Chapter Content
Okay, so, let's talk about the Great Recession and, you know, the kinda weak recovery that followed.
So, like, back in 2007, if you asked, you know, the smart people, the "well-thinking" as they say... especially in the US... they really didn't see that things were, like, already over. Like, this idea of American exceptionalism, or even just the whole North Atlantic being on top... that was basically done.
You gotta remember, Intel, right? The chip people? They were still doing their thing, making chips, like, twice as fast every three years. And, you know, the tech sector was all over that, making the most of it. Productivity, like, the whole economy, was growing at about the same speed it had after World War II. And, like, no big inflation or recessions for, like, 25 years. They were calling it the "Great Moderation."
And it seemed like this, uh, neoliberal thing, this focus on free markets, was even helping poorer countries grow faster than ever.
Yeah, there was, like, a ton of inequality happening, like, incomes and wealth going to the top. But voters didn't seem to care that much. Tax cuts mostly helping rich people? Totally happening. And the center-left parties, they felt like they had to give in to the right just to win elections. The right didn't really feel the same way. Nobody was really voting in big numbers for parties wanting to, like, fix the inequality problem.
And even the center-left folks in Europe and North America were, like, conflicted. They kinda thought maybe, just maybe, this left-neoliberalism, this idea of using markets for social goals, might actually work. That, you know, faster growth would make it easier to deal with the growing gap between rich and poor.
But, honestly, those "well-thinking" folks should have known better. The foundations were already cracking.
Back in 1993, Newt Gingrich and Rupert Murdoch basically started building this, like, right-wing base through mail, cable TV, and the internet. It was super easy to get them to donate because they were so easily convinced that the left wasn't just wrong, but, like, evil... running child abuse rings out of pizza places, you know? The center-left kept hoping for peace, saying they wanted, like, a "purple" America, not just red and blue. But the right was like, "Nope! If we don't keep them riled up, they won't watch our ads or open their wallets."
Then, in 2003, the whole thing about the US being the trusted leader of the West pretty much ended. After the Cold War, the first Bush administration said the US military would only be used with, like, a big majority vote or with the UN's okay. Clinton changed that to "NATO's okay," and then the second Bush administration just went rogue, using, like, bad intelligence to invade countries that didn't even have nukes. Other countries definitely noticed.
And around 2007, the boost we were getting from tech advances started to fade. There was, like, a technological wall that hit, you know? Before, you could shrink a chip and make it run faster without it overheating. But after 2007, this thing called "Dennard scaling" stopped working because of, like, electrical leakage.
Plus, the focus went from giving people information to grabbing their attention... in ways that played on, like, our weaknesses. Like, the old market at least, in theory, made rich people better off, which, you know, some philosophers could get behind. But this new "attention economy" just grabbed our attention, whether it helped us or not.
And then there were all these financial crises... Mexico, East Asia, Argentina... that hadn't been handled well. Japan was stuck in this, like, permanent slump. But still, the people in charge thought we should, like, loosen financial rules, not tighten them. The Clinton people didn't want to regulate derivatives when they were small because they wanted financial companies to experiment, to figure out how to get investors to take more risk.
But then derivatives got huge and complicated in the 2000s, and the second Bush administration just kept deregulating. The Federal Reserve, too, they mostly agreed. They'd stopped all the big crises from turning into depressions, right? The 1987 crash, the savings and loan mess, the Mexican crisis, the East Asian crisis, the dot-com bust, and even the terrorist attacks... they handled it all.
So, you know, they were pretty confident they could handle anything. And with interest rates low, it seemed worth encouraging, you know, "cowboy finance," even if it meant some excesses, to get people to invest more.
Warren Buffett always says, "You only see who's swimming naked when the tide goes out." And, well, central banks' confidence and governments' love of deregulation meant that a pretty small shock almost caused another Great Depression after 2007, and it definitely cost us, like, half a decade of progress.
So, by 2007, almost no one in power thought there was a real chance of a major financial crisis. The last one in the West was, like, the actual Great Depression. All that time, the memory of the Depression had kept, you know, investors from borrowing too much. But by the time those people retired, that, like, leash on the financial system came off.
