Democratic Deficits: Liberalism, Neoliberalism, and Financialization

REVIEW ESSAY
Democracy in Default:
Finance and the Rise of Neoliberalism in America
by Brian Judge
Columbia University Press, 2024, 352 pages

Since the collapse of Lehman Brothers in 2008, policymakers have broken free of historical norms, channeling trillions—sometimes from thin air—to prop up the global financial system. The coronavirus-induced shocks of 2020 only accelerated this trend.

The cares Act constituted the largest slug of fiscal support ever delivered to an economy in the history of capitalism and America’s largest new welfare experiment since the Great Society.¹ The European Union sidelined austerian institutional frameworks—notably the Euro­pean Stability Mechanism—in favor of the sweeping NextGen EU recovery package, projected to reach a total cost of €1.8 trillion (with, moreover, specific directives for central bank bond buying to be slanted in a green direction).² In Brazil, even the notoriously prudent Chicago-trained economy minister Paulo Guedes was quickly overridden by President Bolsonaro’s government, which, not wanting to be outflanked, declared a “state of emergency,” suspending all fiscal rules; the result would be an impressive $109 billion in emergency spending.³ Between April and July 2021, the Bank of England helped Prime Minister John­son’s government finance an ambitious furlough scheme, eventually writing off 99.5 percent of all Covid-era government debt through “money printing.”⁴

These displays of decisive government action have warmed even some on the left to financial power. Rather than calling to overthrow central authority and to scatter America’s concentrated financial elite to the wind, certain progressives have recently called for powerful cen­tral banks to be harnessed to modulate capital flows toward egalitarian social ends.⁵ “The alternative [to neoliberalism] is both political and economic democracy,” writes the political economist Benjamin Braun: the Left’s challenge is to “turn the financial system into a utility-like sector geared towards the public good, and socialize central bank plan­ning.”⁶ Similar visions of overcoming capitalism—or neoliberalism—by democratizing capital ownership without top-down state control have long been advocated by Yanis Varoufakis, Matt Bruenig, and Bernie Sanders.⁷ According to these narratives, the Federal Reserve might work hand-in-glove with financial institutions and corporate America to prop up a fundamentally irrational and unjust market system today, but this complex could become a counter-neoliberal weapon for progressive finance tomorrow. New forms of democratic control—from the now-independent central bank to the capitalist firm itself—might be agitated for, with the aim of transferring the concentrated power of financial elites into the hands of the majority.

This line of thought constitutes a welcome departure from Occupy-era skepticism of centralized political and economic power. Yet such calls to “democratize finance” proceed from a largely familiar—and in­correct—story about the nature of neoliberalism. This story holds that, as the postwar “Golden Age” buckled under its own contradictions, a counterrevolution, gestating on the slopes of Mont Pelerin and at the University of Chicago, carried out a vast project of walling off the econ­omy from democracy and ensuring finance’s dominance. “The neo­liber­al counterrevolution sought to preserve the forms of democratic rule,” writes the historian Daniel Finn, “while emptying out their content.”⁸

If neoliberalism came about by exempting the economy from liberal-democratic control, it would follow that reasserting such control would reverse neoliberalism itself. But what if the unraveling of the New Deal coalition and the postwar consensus cannot solely be explained by the “hollowing of democracy”? Theories of neoliberalism that emphasize the erosion of democratic rule tend to adopt an explanatory frame cen­tered on “capitalism”—mass politics are conspicuously absent, with “capital” and/or “structural forces” considered the only relevant politi­cal actors. This worldview poses an obvious dilemma for its proponents: “structural forces” alone did not deliver 62.6 percent of California voters in favor of Proposition 13 (limiting property taxes), 525 electoral votes to Ronald Reagan in 1984, or the House of Representatives to Newt Gingrich in 1994.

Democracy in Default: Finance and the Rise of Neoliberalism in America, a new book by Brian Judge, a policy fellow at the Center for Human-Compatible AI at the University of California, Berkeley, raises another possibility: that democracy and neoliberalism are not simply opposites. “Liberal democracies place the financial yoke upon their neck,” writes Judge, “Finance capitalizes on a deep structural feature of liberal democratic politics that must be understood before any serious ‘alternative to neoliberalism’ can be contemplated.”⁹ In its most con­densed form, Judge’s argument is that financialization is a spontaneous response to a crisis within liberalism.

Liberalism, Judge explains, disavows the problem of distributive con­flict. When the postwar growth engine began to slow, finance—which appears to extend distributive shares without requiring taxation or redistribution—promised a way out of the resulting political impasse. Elected officials were not captured or co-opted: they willingly embraced financial solutions to their political problems. Finance, naturally, exacts a price, however: subjecting government to the financial imperative to produce monetary returns has precipitated the transformation of liberal­ism into what is now commonly known as “neoliberalism.” In essence, Judge reverses David Harvey’s dictum: instead of “Neoliberalism entails the financialization of everything,” he arrives at “financialization entails the neoliberalization of everything.”

Neoliberalism, per Judge, is not simply a set of dominant ideas in Western political economy; to the contrary, neoliberal ideology is fre­quently incoherent, even on its own terms. Judge’s picture of neoliberalism is rather one of shifting economic incentives across private and public sectors, which have, in turn, wrought drastic change upon politi­cal life.

While Judge’s account of neoliberalism’s rise is very similar to those of Greta Krippner and Wolfgang Streeck, his unique contribution lies in his examination of the theoretical underpinnings of distributive conflict within liberalism itself, which he implicates in the neoliberal revolution.¹⁰ Judge describes his intellectual project as “put[ting] the liberalism back in neoliberalism.” The upshot is that there is little reason to imagine that a “democratized” finance, operating according to the contours of the liberal-democratic order, would be any less speculative than it is today or was in the years preceding the 2008 crisis. Finance, as we know it, is a creation of liberal democracy. This is not to assert that making finance more responsive to the demands of society is itself undesirable. But as Judge shows, an array of thinkers has confused cause for effect, leaving post-neoliberals with an insufficient political lexicon to articulate—let alone resolve—the causes of our political-economic trouble.

“A World of Walls”

Before it is anything else, Judge argues, liberalism is the theory that political life can and should be divided into discrete spheres—in Michael Walzer’s words, it is “a world of walls, and each one creates a new liberty.” Whereas the monarchical absolutist sovereign saw only, per Thomas Hobbes, an “undifferentiated land mass” over which he ruled, liberalism separates this terrain into distinct spheres where the sovereign may or may not intrude. Religious liberty flows from separation of church and state; the separation of civil society and the state creates political liberty; and the separation of the marketplace and the state creates economic liberty, etc.

As Judge argues, the classical liberal state itself cannot, as a matter of principle, issue politically determined valuations, compulsions, and con­trols. But like any other political order, liberalism exists in a state of material scarcity, requiring that decisions be made about the production and division of resources. These questions are easily resolved under an absolutist regime, which can tax, spend, expropriate, and persecute at will.¹¹ The liberal state cannot do the same: such decisions, according to Judge, require forms of authority forbidden by Walzer’s independent spheres of liberty.

