This post introduces a symposium on Counterrevolution: Extravagance and Austerity in Public Finance. Read the rest of the symposium here.
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How did the American state come to be so extravagant in its recourse to fiat money creation and public debt issuance, yet so selectively austere in its public spending choices? This question, which lies at the heart of my recent book, could have been posed at any point after 1971, when the Nixon administration abandoned its commitment to the gold standard. At this point, the US government no longer had to balance its budgets nor raise interest rates whenever foreign investors tried to redeem their dollars for gold. Instead, as many neoliberal economists, including Milton Friedman, recognized and celebrated, the United States was now free to pursue its economic policies with a newfound independence.
Yet they also understood the move to floating exchange rates as a double-edged sword: too much freedom would allow legislators to pursue an overly generous domestic spending agenda that would empower labor and increase wages. To combat this possibility, neoliberal reformers immediately set to work erecting ring fences around the newfound fiscal and monetary powers of the American state. They embraced central bank independence and institutional limits on money creation, which could serve as a substitute for the discipline of hard money or gold. They also advocated for supermajority voting requirements on taxation, along with constitutional limits to tax and spending at the state and local level. At the federal level, the mere threat of a balanced budget amendment was often sufficient to curb the spending ambitions of wayward legislators. Thus, we arrive at the paradoxical arrangement I attempt to unpack in this book: the power of the United States to issue public debt and create fiat money ad infinitum is reined in by the mandate to combat (wage and price) inflation, which in turn dictates a permanent dampener on redistributive public spending.
In many respects, the book is a continuation of the work that I and others have pursued into the history of American neoliberalism. However, as a study in public finance, it focuses on two currents within this tradition that have received relatively little attention in the literature, at least when compared to the Chicago and Austrian schools: Virginia school neoliberalism and supply side economics. In the final chapter on abortion politics, I also consider the more syncretic forms these schools of thinking have taken, notably in the phenomenon of the religious right, with its fusion of Virginia school, supply side, and American libertarian currents.
Why this choice of targets? Virginia school and supply side neoliberalism are the schools of thought that most dramatically influenced the tax and spending practices of American government from the late 1970s onwards. Yet, interestingly, these two schools saw themselves as rivals and often espoused radically different policy positions, notably on the question of public debt issuance and deficit spending. To simplify the story a little, Virginia school neoliberalism is all about austerity: its founding father, the political economist James McGill Buchanan, saw budget deficits almost as a moral failure. Supply side neoliberalism is all about extravagance: it is agnostic about deficit spending and public debt finance, although not at all agnostic about how public money is spent and who or what it gets spent on. To understand neoliberal public finance, we need to understand how these two schools, despite their differences, converged around the imperative to rein in the redistributive uses of public spending.
Virginia School Austerity
My book seeks to convey some sense of the practical as well as intellectual importance of Virginia school neoliberalism in shaping the mechanisms of budgetary austerity in the late 20th century. Histories of the tax revolt rarely if ever mention the role of James McGill Buchanan in designing tax and expenditure limitations, while scholarly studies treat his discussion of constitutional debt limits and minority vetoes as if they were of merely intellectual interest.
Yet there are few neoliberal thinkers who more successfully translated their ideas into policy practice. Buchanan was the intellectual figurehead behind the long wave of tax and expenditure limitations adopted by state and local government in the late 1970s and 1980s, as his student William Craig Stubblebine translated Buchanan’s constitutional philosophy into ballot propositions across the country. Buchanan was also the intellectual progenitor of the campaign for a federal balanced-budget amendment—an idea he borrowed from the segregationist Southern Democrat Senator Harry Byrd Senior. More generally, it can be argued that Virginia school neoliberalism has left a long shadow in the now familiar spectacles of Republican debt ceiling showdowns, the routine abuse of the Senate filibuster, and threatened defaults on U.S. sovereign debt.