That's why economic crises were rare in the West after World War II. Governments cared about full employment, so they kept recessions small to avoid bankruptcies that could start a downward spiral. One of the big recessions in the West in the 70s was because of war and oil problems. The other, in the late 70s and early 80s, was on purpose... it was the price we paid to stop inflation.
Yeah, Western Europe had high unemployment for years, but, you know, people said that was because they were still too socialist. And Japan had that weird slump after 1990, but everyone figured that was a special case and not a lesson for everyone else. Basically, the US government and the public were confident that neoliberalism was working, that things were solid, and risks were low. And there was no inflation or big war to worry about.
There were some people warning about this. In 2005, Raghuram Rajan gave a paper about how the financial system had become so hard to understand that nobody knew the risks or could even guess the odds. People said they liked the paper, but they also attacked it. They said Rajan was, like, being Chicken Little, you know? That things were fine.
But, obviously, they were totally wrong. Derivatives meant nobody could tell where losses would end up. So, if a crisis hit, everyone would have to assume their partners might be bankrupt. It was, like, painting your car's windshield black. And so the world economy crashed into a wall, hoping the airbags would work.
Axel Weber, who ran Germany's central bank in the 2000s, told this story about being on a panel with bank CEOs. They were talking about how much money they were making with derivatives... buying mortgages, bundling them, splitting them into risky and safe pieces, and selling them off. They said it would all work as long as their models could tell which pieces were risky and which were safe. But the banks shouldn't worry, because they sold all the derivatives off.
Then Weber got up and said that he could see that the top 20 banks were not only the biggest sellers of these securities, but also the biggest buyers! He said, "As a system, you haven't diversified." Each bank wasn't exposed to the risk that their own model was wrong, because they sold the securities. But they were all buying each other's stuff, and they weren't checking each other's models, because the assets were rated AAA.
They weren't asking, "Are these AAA things really good? We know how we play games to get that AAA rating."
Weber said the banking industry "was not aware at the time that while its treasury department was reporting that it bought all these products its credit department was reporting that it had sold off all the risk." Even Bob Rubin, who ran Citigroup when the crisis hit, admitted that he only heard about this thing called a "liquidity put" that was going to cost Citigroup billions, like, right before the whole thing went down.
And the kicker is, Weber thought this was just a problem for the bank CEOs and stockholders who didn't get how risky their assets were. He didn't think it was his business as a central banker, you know? He didn't see it as a potential source of a major depression.
It's not totally unreasonable. Maybe the losses from the mortgage-backed securities would have been only $500 billion if the recession had been avoided. In a world economy with $80 trillion in assets, that shouldn't have been a big deal. The dot-com crash cost $4 trillion, but it didn't cause a serious crisis. Plus, Weber was confident that central banks could handle anything, right? Alan Greenspan's Fed had avoided a serious depression despite, like, five major crises. And everyone thought the market was smarter than governments.
But it was all, like, arrogance, too much confidence. And that led to, you know, a payback. And because being arrogant is fun and payback is not, nobody really wanted to learn the lessons. After 2009, the technocrats couldn't explain why they'd been so optimistic. The signs of a crisis were there. There had been crises in Mexico, East Asia, Russia, and Brazil. Everyone knew a chain of bankruptcies could be disastrous. Global imbalances, low interest rates, and asset bubbles were all visible. And yet, financial markets were less regulated than ever. The main fear was always that the government would mess things up.
After the crisis, some people said the Great Recession was unavoidable, or even necessary. One economist said that construction workers in Nevada "need something else to do." They were saying there couldn't be a big depression unless the economy needed one. Housing prices were too high, construction was too fast, and there were too many houses. So construction had to be cut back, and construction workers would have to find other jobs.
But that was, like, completely wrong. By 2008, construction employment had already fallen back to normal levels without a recession. Adjustment had already happened, with workers being pulled into other industries.
You don't need a recession for structural adjustment to happen. And it's hard to see how making people unemployed is a "constructive" adjustment when you could just have them move to other jobs that are more productive.
