appears at first sight. After all,
it was the fight over US trade policy between the rising northern industrial interests
and the hitherto-dominant southern plantation interests that undermined the political
system of the Early Republic and prompted the Civil War. 13
Party systems
As opposed to a political theory in which political entrepreneurs position
themselves in the policy spectrum to appeal to voters resulting in state policies that
reflect the preferences of the median voter, i.e., the standard Downsian model, the
! The northern industrial interests wanted a massive tariff wall to protect them from British 13
competition while the southern planters derived their revenues from supplying cotton to the British textile industry which would be jeopardized by a protectionist policy. The Republican Party was founded in 1854 by the northern bloc. The home of free trade today presided over nearly a century of arguably the most protectionist regime in history.
investment theory of party competition posits that candidates for political office and
political parties appeal not to voters, but to investors, who are the primary
constituency. According to Ferguson, “parties are more accurately analyzed as 14
blocs of major investors who coalesce to advance candidates representing their
interests.” The policy platforms of political parties reflect the interests of their major
investors, which minor investor-voters are virtually incapable of affecting; save in
the negative sense of voting “no confidence.” As the costs of political campaigns
have skyrocketed in the era of tele-democracy, the logic of money-driven political
systems has become ever more applicable. Once the central premises of this theory
have been digested, a revised approach to party competition and policy formation in
the United States immediately becomes available.
Several party systems can be distinguished historically, which we shall
conveniently label by the year of critical realignment. The Early Republic system of
1812 was dominated by southern planters in alliance with northern mercantile
interests. The Civil War era system of 1860 was dominated by the nascent
Republican Party which was a coalition of railroad and northern industrial
interests. By the turn of the century, the railroads had gone into terminal decline 15
and bigger players – oil, steel, and finance – had emerged on the scene, who would
dominate the system of 1896. Similarly, a new cast of powerful actors emerged in
! Ferguson, Thomas. Golden rule: The investment theory of party competition and the logic 14
of money-driven political systems. University of Chicago Press, 1995.
! The railroads constituted a hegemonic bloc of investors. This was a new breed of politico-15
economic actors, being the first of the modern corporations with a national reach and financial depth that no other firms could even begin to match.
the aftermath of the First World War: multinational firms, whose interests were
directly opposed to the traditional protectionist bloc. Policy formation became so 16
contested that the Republican Party disintegrated by 1928. The onset of the Great
Depression set the stage for a major transformation of the political economy of
Washington.
The novelty of the Democratic coalition in the system of 1936 was that, for
the first time in US political history, it included as a major investor someone outside
the business community: organized labor. However, unions were not the dominant
investor in the Democratic Party. Alongside them were much more powerful players
– internationally-oriented investment banks, tobacco, global oil majors,
multinational firms, and high-tech industrials – firms whose wage bills were an
insignificant part of their overall costs, and were thus tolerant of the somewhat
labor-friendly policies of the New Deal era.
The system of 1936, the ‘New Deal’ regime, was characterized by Keynesian
management of the macroeconomy, centrality and autonomy of the great
corporations, and a constrained financial sector. With banks subservient to industry,
leaders of industry underwrote an informal compact with a residually powerful
working class. In the presence of rapid growth in productivity, wages rose
impressively and progressive taxation financed increasing welfare spending. The
policy invariants of the system – fixed-exchange rates made possible by the quasi-
! The internationally-oriented firms could not maintain their market shares in Europe unless 16
the Europeans could earn dollars by selling their wares in the US market through the tariff walls set up to protect the nationally-oriented US manufacturers.
public international financial order, ceilings on interest rates that depository
institutions could offer (mandated by Regulation Q), expansion of the welfare state,
and Keynesian management of the macroeconomy to maintain high employment
rates – reinforced each other, were co-dependent; and were, in the final analysis,
predicated on the competitiveness of US firms in the global markets. 17
The neoliberal counter-revolution
The neoliberal counter-revolution has its origins in the re-emergence of
global finance with the eurodollar market in the City of London that undermined the
quasi-public international financial order of the early post-war period. Thus freed-18
up, capital flows undermined the Bretton Woods system of fixed exchange rates that
had already come under pressure with the onset of inflation in the late sixties. By 19
1975, the center countries – the United States, Germany, Japan, and the United
Kingdom – had to abandon fixed exchange rates and relinquish capital controls
under pressure from unregulated capital flows.