As such, a central concern of liberal political theory—as the chapter of Democracy in Default dedicated to intellectual history demonstrates—is how production and distribution might take place outside of the state while also generating a stable and consensual political order. The answer Judge finds in canonical liberal theorists is that the “invisible hand of the market” optimally divides and distributes that which the state cannot. Distributive conflict is not abolished but simply located outside the state and, when the system functions correctly, depoliticized: an essential (though often unavowed) premise of liberal government.

Liberal theorists, Judge writes, nonetheless recognize the latent tension beneath this order. Discourse alone does not guarantee political legitimacy: a regime of depoliticized religion (i.e., secularism) requires that the state cultivate the necessary dispositions among its subjects (i.e., accepting the privatization of religious faith). The history of secularism was hardly one of constant forward march: after the Edict of Nantes, neither Catholics nor Protestants abandoned their ambitions of fully converting the other, so secular government quickly collapsed.¹² How can liberal societies guarantee buy-in from the less fortunate? Judge finds that the answer converges in growing collective wealth: “A rising tide lifts all boats.”¹³ Just as “tolerance” serves as a depoliticizing dis­course for questions of religious conflict, “the market” serves to de­politicize distribution; “toleration” is religious conflict’s depoliticizing practice, while “growth” does the same for distributive conflict.

Judge finds various shades of this discourse in the works of John Locke, John Stuart Mill, and John Rawls. To Locke, exclusive ownership creates an incentive for labor and productive use of resources, benefiting society as a whole. With the advent of money comes the ability to produce and share more than one consumes oneself; money enables growth, justifying “a disproportionate and unequal possession of the earth.” “He who appropriates land to himself by his labour,” writes Locke, “does not lessen but increase the common stock of man­kind.”¹⁴ When there are finite common resources, everyone is better off when the “industrious and rational,” rather than the “quarrelsome and contentious,” possess more resources.

But Locke conceived of the commons as infinite, especially given the incipient colonization of the New World. His explanations for what mechanism might rightly determine unequal shares thus fall short. Set against growing economic stratification, liberalism will require better justifications for why the poor ought to accept economic inequality. John Stuart Mill confronted this dilemma in the age of democratic and labor insurgency. In 1848, as a series of popular revolts rocked Europe, Mill penned his Principles of Political Economy. At its core was the then timely question: how can majority rule—inevitably implying the rule of the poor over the rich—be prevented from ultimately doing away with private property and free markets?

Mill’s works contain a series of striking concessions about the unjust nature of his era’s capitalist exchange. Appropriation seems to occur in an inverse ratio to labor: the largest portions go to the people who don’t work. “The very idea of distributive justice, or of any proportionality between success and merit, or between success and exertion,” writes Mill, “is in the present state of society so manifestly chimerical as to be relegated to the regions of romance.”¹⁵ To rectify this, Mill believed that reform to “favour the diffusion, instead of the concentration of wealth” would cure “the physical and social evils which almost all Socialist writ­ers assume to be inseparable from the principle of individual property.”¹⁶ By securing improvements in labor conditions, worker cooperatives, for instance, could reconcile the working classes to the existence of private property. In sum, property can be reformed: “The evils and injustices suffered under the present system are great, but they are not increasing; on the contrary, the general tendency is towards their slow diminution.” Growth, development, and progress resolve the tensions in the liberal order. For Mill, liberalism and progress are the same: indeed, liberalism means growth. Judge concludes, “The focus on progress enables Mill to sidestep the contradiction between political equality and economic inequality at the heart of liberal social contract theory.”¹⁷

John Rawls, finally, attempts to correct the deficiencies of classical liberalism, motivated by the question of how a society might be “free and equal” while its subjects are divided by reasonable religious, philo­sophical, and moral doctrines. Beginning from the “fact of reasonable pluralism,” Rawls attempts to discover a basis for political cooperation and provide all involved parties with a basis for avoiding destabilizing conflicts. The shortcomings of this approach, Judge posits, are telling.

The challenge of liberalism is to take various religious, philosophical, and moral doctrines and generate a social basis for cooperation among them. Rawls’s solution is to find a “public conception of justice” inde­pendent of ideology. This “public conception,” Rawls supposes, must be found among all these different ideas’ overlapping principles. If coercive state power is to be deployed, it should only be in service of ideas that “widely different and even irreconcilable comprehensive doctrines can endorse.” Matters that cannot be decided according to common princi­ples, Rawls concludes, are expelled from liberal politics: “the public conception of justice should be, so far as possible, independent of controversial philosophical and religious doctrines.”¹⁸ From this van­tage, it is clear why distributive conflict poses an existential dilemma for liberalism: distribution, by its very nature, cannot be managed in a pluralistic way, so it must be managed outside of the state.

We see that liberalism presumes progress. Locke, Mill, and Rawls each struggle to imagine a legitimate liberal order without presuming a Whiggish notion of perpetually improving economic conditions. But what happens when progress stalls? While Mill might insist that liberal­ism without progress is definitionally illiberal—and thus illegitimate—liberal politicians themselves cannot indulge this fantasy. Political legit­imacy, even in crisis, must hold: a dilemma confronted in its full force by liberal politicians of the 1970s.

Disembedded, Embedded, and “Neo-” Liberalisms

Judge’s intellectual project draws heavily upon that of the international relations scholar John Ruggie, who, in 1982, proposed the term “embed­ded liberalism” to characterize the postwar liberal order’s institutional configuration. Until the rise of modern economic liberalism, markets, where they had existed at all, were always and everywhere subject to various social, religious, and political controls—whether the dictates of guilds, physical regulation of market spaces (through the Middle Ages, markets, then known as fayres, were permitted by most towns to open only twice a year), or expropriation by monarchs. The “disembedding” of political dictates from markets allowed unprecedented productive accumulation, heralded even by the likes of Karl Marx as a new phase of human development, at the expense of social inequality and political stability. “Embedded liberalism,” then, sought to fuse the benefits of both the socially stable guild-dictated “embedded markets” with the wildly productive “disembedded markets” spanning, roughly, from the abolition of outdoor relief to the collapse of the international gold standard in the 1930s.¹⁹

Embedded liberalism offered, in essence, a simple resolution to enduring questions of distribution within capitalism. Free markets, backstopped by public debt, would produce extraordinary returns for capital. The state, meanwhile, would siphon part of these profits back into state coffers, which would fund arms buildups and working-class consumption. The top-secret National Security Council planning docu­ment entitled “United States Objectives and Programs for National Se­curity” (NSC-68) attests to this strategy: although containing the Soviet Union would require unprecedented military spending and a massive build-up of technological capacity, this “could be accomplished without a decrease in the national standard of living because the required resources could be obtained by siphoning a part of the annual increment in the gross national product.”²⁰ In other words, as long as growth remained steady, American free enterprise would achieve both an egalitarian social order and military dominance while avoiding overt redistribution.