But this idea that "the market giveth, the market taketh away; blessed be the name of the market" is strong. Sometimes economies need to adjust. Sometimes there are big depressions. Therefore, some people thought, big depressions *are* that adjustment.
It's a tempting story. And it shifted the blame from the people running the world economy in 2005 to earlier policy makers. So they started asking why there were so many houses, why construction had been too fast, why housing prices were so high. They said it was because of low interest rates and easy financing.
After the dot-com bubble burst, investors had fewer places to put their money. At the same time, Asian countries were making a ton of stuff and had huge piles of cash, which they wanted to use to buy assets in the West. For China, especially, it was a strategy: keep people working in Shanghai by lending Americans the money to buy their products. This created a "global savings glut," as one Fed chair called it.
This glut threatened to turn a small economic dip into a big one. To stop that, companies needed to issue more bonds to satisfy the demand for savings. Central banks flooded the world with money, buying bonds for cash and promising to keep things easy. The idea was to lower interest rates and encourage companies to invest. It worked a bit, but it also had bad side effects: lower interest rates created a mortgage boom and a financial boom, which created a housing boom, which brought the US back to full employment.
But home prices rose too much, even with low mortgage rates. And to understand why, you gotta know how mortgage financing changed. The old way, where banks held on to the loans they made, was replaced by this "originate and distribute" thing. Mortgage companies made loans, then sold them off to other companies. Those companies repackaged the loans and sold shares of the pools. Rating agencies gave their AAA seal of approval to the safest parts of those securities.
In the US, housing prices shot up by 75 percent, but the bubble wasn't just in the US. Real estate prices soared all over Europe. Everyone ignored the risks, and the bubble kept inflating. And when it popped, a lot of that AAA paper turned out to be worth almost nothing.
Everyone agreed there were lessons to be learned, but nobody agreed on what they were.
Some people said it was overregulation: the Fed had been forcing banks to lend to minorities who couldn't afford it. They said this was social democracy interfering with the market, giving things to minorities they didn't deserve, and that's what broke the system. But there was no evidence for that. They just had faith that the market couldn't fail unless it was ruined by socialism.
Others, in a similar way, said the government shouldn't be subsidizing housing lending in the first place. There was a reason for that, but the overall idea was still wrong. Programs like Fannie Mae did drive up prices. But during the 2000s, Fannie Mae didn't cause the *extra* jump in prices, because its effect was there from the start. The loans that let people buy houses at higher prices were mostly made by private mortgage lenders, not Fannie Mae.
Another idea was that the Fed kept interest rates too low. The Fed did cut rates a lot, but the European Central Bank didn't cut them as much. So, by this theory, Europe should have had a smaller bubble. But Europe's bubbles were bigger than the US's. Overlooking this little detail, many argued that the Fed should have started raising rates in 2002, before unemployment peaked, instead of waiting until later. But even if they had kept rates higher, it wouldn't have stopped the housing prices from going up.
A final explanation was that there was too *little* regulation, not too much. Down-payment requirements and credit standards were a joke. That's true, but it doesn't explain why things fell apart in 2008. By 2005, people were worried about the financial system and the housing bubble. Could the market be cooled down without causing a recession?
The answer was yes, it could be, and it was.
This is important: The idea that the Great Recession was a necessary adjustment after the housing boom is wrong. Housing prices had started falling in 2005. By 2007, construction had fallen back below average. If someone had said there were too many construction workers in 2005, they'd have been right. But by 2008, that was just false. The economy had already found other jobs for those workers, and a recession wasn't necessary. In a good economy, workers move from shrinking to growing industries because of incentives, not because they're unemployed.
The idea that the Great Recession was unavoidable fits our ideas of transgression and payback. There was hubris, and there was nemesis. There's something comfortable about believing in a market that gives, takes, and is blessed either way. What happens is never the believer's fault.
But it didn't happen that way.
Understanding what happened after 2007 takes patience. You can't just blame it on a market that's smarter than everyone. You have to remember why recessions and depressions happen in the first place. Then you can see why the Great Recession was such a surprise.
