Insurrection Through the Balance Sheet
Melinda Cooper's _Counterrevolution: Extravagance and Austerity in Public Finance_
Programming Note
For many months I have been promising readers of this newsletter a post or series of posts that would answer the question “what is a bank?” I can now report that I have written, rewritten, edited, and polished two such posts. They were scheduled to be posted to Substack a few weeks ago. But as any reader paying attention to US politics will well understand, political events in my home country overtook me – as I suspect they did many readers as well. In that context I chose to delay my inquiry into the political and metaphysical nature of banks.
The bank posts are still coming, but in the meantime I’ve been reading a book that is both all about money/power and that makes a timely intervention in contemporary US politics. In particular, many of the apparent contradictions in the current formation of the US political right (between, for example, Trump and his VP pick, JD Vance, or between Trump and Elon Musk) quickly resolve when viewed through the lens of Cooper’s brilliant new book.
What has actually happened to the political economy of the United States over the last half century?
For the past two decades the most common one-word answer to that question has been: neoliberalism. The best critics of neoliberalism used the term not just as a pejorative (though it was surely that) but as a productive critical concept. David Harvey shows his readers the massive structural changes of global capitalism, and their links to the “Washington consensus” on domestic and foreign policy that produced a striking rise in inequality, one which Harvey was happy to call “the restoration of class power.” Wendy Brown outlines the historical rationality, the “order of reason” that comes to dominate within a period in which the logic of homo economicus becomes the logic of politics, the logic of existence.
But over the past decade the critics of these critics have cried out loudly and frequently, sometimes insisting that neoliberalism has no coherent meaning at all, and at others redefining it themselves in rather bland terms. Whether neoliberalism means everything or nothing, the end result is the same: inoculation. The term has lost its critical edge. There has thus been a kind of “restoration” of neoliberalism to a neutral, baseline term. This means it can no longer be used as a weapon, but also that it doesn’t say much. We can see the culmination of this recent trend in the Stanford Encyclopedia of Philosophy entry on neoliberalism, which tells readers that neoliberalism is nothing more than the “view that a society’s political and economic institutions should be robustly liberal and capitalist, but supplemented by a constitutionally limited democracy and a modest welfare state.” I guess that’s fine, but any undergraduate student of political theory can tell you that’s just a definition of liberalism. Whatever neoliberalism might mean, that definition certainly cannot serve as the answer to what has changed in political economy over the five decades.
The rise and fall of “neoliberalism” provides context for considering the new and different answer that Melinda Cooper gives in her new book. Hers too is a one-word answer – the title of the book – Counterrevolution.
That’s not a metaphor. Cooper seeks to reveal a profound and dramatic politico-economic reversal that has played out in the US since the 1970s. Crucially, this is much more than an undoing of what came before: Cooper’s “counterrevolution” names a radical shift in momentum in which one possible, but never-completed revolution was stopped in its tracks, while another was begun.
To capture this rich, twofold sense of “counterrevolution,” we can again use neoliberalism as a helpful foil. A simple model of the neoliberal transformation will counterpose neoliberalism’s unleashing of market forces across all of society (including the remaking of the logic of government according to the logic of homo economicus) against an earlier alternative of “embedded liberalism” (one that contained those forces within their proper domains, and necessarily policed the boundaries). However, in formal terms this is obviously a deeply conservative argument, because it easily turns critiques of neoliberalism into implicit (or explicit) calls to return to a past that was better. Neoliberalism’s critics want to re-embed market logic and forces, to return them to their contained fields – like redrawing the maps to the earlier borders; they want to fight off homo economicus with a hypostatized politico economicus that supposedly goes back not just to the 1950s but to the early liberals, or precursors to liberalism (Locke), or even to the so-called first political scientist (Aristotle).
Cooper mobilizes a much more radical political logic, grounded on a far more careful reading of history. For her the 1970s were not just a moment of structural breakdown (stagflation, the end of Bretton Woods), but also a moment ripe with progressive political possibilities. Through an incisive reading of the work of Michal Kalecki (as “left” a Keynesian as ever there were) Cooper indexes the pressures placed on the Keynesian consensus and the “New Deal contract” coming from both the right and the left. The left saw the possibility of completing the revolution that started with the New Deal policies of the 1930s and was extended through the Civil Rights movement of the 1960s.
Kalecki understood that the limits of the Keynesian consensus were political, not technical. Efforts by government to subsidize public services, welfare, and the wage might be beneficial in stimulating profits in the short term. But by releasing workers from the fear of unemployment and welfare dependents from poverty, they threatened the raison d’être of capitalism itself. Absent the discipline of the market, there was nothing to stop workers from pushing up wages or politicians from redistributing wealth to win their votes. If pushed too far, it was possible that the institutions of the social state—from public schools and hospitals to health care, old age, and unemployment insurance—would be seized from below, turning state dependents into agents of a new kind of social revolution.