By 1973, however, postwar growth itself was sputtering. Creeping inflation, Ruggie predicted, would be “likely to lead to a direct renegotiation of the modus vivendi that has characterized embedded liberalism.” By the waning years of the 1960s, inflation had crept well above its postwar baseline.²¹ In 1974, Paul Samuelson coined the term “stagfla­tion” to characterize a problem that orthodox Keynesian economics seemed unable to explain: the coincidence of high inflation and high unemployment. A surge of new economic theories quickly constructed stagflation as an “all-encompassing social crisis” of embedded liberalism. These critics cast inflation as a technical, social, and moral problem that the Keynesian “zeitgeist” had allowed to fester. An overly permissive state had unleashed the wage-price spiral, its politicians unwilling to introduce the proper labor discipline necessary to control the crisis; addressing inflation, therefore, required restoring the supremacy of “free enterprise” over “big government.”

It is this diagnosis that Judge first seeks to correct. The crisis of the 1970s was not an inevitable structural crisis of the antecedent regime’s “unresolved contradictions” but a classic case of the destabilizing dis­tributive conflict that confounds all liberal theorists. Judge demonstrates inflation was the “monetary manifestation of distributive conflict” arising from the breakdown of the postwar growth regime. The crisis mainly resulted from a confluence of disastrous but otherwise unrelated ecological, social, and political shocks to the postwar political-economic order—not, as Federal Reserve chair Paul Volcker and fellow monetarists would have it, simply “too much money chasing too few goods.”²²

Foremost among these was the 1973 OPEC embargo, itself rendered more devastating by the domestic political fallout of the 1969 Santa Barbara oil spill; environmental concerns paralyzed construction of the trans-Alaska pipeline that would connect world markets to the massive Prudhoe Bay field, thereby leaving the United States with no remaining domestic surplus production capacity by 1971.²³ The Department of Energy began filling its Strategic Petroleum Reserve in 1977, putting further upward pressure on oil prices. Two years later, the Islamic Revolution in Iran tripled oil prices from $13 to $34. These shocks upended the carefully negotiated structure of global oil markets: the Carter administration’s price deregulation subjected a previously tightly regulated commodity to the whims of the market, while the advent of state-owned companies like Saudi Aramco, with little to no refining capacity, permitted increasingly speculative oil trading, as traders sought to play upstream and downstream suppliers off one another.²⁴ By the decade’s close, the total American oil bill rose from its postwar baseline of 2 percent of GDP to nearly 8 percent, while motor vehicle insurance spiked 27 percent nationally from 1975 to 1976.²⁵

The oil shocks were felt dearly in the agricultural sector, which experienced a persistent fertilizer shortage throughout the 1970s with cascading effects in adjacent livestock markets. Meat prices increased 30 percent year-over-year, contributing nearly 2 percent to the CPI in 1974.²⁶ A global drought in 1972, meanwhile, reduced worldwide grain production by thirty-six million metric tons, with losses concentrated in the Soviet Union; in hopes of reducing the deficit, buying farmers’ political goodwill, and solidifying the détente with the Soviets, the Nixon administration extended the Soviet Union a $750 million line of credit to purchase wheat from U.S. growers, further decreasing domestic stock. As such, cattle prices doubled between 1976 and 1978. In Califor­nia and much of the western United States, the year 1977 was the driest ever recorded; the abnormally harsh winters of 1977 and ’78, and the 1980 heat wave and drought, further squeezed meat producers. Rising meat prices added a percentage point to the CPI’s rate of increase.²⁷

Finally, from 1972 to 1982, the sale price of a new single-family home increased from $30,100 to $80,500. A confluence of poor monetary policy choices and demographic factors drove this inflation. The entry of the baby boomer generation into their prime home-buying years placed severe pressure upon housing demand. Credit was similarly scarce; given the rapidly eroding value of cash and bonds, savers hoping for greater return pulled their money out of savings and loans, investing it in new, unregulated products like certificates of deposit.²⁸ Given that cash and bonds could no longer serve this function, housing itself became a hedge against inflation. As demand for housing surged, the creation of new housing supply ground to a halt, paralyzed by price shocks in energy and transportation as well as builder financing costs driven by rising interest rates. Meanwhile, mortgage rates rose sharply to combat inflation, reaching a peak of 18.63 percent for a thirty-year fixed mortgage in 1981—though not officially counted in the CPI, Americans’ monthly payments reached excruciating heights.

In sum, inflation abstracted to the Consumer Price Index obscured the actual conflicts underlying the crisis: compounding issues of a growth machine running, by the mid-1970s, on fumes. Cheap energy, cheap suburban housing, and a tightly regulated financial system had contained various social conflicts—but could not be sustained during crisis. Inflation, brought on by these resources’ newfound scarcity, marked this regime’s limits. The political ascendancy of neoliberalism certainly originated in the crisis of inflation. Yet to understand the “worms liv[ing] in the bowels of a hegemonic Keynesianism” as having simply been those of inflation, as the neoliberals did, is to mistake the symptom for the cause.²⁹ Inflation was the “monetary manifestation” of the crisis—not the crisis itself.

The spontaneous political reaction to inflation was to deregulate finance and to publicly subsidize financial risk-taking, in hopes of managing the resulting conflicts over newly scarce social resources. For conventional liberal political arrangements, inflation, and the distributive crisis it represented, surfaced a historic dilemma. Embedded liberal­ism could, in theory, have soothed the inflationary crisis of the 1970s: the state could have achieved disinflation by implementing price controls on key inputs, investing in public infrastructure to alleviate supply bottlenecks, and nationalizing the noncompetitive, state-de­pendent oil and defense sectors.³⁰ In this scenario, however, capital would have been forced to accept an ever-dwindling rate of profit. This presented both an ideological and political crisis for unions and mass parties. As ever, their presupposition was that the system would deliver limitless growth.³¹ They had accumulated neither sufficient political power nor an ideological line to adapt to—let alone to challenge—the changing nature of American capitalism in the absence of such growth.

The result was that no coalition emerged to remake the concentrated, private core of American economic life. The growing cohort of powerful voters whose financial position depended on the continual appreciation of capital assets at the expense of wages, whom Hyman Minsky termed “the deflationary coalition,” had come to dominate the politics of housing and welfare provision. Growth stagnated and scarcity increased, but the obligations of liberal political entities remained stable. Without a political basis for the kinds of demand-side interventions necessary to jump-start growth—interventions that would have required breaking from deep structural features of liberal government—liberal politicians sought to maintain their commitments to constituents by appealing to the world of finance.

A New Growth Regime

Judge’s ambition in the ensuing chapters is to chart the exact change in financial behavior wrought by mutating incentives. Few institutions of the postwar economy are more emblematic of the shift toward a new growth regime than the California Public Employees Retirement System (CalPERS); it is today the largest portfolio of financial capital in the United States, managing $450 billion for six hundred public employers. CalPERS—and the public pension system at large—is singular among labor’s great postwar victories. It is also, Judge finds, among America’s most powerful engines of upward redistribution.

