By Tom Kozlowski
When the 2008 financial crisis threatened the survival of the American economy, the ideology of many Americans conflicted with their pragmatism. Those who maintained a Reagan-era commitment to limited government and free-market reign began asking the government to intervene, a political about-face that traded principles for action.
Americans got what they wanted: The Obama administration, fresh in office, delivered a series of policies to fight unemployment and bail out a capsizing banking industry. But according to famed economist and Princeton University professor Alan Blinder, what Americans initially asked for became what they ultimately railed against, a paradox that has loomed over the Obama administration ever since.
“There’s a lot to say about the backlash against what were generally well-executed policies by the government,” Blinder said. “They were bold, comprehensive and effective policies that were highly interventionist, but Americans, despite asking for them, largely didn’t like them.”
Taking a retrospective look at the 2008 financial crisis and the interaction between government policy and public response, Blinder spoke to the College on Wednesday, Nov. 12, approving of the government’s actions but criticizing how effectively it persuaded the public those actions worked.
Blinder, one of the most prolific economists of his generation, served on President Bill Clinton’s Council of Economic Advisers and as vice chairman of the Board of Governors of the Federal Reserve System from 1994 to 1996. His most recent work has focused heavily on monetary policy and central banking, with contributions appearing regularly in The New York Times, The Wall Street Journal and other major publications.
Now, with his latest book “When the Music Stopped,” Blinder has turned his attention to the recession and its sluggish recovery, bringing his own distinct analysis to the College. To guide his analysis of the crisis, Blinder offered a three-pronged approach to understanding the responses of both government and polity: first, the policy paradox that followed the crisis; second, the multifaceted backlash to the policies the Obama administration helped spearhead; and third, some lessons to be learned from the government’s Keynesian experiment.
In the economic boom of the middle Bush years, Blinder, along with many of his colleagues, believes the free market ran amok. The financial industry thrived off toxic derivative sales and faulty loans while the housing bubble inflated. There was a fundamental “abdication of regulatory authority,” according to Blinder. But when the bubble burst and the proverbial roof fell in, the financial industry, a traditional advocate of laissez-faire economics, turned to the government for help.
This presented an even larger rift among the public, which wanted the government to fight rising unemployment and economic instability while simultaneously staying out of the free-market. Blinder recounted how one citizen embodied the paradox perfectly, standing before a town hall meeting and proclaiming, “Keep your government hands off my Medicare.” The example represented a broader American consensus, though, one committed to a conservative, if not neoliberal ideology but desirous of government support.
“Ideologically, they were an anti-government populous. But pragmatically, they were pro-government,” Blinder said.
As a result, Americans transferred their economic frustrations to a backlash against the Federal Reserve, Congress, the Democratic Party and Obama himself. Former President George W. Bush, whose administration presided over the crisis’s origins, “got out just in time,” according to Blinder. But no matter which party was in charge at the time of the collapse, Blinder predicted that the government would inevitably receive the brunt of public anger.
In response, the government employed a number of highly experimental Keynesian policies in order to stimulate the economy, but Americans correlated these measures to big government and big spending. House Majority Leader John Boehner (OH-R) went so far as to repeatedly call them “job-killing government spending.” But Blinder found these accusations absurd.
“The government can either buy things from businesses, which they did in massive quantities that I believe were effective, or they can spend money to stimulate the economy,” Blinder said. “These do not kill jobs.”
Americans remained unpersuaded. Rising budget deficits and unorthodox monetary policy by the Federal Reserve fed into the lasting backlash, one that the Obama administration failed to control when it was implementing its post-crisis policies. Moreover, Blinder believes Obama took on too many social issues too soon, such as healthcare and education reform, amidst the “mandatory need for action” in the tanking economy. Because of both ill explanation and a stretched agenda, the government faced what Blinder called “massive confusion in the body politic and lots of inchoate anger.”
Looking forward, Blinder offered several steps to combat the next, perhaps inevitable financial crisis — but from a public relations standpoint. He suggested the government stick to a concise agenda, explain their actions and persuade the electorate, use down-to-earth language, set expectations low, be mindful of the public’s perception of fairness and, to be safe, repeat these steps as many times as possible. These communicative measures may not prevent a financial collapse, but they can ease the government’s task of picking up the pieces.