The Political Economy of the US State

ABSTRACT: The policies of the US state emanate from tightly-knit sectors of wealth and power. This essay lays out the precise mechanism through which the interests of the powerful are translated into policy.

Above [the market economy], comes the zone of the anti-market, where the great predators roam and the law of the jungle operates. This – today as in the past, before and after the industrial revolution – is the real home of capitalism.

– Fernand Braudel  1

Political campaigns in the United States have been overwhelmed by money. In 2012,

the average House winner spent around $1.6 million, while the average Senate seat

cost $11.5 million.  In this era of tele-democracy, money offers a decisive advantage 2

in electoral campaigns.  Indeed, the fund-raising advantage of the incumbents is so 3

acute that, despite public discontent, more than 90 per cent of incumbents get re-

elected. White House races now cost a billion dollars apiece.

Campaign contributions are not the only way money saturates Washington.

Political money slushes around the system from all corners. In the 2012 cycle, even

as campaign spending crossed the $6 billion mark, outside political spending

unleashed by Citizen’s United exceeded a billion dollars. Moreover, moneyed

interests spent $8 billion lobbying Congress in the five years from 1998-2002, more

! Braudel, Fernand. Civilization and capitalism, 15th-18th century: The perspective of the 1

world. Vol. 3. University of California Press, 1982.

! All political spending data is from the Center for Responsive Politics unless otherwise 2

specified.

! Television advertising has significantly increased the demand for campaign funds. See 3

Garfinkle, Adam. Broken.

than $12 billion in 2003-2007, and $17 billion in 2008-2012.   Total lobbying 4

expenditure outnumbers campaign contributions by a factor of nine.

When the Obama administration moved to support the Volcker rule that

would forbid FDIC-insured banks from speculative trading, Wall Street mobilized a

massive lobbying effort to scuttle the proposal. The proposal died a lonely death

somewhere in the bowels of Capitol Hill. Illinois Senator Dick Durbin quipped:

“they frankly own the place” – ‘they’ meaning the banks, and ‘the place’ being

Congress.  Sometimes, ‘they’ simply write the bill themselves. The New York 5

Times Dealbook reported on May 23, 2013, that an amendment to the Dodd-Frank

Act was essentially authored by Citigroup, with entire paragraphs copied word for

word from the bank’s proposal. The financial sector has since doubled its political

spending, with lawmakers who supported the bill championed by Wall Street

receiving twice as much in contributions from financial institutions compared with

those who opposed them. Senator Shelby, the Chairman of the Senate Committee on

Banking, Housing, and Urban Affairs, took $2 million from financial interests, more

than double the contributions from the next leading industry.

The week after the committee vote on the ‘Citigroup amendment,’ House

Democrats’ fund-raising boss, Congressman Joe Crowley, took the freshman

! Even billionaires can prove decisive in electoral battles. For instance, the Koch brothers 4

almost single-handedly bankrolled the successful gubernatorial campaign of Scott Walker, the union slayer of Wisconsin.

! Doster, Adam. “Durbin on Congress: The banks ‘own the Place.’” Progress Illinois. April 5

29, 2009.

Democrats on the committee to meet with bank executives.  The lawmakers met 6

with Goldman Sachs CEO Lloyd C. Blankfein as well as Jamie Dimon, the boss of

JP Morgan, the two-and-a-half trillion dollar gorilla on Wall Street. Dimon is

reported to have delivered something of a pep talk. All seven freshmen Democrats

on the committee are already on the payroll of the New York banks. Indeed, each of

them has raised more industry PAC money so far this year than the committee’s top

Democrat. With so many Congressman clamouring to be on the Financial Services

Committee, it had to be expanded to 61 members from 44 in 1980, forcing the

installation of four rows of seats in the room that houses the committee.  As Frank 7

Underwood, the fictional Congressman played by Kevin Spacey, dryly remarked in

the House of Cards: “When the tit’s that big, everyone gets in line.”

With corporate coffers overflowing with cash, each industry now has

lawmakers on their payroll. Every new legislation summons a virtual army of

lobbyists. The Financial Times reported that more than three thousand lobbyists

converged on Capitol Hill to influence immigration reform.  Many of these lobbyists 8

work for private prison companies such as Corrections Corporation of America and

the Geo group, whose revenues and profits depend on the mass incarceration of

! Lipton, Eric. “For Freshmen in the House, Seats of Plenty.” New York Times. August 10, 6

2013.