Back in 1829, John Stuart Mill said that a "general glut" happens when there's too much supply and not enough demand for everything, because there's too much demand for cash. That is, assets that everyone trusts to hold their value and that are easy to sell.
Cash is special because it's a means of payment. If you want anything else, you buy it. But if you want cash, you sell stuff or stop buying stuff. If you keep your income the same but reduce your spending, you'll get more cash.
This is why recessions and depressions happen. This way of getting cash works for individuals, but it can't work for the whole economy. One person's income is another's spending. When everyone tries to spend less, everyone's income drops. The demand for cash doesn't go away. All that happens is that people buy less and fewer people are employed.
This excess demand for cash can happen in three ways:
First, a "monetarist depression." Like in the US in 1982. Paul Volcker's Fed wanted to reduce inflation by reducing spending. They sold bonds to banks, which meant the banks had less cash in their accounts. To get that cash back, they reduced lending. So fewer businesses opened, and unemployment went way up.
You can tell it's a monetarist depression because interest rates are high. When everyone's trying to get cash by selling bonds, bond prices go down. To get people to buy them, interest rates have to be high. That's what the Fed did to stop inflation.
The cure for a monetarist depression is easy: The central bank increases the money supply. When Volcker's Fed thought inflation was under control, they bought back bonds for cash. And the economy boomed.
Second, a "Keynesian depression." People spend money on goods and services, taxes, and investments. One way to invest is in stocks. But what if businesses get scared and don't issue stock? Then the price of other investments will go up, and their rate of profit will go down. They'll become like cash, but risky.
People will rather hold extra cash instead of expensive and questionable investments. This leads to an excess demand for cash, a "general glut" of goods, idle factories, and high unemployment. The COVID pandemic was kinda like this - it wasn't only about the initial panic but also people were willing to pay for financial investment vehicles, and so bond and stock prices were high, people wanted excess cash to hold as a substitute for normal financial investment vehicles.
The central bank can't fix a Keynesian depression by increasing the money supply. All they do is give firms cash to hold while taking other investments off their books. It doesn't fix the shortage of total financial investment vehicles, they all still want more cash. The government needs to either encourage businesses to expand, or sell its own bonds and then spend the money to satisfy the demand for investments. Which means a larger deficit, cause the government needs to get the money circulating in the economy.
But what happened from 2007 to 2009 was neither of those things. It was a "Minskyite depression," named after economist Hyman Minsky.
In this type of downturn, what's missing is safe assets: assets that are either cash or can be turned into cash quickly without losing value. That's the point of the name - safe. Over 2007–2009, the world wasn't short of money or investments. You could buy risky investments cheaply, because central banks were trying to flood the world with cash. But a lot of "safe" assets turned out to be not so safe. And people scrambled to sell them and buy cash instead.
This safe-asset shortage came from the fact that too many financiers had bet too much on housing prices going up. So the housing bust created a crisis of confidence and paralyzed the financial system. The Fed reacted by offering loans to institutions that were in trouble, but they didn't want to do more, because they didn't want to encourage more risky lending in the future.
The vice chair of the Fed was worried about this, saying, "We should not hold the economy hostage to teach a small segment of the population a lesson." But his view didn't win out until it was too late. And that's why the Great Recession was such a surprise.
Some people thought the problem was manageable. Like, maybe five million houses had been built that shouldn't have been. Each had $100,000 in mortgage debt that would never be paid. So there was, like, a $500 billion financial loss. But the dot-com crash had been even worse, and it only raised unemployment by a little. The housing crisis probably wasn't going to have a big effect. But the market saw things differently.
Investors saw that there were $500 billion in losses somewhere. And maybe that was just the beginning. Maybe the people who said those mortgage-backed securities were safe had lied or were wrong. So everyone wanted to sell risky assets and buy safe ones, at any price.
The Fed and the Treasury wanted to stop Wall Street from profiting from the crisis in September 2008. Before, stockholders had been punished when their firms were too big to fail. But bondholders and other creditors had been paid in full.
The Fed and Treasury thought that was a bad lesson. To change that, they decided to let Lehman Brothers fail without any help. In hindsight, that was a big mistake.