The right saw the opportunity of undoing the New Deal consensus, of deconstructing the shoddily built American welfare state, and of rolling back the civil rights advances.
business elites would allow only limited and temporary implementation of Keynesian policies: spending on physical infrastructure or defense would be favored over long-term investments in education, health care, and welfare, while boom-bust cycles would be tolerated as an economically disruptive but politically safe alternative to permanent deficit spending. Instinctively, industrialists and asset holders understood that labor discipline was more important to the survival of capitalism than nominal profit rates or the stability of economic growth…. As soon as asset holders in particular were threatened by rising wages and prices, Kalecki warned, a “powerful block is likely to be formed between big business and the rentier interests, and they would probably find more than one economist to declare that the situation was manifestly unsound.” (Cooper 12; quoting Kalecki 1943: 330)1
Cooper’s book provides a painstakingly detailed, yet still thoroughly engaging and readable, scholarly account of how this second path has actually unfolded over the past 50 years. Unlike much work on neoliberalism, Cooper eschews abstract theory and high-level generalizing. While this is surely a work of political economy, it operates at the concrete level of the history of ideas and the practical, on-the-ground implementation of laws, regulations, tax schemes, and the like. Readers of this book will repeatedly glimpse, in a way one rarely encounters, the particular interaction between intellectual ideas and specific policies – policies with wide-ranging, powerful effects.
The book is thick with textual and historical detail, forcing a difficult dilemma on its reviewer: either do an injustice to your readers, and write an extremely long review, or do an injustice to the author and boil things until there’s nothing left but desiccate. I am choosing the latter path, but hoping to ameliorate the damage by encouraging everyone reading this review to read the book. It’s an incredibly lucid and powerful account that continues to fold in layer after layer of detail, making it possible for the reader to see the big picture in the form of a deep cross-section of American economic history. In the next three sections I will highlight the two most important striations, and then map their crossing.
The Crucial Role of the “Virginia School” of “Public Choice” Theory
Cooper comes neither to praise nor bury neoliberalism. Rather, by shifting from the level of generalizing accounts (where everything gets blamed on an amorphous “neoliberalism”) or polemics (where specific neoliberals get attacked for the effects of their bad ideas) to the level of concrete ideas and the policies they engendered, Cooper situates neoliberal theory and ideology in a much larger context, and she dramatically changes our focus. For decades now, too much attention has been paid to the Chicago school, and particularly to Friedman and Becker, and not nearly enough time has been spent considering the Virginia School of neoliberalism, especially the work of its founder and leader, James Buchanan2 (197).
Buchanan was taught by Frank Knight at the University of Chicago, where he was imbued with faith in the so-called “free market.” Perhaps more importantly, it would seem Buchanan learned from Knight a certain skepticism about democratic political institutions.3 And this was Buchanan’s major contribution: not a novel economic theory, but a fairly simple set of anti-democratic institutional arguments. How do you stop the movement toward equality achieved by the New Deal and Civil Rights? By stopping, or at least slowing down, democracy itself.
Buchanan feared that the seemingly unstoppable momentum of the federal power of taxation was forcing productive citizens to pay for public services that other “unproductive and essentially parasitic members of society” benefited most from [Buchanan 1973: 7, my emphasis]. As southern Blacks and poor whites threatened to emerge as a numerical electoral majority, Buchanan became increasingly alert to the dangers of majority rule itself, especially in the context of expanding fiscal transfers. (20, 201)
Given this diagnosis of the “problem,” Buchanan’s answer seems almost obvious: limit popular sovereignty and majority rule. Specifically, put in place political limits that will “protect the taxpaying minority from the excesses of majority rule” (211). In formal terms, Buchanan’s work calls for fundamental, constitutional transformation; it thus takes the form of political philosophy rather than political economy. But as an economist, Buchanan’s work massively influenced tax and fiscal policy.
Specifically, we have Buchanan to thank, first, for the rule of balanced government budgets4 – including both the proposal for a balanced budget amendment, and the political brinksmanship of Congressional Republicans threatening to allow the US government to default, rather than raise the debt ceiling. Second, Buchanan’s work helps lead to the the California tax revolt, a series of measures passed by referendum in the 1970s and 1980s that ultimately implemented three elements: 1) constitutional limits on the ability of the state of California to tax its own citizens; 2) ceilings on what the government could spend, even when it has the money, and 3) supermajority rules for altering the taxing and spending structure, which make it almost impossible to undo those constraints. This is how you mobilize an antidemocratic politics in the guise of liberal freedom.