The stagflation crisis of the seventies exposed the inability of Keynesian
! Regulation Q, which had been law since 1933, imposed a ceiling on what interest rate 17
could be offered by depository institutions. When the economy overheated market rates rose above the ceiling, prompting a rapid outflow of funds from depository institutions. This “disintermediation” contracted capital available for lending, especially mortgage lending, thereby reigning in the overheating economy. During a slowdown, market rates fell below the ceiling, drawing capital into depository institutions, which increased lending, boosting the economy. No matter the fairness of what we would now call a draconian law, as a stabilizer of the economy it functioned with ‘hydraulic efficiency’.[See Krippner, Ibid.]
! Burn, Gary. The Re-emergence of global finance. Palgrave Macmillan, 2006.18
! Speculators used the eurodollar market to attack currencies of the center countries and 19
forced them to devaluate: the pound sterling in 1967, the Deutschmark in 1969, and finally, the biggest fish in the tank, the US dollar in 1971.
policies to stabilize the macroeconomy. The structural crisis – the secular decline of
profit rates and global market shares of US manufacturers facing relentless Japanese
competition – caused a precipitous decline in the wealth and revenues of the upper
classes as a whole. The share of wealth of the wealthiest 1 per cent of Americans 20
halved during the seventies. 21
The decisive moves towards the neoliberal order took place when the Senate,
the House, and the White House were controlled by the Democrats. As the dollar
plunged in 1979, a panicked White House was cornered into appointing a known
monetary hawk, Paul Volcker, to the Federal Reserve. Volcker immediately started
delivering the bitter medicine. He kept raising interest rates in a bid to kill
inflationary expectations, with total disregard for employment and the fortunes of
industry. The long-term effect of the Volcker shock – what Duménil and Lévy call
‘the 1979 coup’ – was to decisively alter the balance of power between finance and
industry, as the sky-high interest rates led to a massive transfer of surplus from
industry to finance. 22
The macroeconomy continued to deteriorate during the rest of Carter’s term.
With unprecedented inflation rates eroding the value of their savings, a variety of
groups started clamouring for the removal of interest rate ceilings mandated by
! Brenner, Robert. The boom and the bubble: the US in the world economy. Verso, 2003.20
! Duménil, Gérard, and Dominique Lévy. Capital resurgent: Roots of the neoliberal 21
revolution. Harvard University Press, 2004.
! Volcker’s appointment represents a major milestone towards the establishment of financial 22
hegemony whereby the monetary and financial-regulatory apparatus of the US state – the New York Fed-US Treasury-US Fed triumvirate – was virtually taken over by Wall Street.
Regulation Q. Congress passed the Depository Institutions Deregulation and
Monetary Control Act of 1980 that deregulated interest rates – the central pillar of
the New Deal order that had for decades regulated the economy with ‘hydraulic
efficiency.’ This was all for naught, as far as Carter’s prospects for re-election 23
were concerned. There were no short-term solutions to be found for the stagflation
crisis and no way to save Carter as the election approached. Ferguson describes the
critical election of 1980: 24
The atmosphere of intensifying crises enormously advantaged the only political party for which massive welfare cuts were thinkable – the GOP. Multinationals which were perfectly prepared to support Democrats during the New Deal era abruptly cut off their support, or intensified their commitment to Republicans. At the same time so did the traditional protectionist bloc. Not surprisingly, the first result was confusion, as all sorts of “New Right”, “Old Right”, and “neoconservative” cultural and political entrepreneurs competed to tap the rivers of cash that rapidly began flowing. Under the inflexible pressure of political deadlines, however, a more or less articulate compromise emerged in the candidacy of Ronald Reagan.
Writing in the immediate aftermath of the election of 1980, Ferguson notes Reagan’s
modulation of his policy platform to attract major investors. In particular, the 25
candidate, hitherto the flag-bearer of the nationally-oriented traditional protectionist
bloc of the GOP, moved decisively to the internationalists. Ferguson failed to
recognize the birth of financial hegemony and the coming to power of this bloc,
arguing that “what the Reagan victory represents most, in fact, is not critical
realignment, but an almost equally fateful dealignment.”
! Krippner, Greta R. Capitalizing on crisis: The political origins of the rise of finance. 23
Harvard University Press, 2011.
! Ferguson, Thomas. Ibid.24
! Ferguson, Thomas and Joel Rogers. The hidden election. Random House, 1981.25
Hindsight is twenty-twenty of course. If we pay attention now to this critical
juncture in US political history, we can discern the birth of the system of 1980. On
the floor of the Republican Party convention, the crowd was first treated to Jesse
Helms attacking Henry Kissinger and the un-American Eastern Establishment
internationalists. Ferguson describes what happened next: 26
Only a few hours later, millions of Americans watched in stunned disbelief as the world's most famous multinational foreign policy analyst, the chairman of the international advisory committee of the Chase Manhattan Bank, consultant to Goldman Sachs, director of the Council of Foreign Relations and [the] Atlantic council, member of the Bilderberg steering committee, senior fellow of the Aspen Institute, consultant to the National Broadcasting Company, and Trilateral Commission executive committee member materialized again at the center of the Republican Party.
