This Is Why It's So Hard To Cut Public Spending

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1:15Bloomberg Audio Studios. Podcasts. Radio. News.

1:30Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Weisenthal. And I'm Tracy Allaway. Tracy, spending cuts in the air these days. You could say that. It's a vibe shift. It's a vibe shift. Yeah. So under the Trump administration, obviously, there is a stated ambition to reduce spending and make the government more efficient overall? Yeah, Scott Besson, I think he has something, the 3-3-3 plan. Part of it, I think he wants 3 % growth, 3 % more oil production, and then 3 % deficit. And I think deficits are around 6 % currently, which is really high by historical standards, especially because we're at, what, 4.1 percent unemployment.

2:18Usually when the economy is running this hot or this tight, you don't expect to see deficits this large, add in rates as high as they are. There does seem to be this impulse, for better or worse, and other people can be the judge of that, to cut spending. But on the other hand, it's very difficult. Wait, why do you say that? Because early in my career, there was the eurozone crisis. And I think there was some austerity imposed in places like Greece, ultimately. So why do you say it's difficult? So actually, there's two things here. And I think that's really apt. And I think this is a fascinating question in its own right, which is, why is it that in 2009, 2010, in the aftermath of the great financial crisis, when we had widespread unemployment, why was the appetite for austerity so high then at a time when there was so little aggregate demand?

3:09And now at a time when, you know, obviously inflation has been running hot and so forth, why does it seem more difficult? That in itself is a fascinating question. But I guess what I would say to answer your question specifically is that anytime people talk about cuts, there is not a ton of discretionary spending in the U.S. government budget. There's the entitlement, Social Security, Medicare, Medicaid, and then there's defense, which there's usually not much political appetite to cut. And then when you have leftover, it's hard to move the dial. And so the theory is that if you actually want to move the dial on spending and deficits, you have to like cut into some areas.

3:50You have to break promises, perhaps, that you've made to various constituencies like seniors. Right. Ultimately, you're inflicting pain on someone and at least in Democratic governments, because it's all about a numbers game, it's all about getting votes, that would be a bad thing. Well, we have to then talk about how do the stars align? If you actually want to meaningfully cut spending, how does that actually happen? How do democratically elected governments sort of build the political capacity to inflict pain, perhaps, on groups that obviously have some stature? We really do have the perfect guest.

4:29We are going to be speaking with Fritz Bartel. He is an assistant professor of international affairs at the Bush School at Texas A &M, and he is the author of the book, came out in 2022, The Triumph of Broken Promises, The End of the Cold War and the Rise of Neoliberalism. And it's kind of about exactly this topic, how governments break promises. So, Professor Bartel, thank you so much for coming on Odd Lots. Thanks so much for having me. Your book is really interesting because you talk about the sort of resource constraints and spending constraints in the U.S., the U.K., and the Soviet Union.

5:05All of it was sort of building up to a head in the late 1970s, early 80s. Before reading your book, that hadn't clicked to me, that all of these different economies were sort of facing the same stresses at the same time. What was going on that suddenly around the world governments felt this impulse like we have to cut, we have to constrain ourselves? Yeah, so I guess the short answer is that the kind of post-World War II economic boom had run aground in the 1970s. Obviously, there was the kind of birth of stagflation. There was a decline in productivity growth across Western economies. The Soviet economy and the Eastern Bloc, more generally the Communist Bloc, had run into the end of their growth model, kind of this hyper-industrialization growth model, had started to produce fewer and fewer results.

5:54So in both the Eastern Bloc, the communist world, and the West, the growth model, one largely based on kind of industrialization, certainly based on cheap energy resources, had started to run aground roughly at similar kind of moments in the early 1970s. And then these crises that kind of came to define the 1970s, the energy shock of 1973, again in 1979, the monetary confusion and shocks of the 1970s also spurred a great deal of inflation and crisis across the world. And so in both East and West, the societies had largely concluded that they did not have the resources to meet the commitments that they previously had made to their constituencies, or at least that's how it became framed and understood.

6:45So you mentioned commitments. What exactly were the commitments or the promises that different governments had made to their citizens? Because, you know, I think about America and obviously in the 1950s, 1960s, there was the American dream of a nice house in the suburbs and a car and 2.4 children or whatever it was. And then in the East, I think there was a promise of economic growth, but maybe the emphasis was more on equality of economic growth versus just pure economic growth. Yeah. So I think, as I defined in the book, this kind of politics of making promises took different shapes in the West and the East.