The Complicated Truth of Supply Side Economics
In Cooper’s telling of the tale, Buchanan’s public choice theory strand of neoliberalism would never have had the impact it did were it not for the fact that it was woven together with another key thread of theory and policy – namely, supply side economics. Many readers will know “supply side” as a synonym for “trickle down” economics – the simplistic idea that tax cuts (especially for the wealthy) are always good because they create so much economic growth that they pay for themselves. Cooper provides both a bigger picture and a more fine-grained analysis. Most significantly, she demonstrates the popular (and also much-maligned) version of supply side economics that became well known under Reagan (associated with economists like Arthur Laffer and politicians like Jack Kemp) might have never gotten off the ground were it not for the work of a prior generation of “elite economists”5 who played important roles in the Nixon and Ford presidential administrations.
These early supply side thinkers repeatedly advanced a now largely forgotten argument about the essential need for “capital formation” in the healthy functioning of a “market economy.” The idea is so basic that Cooper herself never really tries to unpack it, but the core idea can be traced back to classical political economy – specifically to Smith’s notion of “accumulation of stock.”6 For Smith, the wonder and power of capitalism – brought out through the magic of the “division of labor” – all depend upon a prior piling up or pooling of capital. Without this prior accumulation, the market engine cannot run. Supply side economists see, quite logically, that progressive income taxes, and especially capital gains taxes, stand in the way of this necessary accumulation of monetary wealth. “Capital formation” is nothing more than a euphemism for large piles of money.
This scarcity of capital thesis formed the theoretical core of the supply side argument,7 and led them to advocate not only capital gains and income tax cuts, but also accelerated depreciation schedules, “allowing investors to claim tax write-offs up front and thus reinvest their money as quickly as possible” (38).8
Having lost sight of this early articulation of supply side economics, we have also lost touch with one of the crucial concepts developed at the time to challenge the supply side vision. Stanley Surrey worked in the Treasury during the Roosevelt administration and was secretary of the treasury for tax policy in the 1960s. He made plain an obvious truth: given whatever the current budget might be at any point in time, a change to tax policy that reduces tax revenue functions no differently than an increase in spending. He called this a tax expenditure. Surrey wrote up a short account of the concept in 1973, and used the capital gains cuts and altered depreciation schedules as prime examples. Cooper points out in her introduction that as of 2020 the US currently “spends” in the form of tax expenditures more on tax breaks than they do on Social Security (16).
“Syncretic Faith”
The genius of Cooper’s book comes when she draws the political link between public choice theory and supply side economics. She herself emphasizes that in terms of economic theory, these two ought not go together: the commitment to a balanced budget lies at the core of public choice theory, while supply side economics (in its mature form) argues that with disciplined monetary policy, the US (as issuer of the world reserve currency) can run deficits as long as they want.
But contradictions that cannot be logically resolved in theory may be dialectically transcended politically, and that’s one way of describing the politics of the right in the US for the past 30 years.
[P]ublic choice and supply-side economists found an uneasy point of convergence around the need to contain certain kinds of public spending. While they might never agree on the fundamentals, representatives of both schools found common ground in a shared animosity toward Eisenhower Republicanism. As is so often the case, moreover, political actors barely paused to contemplate the logical conflict. Thus, Newt Gingrich and almost all his followers on the insurgent Republican right embraced a syncretic faith of balanced budget piousness and supply-side indulgence. At the same time that Virginia school balanced budget rules demanded continuous assaults on “unaffordable” social services, supply-side tax expenditures (dubbed “incentives”) authorized a guilt-free transfer of public money into the coffers of personal wealth holders, real estate developers, and corporations. The logical contradictions could never be perfectly resolved, of course, since supply-side tax expenditures would always violate the Virginia school prohibition against budget deficits. Yet this itself imparted a self-reinforcing momentum to the whole cycle, allowing legislators to invoke the soaring federal debt as proof of fiscal sinfulness each time they inflicted a new round of cutbacks.
This political link between public choice and supply side theories forms the spine of Cooper’s book, allowing her to unpack a set of otherwise deeply complicated issues in both the history of economic thought and the recent history of US fiscal and monetary policy. Indeed, the power of the book lies in its granular detail, in a way I’m unable to capture without writing the too-long review I eschewed above. But to give would-be readers a flavor, I will close by mentioning just three key highlights.
The actual story of the California tax revolt is messy and astounding and important. Cooper not only tells it, but also continually links back to it to indicate the extent to which this relatively “local” story has had profound effects across all of US society.