The system of 1980 is characterized by a hegemonic bloc led by big banking firms
in alliance with multinationals. The vital interests of this bloc are embodied in the
globalist-neoliberal consensus over trade, monetary, financial, security, and foreign
policies. This is the most highly-organized sector of US society. The World
Economic Forum, the Bilderberg group, the Trilateral Commission, the Council of
Foreign Relations, and other related internationalist institutions where core policies
of the US state are formulated, were all bankrolled by this bloc.
The core elements of the globalist-neoliberal consensus are: freely-flowing
global capital markets, monetary management of the macroeconomy, unconstrained
financial sector, muscular foreign policy, stringent global investor rights regime,
austerity for the masses whenever the fiscal situation requires belt-tightening, low
! Ibid.26
taxes on capital, benign neglect of offshore secrecy jurisdictions that allow capital to
largely escape taxes and regulation in the center countries, and so on and so forth. 27
Financial hegemony
A rather under-appreciated aspect of the reign of Wall Street is the primacy
of finance over industry. The Chandlerian firms were incubators of long-term value
run by an autonomous managerial elite. The autonomy of these great corporations 28
depended on their ability to self-finance their expansion with their internal
surpluses. The uncertainty in the cost of capital and foreign exchange, induced by
the deregulation of currency markets and interest rates, forced these firms to
disgorge their surplus to capital markets. Many were simply taken over by Wall
Street. Financiers pooled their resources into private equity firms to amplify their
capital power, seizing control of industrial firms reeling under the impact of the high
cost of capital and the strong dollar. Nonfinancial firms were forced to reorient 29
themselves towards capital markets, in what amounted to a ‘Copernican
revolution.’ CEOs now dutifully report to Wall Street analysts every quarter. 30
! A muscular foreign policy geared towards opening up world markets for exploitation by 27
Western capital, with the attendant commitment to prolonging US primacy in the international system, is a centerpiece of the bipartisan neoliberal consensus.
! Chandler, Alfred D. The visible hand: The managerial revolution in American business. 28
Harvard University Press, 1977.
! A major innovation was the leveraged buyout that allowed financiers to borrow money to 29
acquire a firm using the targeted firm’s assets as collateral.
! Davis, Gerald F. Managed by the Markets: How Finance Reshaped America. Oxford: 30
Oxford UP, 2009.
The Great merger wave of 1897-1901 created a ‘unity of interests,’ so that
policymaking became considerably easier, as in 1909, when J.P. Morgan fine-tuned
the tariff bill from his yacht by telegraph. A similar process unfolded in the
aftermath of the Great merger wave of 1983-1986. The strong dollar and sky-high
interest rates were in the interest of Wall Street, which had vast sums invested
overseas and in the bond market. On the other hand, they were devastating for
industrial firms. Nonfinancial firms pushed in vain to bring down the mighty dollar
for years. As the merger wave crested, a decisive section of the financial sector 31
acquired an interest on the other side of the equation. This created the political
momentum for the Plaza Accord of 1985, whereby the United States negotiated a
depreciation of the dollar against the Japanese yen and the German mark. As Robert
Brenner notes in his authoritative economic history of the period, the relief was
immediate. 32
Unlike other major investors, Wall Street has usually kept a bipartisan
portfolio of politicians on its payroll. This is not just because bankers like to hedge
their bets. An investment bank may overnight acquire a stake in a nuclear energy
firm, giving it an interest in the protection of that sector from competition by natural
! The ‘Caterpillar report’ by the Business Roundtable argued that the yen was being 31
deliberately held down by the Japanese and that liberalizing Japanese capital markets would solve the problem. Treasury knew that the dollar was strong because of Volcker’s sky-high interest rates and that deregulating the Japanese capital markets would increase the upward pressure on the dollar since Japanese controls were holding down further capital flight to the US. Treasury played along with the Roundtable in order to placate the losers, going so far as to launch a diplomatic offensive aimed at liberalizing Japanese capital markets.
! Brenner, Robert. Ibid.32
gas and coal. Another one may have invested in a gas company and thus be on the
other side of the tug-of-war over energy policy and environmental regulation. Thus,
financial interests can usually be found to be aligned on both sides of the equation.