7:27The West had more abundance from the start, and certainly creating abundance was at the core of what democratic capitalism was all about. But it wasn't particularly because the West was in this Cold War. You couldn't just be about creating abundance. There had to be some sense of limiting inequality at the very least. And so Western states, not universally and not necessarily with all of their conviction, but they supported labor unions to a much greater degree than they would subsequently. They created broad welfare states that invested in cradle to grave type of state intervention. they largely secured for at least large segments of their population, income security, job security, full employment, even the commitment to full employment was a kind of post-war novelty that governments could actually make credible.

8:20And in the East, it took something, you know, it was a slightly different shape, but there were similar kinds of promises made that your workday would get shorter, your even intergenerational upward mobility would increase, you had access to housing, all of these always very incompletely fulfilled, but they were kind of making progress incredibly in the eyes of their populations, making more progress towards a future of both material abundance and some form of equality, not full on equality, certainly much more in communist or state socialist societies. Equality was held in higher regard, but also very much in the West.

8:57You kind of couldn't come out just as fully comfortable with the levels of inequality that we've reached by today's standards. So this search for both abundance and some measure of equality was there in both the West and the East. You know, it's funny, like, obviously, I think today we think of the Soviet Union's economic model as sort of having been a basket case and a disaster. But for many years, they were actually, they were growing, they were industrializing, they had rapid growth. Something that I hadn't realized until I read your book, and maybe we're skipping ahead a little bit here in the story, but even like in Western financial markets, there was sort of an obsession with like Eastern Bloc debt.

9:39Like it was an exciting trade to lend to some of the communist countries in the East and like financial analysts were like really excited about these investments. Yeah. And I don't know that we can really pin that necessarily on their growth prospects per se, but Western bankers definitely believe that the communist world had a nice recipe for making secure loans. So if things were to come to a crisis, it was believed that authoritarianism was going to be very good at imposing these kinds of cuts, at imposing discipline and breaking promises. And in the background, the Soviet economy itself, in the background of a country like Poland or Hungary or East Germany, the Soviet economy was sitting there as they literally called it an umbrella, an economic and financial umbrella over the rest of the Eastern Bloc, where if any of these countries ran into financial difficulties, it was assumed that the Soviet Union would kind of come to their financial rescue, would bail them out, and in the end, pay off their debts.

10:38And it turned out that that wasn't the case by the 1980s. But in the 1970s, in particular, that was a very popular view in the Western financial press. Explain how we got from the 1970s, where Russia, you know, is kind of impressive, at least to Western investors and analysts, to the 1980s, where it's unable to do what it had promised to some of its allies. Yeah. So, you know, it's largely a story of oil and natural gas. Kind of coming into the 1970s, the Soviet Union has found significant oil reserves in Western Siberia. It's started to develop those reserves over the course of the 1960s. And by the 1970s, it's coming online, so to speak, as an energy superpower at the same time that world markets are creating multiple crises that send the price of oil and natural gas through the roof.

11:33And so throughout the 1970s, it looks like the Soviet Union had, and in fact, it does have all of this energy wealth at its disposal. And then the 1980s come and the kind of fortunes reverse. So, you know, when prices go up, people start to look for more supply. They find energy in places like the North Sea. They start to develop much more energy supply. Western countries have done not a great job, but they've done something to create more energy efficient economies. And so the forces of supply and demand start to send the price of oil in the 1980s on a downward trend, pinpointed by a couple of particular moments like 1985, where it really significantly collapses.

12:15And the Soviet Union itself finds that it's much more difficult to produce the growth in its energy sector that it had produced in the 1960s and the 1970s. And so these two forces, a kind of plateau in production and the collapse in price all of a sudden leave the Soviet bloc as a whole looking much less economically powerful by the even the middle of the 1980s than it was, let's say, in the late 1970s. When we were talking about the intro, and you sort of alluded to it when you were talking about the umbrella and this belief in the West that, well, you know, the Soviet Union is authoritarian, centrally planned economy.

12:55They don't have to pander to voters. And therefore, one might think that that's a more politically conducive environment for cutting spending or making difficult decisions. I'm curious the answer why that didn't turn out to be the case. My guess is part of the story is that, well, maybe the promises to their own citizens could be taken for granted, that these other satellite countries, East Germany, Poland, etc., they have no obligation to stick with the Eastern Bloc if they're not getting that support anymore from the Soviet Union. But why don't you sort of explain why that authoritarian ease didn't end up working out?

13:38Yeah, so it kind of corresponding to this belief in the West that authoritarians would be good at breaking promises. Those same people and many others believe that democracies would be very bad at breaking promises because, as you mentioned in the intro, it would seem to make sense that if you're trying to get elected, it's just not in your interest to try to break promises to your own citizens. The turn of the 1980s, both events in the United States and Great Britain and events in the Eastern Bloc, suggest that this might not be true. And in fact, democratic elections and the kind of legitimacy that it bestows on governments at least that it did bestow in the past.