All hell broke loose. Investors dumped assets they thought were safe only to discover that truly safe assets were hard to find. Panic selling began as everyone tried to avoid being stuck with assets they couldn't sell. So financial losses were multiplied, what could have been a $500 billion event became something in the range of $60 to $80 trillion! Borrowing costs went way up, and the world economy almost collapsed.
So how do you fix a safe-asset shortage?
The central bank expanding the money supply by buying bonds for cash won't work. Yes, it provides cash, a safe asset, but only by taking another safe asset, short-term government bonds, off the table. There is still a shortage of safe assets. Likewise, incentivizing businesses to expand by issuing stock won't fix it. There is no shortage of risky assets to hold, just a shortage of safe assets. Stocks don’t meet the need.
There are a number of things that can be done. In fact, there's a standard playbook that's been around since the 1870s. It's called the Bagehot-Minsky playbook. In a Minskyite depression, the government should immediately fight the shortage of safe assets by lending freely on collateral that is good in normal times, but to do so at a penalty rate. The “lending freely” part means to create enough safe assets that they are no longer in short supply. The “good in normal times” part means to try to distinguish institutions that are in trouble and face bankruptcy only because of the financial crisis from institutions that are permanently insolvent and need to be put into receivership. The “penalty rate” part means to discourage opportunistic financiers from exploiting the situation.
Some of these things were tried. Central banks took risk off of the private sector's books by buying up long-term risky assets for cash. That was a good idea, but they didn't spend enough, so it wasn't as effective as it could have been. Governments also increased the supply of safe assets by running bigger deficits and using the money to put people to work. That worked, but only when the government's debts were seen as safe.
Governments also offered loan guarantees and asset swaps, turning unsafe investments into safe ones. That's the cheapest and most effective way to fight a Minskyite depression. But to do it well, governments needed to know how to price those guarantees and swaps. If it was too high, no one would buy them and the economy would crash. If it was too low, financiers would rip off the government. And such loan guarantees and asset swaps treat unequals equally: those who have been financially imprudent and bear some responsibility for the crisis get bailed out along with those whose only fault was getting caught in the unexpected financial whirlwind.
The safest thing for governments to have done would have been to boost spending and let the deficit go where it needed to preserve full employment. That's what China did, starting its massive fiscal-stimulus and job-creation policies in the middle of 2008. Only China’s government grasped that the key task was to do whatever it took to keep the flow of spending through the economy high enough to avoid mass unemployment. And only China avoided the Great Recession. The proof? China continued to grow. The United States and Europe did not.
The worst thing was to assume things wouldn't get worse. That's what the governments in the West did. Spending and employment collapsed. US unemployment rose to 10 percent and didn't recover until 2012. It could have been much higher. Some economists said that if the government had followed the advice of Republicans, unemployment would have gone to 16 percent.
Some people were confident that governments could keep the world economy out of a deep depression. But they were wrong. The problem wasn't that economists didn't know what to do. The problem was that it was impossible to get the political support to do it. Governments and politicians decided there was no political will to dole out nemesis in useful measure to hubris in ways that would provide a net benefit to the recovering economy. And so many governments, instead of taking drastic and immediate action, decided simply to wait and see what would happen.
Interventions by the Fed to guarantee loans and expand the money supply were pretty effective. They got about 60% of the way to fixing the unemployment problem. A glass three-fifths full is not empty. On the other hand, the glass remained two-fifths empty. And things were slow to recover.
The Bagehot-Minsky playbook: lend freely at a penalty rate on collateral that is good in normal times. Policy makers did rush in. Financial institutions were bailed out at taxpayer expense. Guarantees were extended to restore confidence - for example, Ireland, took the extraordinary step of guaranteeing all Irish bank debt. Central banks and government agencies stepped in as “lenders of last resort,” providing credit where banks could or would not. These measures were successful in stemming the panic - by the early summer of 2009, most measures of financial stress had subsided to more or less normal levels, and the world economy ended its headlong plunge. But that was just the “lend freely” part. Governments neglected to implement the “good in normal times” part of the Bagehot-Minsky playbook. Not even too-big-to-fail Citigroup was put into receivership. Worse still, governments completely ignored the “penalty rate” part: bankers and investors, even or perhaps especially those whose actions had created the systemic risks that caused the crisis, profited handsomely.