As a case study in neoliberalization, CalPERS exemplifies how an apparatus previously funded by property taxes and investments in productive capital turned to finance, in turn evangelizing the speculative financial instruments most associated with neoliberalism. From 1930 to 1966—corresponding to the prevailing nominal interest rate—CalPERS’s dis­count rate was set at 4 percent. Accordingly, the required rate of return was readily generated through productive investments in stal­warts of the postwar economy like Bethlehem Steel, public utilities, and a conservative mix of government, municipal, and corporate bonds.³²

Yet the confluence of general inflation, appreciating housing prices, and bureaucratic modernization left CalPERS increasingly dependent upon redistributive taxation to meet its obligations. The Los Angeles City Council, for instance, voted in 1961 to increase property taxes by 10 percent yearly to maintain its obligations to pensioners; by the middle of the next decade, the city of Los Angeles would direct nearly half of all property taxes toward funding pension benefits.³³ A once relatively unobtrusive state obligation had quickly become the center of a fierce zero-sum distributive conflict between homeowners and pen­sioners—a conflict quickly seized upon by antigovernment political entrepreneurs.

In the 1978 primary election, nearly 63 percent of California voters cast ballots in favor of Proposition 13. Spearheaded by local businessman and per­petual crank Howard Jarvis, Proposition 13 ignited the “tax revolt” that would have far-reaching national repercussions for the advance of Reaganite conservatism. In requiring city and state officials to recommend taxes for the ballot, which could only be approved by a two-thirds supermajority in the state legislature, Proposition 13’s passage functionally stripped local governments of control over government finance. Sensing the shifting political winds—and to the horror of labor lead­ers—Democratic governor Jerry Brown reversed his attitude toward Proposition 13, referring to himself as a “born-again tax cutter” while charging his Republican challenger Evelle Younger with living large off the four public pensions he received.³⁴ For this, conservative commentator George Will hailed Brown’s recognition that there was no longer political support in California for “explicit redistribution of income for egalitarian purposes.” Whatever its strategic motivations were, Will’s diagnosis was correct.

The combination of inflation and Proposition 13 created a severe double bind for California’s public employers: just as wage and pension costs became historically burdensome, tax revenues were drastically cut. Los Angeles, for instance, laid off 20 percent of its municipal workforce to meet its pension obligations. These austerity measures nonetheless did little to resolve public employers’ untenable predicament: as one city official put it, “If we are going to get property tax relief, it is necessary for the city to find some other sort of revenue to finance pension systems.”³⁵

A new distributive bargain quickly emerged: rather than offering wage increases, public employers lowered pension contributions.³⁶ Whereas wages must be paid immediately, a pension fund’s obligations are fulfilled decades in the future. Investment returns, fund managers reasoned, would eventually make up the difference. In this new political climate, increasing returns was an existential necessity. As CalPERS head Jim Smith explained, “Pension fund managers above everything else have to make an adequate yield.” Following this logic, Brown made it clear that “pension funds will have to institutionalize an allocation to greater risk.”³⁷

Fortunately, a new financial asset class offered pension managers some relief from their double bind: in 1983, Freddie Mac issued the first collateralized mortgage obligation (CMO). Home mortgages had been unattractive to pension funds because they were not readily marketable and required long-term commitments at fixed rates of return; the advent of the CMO removed these obstacles. By tranching a pool of mortgages into medium- and long-term bonds, the CMO eliminated the prepayment and duration risk from mortgage speculation. Prior to the advent of the CMO, securitized mortgage issuance had been largely stagnant; by the end of the decade, it would double in volume.³⁸ Witnessing this feeding frenzy, BlackRock CEO Larry Fink—then a managing director at First Boston—remarked, “I’ve never seen a more impressive list of pension managers [buying] mortgage-backed securities.”³⁹

Bankers and developers lauded CalPERS’s investment in private-label MBS and direct equity as a new source of funding in the Volcker era of 20 percent interest rates. By the mid-1980s, 35 percent of its portfolio was invested in mortgages; the funding once derived from tax revenue and “productive” investments in American industry now came mainly from speculative financial assets. Increased risk delivered increased re­wards—an unmistakable political lesson.⁴⁰

The 1984 passage of Proposition 21—a measure pushed by CalPERS, the California State Teachers’ Retirement System (CalSTRS), and As­sembly Speaker Willie Brown—removed the 25 percent cap on equity investments. Free to invest in the stock market without limit, CalPERS quickly increased allocation to its equity portfolio. In turn, the fund became highly engaged in matters of corporate governance to maximize returns. In 1985, twenty-one public pension fund officials—State Treas­urer Jesse Unruh chief among them—founded the Council of Institutional Investors to promulgate a “shareholder bill of rights” calling for the principle of “one share, one vote” in hopes of eroding industrial capitalists’ power within the firm.⁴¹

Seeking to maximize profits from its new equity exposure, CalPERS joined the vanguard of the movement toward “shareholder value” as a firm’s primary purpose. The fund, in turn, became “widely regarded as the leader in shareholder activism in the U.S. equities market.” In 1982, the CalPERS board declared its intent to seek representation on portfo­lio firms’ boards of directors.⁴² Its intent, per that year’s annual report, was “to improve corporate profitability and to stimulate corporate man­agement to better operate the companies for the shareholders’ benefit and increased return.” With the financial tailwinds of the 1980s at its back, CalPERS earned double-digit returns throughout the decade.⁴³

In July 1990, the United States officially entered recession. For CalPERS, the recession’s political consequences were severe: in 1991, seeking to close California’s $14 billion deficit, Governor Pete Wilson began an unprecedented political assault against CalPERS. The State of California ceased paying into pension funds for employees, teachers, and University of California staff entirely; their respective pension funds were left to ride the stock market.⁴⁴ (A former Jerry Brown chief of staff likened Wilson’s offensive against CalPERS to Saddam Hussein’s invasion of Kuwait the previous year: “Hussein wanted Kuwait so he took it. The governor wants CalPERS and he’s trying to take it.”)

CalPERS, ever in search of ways to restore its portfolio’s flagging profitability, made its first investment in a new asset class called “private equity.” State pension funds were critical first adopters of these new funds in the early years of the leveraged buyout (LBO) boom. The Oregon Public Employees Retirement System injected 8 percent of the fund’s assets into KKR’s buyout of Fred Meyer in 1981, an incredible 40 percent of the deal’s total funding. The state of Iowa invested 5 percent of its pension fund in KKR’s legendary 1989 buyout of RJR Nabisco alone.⁴⁵ New York subsequently invested $55 million in 1986, promptly followed by another $370 million in 1987, with KKR. One 1996 study found that, in these early years, nearly 30 percent of all private equity capital came from public pension funds.⁴⁶ Justifying these investments, Washington state pension fund chief John Hitchman explained, “All the squares on the Monopoly board have been taken.”⁴⁷ To the great admiration of institutional investors across the United States, David Swensen’s “Yale Model”—in which a significant percentage of the en­dowment’s portfolio was allocated to illiquid “alternative” asset classes like hedge funds, private equity, and real estate—yielded the university a 34 percent return on its investments between 1997 and 2007. Greatly inspired by the successes within the Ivy League, CalPERS, like most other state pension funds, increased its allocation to hedge funds and private equity—and, consequently, to “corporate restructuring” strate­gies.⁴⁸

