This article is adapted from Jeff Madrick’s The Case for Big Government (Princeton).
The financial crisis jeopardizing living standards around the world is the direct result of the antigovernment attitudes that began to spread in the United States as far back as the 1970s and reached their height in the George W. Bush administration. It had become conventional wisdom that high levels of taxes, government spending and regulation–in sum, big government–inevitably undermine a nation’s prosperity. The claims, embraced enthusiastically by business, apparently also struck a deep intuitive chord among Americans. The dangers of big government had become so obvious to so many over the past thirty years that they hardly seemed to require demonstration any longer, even among many Democrats. Government was widely seen as the problem and rarely the solution, a sharp reversal of attitudes that prevailed for the first two-thirds of that century. Cutting taxes was the main rallying cry, but deregulation was its close cousin. Starting in the 1980s, with Ronald Reagan’s presidency in particular but extended by George H.W. Bush, Bill Clinton and George W. Bush–as well as Alan Greenspan, the ideological Federal Reserve chair who won far more credibility than he deserved–the government reduced its regulatory oversight radically over the course of a generation.
President Clinton proudly announced the new position in 1996. “The era of big government is over,” he said with fanfare in his State of the Union address, the year of his presidential re-election bid. He successfully raised taxes on better-off Americans in 1993 but with the express purpose of reducing the federal deficit, not developing new social programs. In the ensuing years, considerable regulatory damage was done. Even after severe financial storms in the late ’90s in Asia and Russia and at hedge funds in New York, neither the Republicans nor the Democrats asked for new regulatory authority or requirements for disclosure of more information. Now even Greenspan acknowledges serious errors of judgment. No one knows the extent of the liabilities of financial firms today because of the lack of federal oversight of financial derivatives. The Clinton administration signed off on the end of the Glass-Steagall legislation, which had separated in law and spirit commercial and investment banking, and Clinton’s Treasury secretary prevented the Commodities Futures Trading Commission from actively regulating derivatives.
But it was the George W. Bush administration that took up the Reagan banner with energy and vindictive delight. Bush engineered enormous tax cuts, but the loosening of regulations was also integral to his philosophy. In 2004, for example, the Securities and Exchange Commission undid restrictions on how much investment banks could borrow, even as they made enormous profits. In return, the banks volunteered to open their books to the SEC, though this option was never aggressively pursued. Bush’s appointee as SEC chair, Christopher Cox, formerly a conservative Congressman, enforced the program with the deliberate Bush-style laxity that has characterized the administration’s management of the Food and Drug Administration, the Environmental Protection Agency, the Federal Aviation Administration and, of course, the Federal Emergency Management Agency, which so tragically mangled the Hurricane Katrina rescue efforts. Cox has admitted that the voluntary program did not work and has urged comprehensive securities regulation at last.