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Why the 2008 crisis was a bad crisis for new ideas

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Abstract

Economic crises are, theoretically, fertile ground for alternative policy-relevant ideas. Through an examination of the policy debates in the United Kingdom and the United States during the 2008 economic crisis, this article claims that the assumption of the plasticity of the policymaking environment in the wake of crises needs to be rethought. The article argues that both governments’ superficial turns towards Keynesianism, the leading alternative policy idea, were undermined by three factors. First, the crisis was subject to two competing conceptualisations of its underlying material reality — the crisis as deep recession vs the crisis as insurmountable public debt — and as the crisis unfolded, the former lost ground to the latter. While the first interpretation of the crisis opened space for the Keynesian tool of expansionary fiscal policy, proponents of the second understanding of the crisis rejected the appropriateness of this tool. Second, even if the crisis-as-recession interpretation had carried the day, fiscal policy had been discredited over the course of several decades in favour of monetary policy, making it unlikely that fiscal policy would be judged successful regardless. Third, over the same period, monetary policy had increased its institutional strength via the growing influence of central banks in economic policymaking.

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Notes

  1. As is well-known, both economic systems have been identified as liberal market economies with relatively thin welfare systems (Esping-Andersen 1990; Hall and Soskice 2001).

  2. In addition, the United Kingdom and the United States provide good cases to examine because, during the crisis, they both held elections but with opposite outcomes: in the United Kingdom, the left-leaning Labour government was replaced by a coalition between the right-wing Conservatives and the Liberal Democrats (in May, 2010), and in the United States, the Republican Party was replaced by the Democratic Party (in January, 2009). If and how these opposite ideological shifts affected the prospects of dominant and alternative ideas in the post-crisis period calls for analysis.

  3. Policy-relevant ideas are interpretations of the material environment and conceptualisations of the relationship between policies and policy outcomes (i.e., causal ideas, not normative ones) ‘that political decision makers use to predict the likely effects of the policy alternatives they consider’ (Lindvall 2009: 705).

  4. While Chwieroth’s usage of ‘carriers’ is appealing, given there is no assumption or implication here about the extent to which the advocates of the alternative idea have internalised that idea, we prefer the term advocate in this case.

  5. Hall (1993) argues that first-order change comprises the regular tweaks to policymaking that ‘we normally associate with the policy process’ and second-order change involves ‘the development of new policy instruments’ (280). This article takes up Hall’s analysis, and in particular his notion of third-order change, which he discusses in relation to the unseating of Keynesian ideas by monetarist ideas at the end of the 1970s and in the early 1980s. We thank one of our anonymous referees for this point.

  6. We use Keynesianism as it relates to the ideas that Keynes (1937) outlined in the General Theory and work that is directly related to it, such as ‘The Theory of Employment’, which provides the core of Keynesian thinking and policy prescriptions, in particular the counter-cyclical demand management. Given this emphasis, we do not wish to claim that we provide an exhaustive discussion of multiple dimensions of Keynesian thinking. For instance, on Keynes and trade protectionism, see Eichengreen (1984). Moreover, given the fundamental differences between core Keynesian ideas and Keynesian offshoots, such as New Keynesianism, we do not include the latter in our exposition of Keynesianism. New Keynesian models (NKMs) embrace core assumptions of neoclassical models, including rational expectations, but tamper with these models on the margins through a focus on market imperfections, including price rigidities (e.g., Stiglitz and Greenwald 1993; DeLong 2000; Mankiw 2008). By incorporating rational expectations, NKMs depart from the Keynesian emphasis on irrationality (Blyth 2002: Chapter 5; see this article). Also, New Keynesians adhere to the notion of the non-accelerating inflation rate of unemployment (NAIRU) (DeLong 2000; Blinder 2008; see this article). And, unlike Keynes’s focus on fiscal policy, New Keynesian policy prescriptions are disposed towards the use of monetary tools (DeLong 2000; Krugman 2009).

  7. There were numerous other intellectuals arguing for the relevance of the Keynesian tool of counter-cyclical fiscal policy (for instance, Krugman 2008; Romer 2011; Skidelsky 2009).

  8. The parliamentary debates in the United Kingdom, which are cited below, also made explicit references to Keynesianism.

  9. For the history of Keynesianism in the two societies under consideration here, the United States and the United Kingdom, see Gourevitch (1989), Hirschman (1989) and Weir (1989).

  10. Policy contestation means the incumbent’s policy choice and/or conceptualisation of the crisis face robust competition in the form of a competing policy-relevant idea for how to deal with a diagnosed problem and/or to define the underlying crisis.

  11. For instance, while the Federal Reserve does not announce an explicit inflation-target, the Bank of England faces a formal target set by the government.

  12. Over time, many central banks, including the Bank of England and the Fed, have substituted monetary targets in favour of (implicit or explicit) targets for inflation.

  13. ‘[I]ndependent central banks can, up to a point, insulate monetary policy from politically induced monetary volatility due to partisan or opportunistic motivations’ (Alesina et al. 1997: 212).

  14. Specifically, efficient markets theory claims that ‘speculative asset prices […] always incorporate the best information about fundamental values and that prices change only because of good, sensible information’ (Shiller 2003: 83).

  15. See Blanchard quotes in Beattie (2008).

  16. On the importance of the coherence of carriers, see Chwieroth (2010).

  17. The two sides agreed on the need to provide bank bailouts after the nationalisation of Northern Rock, which the Conservatives criticised.

  18. And the British public opinion has not fallen clearly on either side of the debate. Both concerns about the budget deficit as well as discontent with the Conservative Party’s budget cuts have been prevalent in public views (e.g., Borges et al. 2012).

  19. The extent to which the Labour Party would have facilitated a turn to Keynesianism without the contestation of its policies from both the head of the central bank and the Conservative Party at the eve of elections remains historical speculation, but not directly relevant to our argument.

  20. Further, electoral victory in the mid-term elections gave the Republicans control of the House of Representatives and with it the ability to block any significant initiatives by the administration, intensifying the policy contestation.

  21. Nonetheless, the Republicans also contested expansionary monetary policy and advocated, generally, the alternative of dispensing with (fiscal or monetary) stimulus altogether to focus on the debt. Since QE does not require Congressional approval, it is not possible to cite numbers on how many Congressional members cited their disagreements with it. Still, the 2012 Republican Presidential nominee Mitt Romney’s objections, along with those of other leading Republicans, have featured in news media.

  22. As in the UK case, public opinion did not provide clear guidance — it cared both about budget deficit and continued public spending. For instance, while the percentage of those worrying about budget deficit had increased from 53 per cent in 2007 to 69 per cent in 2012, there was no consensus in this opinion for reduced public spending (Kohut 2012).

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Acknowledgements

The authors would like to thank Stephen Golub, Asli Leblebicioglu, Jonathon Moses, Daniel Segal, participants at ISA 2011 and APSA 2011, the anonymous reviewers and the editors of the Journal of International Relations and Development for their very helpful comments on earlier drafts of this work.

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Kaya, A., Herrera, G. Why the 2008 crisis was a bad crisis for new ideas. J Int Relat Dev 18, 505–531 (2015). https://doi.org/10.1057/jird.2014.8

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