When the New Deal Consensus fell apart, the liberals were in no position to revive it or replace it with another compelling worldview. They were badly fragmented along identity and ideological lines. Some New Deal liberals remained, but they were more than counterbalanced by the New Democratic Coalition people who thought that somehow market forces will magically restore income growth for the middle class and rescue the people who lost good paying jobs.
Given America's Puritan, Calvinistic roots and the extraordinary power of social ideas and norms created in the age of the Robber Barons, the decline of the New Deal Consensus should be no surprise. Political forces and change undermined the New Deal electoral coalition that supported this value structure. The coalition foundered on the rocks of identity politics, southern and northern blue collar reaction to the civil rights revolution, and the cultural clash between white ethnics and the young people of the Sixties' cultural revolution. Blue collar folks took the young people's rejection of traditional mores and sexual ethics as a rejection of themselves.
Three things were happening more or less simultaneously: the old New Deal consensus was breaking down; many on the right were busy selling a market-oriented philosophy that very much resembled what prevailed in the Gilded Age of the late 19th Century; powerful cultural currents emerged t4at emphasized selfish individualism and a distrust of institutions and traditional narratives. The warmed over-ideas from the Gilded Age were received as new and fresh by people who had no inclination to see how these ideas worked a century ago. Among the portions of history that fell into irrelevance were the account of the struggles of workers for basic economic rights and the story of how consumers had to work to curb the power of trusts and monopolies. In place of solid historical information and enlightened values, many Americans have bought into a shallow ideology , and , according to Chris Hedges, “We are the most illusioned society on the planet.”
A large network of right-wing think tanks and foundations emerged that vigorously sold what was called market capitalism—an outlook that opposed regulation of business, called for the restriction of union rights, tax cuts for the wealthy, and small government. More than a decade later, the end of the fairness doctrine gave birth to radio shock jocks who sold the right-wing message on nearly a thousand radio stations. Then came a television cable channel devoted to selling propaganda as “news.”
The U.S., in the late 1970s, entered a time when the centuries old explanations based on capital, labor, and land no longer seemed to work. So many abandoned economic policies based on empirical economics and went to theoretical approaches rooted in political theories. The US had passed through a confusing period of business consolidations that often yielded poor results. Many blue chip giants had become destabilized, and almost no one understood why. There were many defaults in Latin America caused by irresponsible US banking practices, and government was finding creative ways to prop up the banks and impose austerity on Latin American debtors. The U.S., in the late 1970s , entered a period when the macroeconomic scene was harder than ever to understand, and people were being asked to believe in theories that often had no scholarly underpinnings. International economics was becoming more and more complex. More and more, economic progress seemed to depend on government. America's competitors relied upon very sophisticated economic schemes called “industrial policy” to advance their interests. Many competitors used the Value Added Tax to subsidize exports. China manipulated its currency to make its exports more attractive.
The Right filled the void left by the broken New Deal Consensus with ideas rooted in the Age of the Robber Barons, when union-busting was patriotic and the poor were free to live under bridges. Over time, conservative thinkers built arguments for a return to the period before the New Deal. They also subtly undermined the civil rights revolution.
The conservatives were supported by a vast network of foundations and think tanks and created a national narrative that tied unfettered capitalism contempt for the welfare state to the individualism of the American revolution. Equality and fraternity were sidetracked. In time, these views were magnified in a vast echo chamber comprised of talk radio and cable political shows. An worldview built around market capitalism gradually replaced the New Deal consensus. Market capitalism was also called market liberalism, neo-classical capitalism, neo-liberalism and market fundamentalism. It postulated a flexible, self-equilibrating economy that worked just fine when government kept its hands off it. It promised endless growth and prosperity for all. It did not offer models specifically developed for the macro-realm; rather it used 1some ideas that had been applied to microeconomics. These rightist think tanks treated ideas as though they had the power of loaded weapons, and they made great headway. Soon, even people nominally in progressive ranks, were spouting libertarian ideas.
Milton Friedman led the conservative charge against liberal, Keynesian economics. He offered monetarism, adjusting the economy by manipulating the money supply—usually downward. Hie skilfully offered his views in the PBS series, “Free to Choose.” He talked about a built-in, “normal” level of unemployment and argued against the liberal view that government should promote full employment. Inflation was the great evil, and he and his minions somehow managed to connect it with political corruption, promiscuous sex, and others social evils. People listened in part because Democrat Fed Chairman Paul Volcker had used a variant of monetarism to curb stagflation.