Complementing the well-known work of scholars like Thomas Piketty, Emmanuel Saez, and Gabriel Zucman, Cooper makes a case for what she calls “dynastic capitalism.” The subtle shift from the corporation to the “family firm” may prove to be a more important recent transformation of capitalism than many of the other leading candidates for that title.9
Most significantly, Cooper’s detailed reading of the political mobilizations on the right show powerfully that sex, gender, and family politics are absolutely not the “wedge” “cultural” issues that they have so frequently been deemed by pollsters and pundits. They are economic through and through. Cooper’s final chapter, titled “Aborting America: The Reproductive Politics of the National Debt,” is a tour de force. Proving beyond any doubt that the politics of abortion cannot be severed or disentangled from political economy.
Cooper closes her book by looking up from the dense historical archive in which she has been embedded, giving her a moment to observe the present and consider the future. That future remains open-ended, because the counterrevolution she details was not actually an overturning of a completed revolution, but rather a “a preemptive strike against an incipient social revolution that was not to be” (375). Today the neoliberal counterrevolution seems almost complete, yet the chaos of the 2020s (Trump, Covid, inflation) seems to echo or repeat the turmoil of the 1970s. Perhaps, Cooper seems to me to suggest, such a moment creates similar opportunities for a new (counter)revolution.
Cooper’s careful explication of Kalecki allows her to avoid the trap of the standard reading (a deep misreading) of the inflation of the 1970s as a general failure of “the economy.” Where others see economic failure, Cooper, following Kalecki, sees “the political turmoil of the 1970s, when wages effectively outran the power of corporations to collect profits and the resulting consumer price inflation eroded the wealth of asset holders” (12, emphasis mine).
To a meaningful extent, both “Virginia School” and “public choice theory” are aliases for Buchanan and his work, and the two terms almost mean the same thing – as evidenced by this encyclopedia entry, “Public Choice: The Virginia School.” While many authors, including Cooper, use the language it’s not 100% clear that there was much of a “school.” On the other hand, “public choice” has certainly enjoyed a life beyond Buchanan.
This is my own speculation, not a claim that Cooper makes. Despite not having read Buchanan nearly as carefully as Cooper, I remain confident about the claim based on my own close reading of Knight. On the one hand, Knight does not fit the caricature or ideal-type of a “neoliberal,” despite the claims of certain of his students: he was deeply skeptical of the idea of anything like a “pure” free market. On the other hand, Knight was indeed very worried and wary about American democratic institutions. As Angus Burgin deftly puts it, at one point Knight endured “a depression that lasted for much of the decade, precipitated in part by a sense that failures of public deliberation had rendered democracy an unsustainable form of government” (Burgin 2012: 13).
Buchanan gets credit for producing the first academic defense of a balanced budget amendment, outlined in his Public Principles of Public Debt (1958), but the idea did not come to him from the abstract ether of economic theory. Rather, he built a faux intellectual defense of an idea that he borrowed directly from politics – namely, from Virginia Senator Harry Byrd, Sr. A staunch segregationist, Byrd had already spent two decades in the Senate fighting against, obstructing, or watering down key planks of the New Deal – including the Social Security Act and Aid to Dependent Children – when, in 1953 and 1954 he came up with the idea of trying block the standard legislative process for increasing the US debt ceiling unless the Senate passed a balanced budget amendment. Two years later Buchanan consulted for a business interest group that lobbied Congress to oppose public borrowing to fund Eisenhower’s proposed interstate highway project. Byrd then echoed the Buchanan-advised committee in his efforts to stop Eisenhower’s infrastructure project (255–258).
Cooper lists Martin Feldstein, Michal Boskin, Norman Ture, and William Simon. Elsewhere in the book she places an important spotlight on Robert Mundell, perhaps the supply sider most influential in arguing not that tax cuts would pay for themselves, but that as long as monetary discipline was maintained (to keep wages and social spending in check) US deficits would be happily financed by foreign investors (57).
By sticking with Smith’s terms, which are really all that matter for the 1970s supply-side arguments, I am avoiding the bottomless debate over “so-called primitive accumulation.” But as I step around it, let me just say this: Robert Nichols is right.
To be clear, the “capital formation” argument itself simply will not hold water. But at least it’s a real argument.
In another side story that is worth the price of admission, Cooper carefully traces the links between these changes to the tax law concerning depreciation that, in a word, led to the rise of Donald Trump as real estate mogul.
On the top of this list we will find “financialized capitalism.” Cooper herself seems to agree with much of the overall thesis that since the 70s we have seen a marked shift from industrialized to financialized capitalism (30–32). I think this thesis is false, and in deeply important ways, because I contend that it misunderstands the basic nature of global capitalism. I’ll take up this point – minor with respect to Cooper’s book, but quite significant on its own terms – in a separate post.