14:17We can talk about whether or not that's still true. In the 1980s, it turned out that democracy in competitive elections provided a sense of legitimacy that made the, let's say, the sales pitch of breaking promises more credible in the eyes of Western populations than it turned out to be in communist societies. So the specific case that I think is probably most illustrative is Poland in the early 1980s. People will probably know, or if they're old enough, remember the Polish labor union, Solidarity, its famous leader, Lech Wałęsa. It's born in the summer of 1980 precisely because the Polish government tries to increase consumer prices, basically, which in communist societies was one of the foundational promises that had been made to the population.

15:05We will keep your basic basket of goods, the price of those goods very stable. They try to increase the prices in order to repay their debts partially, in order to solve some of their financial problems. And people openly revolt because they don't trust that their government, that the state socialist state, is essentially telling them the truth, that you need to go to the people that break these promises to get some sacrifice from them in order to repay debts. That's not a credible and legitimate claim in the eyes of Polish society. In contrast, when someone like Paul Volcker in the United States says essentially that the United States needs to go through a very painful recession in order to fix the problem of inflation that had come to define the United States over the course of the 1970s, lots of people are unhappy about that.

15:59He gets death threats. There's protests. He's on the cover of Time magazine. He's kind of public enemy number one in a sense, but it does not result in a kind of full-blown revolt against the system as it did in the Eastern Bloc. And so the legitimacy that democracy itself bestowed on Western states turns out to be the mechanism, I think, by which they were able to break promises to their people. Whereas in the Eastern Bloc, authoritarianism proved to be very weak at this task because the only thing people had come to expect from their government, they didn't have any political role in it. The only thing they'd come to expect was some kind of material improvement year over year, meager though it was, and that was lacking in the Eastern Bloc.

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17:44In addition to all that variety, EasyCater also gives you full visibility of your organization's food spend with invoicing, centralized reporting, and seamless integration with expense management systems, all on one platform. EasyCater, your business tool for food. To learn more, visit easycater.com slash podcast. Can you say more about this, maybe in the context of Ronald Reagan? Because I think that would be a good example of, I guess, the role of free elections and competition between political candidates in basically letting the population like let some of their frustration out, right? It's kind of like, okay, the current politicians have failed to keep their promise.

18:28And so we are willing to try anything, even if it means short-term pain, in order to get what we want again. Yeah. So Reagan is a kind of quintessential figure for this turn. He's not a political outsider necessarily, certainly on the level of Trump in the 1970s, but he does come to DC, wins the 1980 election with a distinctly different message, right? He famously says in his inaugural address in 1981, government is not the solution to the problem, it is the problem. And that kind of message, which is already one that is then conducive to breaking promises because it's redefined the state as the problem itself, the popular mandate that he has by winning the 1980 election in turn gives him, I guess the term would be more political capital and certainly more receptivity even from his enemies or from his political enemies to accept the policies that he then enacts, right?

19:35So I think that's one of the key factors is, yes, he has certain people who agree with many people who agree with him, But even those who disagree with him work within the bounds of the system where they accept, again, this is where it gets a little different in the recent years, they accept the outcome of the election, right? And they view the process itself by which this was decided as legitimate. And so he's not particularly successful, and he and his team are not particularly successful in cutting spending in particular, in breaking promises. Much more of that in the U.S. case comes from the Federal Reserve.

20:10But he dramatically alters the rhetorical landscape of the United States and does so by bringing this movement from outside Washington, D.C. and redefining what the kind of terms of the debate will be in the 1980s. You make a compelling argument that at least 40-something years ago that something about the democratic system was more conducive to cutting spending. But A, a lot of the sort of austerity that was imposed in the U.S. came more from the Fed rather than actual spending cuts. And of course, we know that deficits actually widened quite a bit. So it sort of relied on the fact that we sort of have this sort of outside of government, undemocratic enforcer in the form of the Federal Reserve.

20:58But then also the UK example, which, as your book lays out, you know, there was fights with the coal miners, and maybe you can explain that. But ultimately, what allowed Margaret Thatcher to have the political capital to cut was the Falkland Islands War in 1982, which gave her a burst in popularity, which, OK, maybe that allowed for some breaking promises. But sort of, I don't know, deus ex machina does not sound like a great triumph of like, oh, this is the democratic process working smoothly with the mandate. No, and I don't think it's ever a, let's say, clean and easy process. And Reagan was one of those elected, I guess, with that most in his mandate, Thatcher, another one.