The Logic of Money-Driven Political Systems
In the framework of the investment theory of party competition, blocs of
major investors compete with each other to control the policies of the state. The
platforms of political parties reflect the interests of their major investors. Therefore,
political parties are best seen as coalitions of major blocs. The goal of each bloc is,
first and foremost, to defend its vital interests. Blocs mobilize resources and try to
recruit allies when they compete over policy with rival blocs. Such balancing and
alliance formation are suggestive of great power competition. We can therefore
borrow the logic of balance-of-power theory from international relations and apply it
within the investment theory of politics. As we will see, such a strategy will be 33
useful in teasing out the logic of money-driven political systems.
To wit, a political system consists of highly-organized societal actors called
! This is natural since neorealism is just market theory applied to international politics in the 33
first place. See Waltz, A theory of international politics.
blocs that compete over state policy. Power is the aggregate capacity of a bloc to 34
mobilize politically. In a money-driven political system, this is more or less
equivalent to the aggregate financial resources at the disposal of the bloc. Blocs
worry about defending their vital interests and balance more powerful blocs by
increasing their mobilization efforts or seeking alliances with other blocs. One may
restrict attention to the most powerful blocs of the system without loss of generality,
since minor blocs are incapable of influencing policy in any significant way.
Blocs care much more about certain subsets of the policy spectrum than
others. That is, they occupy a specific ‘territory’ in the policy spectrum. Proximity in
in the policy spectrum is the best predictor of alliance formation. Blocs that compete
over the same policy portfolios are likely to be found in opposing alliances. The rise
and fall of blocs – the law of uneven growth – undermines the stability of the
political system. Rising blocs seek to challenge the status quo upheld by dominant
blocs, until a ‘hegemonic war’ reorders the political order, determining which blocs
will govern the system.
! The international system consists of sovereign states that interact in anarchy. That is, each 34
state fends for itself and there is no night-watchman to protect the states against their militarily stronger rivals. States try to maximize power in order to ensure their long-term survival. They balance their rivals by increasing their internal efforts or seeking alliances with other powers. One may restrict attention to great powers without loss of generality, since minor powers don’t matter in the global balance of power. Moreover, power decays over large distances. The best predictor of alliance formation is proximity. States fear powerful neighbours more than faraway great powers. Therefore, states that compete over the same territory are likely to be found in opposing alliances. The rise and fall of great powers – the law of uneven growth – undermines the stability of the international order. Rising powers seek to change the status quo upheld by dominant states, until a hegemonic war determines which states will govern the system. The principal explanatory variable of the theory is the system structure. That is, the distribution of power among units. To evaluate the stability of a given system, one analyzes the evolution of the system structure.
Therefore, in order to evaluate the stability of a given party system, one
must analyze the evolution of the system structure: the distribution of power among
blocs. Evaluating the capabilities of blocs is, by necessity, an imperfect exercise. We
shall use a proxy variable, corporate profits, to measure the relative power of
different blocs. As we will see, this will shed light on both the stability of the party 35
system and the gridlock in Washington.
The competition between rival blocs over policy goes beyond party
competition and permeates the entire edifice of the juridico-regulatory regime. For
instance, the paper of record reported this summer that Goldman Sachs had
essentially taken over aluminum warehouses, moving the metal around to dodge
regulations against hoarding. In the aluminum market, the “premium” – the cost 36
of physical aluminum above the futures price, has risen from $93 to $265 per ton
this year. MillerCoors, a brewer, complained to the Senate that its supply chain had
been hampered by the long queues to take delivery of the metal from warehouses
owned by Goldman and other banks and traders. 37
This battle pits the banks and the aluminum smelters against brewers and
other end users, illuminating at the micro-local level the central feature of the
political economy of US policy. Namely, ‘politics as organized combat’ between
! The data is taken from The Economic Report to the President, 2013. 35
! Kocieniewski, David. “A Shuffle of Aluminum, but to Banks, Pure Gold.” New York Times. 36
July 20, 2013.
! “Goldman Relents in Metals Warehousing Row.” Financial Times. Web. 15 Oct. 2013.37
rival blocs. The maneuvering for oil, tea, cotton, coffee, and other commodities 38
has brought billions to investment banks like Goldman Sachs, JP Morgan, Bank of
America, Barclays, and Morgan Stanley. The Federal Reserve is now considering
whether to revoke a series of approvals allowing banks to trade not only commodity
derivatives from computer screens, but actual commodities from docks, tanks and
pipelines. It is unlikely to reign in the banks, or so one would expect given the
balance of forces in play. In 2012, the combined profits of the food, beverage, and
tobacco industries were only $45 billion, while that of the financial sector were half-
a-trillion dollars.