Following the groundbreaking work of Nancy MacLean, I seek to contextualize Buchanan’s project within the longer history of the conservative Democratic South and its efforts to maintain white supremacy. Yet in contrast to MacLean, I see Buchanan as more directly indebted to the counterrevolutionary project of the Southern Democratic Redeemers, rather than the pre-Civil War project of Senator John C. Calhoun; Buchanan was a philosopher of fiscal rather than territorial secession.
It is important to understand, for instance, that the mechanisms Buchanan helped build into the tax and spending ballots of the 1970s were near replicas of the devices invented by Redeemer Democrats in the wake of Black Reconstruction. During this period, southern states reformed their constitutions to limit the redistribution of property taxes via public spending, with the aim of rolling back the minimal welfare rights gained by blacks and impoverished whites during this period, most prominently access to free public schools. These constitutional reforms included limits on the rate of taxation, spending limits, and supermajority vote requirements on tax decisions—all of which were key elements of Buchanan’s political philosophy and familiar to us now as part of the 1970s’ tax revolt. Though Buchanan never referenced these historical precedents outright, it is hard to imagine he could have been ignorant of them. He did, moreover, describe his own project as a method of “internal exit without secession”—a kind of secession by other, fiscal means, which could just as easily apply to the counterrevolutionary project of the Redeemer Democrats.
My book also moves forward from the tax revolt of the 1970s to the urban politics of the 2010s, using Ferguson Missouri as a case study in the long-term impact of tax and spending limits on urban politics. Today, the interface between the fiscal and punitive functions of the neoliberal state are made starkly apparent when we look at the role played by fines and user fees in the financing of cash-strapped municipal governments. After the death of Michael Brown at the hands of police in 2014, the public interest law firm ArchCity Defenders published a study investigating the widespread use of fees and fines in Ferguson, Missouri and other towns in the St Louis area. The study pointed to the deep connection between urban austerity politics, racialized inequality, and police violence. It could also be read as a statement on the legacy of Virginia school neoliberalism on urban budgetary politics.
One predictable effect of tax and spending limits, which Buchanan embraced in his widely used textbook on public finance, was a shift from income and property to regressive consumption taxes. Across states and municipalities, a growing proportion of consumption levies now take the form of invisible taxes such as user fees (which turn the resident into a private consumer of nominally public services such as parks, libraries, roads, parking, utilities, etc) and fines (which turn civil sanctions into flat rate, hence regressive taxes).
Recognizing user fees and fines as invisible forms of taxation helps clarify something about the anti-tax message of Virginia school neoliberalism: it is not ultimately an argument against taxation so much as a plea for a more regressive tax system, one that blurs the boundaries between taxation and punishment for the very poor. The user fee was Buchanan’s favorite form of taxation because it rejected the idea of a progressive general tax fund redistributed according to need and instead tailored individual benefit to individual cost. What you got in terms of “public” services was what you could individually pay for. The flipside was that any consumption of “public” services beyond your individual means would translate into a private debt, which in turn could be converted into a monetary sanction or fine. Buchanan’s Chicago school colleague Gary Becker pursued the same logic from the point of view of criminal and civil law and celebrated the fine as the ideal form of punishment. As a critic of public spending excess, Becker wanted to see the prison-industrial complex replaced by a system of monetary sanctions that would force offenders to cover the social costs of their misdemeanours on a user pays basis. Instead, what we got was a combination of the two: a sprawling criminal justice system that nevertheless operates in the most austere of ways, transferring a growing portion of costs to the individual defendant.
In contrast to local and state tax and expenditure limitations, the long campaign to enact a federal balanced budget amendment (in which Buchanan also played a key role) is often dismissed as a failure. Nevertheless, a sizable portion of the Republican Party remains doggedly attached to the campaign and, much like the senate filibuster, the balanced budget merely has to be brandished as a threat to pull its enemies into line. This has made it increasingly difficult to raise direct or discretionary spending, leaving tax expenditures as the only viable arena for new fiscal initiatives—a restriction that makes it much harder to pursue genuinely redistributive, anti-poverty initiatives. This was precisely what motivated Buchanan when he took up the cause of the balanced budget amendment in the 1970s.