CalPERS had become a major player in private equity, but the fund achieved legendary status in the public equity markets. In the late 1980s, CalPERS began publishing an annual “hit list” of its underperforming equity holdings, placing laggards under tremendous pressure to squeeze profit wherever they could. In 1990, with the accidental assistance of Michael Moore’s debut documentary Roger & Me, CalPERS successfully removed the chief executive officer of General Motors. Conversely, CalPERS played a critical role in quelling a 1993 shareholder revolt at Kodak, giving its public support to CEO Kay Whitmore in exchange for a public promise to make the firm more profitable.⁴⁹ In 1994, an increasingly combative CalPERS began assigning its top two hundred stock holdings a questionnaire evaluating their “responsiveness to shareholders” and publishing an annual “report card” based on their responses. By 1997, the Business Roundtable’s infamous “Statement on Corporate Governance” cited CalPERS’s most common demands as corporate best practices.⁵⁰ CalPERS itself expanded across borders: its International Corporate Governance Program transferred to international markets the Friedmanite governance principles the fund had promoted in the United States.⁵¹

The central principle of “accountable corporate governance,” per a 2008 internal report, was “optimizing shareowner return: Corporate governance practices should focus the board’s attention on optimizing the company’s operating performance, profitability and returns to share­owners.”⁵² In turn, the financial press approvingly dubbed the growth in “shareholder value” from corporate governance initiatives “the CalPERS effect.”⁵³

In 1993, the Enron Corporation received a $250 million direct investment from CalPERS—a crucial vote of confidence for Enron’s transition from a simple energy infrastructure owner to a high-flying fraudulent energy trader. In sum, Judge writes, “CalPERS had become a central protagonist in the transformation of corporate governance wherein the firm was no longer treated as an entity producing goods and services but as a financial asset to be maximized by any means necessary.”⁵⁴ One would struggle to find a more apt encapsulation of the neoliberal transformation of private sector incentives.

By the end of the 1990s, CalPERS’s funding ratio surpassed 100 percent, and California’s finances, fueled by a wave of tech IPOs, were in surplus. A raise, the California State Employees Association insisted, was in order: spooked by the threat of a strike, Governor Gray Davis signed SB400 into law in 1999. The bill—which passed both houses of the state legislature with overwhelming bipartisan support—allowed California highway patrolmen to retire with a generous pension at age fifty, mas­sively expanded benefits, and granted all state employees an immediate 5 percent raise. Incredibly, not one of these benefits would require addi­tional contributions from employees or employers; the necessary funds would come only from the booming stock market.⁵⁵

California’s good fortune would not last. By late 2002, the state made national headlines for its $30 billion budget deficit—a sum, at the time, greater than the annual budgets of nearly all of the nation’s states. One-quarter of the state’s revenue had come from capital gains on stocks and stock options; the dot-com bubble bequeathed California with a $7 billion windfall surplus, which evaporated after the ensuing crash.⁵⁶ After failing to pass a budget, the state entered a partial government shutdown.

CalPERS’s condition was no less grave. The collapse in global equity prices took a severe toll on its funding ratio; the new low-interest rate environment, and its lower prospective returns, appeared a grim omen for the fund’s long-term status. The Greenspan Fed’s efforts to stimulate spending throughout the 2000s kept interest rates chronically below pension funds’ assumptions: these features of the post-2002 macroeconomic climate pushed CalPERS’s leadership to scramble for new finan­cial instruments.

Given these macroeconomic and political pressures, public pension funds saw collateralized debt obligations (CDOs)—much like MBS and private equity two decades earlier—as “manna from heaven.” Wooed by investment banks’ promises of 20 percent returns with investment-grade risk, pension funds like CalPERS became major investors in the CDO craze fueling the subprime-lending bubble.”⁵⁷

Thus, by liberal political entities’ financial sleight of hand, state employees would ironically find themselves among the constituencies most critical to bringing about financialization-cum-neoliberalism. The financial innovations most closely associated with the neoliberal era—private equity, shareholder value, labor-disciplining mobile international capital, and subprime mortgages—were each partially seeded by a state institution scrambling to meet its obligations to constituents. To do otherwise would be to renege on the most fundamental principle of liberal conflict management: injecting infinite growth back into other­wise unmanageable distributive conflict.

Stockton’s Distributive Dilemma

In the absence of growth in the real economy, Judge argues, finance “appears to expand distributive shares without impinging on other groups.” A Hobbesian zero-sum game for control of resources and wealth, pitting homeowners (whose taxes fund pension benefits) against pensioners (whose lifestyles, in the absence of economic growth, are sustained by redistributive taxation), and employees against employers, is once again made tractable. It was this logic that rendered finance so infectious for CalPERS.

Yet the profound effects of the turn to finance upon liberal political entities were hardly limited to high-flying financial portfolios: Judge’s study of Stockton, California, offers a different, though comparable, case study in neoliberalization. As with CalPERS, the passage of Propo­sition 13 deprived Stockton of its traditional sources for municipal revenue; statewide regulations forbade it from shifting course. Finding themselves in a double bind similar to that faced by CalPERS’s manage­ment—the imperative of maintaining growth while its sources of reve­nue were drastically cut—finance presented itself as a fortuitous work­around. In a critical sense, Judge demonstrates, both liberal political entities’ dilem­mas were the same; Stockton’s was only localized on a municipal scale. Much like CalPERS, Stockton’s city leaders habitually met constituent demands by assuming ever-increasing financial risk. Vehicles such as tax‑increment financing, pension obligation bonds, revenue bonds, and ambitious redevelopment projects appeared to ex­pand the distributive rewards of economic growth without requiring redistributive taxation.

Stockton’s agreements with organized labor bound the city to multiyear increases in benefits and compensation, requiring the city to assume the risk that future revenues would be sufficient to meet these obligations.⁵⁸ In the 1980s, the city began covering health insurance for retired employees regardless of their tenure, funded, unlike the city’s pension plans, entirely by current revenues—in effect a financial specu­lation that future revenue would be sufficient to meet the system’s obligations. During the subprime boom, the city agreed to increase the salaries of all workers represented by the Stockton City Employees’ Association by 90 percent of city revenue growth annually. Firefighter and police unions won a similar cost of living inflator equal to 80 percent of the CPI for Urban Wage Earners. Salaries for public safety employees became the largest item in the budget, necessitating, critically, that the city assume a corresponding financial risk.⁵⁹

In one such case, facing mounting obligations to its pension system, a Lehman Brothers representative talked the city into issuing Pension Obligation Bonds. Stockton’s unfunded obligations toward CalPERS functioned, in effect, as a public debt. In issuing POB, Stockton could immediately put borrowed funds toward paying down its unfunded liability to CalPERS—on which it paid an interest rate of 7.75 percent—and instead pay its bondholders somewhere between 5 and 6 percent.⁶⁰ The city would seemingly be able to meet its existing obligations at a lower cost; its ballooning obligations to CalPERS could be kept in check without requiring redistributive taxation, cuts to benefits, or other pro­grams to preserve existing benefit levels. After five minutes of council discussion, the motion passed 7–0.

The city’s ambitious redevelopment projects, conducted under the aegis of the Proposition 13–exempt Stockton Redevelopment Agency, similarly attempted to extend the local development industry’s distributive shares. California’s Proposition 18 provides a critical workaround to Proposition 13’s strict constraints upon city finances, allowing tax-increment financing (TIF) to fund redevelopment projects in “blighted” neighborhoods.⁶¹ TIF is, in effect, a speculation upon further growth: cities fund redevelopment activities using anticipated increased property tax revenues from the redevelopment project itself.⁶² More broadly, similar financial speculation enabled California cities to bypass statutory fiscal limits imposed during the tax revolt.