! Brad Miller, who was on the Financial Services Committee for years, says: “Freshman are 7

pushed and pushed and pushed to raise money – it’s how they are judged by the leadership and the political establishment in Washington. It’s only natural that it has got to be on your mind that a vote one way or other is going to affect the ability to raise money.”

! Fifield, Anna. “US Immigration Reform Draws 3,000 Lobbyists.” Financial Times. March 8

20, 2013.

illegal immigrants from Mexico. CCA has spent $17 million in the past decade to

promote hardline policies that line its pockets.

The pharmaceutical industry has spent nearly three billion dollars lobbying

lawmakers in Washington in the past fifteen years. In return, Capitol Hill ensured

that Medicare would not directly negotiate prescription drug prices with

pharmaceutical companies. Dean Baker estimated $308 billion in savings in the next

decade if American seniors paid Canadian drug prices and $726 billion if they paid

the much lower Danish prices.  Meanwhile, the largest pharmaceutical companies 9

made $711 billion in profits in the past decade.

In the summer of 2012, a cache of emails between administration officials

and the drug lobby surfaced, exposing the secret deal through which the idealist-in-

chief sold out to the very same interests he had attacked on the campaign trail.  The 10

deal included explicit commitments on a range of policy desiderata of the

pharmaceutical industry. Obama agreed to kill this provision that would’ve allowed

the US to import cheaper prescription drugs, as well as the proposal to give the

government the power to negotiate drug prices for Medicare recipients. In exchange,

the pharmaceutical industry promised political support for the healthcare bill,

including a $150 million advertising blitz coordinated with the White House

political shop. PhRMA negotiator Bryant Hall informed the CEO of Pfizer that the

White House was “working on some very explicit language on importation to kill it

! Baker, Dean. “Reducing Waste With an Efficient Medicare Prescription Drug Benefit.” No. 9

2013-05. Center for Economic and Policy Research (CEPR), 2013.

! ObamaCare's Secret History.” The Wall Street Journal. June 13, 2012.10

in health care reform. This has to stay quiet.” Obama also directed all his criticism at

the insurance industry, ignoring the role soaring drug prices play in driving up

overall healthcare costs.

Big Oil had a fantastic year in 2012: $118 billion in profits. In the past ten

years, the six oil majors together made a neat trillion, with Exxon alone making

nearly three hundred and fifty billion dollars. This powerful industry has almost

single-handedly sought to contain environmental legislation. In 2010, the energy

industry spent $453 million on K Street. In the period 1990-2013, the industry

handed out $91 million to the Republicans and $23 million to Democrats – amounts

which appear low, as they indeed are, due to legal limits on direct contributions.

Total lobbying in the much shorter period 1998-2013, was a more respectable $4

billion. The industry has been a stalwart supporter of the Republicans in the

neoliberal era. However, it was recently reported that the oil lobby has sought to

work with Obama, now that the environmentalist-in-chief has shown a more

favourable stance on hydrocarbons, in light of the shale boom.  11

Bank bonuses totalled $66 billion in 1998-2002, surged to $117 billion in

2003-2007, declining only slightly to $100 billion in the five years after the onset of

the banking and financial crisis. In the same period, the 5-year-totals spent on

lobbying by the financial sector were 1.1, 1.8, and 2.4 billion dollars respectively.

Compensation is the biggest component of operating costs for big banking firms, so

this provides another relative measure of political spending. Total corporate profits

! Fifield, Anna. “Oil Lobby Seeks to Work With Obama.” Financial Times. December 26, 11

2012.

after tax in 30-year-period 1983-2012 amounted to $20 trillion. Yet, total political

spending was only around $50 billion, a quarter of a percentage point. Even by

extrapolating the heightened current rate of, say, four billion a year over thirty years,

we only get 0.6 per cent.  12

Let me not belabour the point. Such levels of political spending are pocket

change for big firms. There is reserve firepower, an excess capacity, in the war

chests of US firms and moneyed interests. This is certainly puzzling. Lawmakers on

your payroll are surely a good investment. Here, the House Finance Committee

shenanigans around the ‘Citigroup bill’ hint at a potential resolution to this puzzle.