Supply Side Extravagance
When compared to Virginia school neoliberals, supply side economists are considerably less naive about the workings of government budgets. They have the same pragmatic understanding of government debt and deficit spending as do bond traders, and harbor no blanket opposition to government debt. However, these are also people who are unusually sensitive to the interplay between government spending, inflation, and central bank interest rate policy, so they are also very hawkish about any spending that might lead to inflation, higher interest rates, and falling asset values. It is not so much the amount of debt issued by government as the type of spending it finances that they are concerned about.
The political economist Greta Krippner has shown how the adoption of floating exchange rates under Nixon eventually led to a new regime of dollar hegemony, under which the United States could run perpetual deficits while still finding willing buyers in global debt markets. Robert Mundell, an economist revered by the supply siders, was among the first to understand this. He foresaw that with the end of dollar-gold convertibility and the integration of financial markets, the US could potentially escape the limits that weighed on its public spending capabilities so long as it could persuade foreign central banks to purchase US government debt at low interest rates. However, he also understood that the price to pay for this privilege was a permanent war against domestic (wage and price) inflation. This was made clear in 1978 when foreign central banks began dumping the dollar en masse in response to President Carter’s attempted reflationary politics.
The 1978 run on the dollar clarified what kind of spending was compatible with America’s ability to issue debt ad infinitum. Defense and police spending were acceptable, as were tax cuts. But anything that might drive up the (social) wage, such as more generous public services or redistributive public spending, was off the table (since the social wage was considered at this point the foremost cause of consumer price inflation). Thus, the supply siders end up enacting a rule of selective austerity in the context of plenty and find a pragmatic point of convergence with Virginia school neoliberals. The supply side economist Paul Craig Roberts puts this nicely when he says that there are two kinds of deficits, inflationary and non-inflationary. The distinction is all important because it allows supply siders to pursue an extraordinarily generous public spending agenda—in the service of financial asset holders. While bond holders are allergic to wage, consumer price, and to some extent profit-driven inflation, they have no problem with asset price inflation.
The supply siders were closely involved in the elite business revolt of the 1970s, which saw major trade associations rebel against the terms of the New Deal labour consensus. At the time, industrialists and financial asset holders were barely keeping their heads above water. Profits were stagnant or falling, with management struggling to hold its own against labour unions, and by the end of the decade, equities and bonds were yielding paltry, sometimes negative returns. The supply side answer? A massive government spending campaign to subsidise returns to capital: that is to say, the adoption of “tax incentives” to capital income of all kinds. We don’t often think of the elite business revolt in these terms. We think of these people in terms fashioned by their own rhetoric, as seeking to escape from the overbearing grip of the state. But as the tax specialist Stanley Surrey has argued, selective tax cuts enacted against a baseline income tax rate are functionally equivalent to public spending. Supply siders made sure that this spending would favour people who derived the majority of their income from capital—not the beneficiaries of industrial profits but rather the holders of financial assets.
Central to the supply side vision of economic renewal are what are known as capital gains. A “capital gain” is the tax accounting term for asset price appreciation. It refers to any increase in the value of an asset that can be attributed to processes of market valuation, rather than to its capacity to produce commodities (the latter referred to as capital stock or factor of production). Cuts to the capital gains tax were at the heart of the supply side agenda from the very beginning. By focusing on this particular type of capital income—the appreciation of asset values, not the accumulation of industrial profits mediated by labour—they aimed not just to restore the capital share of national income, but to escape the New Deal regime of capital accumulation. Although all kinds of industrial interests participated in the business-led revolt of the 1970s, in the end, it was the holders of financial assets who triumphed. As the leveraged buyout and real estate booms of the 1980s showed, the ascent of a capital gains-based regime of wealth creation meant the active destruction of industrial capital stock as well as industrial labour. Corporate raiders sold off warehouses and workshops at the same time they laid off internal workforces. The transvaluation of industrial real estate from factor of production into financial asset took a starkly physical form when real estate developers turned recently profitable industrial warehouses into luxury real estate.
