George Friedman - The Next Decade

In retrospect, Roosevelt’s frantic one hundred days of legislation had little effect on the Depression, which was ended by World War II rather than by his economic policies. Reagan also promised actions, although in the end the solution rested not with the president but with the Federal Reserve. Nonetheless, describing the times as being “Morning in America,” a phrase that was part of his 1984 campaign, Reagan, like Roosevelt before him, tried to change the expectations of the public, stabilizing the political situation and buying time for the economy to heal without weakening the state.

Both Roosevelt and Reagan understood that the real threat of an economic crisis would be its political impact, with the misery that piled up wrecking the entire system. They understood that their job as leader was not to solve the problem—the president really has little control over the economy—but to convince the public not only that he has a plan but that he is altogether confident of that plan’s success, and that only a cynic or someone indifferent to the public’s well-being would dare to question him on the details. This is not an easy thing to pull off; it takes a master politician, which is to say a master of illusion. Roosevelt certainly saved the country from serious instability and, in spite of the lack of recovery, positioned it to fight World War II. Reagan saved the country from the sense of malaise that the Carter administration was known for and set the stage for the reversal of fortunes with the Soviets.

Roosevelt and Reagan did one other thing that was in their power to deal with the crisis. They shifted the boundary between public and private, state and the market. Roosevelt dramatically increased the power of the federal government. Reagan decreased it. The problem they were addressing wasn’t the economic crisis itself, but a fundamental political crisis. In the 1929 depression, the financial elite had lost the confidence of the public. They appeared not so much corrupt as incompetent. Under Hoover, they were permitted to play out their hand, but then the situation got worse. Roosevelt intervened, shifting some of the power that had been in the hands of the financial elite to the political elite. Had he not done so, the sense that all the country’s elites had failed might have prevailed, a sentiment that led to fascism in places such as Italy and Germany.

The reverse happened under Reagan. In the 1980s, the political elite was perceived to be behind the economic crisis, and the public blamed the structure of “big government” left behind by Roosevelt. Reagan shifted the balance between the state and the market back the other way, weakening the state to strengthen the market.

Part of rebuilding confidence has to do with understanding which part of the elite—political, corporate, financial, media—is to be held responsible for the crisis. By essentially putting one set of elites or another into receivership, transferring their authority in many ways to other elites, Reagan and Roosevelt gave the public the sense that the president was acting decisively and taking power away from those who had failed. This eased the sense that everyone was helpless, and indeed cleared the way for at least some reforms that didn’t hurt, might have helped, and certainly were needed symbolically. In the end, the crises worked out both because of the underlying power of the United States and because of the resilience of the modern state and corporation, which cannot live apart, yet have trouble living together.

Neither Bush nor Obama was able to manage the national psyche as Roosevelt and Reagan had. Bush lost control of the war and was blindsided by the financial crisis. He fell behind the curve after Iraq and never caught up. Obama created expectations he could not fulfill, then failed to create the illusion that he was fulfilling them. But of course Reagan ran into similar problems at first. The issue that is unknown but that will affect the next decade deeply is whether Obama can recover and lead. Can he understand that when Roosevelt spoke about fearing fear, he meant that the president’s job is to appear to be effective whether or not he is? If Obama doesn’t learn that, the nation will survive. Presidents come and go, but this is a fragile time, with the legitimacy of the presidency and the country itself caught between the demands of republic and empire.

When we talk about shifting the boundaries between corporate and political elites and between the state and the market, this inevitably raises ideological issues. For the left, strengthening the corporate elite and the market threatens democracy and equality. For the right, strengthening the political elite and the state threatens individual freedom and property rights. It is an interesting debate to watch, save that the problem is not moral or philosophical but simply practical. The great distinction that prompts such heated ideological debate just isn’t there.

The modern free market is an invention of the state, and its rules are not naturally ordained but simply the outcome of political arrangements. The reason I say this is that the practical foundation of the modern economy is the corporation, and the corporation is a contrivance made possible by the modern state. The corporation is an extraordinary invention. It creates an entity that the law says is liable for the debts of a business. The individuals who own the business, whether a sole proprietorship or a huge publicly held entity, are not held liable for those debts personally. Their exposure can be no greater than their initial investment. In this way, the law and the state shift the risk from the debtors to the creditors. If the business fails, the creditors are left holding the bag. Nothing like this existed before the birth of “chartered companies” in the seventeenth century. Before that time, if you owned a business, you were liable for all of it. Without this innovation, there would be no stock market as we know it, no investment in start-ups, little entrepreneurship.

But this apportionment of risk is a political decision. There is nothing natural in the idea that the boundaries of individual risk are drawn where they are. Indeed, over time, these boundaries shift. The corporation exists only because the law created it. The political decision to create corporations also means that corporate law, not the law of nature, defines the precise boundaries of risk and liability. There may theoretically be some sort of natural market; but a market dominated by limited liability corporations, from the Fortune 500 to the local plumber, is inherently political.

Since 1933 and the New Deal, the issue of corporate risk has been bound up with the issue of social stability. The structure of risk has been built around the social requirements. During the Roosevelt administration, the boundaries of state control expanded. Under Reagan, they contracted.

What the 2008 crisis did around the world was redefine the boundaries between corporations and the state, increasing state power and the power of politicians, reducing market autonomy and the power of the financial elite. This had minimal impact on China and Russia, where the system was already tilted toward the state. It had some effect on Europe, where state power has always been greater than in the United States. It had substantial effect on the United States, where the market and the financial elite had dominated since Reagan. It also kicked off a political brawl between left and right over whether this shift was justified. In the United States in particular, the boundaries are always shifting and the argument is always couched in moral terms. In spite of variations, the strengthening of the state will be one of the defining characteristics of the next decade globally.

Along with helping define the boundary between state and corporate control, presidents and other politicians manage the appearance of things, largely by manipulating fear and hope. What made Roosevelt and Reagan great was not only that they readjusted the boundary of state and market to suit the needs of their historic era, but that they created the atmosphere in which this appeared to be not just a technical operation but a moral necessity. Whether they believed this or not is less important than the fact that they caused others to believe, and through that belief enabled the technical realignment to take place.