The trouble is that there is no evidence that monetarism can create jobs and growth. Friedman's disciples, called the “Chicago Boys,” fanned out over the world to apply his teachings, but they did not produce growth. Sometimes they applied too much currency contraction and brought about great human suffering. As Daniel Rodgers wrote, “Monetarism, in short, turned out to be a bulldozer that could raze a building but not erect one.” Friedman insisted that his approach had never been given a fair chance. His disciples tried it in Chile, producing much greater income inequality and suffering.
Engrafted onto the supply sider's tax cut populism was the rational expectations theory. It postulated that there were many investors who could read economic indicators accurately and with lightning speed and accuracy and make the best and most enlightened decisions possible. They would not take unnecessary risks so there was no need to regulate them. Indeed, the existence of regulations cloud their vision. There were soon political variants of theory, the idea that every economic decision was democratic because it was in effect casting a vote. People experimented with rational expectations theory by using its premises for all sorts of game theory exercises. It is this theory that underpins the insistence of many today that macroeconomics should be ignored and government can simply apply remedies that prudent people might use in a small household.
The main ideas of the growing economic consensus is that government should have very little to do with the economy. Politicians were expected to strip away economic regulations and lower taxes on corporations and the wealthy.
The effort to strip away regulations began under Jimmy Carter and was greatly accelerated under Reagan and the two Bush presidents. Under Bill Clinton, Al Gore worked to eliminate pointless and redundant ones, and President Barack Obama is doing the same. By most scholarly accounts, the destruction or regulations opened the door for the near-collapse of the financial system in 2007-2009. Now we are again hearing that the Dodd-Frank regulations should be repealed. With respect to industrial regulations, the Republican presidential candidates uniformly complain that government must get off the back of industry. The fact is that many of the regulations are gone, and those that remain are hard to enforce because the agencies are so short of personnel.
By 1980, the national anti-tax movement was no longer confined to California and six other states; it was nationwide and well organized. This movement combined its rhetoric and organizational skills with the optimism of market fundamentalism. Together, they were began to convert a majority of Americans. In a time of crisis, these merged theories offer a return to America's traditional easy optimism, but for the most part they are notions advanced by amateurs, and they have no grounding history or reality.
Although there is little empirical evidence to support the interlocking Republican economic theories, they are easily learned through bumper-stickerlike catch phrases. They promise easy answers, no sacrifices, no hard choices, and instant results. Of course, they position hated demons—the liberals. We live in an age when such ideas have irresistible appeal. It is, as Frank Bruin writes that ours is an age particularly given to glib, simplistic explanations. He writes that “we live in a post-Enlightenment age in which rationality, science, evidence , logical argument and debate have lost the battle in many sectors....” (NY Times, August 14, 2011, 6 sr) He thinks many have gone backward toward old modes of thinking and away from the techniques of rational thought. He thinks in terms of a “post-idea world.” This is due in part to changes in university education, the emergence of a visual world, and a plethora of information that discourages sorting out information and analyzing some of it.
There was clear evidence that Reagan's economic schemes did did not work as promised, but people latched onto them because they provided the assurance that the American Dream was alive and well. With little reason for doing so, they blamed the problems of the 1970s on mainstream economics. Then, in 1989, the Berlin Wall came down, marking the failure of Communism. Many mistakenly saw this as also marking the collapse of liberalism and mainstream economics. That was very much muddled thinking. Mainstream economics was based on empirical data and decades of scholarship; it had nothing to do with politics. Liberalism and socialism were also quite different, but there is no accounting for how people think. For these people, it was the green light for ending economic regulations and ushering in the age of unbridled capitalism. Even many moderate Democrats, members of the New Democratic Coalition sometimes turned away from policies rooted in solid economics. He followed conventional economics in balancing the budget and shrinking the deficit, but he and some other Democrats joined the crow in following popular, untested theories about deregulating the economy. The results in 2007-2009 would be disastrous.
In 2000 and 2001 Clinton and a minority of Democrats joined the Republicans in in undoing some of the New Deal. President Bill Clinton, signed legislation stripping away basic banking regulations, thus preparing the way for the near destruction of the financial system in 2007-2009. Some scholars thought the end of the struggle with communism marked “The End of History,” which encouraged the notion that history had demonstrated that the economic conservatives had been correct all along. No economist needed to come forward with even one equation to prove what people wanted to believe.