Such asset price appreciation, even when not consumed or realized, affords one the power to command resources and instigate investment, notably by increasing the collateral that one can use to borrow. When conditions are right, asset appreciation can act like it is possessed of a power of self-multiplication thanks to the mechanism of leverage. Interestingly, former Fed chairman Alan Greenspan recognized this quality of unrealized capital gains from very early on in his intellectual career and was adamant that the US should introduce a system of national accounts that would track capital gains on a mark-to-market basis.
Taxation can also play an active, value-generating role in a modern fiscal state—a fact that supply siders half recognized and distorted when they claimed that tax cuts would pay for themselves. We tend to think of taxation as merely subtractive or additive: taxes redistribute, they don’t create new value. In this vein, the legal scholar Katharina Pistor critiques Piketty’s faith in wealth taxes, which she sees as reducing the efficacy of law to that of redistribution. Pistor wants to intervene at the predistributive moment when the law creates claims to wealth, as opposed to what she sees as the less effective post-distributive solution of taxing wealth. But the history of the income tax shows that any shift in fiscal settings—any increase in the capital gains preference, for instance—does more than redistribute shares in a zero-sum game of musical chairs. It can also actively collateralize and instigate investment flows, bringing financial assets into being that might not have existed otherwise. In this sense, predistribution is hard to distinguish from postdistribution in a fully developed fiscal state. A lot of what we romanticise as heroic financial innovation turns out on closer inspection to be a methodical exploitation of tax subsidies. And these subsidies work on the downside as well as the upside, offsetting losses as well as incentivizing gains. This helps to explain why someone as clueless as Trump looks like he is always failing upwards.
Patrimonial Capitalism
In my previous book, Family Values: Between Neoliberalism and the New Social Conservatism, I argued that any regime of value based on capital gains is bound to elevate the importance of family wealth in shaping individual life chances and class status. The elite supply siders were very much aware of this: from the start, they pushed for cuts to the estate and gift tax alongside tax preferences for capital gains. Whether they intended this or not, the long-term effect of their tax agenda has been to privilege those forms of economic activity that benefit most from capital gains preferences, notably general partners in private investment funds (hedge funds, private equity and venture capital) who claim “carried interest” on the investments they sponsor, and, of course, real estate investors. A a real estate heir such as Donald Trump owes his extraordinary personal ascent to the supply side movement as much as to his father.
Given the relationship between capital gains and inheritance, it was almost inevitable that we would arrive at the present conjuncture, with its frightening concentrations of wealth. I say almost inevitable, because the real accelerator was the shift in monetary policy of the late 1990s, when the once hawkish Alan Greenspan pivoted to low interest rates and the Fed promised to do all in its power to inflate the value of financial assets. The shift towards monetary accommodation reached its climax with the post-Global Financial Crisis and coronavirus rounds of Quantitative Easing (QE). The irony here was that the Fed was now openly engaging in a practice that was the founding taboo of neoliberal monetary policy—namely, money printing or the creation of money to purchase government securities. The effect was to drive down the cost of public spending to zero.
Yet far from representing a turn away from neoliberal monetary logic, I argue, this was simply the acknowledgement that government spending itself had become so indulgent towards asset holders and so inimical to wage earners that central bank money creation no longer represented the threat it once had. By driving down government spending to zero, QE supercharged the flood of investment money into financial assets and drove up asset prices. At the time, there was some bewilderment among economic analysts that “money printing” on such a grand scale did not awaken the old bogeyman of wage inflation. As I see it, the explanation for this is that monetary policy does not operate independently of the fiscal environment in which it finds itself: in other words, tax and spending settings channel cheap money in certain directions and not others. When we consider that a growing part of government fiscal settings are oriented towards the subsidization of capital gains, then it makes sense that central bank money creation today would have different effects than it might have had in the 1970s. What once looked like a slippery slope to the hyperinflation of wages is now openly embraced as a policy pathway to the hyperinflation of financial assets.