Financial vehicles like TIF would permit the city to extend its development industry and its construction workers’ distributive shares without impinging upon other interest groups. Perhaps most obviously, the city’s assumption of incredible financial risk to construct the Stockton Arena constituted a direct handout to these groups: at a local developer’s urging, the city assumed the role of the project’s lead developer, presuming its financial risk-taking would encourage further investment and real estate appreciation. As a former council member noted prior to the project’s approval, “It’s all about money . . . of course the developers are excited, they aren’t putting in a dime.”⁶³

By May 2008, however, the City Council recognized a serious prob­lem: property and sales tax revenues had fallen significantly short of expectations, necessitating major cuts to the recently approved city budget. The nearby Bay Area city of Vallejo, which had followed a similar redevelopment model, had filed for bankruptcy. By August, the council needed to cut $16 million to balance the next fiscal year’s budget.⁶⁴

In hopes of closing the deficit, the council immediately began discussing ways to submit previously non-marketized domains of public life to the tribunal of profit, hoping to maximize revenue from city properties including libraries, auditoriums, and parks.⁶⁵ Such proposals would appear tame compared to the brutal austerity program the city would enact in the successive year. Stockton slashed community devel­opment staffing from eighty-eight to forty-two in one year, while reducing public works staffing from 212 to 142. Despite thousands of backlogged service requests, the city ceased irrigating parks and all but eliminated its tree maintenance program.⁶⁶ Stockton’s police headcount shrank by a hundred full-time employees; the department eliminated its truancy program, park patrols, and auto theft division while firing half of its counter-narcotics officers. As a result of layoffs and increased service demands, the city became reliant upon outsourced consultants to meet basic staffing requirements; downsizing city departments had the ironic effect of increasing overall costs.⁶⁷ Tax revenues continued declin­ing; by April 2010, despite painful austerity, the deficit forecast had increased by another $10 million.⁶⁸

On May 26, 2010, Stockton declared its $23 million budget deficit a fiscal emergency, permitting the city to suspend scheduled pay increases for the police and fire departments.⁶⁹ Stockton had to both break prom­ises of pay raises and benefits increases and make deeper cuts to current expenditures. On June 22, the council passed a drastically reduced 2010–11 fiscal year budget. Services were slashed and the deficit was closed.

Still, Stockton’s headache would not pass. That September, new city manager Bob Deis acknowledged the “bankruptcy option” should the city fail to reduce its expenditures. In November, Stockton voters nar­rowly passed a measure stripping the firefighters’ union of protections enshrined in city bylaws. On January 20, 2011, Moody’s nonetheless downgraded Stockton’s rating from AA3 to A1, citing a potential decline in the city’s already limited finances as its primary reason. Stock­ton’s large and “economically challenged tax base” posed a significant risk of further “negative credit consequences” if binding arbitration with the fire department failed to impose sufficient austerity. Moody’s noted Stockton’s union-busting as a beacon of hope: “The city’s ability to use these new powers to achieve a sustainable balanced budget in fiscal year 2012 and beyond will be critical to maintaining its rating over the longer term.”⁷⁰

Union labor, Vallejo’s ongoing bankruptcy proceedings indicated, could and would be discharged in bankruptcy. While waiting for the outcome of arbitration with several of its unions, the city identified retiree medical benefits as an untenable commitment. In March, the city began drafting the next year’s budget; per Deis, the city needed to “create permanent and structural change to [its] expenditure.” Choosing public services to cut, Deis bemoaned, was like “God asking Abraham which son he wants to give up. There’s no ‘no’ option.” The city’s only options, Judge shows, were varieties of neoliberalism.

Stockton cut over 40 percent of its full-time workforce between 2008 and 2011, firing 560 of its 1,360 employees in three years. Moody’s downgraded Stockton again on June 28, 2011, noting the “cost escalations built into the city’s existing labor agreements and growing pension requirements.” The city’s financial obligations, owing largely to the abovementioned deals, increased dramatically as revenue fell. By 2011, general fund revenues had decreased by $27 million compared to 2007. Deis concluded, “Focusing only on current revenues and expenditures avoids a large source of the problem—debt and other contractual liabili­ties—that can only be addressed through the AB506 mediation process and/or chapter 9 bankruptcy proceedings.”

Deis explained that, should the negotiations fail to bridge the deficit, his office would produce a “pendency plan.” Negotiations yielded concessions from eight of the nine bargaining groups, which were nonetheless insufficient to close the deficit. On June 26, Stockton caved to the inevitable: its adoption of the pendency plan made national headlines.⁷¹ The City of Stockton filed for bankruptcy two days later. Stockton’s bankruptcy would only intensify the process of subsuming public life into market structures. The city faced excruciating cuts to public services and state capacity; its finances became tightly surveilled by creditors and subject to their benchmarks, ratings, and metrics; and its political discourse reoriented itself around entrepreneurialism, governance, and fiscal prudence. The city laid off 40 percent of its employees while cutting public expenditure by 25 percent.⁷² “In a word,” Judge writes, “‘neoliberalism’ came to Stockton.”⁷³

An observer of the state of Stockton municipal government in the mid-2010s would be forgiven for assuming the city’s politics to be dominated by free-marketeers, conservative ideologues, and anti-gov­ernment cranks. Stockton’s austerity politics superficially resemble the prescriptions of neoliberal ideologues. Yet Judge’s close examination of Stockton’s neoliberalization finds such figures conspicuously absent. There was no “great persuasion” or “hollowed democracy” in Stockton: simply the imperatives of financialization unleashed by liberal-demo­cratic politics.

Privatizing Keynesianism

Judge convincingly finds the origins of austerity politics and shareholder value ideology in the spontaneous reaction to the crisis wrought by the end of redistributive taxation. But when one takes stock of the changes wrought by neoliberalism upon America, few are more striking than the dramatic accumulation of debt—household, corporate, and public—be­ginning in the 1970s. It is easy to ascribe this shift to the anti-democratic neoliberal masterplan, and the ensuing reforms to fiscal and monetary policy, industrial relations, and regulatory policy—all, of course, laid out in extensive detail by neoliberal ideologues. For Judge, however, this history does not center upon conservative intellectuals or central bank­ers, but upon the imperatives of liberal conflict management.

The era’s basic political dilemma was that, by the 1980s, the political basis for the New Deal politics of housing provision had all but evaporated, yet the obligations of the state to its constituents remained stable. The American state had to continue provisioning housing on a massive scale without new taxation or redistribution. Mid-century suburban consumerism—based on an overlap between elite and white middle-class interests secured by the “Golden Age” of growth—prom­ised economic equality without aggressive redistribution of existing wealth. Living standards continued rising, though they were not secured through rising incomes—and the downward redistribution that would require—but through rising financial asset prices, lower consumer prices from globalization, and easy consumer credit access.

