Tuesday, February 5, 2013

Breaking up is hard to do

James Kwak points out that Michael Lewis backs his position that the too-big-to fail financial institutions should be broken up. He also notes that, not only hasn't this happened, it doesn't seem likely to happen. Why not?

This is actually a pretty interesting conundrum for democratic politics. A whole set of factors would suggest that financial reform should happen. First, the consequences of not doing so seem pretty serious - not only has the systemic vulnerability of the financial sector not gone away since the meltdown of 2008, on some readings it has got even worse. Failing institutions were taken over by others that were also failing, but managed to hang on longer, thus becoming even 'bigger to fail'. And new technologies are potentially introducing greater volatility to the markets, opening up the possibility of staggering losses beyond market actors' control.

Second, if politics were at all driven by public opinion, then surely taking the axe to the financial institutions responsible for the crisis would be a huge vote-winner, and politicians would be queuing up to promise ever more swingeing measures to rein in the banks. The various median vote theories out there surely mean political parties would promise to deal with the financial sector, since the majority of  voters demand this, and only a tiny minority oppose it. And yet, as Kwak reports, the US Senate mustered barely a third of votes behind such a proposal.

So what is going on? Well, part of it is the usual story in public policy, that reforms often damage a small number of people disproportionately and immediately, whereas the benefits are spread out amongst many people and over time. The former mobilize, the latter don't. It was ever thus.

But surely we need more to explain this, or no policy measures benefiting the mass of voters would ever have made it through the democratic process. My guess is that politicians and their parties have become so ideologically and organizationally weak that they are now incapable of mobilizing popular opinion behind the production of public goods. To deliver policies that benefit the public, the public needs to be mobilized in such a way as to neutralize the efforts of the affected minorities. The more powerful and rich these minorities, the more parties have to do to convince voters of the need for policy change, and the better organized they need to be to mobilize support and get the vote out.

All of this is what political parties used to do, but no longer bother. Why risk annoying powerful people who can finance your reelection, when you could do nothing and blame someone else for the bad consequences of failing to deliver reforms? Postdemocracy, as Colin Crouch calls it. There will be no way out of the crisis without mobilizing social groups that have an interest in reform. The longer it takes for this to happen, the less likely it is that there will be peaceful outcome to this crisis.