While the distributional consequences of the neoliberal counterrevolution have been closely tracked by scholars such as Thomas Piketty, Emmanuel Saez and Gabriel Zucman, less appreciated is that this same era has witnessed a shift in the organisational forms of capitalism. The large publicly traded corporation was the primary institution that mediated the Fordist consensus between labor and capital. It was in many ways an artifact of New Deal securities law that regulated institutional investors, as well as corporate equities, and allowed only small private investment firms to claim performance fees based on capital gains (so-called carried interest). Since the 1980s, these boundaries have broken down in all kinds of ways, and private investment funds like venture capital or private equity can now claim capital gains preferences while also leveraging the vast volumes of capital provided by institutional investors. Today, private investment funds can command as much if not more institutional capital than listed corporations. Indeed, these funds have themselves become major sources of private credit to corporations.
The distinct regulatory trade-offs that once separated private but high-risk investment from publicly listed but highly capitalized corporations no longer hold. As a result, and thanks to the abundance of institutional money now flowing through private credit markets, founders can grow their companies to massive size without having to renounce their control rights in a public offering. If they do go public, they can turn to “dual class” share structures and other byzantine voting rules to hold onto power and claim an exorbitant share of the organization’s wealth. In either case, we are seeing the rise of a new, patrimonial class of private investors who are able to leverage the powers of institutional money to amass vast personal fortunes. The recent proliferation of family offices—kin-based investment funds dedicated to the preservation of family inheritance—is the clearest sign we have of the extreme wealth concentration at work here. In many ways, this looks like a return to the situation of Gilded Age finance, as analyzed by Adolph Berle and Gardiner Means in the early 1930s, with the added complication that small shareholder money is now channelled through the hands of mega mutual fund managers such as BlackRock and Vanguard.
It seems to me that this shift is key to understanding not just the economic but also the political locus of power in contemporary capitalism. In the wake of the 2010 Citizens United decision, private, unlisted companies and their founders have turned out to be the major contributors of super PAC money. Hedge fund billionaire Robert Mercer, in particular, seems to have perfectly understood the importance of private investor money in funding the long war of position from the right. Mercer played a key role in financing the legal challenge behind Citizens United and was among the first to take advantage of its new rules to funnel money to the anti-establishment far-right.
Mercer stands at the intersection of an older lineage of activist donors, such as the private business dynasties of the Kochs and the DeVoses, and a more recent constellation of Republican right figures, such as Vivek Ramaswamy, J. D. Vance, and Peter Thiel, all of whom made their fortunes in the world of private investment. In a very practical sense, the venture capital firm and hedge fund have served as enclaves in which young financiers of the right can found their own lineages and enforce hierarchies at will, unburdened by the administrative niceties of the public corporation. These political entrepreneurs have resurrected the old libertarian critique of corporate managerialism to cast themselves as representatives of a more heroic “anti-woke” capitalism, oriented to the high-tech future as much as it is to an imagined feudal past. As a sponsor of tech start-ups, Thiel celebrates the mystique of the founder-controlled firm, crediting it with unique cultish qualities that cannot be found in the listed corporation. In his words, founder-controlled tech firms “resemble feudal monarchies rather than organizations that are supposedly more ‘modern.’” The cultural production of the Silicon Valley right rests on real economic foundations: it reflects the unique freedoms afforded by private capitalism and the heady sense of sovereign power acquired by the first-generation dynast.
Counterrevolution and the Far Right
The book is haunted by the far right for the obvious reason that the Republican Party is becoming indistinguishable from its far-right fringe. For many years, however, it was the conservative Southern Democrats who played the same role of far-right agitators within the Democratic Party. As noted above, many of fiscal tools that have exacerbated upward redistribution in modern times—from tax and spending limits to debt ceiling showdowns, the Senate filibuster, and the balanced budget amendment—were first developed by Jim Crow Democrats.