The tax state became the debt state, its financial burdens increasing in lockstep with the decline of social spending.⁷⁴ For both households and governments—from the municipal to federal level—goods once provi­sioned through gently redistributive taxation were now accessed finan­cially. From 1980 to 2007, household debt as a percentage of disposable income surged from 60 to 130 percent.

On paper, the postwar good times had resumed. From 1982 to 2007, annual real GDP growth averaged 3.5 percent—just 0.4 percent lower than the peak of the postwar Golden Age.⁷⁵ Even as real incomes stagnated, Americans enjoyed cheap oil, credit, and consumer goods for the better part of three decades and four presidencies. With redistributive taxation out of the question, finance would meet the liberal state’s obligations to its subjects. Growth would be preserved on paper as real incomes and the Fordist family wage decayed.

For consumers, this debt would be issued, held, and traded through the “shadow banking system,” an unregulated financial system providing bank-like functions—maturity, liquidity, and credit—without access to the guarantees of a central bank. Its emergence is typically explained away by historians on both left and right as simply the result of free market ideology, gross capture, and malign neglect. Judge seeks to intro­duce another factor: “the foundational imperative for depoliticization at the heart of liberal government.” In other words, the rapid acceleration of household debt—and the hulking financial leviathan that accompanied it—did not emerge as a consequence of mere shortsightedness or neglect. As Wolfgang Streeck observes, by replacing the welfare state with public debt, and radically reconfiguring consumer behavior as such, liberal democracies had “bought time,” indefinitely delaying distributive crisis. The crash of 2008 may have marked the collapse of this financing regime for homeowners, but the American credit binge as a means of fending off enduring distributive conflict holds. Nowhere is this strategy for conflict management more evident than in the emergence of the shadow banking system.

The effort to salvage the New Deal politics of housing provision seeded—almost spontaneously and by political necessity—the transformation of American housing finance toward a market-based system. Rather than being issued under the roof of a single para-state entity, mortgage issuance became progressively “vertically disintegrated” into its component tasks of origination, brokerage, warehousing, credit risk, and servicing, with each step performed by a distinct entity along a “value chain.” For the government-sponsored enterprises (GSEs)—Fan­nie Mae, Freddie Mac, and Ginnie Mae—this transformation offered an incredible market opportunity: GSEs either guaranteed or directly held 60 percent of all existing mortgages.⁷⁶

As both for-profit and para-state agencies—their assets had officially been taken off government balance sheets in the early 1970s to smooth over political concerns about debt issuance—GSEs enjoyed innumerable structural advantages. Despite performing many similar functions to their bank counterparts, GSEs’ capital requirements were nearly ten times looser, allowing them to assume far more risk at significantly lower cost.⁷⁷ Yet, because of their para-state status, investors presumed GSE-issued assets carried a similarly impeccable risk profile to Treasuries. GSE assets ballooned from $759 billion in 1990 to $2.4 trillion in 2000, growing at a 16 percent compound annual rate between 1980 and 2007.⁷⁸

Twenty-five years of financial globalization and stagnant growth created huge dollar-denominated institutional cash pools—both within and beyond the United States—existing outside the regulated banking system and in need of safe returns. These investors could not deposit their cash in FDIC-insured savings accounts; yet the trillions of dollars in low-risk bonds that the world’s savers wanted to buy simply did not exist.⁷⁹ As such, American housing debt—as well as other shadow bank liabilities, like asset-backed commercial paper and money market mutual funds—seemingly satisfied this demand. The shadow banking system’s expansion was also a matter of geopolitics: in the eyes of American policymakers, the dollar’s global dominance became clearly linked to their ability to continue producing safe assets for international investors—and thus directly linked to the American financial sector’s ability to loan unfettered by regulations and, conversely, the middle class’s increasing indebtedness and precarity.⁸⁰

Colin Crouch aptly characterized the Clinton-era consensus as “pri­vatized Keynesianism”—though the government no longer borrowed money to fund access to decent housing, or the formation of marketable work skills, it aggressively secured a debt regime of extreme generosity.⁸¹ The rich, of course, were spared higher taxes, while those wise enough to move their capital into the financial sector were rewarded with huge profits. But, it must be noted, the poor also prospered. Clintonian neoliberalism was a formulation profoundly distinct from Latin American or East Asian neoliberalism; the Clintonites were con­cerned, almost obsessively so, with popular buy-in. (In the words of James Carville, “It’s the economy, stupid!”) Sustaining consumer de­mand—not just financial investment—would remain a core policy objective of the Clinton administration.

In effect, subprime mortgages stood in for the wage increases no longer forthcoming for those at the lower end of “flexibilized” labor markets. Treacherous as that opportunity would later reveal itself to have been, home ownership offered the middle class, and even some among the poor, an attractive—and accordingly politically popular—opportunity to participate in the speculative craze making the rich so much richer through the 1990s and early 2000s.⁸² As house prices soared under rising demand from individuals who would not have been able to buy a home under normal circumstances, new financial instruments enabled Americans to use home equity to purchase a third or fourth abode, to finance the skyrocketing costs of the next generation’s college education, or simply to support personal consumption (mainly, though not exclusively, through credit card debt) in the face of stagnant or declining wages. Unlike the era of public debt, where government borrowing sustained consumer demand and met the liberal state’s obligations to its constituents, resources were now provisioned through individual Americans’ commitments to pay a significant portion of their expected future salaries to creditors, who in return granted instant ability to purchase whatever one liked.

For the welfare state, then, neoliberalization filled in the gaps left by the era of fiscal consolidation and austerity. Much like CalPERS and Stockton, debt and finance allowed liberal political entities to maintain their obligations to constituents without overt redistribution. In addi­tion to generating unprecedented profits in the financial sector, “privat­ized Keynesianism” fueled an economy, Wolfgang Streeck observes, that became the envy of European labor movements. Labor leaders, in fact, praised Alan Greenspan’s policy of easy money underpinning the swift expansion of American society’s indebtedness while urging their own policymakers to adopt similarly low interest rates.⁸³ (These leaders noted with great approval that—unlike the European Central Bank—the Fed­eral Reserve is bound by law not just to provide price stability but also high levels of employment.)

Whatever America’s privatization of its welfare state was, it was anything but nondemocratic. It emerged from deep imperatives at the heart of liberal government. These changes, in sum, created a financial system beyond the reach and comprehension of any single financial regulator. These shifts occurred not from a nefarious ideological master­plan but resulted from a deep depoliticizing imperative at the heart of liberalism.

Whither Democratization?

Neoliberalism is best understood not as a set of ideas—the free movement of capital, goods and labor; privatizing public services; insulating economic policy from democratic politics; cutting taxes and so on—but as a set of financial incentives toward, above all, immediate return and immediate conflict management at the expense of long-term development. It was this overriding impulse which led CalPERS to shift its investments from productive assets toward highly speculative financial instruments, coaxed Stockton into betting on future resources to finance its current obligations, and enabled the development of the shadow banking system as a replacement to the corroded New Deal politics of housing provision. As Wolfgang Streeck explains, above all else, neo­liberalism “buys time” by diffusing political dilemmas through finan­cialization. Neoliberalism is not an offense against democracy, but its uncomfortable twin: neoliberal practices and institutions do not nec­essarily emerge as a counterweight against democracy, but instead as quick fixes to democratic capitalism’s enduring contradictions. It is this fact which renders challenging it so difficult.