The attached chart shows the share of corporate profits of the three major
sectors of corporate America. The three-year-periods are chosen so as to exclude
recessions and bubbles. In 1967-69, the dominance of manufacturers is manifest.
Comparing 1977-1979 and 1986-88, we can see the take-over by the new hegemonic
bloc of finance and multinational firms with significant earnings overseas. The
situation is unchanged in 1995-1997, while 2010-2012 reveals the rise of a new
power on the scene. This is the nationally-oriented mercantile interests comprised of
retail trade, wholesale trade, transportation, utilities, and other nonfinancial
corporations.
! Hacker, Jacob S., and Paul Pierson. “Winner-take-all politics: Public policy, political 38
organization, and the precipitous rise of top incomes in the United States.” Politics and Society 38.2 (2010): 152-204.
!
The gridlock in Washington is being driven by the resurgent reactionary wing
of the Republican Party. A careful look at the changing GOP coalition reveals the
dynamic in play. A number of rising mercantile interests are behind the insurgency
in the GOP. At the forefront are retail interests led by Walmart and Home Depot,
followed closely by transportation, chemical (Koch brothers), gambling (Sheldon
Anderson), wholesale trade, and the food and beverage industry. The traditional
major investors in the GOP coalition – oil, defence, agribusiness, and the nationally-
oriented manufacturers – are more than happy to help in bankrolling the insurgency.
The theory thus allows for a novel perspective on the gridlock in Washington.
Duménil and Lévy expected the financial crisis to undermine the neoliberal
order. Thus far, there are no signs that the neoliberal coalition is unravelling. 39
Indeed, it has proven considerably more robust than previously recognized. The fact
of the matter is that finance and multinational firms still constitute a hegemonic bloc
of investors. Indeed, the big banking firms have emerged stronger than ever. Which
is hardly surprising, after all, “in a recession, assets return to their rightful
owners.” 40
Decomposing the policy spectrum into uncontested and contested spectra, we
observe that the core politico-economic policies of the US state are themselves
uncontested: security, foreign, finance, monetary, and trade portfolios. This is
because the hegemonic bloc is decisive over this vital subset of the policy spectrum.
The stability of the system of 1980 is closely-tied to the primacy of Wall Street. It is
a major investor in both parties which makes the party system more stable than
previously recognized. Foreign and security policies – institutionalized at the 41
Council of Foreign Relations – are largely uncontested by other blocs. The
institutional capture of the holy trinity of the monetary-financial apparatus of the US
state by Wall Street makes the core policies of the neoliberal order robust to
! Duménil, Gérard, and Dominique Lévy. The crisis of neoliberalism. Harvard University 39
Press, 2011.
! This quote is attributed to New York investment banker Andrew Mellon, who served as the 40
Treasury secretary from 1921-1932.
! The system of 1860 was dominated by the Republican Party. The hegemonic bloc, the 41
railroads, only had to bankroll the Republicans. This made the system less stable. Grover Cleveland, the only Democrat to occupy the White House between the Civil War and the First World War, rose to power by attacking the declining railroad interests. Such an opening is unavailable in the present system, since finance bankrolls both parties.
secondary instability in the party system. In particular, partisan fights over fiscal 42
and health policies do not threaten to spill over into the domain monopolized by the
hegemonic bloc.
The existence of a hegemonic bloc does not mean that other blocs cannot
contest secondary features of the policy regime. However, critical realignments
mark the take-over of core elements of the policy spectrum by ascendant industries.
The rising mercantile interests, as yet, do not pose a significant threat to the primacy
of the hegemonic bloc led by Wall Street. However, if this bloc continues to rise, we
may see the system of 1980 unravel. Like the prospect of China’s rise to primacy in
world affairs, this is not altogether appetizing. 43
! The holy trinity that governs the global monetary-financial order is the United States 42
Federal Reserve, the US Treasury, and the Federal Reserve Bank of New York. The last is effectively the liaison office of the US state with the big banking firms.
! The prospects for a revolution from below are even dimmer. Consider the most serious 43
mass-based challenge in US history. In the run up to the 1896 election, the Populists were highly organized, with a solid base in community organizations. They tried to secure control of the Democratic Party but were knocked over single-handedly by the mining interests. The Populist candidates were defeated in primary after primary and the mining firms installed an editor of one of their own newspapers, William Jennings Bryan, as the Democratic Party’s nominee for the Presidency. “The largest, best-organized, and most cohesive mass political movement in American history could not compete with even a part of the business community.” [Ferguson, Golden Rule.]