Many conservative Southern Democrats, whose influence was felt with more or less immediacy throughout the 20th century, tried to keep the white supremacist tradition alive by adopting a position of outright refusal in the face of federal edicts. When the Supreme Court called for the desegregation of the South in Brown v. Board of Education in 1954, Southern Democrats like Senator Harry Byrd tried to resurrect the spirit of John C. Calhoun by calling for the nullification of federal law. James McGill Buchanan was more pragmatic: he saw Calhounian dreams of secession as a lost cause and accepted the reality of formal equality established by the civil and voting rights acts of the 1960s. Consequently, Buchanan’s project was to restore racial hierarchy by other, fiscal means. The more radical “paleoconservative” libertarians such as Murray Rothbard remained committed to the far-right project of nullification and secession; for this reason, they were always very suspicious of Buchanan.
Up until the 2010s, Buchanan’s intuitions about political possibility proved right. With the rise of the Tea Party, however, the formal gains of the civil rights era no longer look so secure, and we see an active campaign by the Republican Party to resurrect the outright voting restrictions of the Jim Crow era. This anti-democratic politics goes together with a new spirit of radicalism in Republican Party fiscal politics, in which we see an almost apocalyptic willingness to play with the possibility of sovereign debt default. Buchanan contemplated this option. But I think what we are seeing in the Republican Party is a shift from Buchanan’s spirit of methodical counterrevolution to the kind of revolutionary reaction espoused by the paleoconservative far right.
One place we can find such a revolutionary reaction, and the subject of the final substantive chapter of my book, is the religious (far) right and its understanding of the relationship between the politics of reproduction and the national debt. It seems to me that this is an increasingly important element in the fiscal and monetary politics of the Republican right but one that is almost systematically ignored by left analysts. (As a rule, I would hazard, leftists find it easier to recognize the racist or white supremacist far right; this makes the legibility of the religious right doubly difficult because the language it deploys, via Catholicism, is often explicitly anti-eugenicist). At the height of Tea Party power in the 2010s, Republican congressmen repeatedly explained their opposition to raising the debt ceiling as a way of defending the unborn. It was hard for anyone not steeped in religious teaching to hear this for what it was, or to imagine that decisions around the budget might be genuinely motivated by Christian millenarianism.
Yet as this chapter attempts to show, religious conservatives have long seen the issues of abortion and the national debt as inseparable, and this premise is key to understanding their politics of fiscal obstructionism. Beginning in the 1970s, Catholic and evangelical conservatives came to see the adoption of floating exchange rates, the legalisation of abortion, and the growth in US government debt as closely interconnected symptoms of national breakdown. Religious conservatives have a direct line to the sexual unconscious of economic life, so while more mainstream neoliberals might worry about ballooning welfare budgets and wage-push inflation, and more mainstream conservatives might lament the breakdown of the family and the proliferation of unmarried women on welfare, religious conservatives go straight to the heart of the matter: the loss of male sexual control over women. As they see it, the fiscal and monetary future of the nation rests on the subordination of women to the future life of the fetus. As a consequence, they came to understand limits to government indebtedness as a way of limiting abortion, and vice versa.
What I try to show throughout the book, but especially in this chapter, is that the politics of austerity goes far beyond the bread-and-butter issues we normally associate it with. Long before they had any judicial success in fighting against Roe v. Wade, religious conservatives spent many years trying to limit women’s access to abortion and birth control via fiscal means. The sheer difficulty of procuring an abortion (the indirect costs of doctor’s appointments, travel and lost work time as well as direct costs) is a tremendous barrier to low-income women and a form of sexual discipline that is less often recognized than outright prohibition. In this closing chapter, the intimate, sexual politics of austerity meets the macroeconomics of government debt.