If neoliberalism were simply a question of political control, it could be overridden by democratizing finance, and then consolidating and im­plementing a countervailing political orthodoxy. But we cannot assume that subjecting finance to liberal-democratic processes will fundamentally alter outcomes: The Stockton redevelopment agency, CalPERS, and the shadow banking system were all established by liberal‑democratic bodies seeking to address distributive conflict without resorting to redistribution or taxation. It is unlikely that the results would differ, as left-wing “democratizers” propose, if democratic principles were ap­plied to various financial institutions under these conditions.

“Publicly run financial institutions might redistribute some surplus currently captured by the financial system or subsidize credit-starved sectors of the economy,” Judge writes, “but such reforms do not alter the operative form of monetary valuation.”⁸⁴ It is difficult to imagine CalPERS’s beneficiaries voting to allocate capital in any way that does not maximize the fund’s returns, even if at the expense of American society at large—much less the stakeholders of Matt Bruenig’s proposed social wealth fund. The worker cooperatives championed by the likes of Sanders and Varoufakis might similarly oppose the most obvious bene­ficiaries of current corporate governance models, but it is difficult to imagine such cooperatives alone spearheading a broader transformation of the American economy. A cooperatively run coal industry, for instance, would have little reason to seek its own self-abolition, or promote modernized energy infrastructure—indeed, for the Democratic Party, maintaining support from Appalachian workers in spite of a climate agenda massively disruptive to the regional political economy remains a perennial challenge. In essence, though it might disempower neoliberal capitalism’s most obvious beneficiaries, “democratic creation or control does not necessarily oppose financial logic and imperatives.”⁸⁵ In the case of CalPERS—and the many state pension funds like it—organized labor operating on behalf of public employees would not only fail to prevent financialization-cum-neoliberalism; they were, in fact, among its key bases of support.

This story, it must be noted, is peculiarly American. All transitions to neoliberalism share some family traits, but it is hard to detect the contours of Judge’s story even in European cases of aggressive market transitions. European neoliberal transitions have not happened through the particularly American method of liberating capital flows to the lower ends of the labor market; they rely far more upon the stick than the carrot, given their reliance upon the often nondemocratic disciplining force of the European Union. It is because the United States maintains the world’s reserve currency that financialization appears as such a powerfully seductive option. The dollar attracts hot flows of capital seeking safe return to run through the United States; American policymakers thus find themselves uniquely poised to skim off this hot money to compensate for their population’s declining wages. Though Judge notes that the transition to neoliberalism has presented itself in distinctly antidemocratic terms in the “Global South,” the use of easy credit to neutralize distributive conflict and buy popular consent ap­pears more narrowly even within the Global North than Judge seems willing to admit.

Yet, at least in the American case, neoliberalism cannot simply be explained as “removal of the economy from democratic control.” Finan­cialization, put simply, meets the imperatives of a politically legitimate liberal order. To imagine that “democratization” along liberal‑demo­cratic lines would generate more just outcomes is wishful thinking. Those outcomes themselves must be scrutinized. Post-neoliberal re­formers should think harder about what capital itself does and how it reconfigures the entities under its control. Even if today’s financial institutions could be democratized, that “democratization” will remain insufficient if their field of action remains constrained and subject to the political mandates of the present growth machine. Through the pre-2008 years, the most democratic of pension funds acted indistinguishably from the most rapacious of asset managers. If finance is to serve the people, then, to obsess over questions of control is to miss the forest for the trees. The problem is not who controls capital; it is what capital does, and the parameters for investment it responds to. Above all else, this is the critical insight of Democracy in Default.

It is unfortunate, then, that Judge’s conclusion elides a reckoning with serious proposals today to reconfigure the incentives under which capital operates. Public investment banks and sovereign wealth funds are dismissed as “[replicating] the functions of existing financial institutions on a more democratic basis.”⁸⁶ Industrial policy and ESG initiatives are included under the same umbrella as misguided attempts at “democ­ratizing” capital.⁸⁷ But far from an attempt to “democratize” finance, a properly-executed national industrial policy would reconfigure the very incentives under which capital operates—incentives which Judge so meticulously charts. This shortcoming stems from Judge’s deep, if misplaced, suspicion of previous attempts at political redistribution of wealth under the framework of liberal democracy. Though the role of a tremendous rate of profit in securing the postwar settlement should not be understated, the fact remains that Judge’s account of “embedded liberalism” seems to underplay the extent of political redistribution under the New Deal order. The existence of a top marginal tax rate of 90 percent from 1944 through 1963, for instance, cannot be explained as hewing to the “walling” imperative of classical liberalism. Overtly polit­ical redistribution took place continually in that era’s “liberal” society—and, for that matter, continues today.

A national industrial policy, if well-executed, would seek to not only democratize existing economic institutions, but coax and set parameters for investment toward the end of unlocking trillions in idle capital stashed away in safe low-return investments and in offshore accounts. Yet Judge is right to note that movements that hope to enact such changes will face severe political headwinds. As long as capital can generate exceptionally high rates of surplus value within the existing system, there is little compelling reason for these institutions to redirect investment elsewhere. Progress in the immediate term, however, will likely require chaining capital to a far lower, and much riskier, rate of return.⁸⁸

It might be tempting for progressives to assume green spending could naturally come about by slightly sweetening the pot for capital. Yet the unfortunate fact is that reindustrialization may very well be a highly unprofitable affair. What then? Post-neoliberals might do better than to imagine our moment not as a habitual crisis of capitalism, as an earlier generation of Left intellectuals did; instead, they could see it as a crisis of Walzer’s “world of walls.” These politics might not overthrow liberalism entirely, but they will challenge its fundamental form of monetary valuation. This, too, is a critical insight of Democracy in Default.

If America remains on its current path—even if financial institutions are rendered more “democratic”—pension funds will continue pouring capital into unproductive service-based enterprises domestically. Finan­cial entities may make “green” investments, but will do so without any incentive to integrate them within a broader program of political trans­formation to the benefit of the American working class; it is all but certain those green jobs would not benefit the American working class, but enable soaring trade imbalances—and thereby anti-worker class warfare—in China and elsewhere. Deindustrialization, the hoarding of capital, and soaring global inequality will continue, just on a slightly greener and more egalitarian basis.

Merely democratizing finance will not reverse neoliberalism and build an economy that works for the majority. One might call for greater discipline rather than greater democracy as the operative princi­ple under which any new post-neoliberal paradigm must govern capital. Put simply, it should not matter which exact authority capital is subject to—so long as it acts in accordance with a national industrial policy’s objectives. To those who seek capital discipline, neoliberalism is not a coherent ideology to be overridden through democratic control alone, but a set of diffuse incentives occasionally, though not always, set by and put in place to the benefit (at least fleetingly) of workers themselves. The task is, put simply, to alter the very terms on which political economy operates.

This article originally appeared in American Affairs Volume VIII, Number 4 (Winter 2024): 116–43.

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Notes