Financial bailouts are unfair because they reward people who made bad bets. But the alternative would be a policy that destroys the web of finance - and thus a policy that shuts down dynamism in the real economy. A crash in prices of risky financial assets sends a message: shut down risky production activities and don’t undertake any new activities that might be risky. That is a recipe for a deep, prolonged depression. The political problems that spring from financial bailouts can be finessed. The fallout from a major depression cannot. Thus, financial rescue operations that benefit even the unworthy can be accepted if they are seen as benefiting all. It's better to secure jobs than to punish a few bankers.
In 2009, the US government, though, couldn't really say that the "unworthy" got nothing. What was readily apparent, however, was that bankers continued to receive bonuses even as the real economy continued to shed jobs.
Maybe there was a rationale. Maybe policy makers recognized that assembling a political coalition in the United States or in Western Europe to do what China was doing - have the government borrow and spend on the scale needed to preserve or promote a rapid return to full employment - was not going to happen. Given that reality, policy makers would have realized that the only way to generate enough spending and investing to drive a rapid recovery was to restore the confidence of businesses and investors. And decapitating banks and deposing bank executives, placing banks into receivership, and confiscating bonuses would do the opposite.
But I think the most likely explanation is that policy makers simply did not understand the situation - nor did they understand the Bagehot-Minsky playbook.
In any event, the situation was on its face outrageous: bankers were getting bailed out while unemployment hit 10 percent and huge numbers of people faced foreclosure. If policy makers had focused more on the “penalty rate” part of the Bagehot-Minsky playbook, they might at least have moderated that perception of unfairness - and potentially built more of a political base for further action. But they did not, and so there was very little public trust in governments to take the steps necessary to spur recovery.
But this is not the only reason the much-touted effort to restore the “confidence” of financiers and investors failed to produce much of a recovery after 2009. The global north’s economy was still hamstrung with too much risky debt.
The story of the decade after 2008 is seen as a failure of economic analysis and communication. That economists didn't tell politicians and bureaucrats what to do. But some did understand what to do.
Like, with Greece, it seemed like the lessons of history were obvious. If Greece hadn't been in the euro zone, they could have defaulted, restructured their debt, and devalued their currency. Since the EU didn't want Greece to leave the euro, they should have given Greece enough help to offset that. But they didn't. So Greece is probably worse off than if they'd left the euro. Iceland, which wasn't in the euro, recovered quickly.
In the US, policy makers also stopped pushing for recovery in the early 2010s. Future historians will find least comprehensible the unwillingness of governments at that moment to borrow and spend. Because the rate they could borrow was basically zero, during this "secular stagnation"!
Yet at the start of 2010, the US president said that "government must tighten its belt as well." It was weird.
Obama's former staffers say he was the best politician in the West in those years. But it's still disturbing that he said that when unemployment was still high. And he seemed completely uninterested.
In the summer of 2011, the Fed chair said the economy would recover because people were saving more and borrowing less. But at the same time state and local budget cuts had slowed America’s pace of investment in human capital and infrastructure, bringing the country’s long-term growth trajectory down by a third percentage point on top of the two it had already suffered.
After the Great Depression, investment in industry during World War II made up for the lost decade. But there was no similar effort after 2008. So there was a half-lost decade in the US and a full lost decade in Europe.
In China, the market wasn't blessed whatever it did. The market was there to serve the goals of the Communist Party. One of those goals was maintaining full employment. So they maintained full employment. There were “ghost cities” built and lots of people put to work building infrastructure that would decay and degrade before anybody could use it. Were unstable financial structures constructed that would not be fully accepted by banks without government arm-twisting? Yes. But those costs were trivial relative to the damage avoided by maintaining full employment and growth through what was, elsewhere, the Great Recession. During the Great Recession, China gained from five to ten extra years in its race to catch up to the global north.