21:46And even those who were elected with spending cuts as part of their mandate found it a very difficult thing to actually enact. So in Thatcher's case, yes, cutting spending is an important part of what she does. They also have a whole series of state-owned industries that they're trying to either close down or privatize. And the coal miners of Great Britain are the ones who ultimately try to fight back against this. And Thatcher, I argue, I think partially because of the kind of legitimacy that democracy bestows upon her, doesn't end up with British society in full revolt against her, right? So I compare in the book the course of the miners' strike in Great Britain versus the course of solidarity in Poland.

22:30Solidarity starts as a strike among workers and builds out into a kind of society-wide revolt against the state socialist system. Whereas the miners in the UK, for a series of contingent but also I think structural reasons, they are unable to form a broader coalition that would ultimately thwart Thatcher's action. And so the strike fails, ultimately, the coal industry in the UK declines throughout the 1980s. And I think it is the kind of democratic system, the legitimacy of the system itself that allows this process to unfold. So for instance, Thatcher in this period is a very divisive figure.

23:10Her approval ratings are something in the range of 45%. But the police who are kind of carrying out her actions and doing the actual work to break up the minor strike have an approval rating somewhere in the 92, 93 % range. So the state itself is deemed to be legitimate, even if the politician who is enacting these policies is still a highly divisive figure. And that's the kind of deep legitimacy that democratic states had in this period and that state socialist countries did not have, I think, is what ultimately produced the break or allowed the process of breaking promises to go ahead in the United States and the Western world more broadly.

23:57The sort of distinction between politics and the economy, I guess. Well, that's a whole nother. Yes. I mean, that's another way by which states, particularly capitalist states, have found ways to break promises is to shift responsibility for social and economic outcomes from the government itself to the market. Right. So even processes of privatization, although technically a change in ownership, were also the kind of consequences of those were often downsizing, unemployment, things like that. So you've shifted responsibility over to the marketplace, over to this realm called the economy. And then the negative social consequences that stem from that process of privatization appear to be the product of the market.

24:44They appear to be the product of the economy rather than a political decision itself. And so that distinction, yeah, the politics versus economy distinction is a fundamentally important one for how and why capitalist societies work. So Gorbachev has a famous quote. I think it's something like politics always follows the economy, not vice versa. And you actually, you mentioned that in your book, but I'd be curious to get your take about the relationship between politics and the economy and which one has the most influence on the other? Yeah. So I've wrestled with this for quite a long time as I was writing this book, and I don't think I have a categorical answer.

25:26I think it can be different things in different moments. Generally speaking, I do think that political economy, the kind of economic forces of our world and of the late 20th century did provide, let's say, windows of opening, windows of possibility and also closed other possibilities in the realm of politics. So if you take something like supply-side economics in the United States, on its face, in terms of whether or not it actually could have succeeded on its own terms, the idea that you cut taxes, you'll unleash economic growth, and it will essentially pay for itself, that idea has continuously been disproven, and yet it continues to exist in U.S.

26:10political discourse, largely because the United States has been able to borrow more money than anyone from the 1980s onwards thought possible. And so I think political ideas and political formations, political movements, their lifespan and their popularity and then their moments of coming to an end do kind of have an economic underpinning that makes them possible or not. You know, I'm curious, this book came out, I think, 2022 during the peak of the recent inflation wave. When you wrote it, I mean, I imagine, you know, this is years and years of research in your career, but how much were you thinking about the present day?

26:51And I recognize you keep sort of hinting at, well, maybe democratic governments in the West don't have the same perceived legitimacy to do unpopular things or to do things at all. But I'm curious, as you were writing, how much you were thinking about this is a lesson for contemporary times. Yeah, it was part of it, certainly as the book came out. So when did the Fed start hiking? You two would probably know better. Was that the first hike was in March 2022? Yeah, so it was about to come out. And I think had that happened much more as I was writing it and researching it, I think the book may have taken a different shape.

27:32Basically, it took on a new kind of resonance as the book was about to come out. As I was crafting it, it wasn't so much, I guess, the present day analogy or the present day comparison I was making was how the United States was able to exist with a system of political economy that didn't seem to me to be sustainable. in the sense of everything I had thought I learned about economics, and I was not a PhD in economics or anything, but four decades of current accounts deficits and budget deficits, many times it had been predicted that this type of system, this type of arrangement could not go on and would one day come to an end.

28:12And yet all of those predictions have continuously been pushed back or been to this point haven't come to fruition. And so I was trying to find the origins in one way of, at least for the part about the United States in the book, trying to find the origins of where that political economic arrangement came from. And it turned out to have its origins, at least I think in the early 1980s with the combination of Volcker and Reagan. So yeah, I didn't go in search of a kind of recipe of how do you go about breaking promises? Because I ultimately don't think the contemporary world is one where more breaking promises is a solution to anything, but more how the United States as a political economic system arrived at the arrangement that it has had for the past four decades.

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