Some good economists exaggerated the risks of public spending. Others overestimated the effectiveness of monetary policy. Still others missed the source of risk. In hindsight, technocrats' errors were a big part of why things went so wrong. If economists had spoken up sooner and been more convincing, things might be better.
For some, the calamity of the post-2008 decade was a result of deep historical currents. Financial deregulation and tax cuts for the rich became idols. The war in Iraq ruined America's credibility. And the Republican Party fell apart.
Yet I see contingency and bad luck. The long, the Great Depression also had bad luck.
Obama could see what was coming, warning against the social effects of ignoring the working class. Roosevelt knew what to do: try something. But Obama was unwilling to follow in Roosevelt's footsteps.
With policy-making having been subjected to the malign influence of a rising plutocracy, economists calling for “bold persistent experimentation” were swimming against the tide—even though well-founded economic theories justified precisely that course of action.
Fed policy makers say they did their best. Obama administration policy makers say they prevented a second Great Depression. Right-leaning economists say their policies were dangerously inflationary.
In the future, they'll praise policy makers for keeping the recession from being a repeat of the Depression. But they'll be puzzled by our failure to learn the lessons of 1933, which laid the foundations for the rapid and equitable growth of the long postwar boom.
From 1980 on, left-neoliberals believed that market incentives were better than commands. Markets were effective at crowdsourcing solutions. And you couldn't ask voters to be generous to those whom the market economy did not give opportunity unless growth was rapid. From 1980 on, right-neoliberals believed that submission to the logic of the market could produce fast growth again. And if that free-market growth produced a greatly unequal income and wealth distribution? Then that was good, because that was what was deserved.
As of 2007, dogmatic neoliberals could still explain the situation away. Hyperglobalization and neoliberalism looked to have been superior to the previous era of too much state-led development led by antidevelopmental states in the global south. The high income and wealth inequality of the Second Gilded Age could be sold as a feature rather than a bug for those who wished to buy it. The information-technology revolution—and a visible future biotechnology revolution—could be sold as a permanent return to the golden-age growth pace. The Great Moderation of the business cycle—low inflation without periodic shocks of high unemployment—looked to prove the excellence and competence of neoliberal technocrats. And voters were, if not happy, unwilling to provide majorities for politicians with positions far to the left or far to the right of the neoliberal center.
By 2016 it was clear that it was more than just a simple misstep. By 2007 it was simply that people had not noticed. It's like the old Road Runner cartoons, where Wile E. Coyote runs off a cliff but doesn't fall until he looks down.
Between 2006 and 2016, income per capita growth in the US was only 0.6 percent. In Europe, it was even worse.
Whatever you had thought of neoliberalism in 2007, its creation of an intellectual and policy-making climate that produced this massively subpar response to a relatively small macroeconomic shock, that brought on first the Great Recession and then an anemic recovery, weighed very heavily in the negative in the balance. And this poor performance had been purchased at the price of a strengthening and intensification of income and wealth inequality.
People noticed. But they started looking for someone to blame. Plus, the United States was no longer leading. The politics of opposition had transformed itself into an agenda where job number one was to make the president of the opposing party a failure. "What are you in America going to do to fix your broken system?" Chinese economists were asking.
I have a hard time believing that I can even approach the historian’s ideal of telling the narratives wie es eigentlich gewesen, as they essentially came to pass, or viewing things sine ira et studio, without anger or bias, seeing and understanding rather than advocating and judging.
I probably overestimate the degree to which bad luck and bad choices by powerful individuals caused the bad state of the world.
I do now think that bad luck and bad choices, plus the weaknesses of neoliberalism, cracked the system from 2000 to 2007. Things were so badly cracked as of 2007 that the shattering of the system by 2010 was likely, if not inevitable. The Obama administration, the leaders of the Republican Party, and the American people were not up to the job, as 2016 showed. In Western Europe things were worse.
But others see not contingency but necessity in this end of the long twentieth century. They agree that the years after 2000 saw the end of the era in which what we call the global north, and especially the United States, were—in a more good than bad way—the furnaces where the future was being forged.
And future historians will probably agree with them, not me.