Since political entrepreneurs are just not competitive without the money to

pay for advertising and campaigning, they have no choice but to compete in the

market for corporate patronage. The competition of the lawmakers with each other

depresses the price of policy. This dynamic reduces the required amount of

investment by a bloc to control policy, unless it is opposed by other blocs of deep-

pocketed interests. This is an important qualification: one must distinguish between

highly-contested and relatively uncontested subsets of the policy spectrum.

Suppose there is a decisive constituency over a policy space. That is, a bloc

of deep-pocketed investors with a vital interest at stake, facing limited opposition

from other blocs. Examples that immediately spring to mind are military firms for

the Pentagon budget, banks over financial regulation, oil majors over environmental

! Note that by using corporate profits after tax we are estimating a lower bound for this 12

capacity. A more appropriate measure is perhaps corporate revenues, since political investments compete with other investments that a firm can make from its revenue pile.

legislation, pharmaceutical companies over prescription drug prices, and so on and

so forth. Facing little competition from other major investors, such decisive

constituencies will enjoy ‘market power’ against lawmakers. The price of policy will

be low and the policies themselves will be consistent and predictable as long as the

bloc remains dominant.

Over highly-contested policy space, where major blocs of deep-pocketed

interests find themselves pitted against each other, we will observe balancing

behaviour akin to great power competition. Coalitions will form between blocs to

secure policies in their interests, and defend them against their rivals. The price of

policy will tend to rise, along with policy uncertainty. The larger the policy space

that is contested, the more instability we will observe in a party system. The analogy

to great power competition is not as far-fetched as it appears at first sight. After all,

it was the fight over US trade policy between the rising northern industrial interests

and the hitherto-dominant southern plantation interests that undermined the political

system of the Early Republic and prompted the Civil War.  13

Party systems

As opposed to a political theory in which political entrepreneurs position

themselves in the policy spectrum to appeal to voters resulting in state policies that

reflect the preferences of the median voter, i.e., the standard Downsian model, the

! The northern industrial interests wanted a massive tariff wall to protect them from British 13

competition while the southern planters derived their revenues from supplying cotton to the British textile industry which would be jeopardized by a protectionist policy. The Republican Party was founded in 1854 by the northern bloc. The home of free trade today presided over nearly a century of arguably the most protectionist regime in history.

investment theory of party competition posits that candidates for political office and

political parties appeal not to voters, but to investors, who are the primary

constituency.  According to Ferguson, “parties are more accurately analyzed as 14

blocs of major investors who coalesce to advance candidates representing their

interests.” The policy platforms of political parties reflect the interests of their major

investors, which minor investor-voters are virtually incapable of affecting; save in

the negative sense of voting “no confidence.” As the costs of political campaigns

have skyrocketed in the era of tele-democracy, the logic of money-driven political

systems has become ever more applicable. Once the central premises of this theory

have been digested, a revised approach to party competition and policy formation in

the United States immediately becomes available.

Several party systems can be distinguished historically, which we shall

conveniently label by the year of critical realignment. The Early Republic system of

1812 was dominated by southern planters in alliance with northern mercantile

interests. The Civil War era system of 1860 was dominated by the nascent

Republican Party which was a coalition of railroad and northern industrial

interests.  By the turn of the century, the railroads had gone into terminal decline 15

and bigger players – oil, steel, and finance – had emerged on the scene, who would

dominate the system of 1896. Similarly, a new cast of powerful actors emerged in

! Ferguson, Thomas. Golden rule: The investment theory of party competition and the logic 14

of money-driven political systems. University of Chicago Press, 1995.

! The railroads constituted a hegemonic bloc of investors. This was a new breed of politico-15

economic actors, being the first of the modern corporations with a national reach and financial depth that no other firms could even begin to match.

the aftermath of the First World War: multinational firms, whose interests were

directly opposed to the traditional protectionist bloc.  Policy formation became so 16

contested that the Republican Party disintegrated by 1928. The onset of the Great

Depression set the stage for a major transformation of the political economy of

Washington.

The novelty of the Democratic coalition in the system of 1936 was that, for

the first time in US political history, it included as a major investor someone outside

the business community: organized labor. However, unions were not the dominant

investor in the Democratic Party. Alongside them were much more powerful players

– internationally-oriented investment banks, tobacco, global oil majors,

multinational firms, and high-tech industrials – firms whose wage bills were an

insignificant part of their overall costs, and were thus tolerant of the somewhat

labor-friendly policies of the New Deal era.

The system of 1936, the ‘New Deal’ regime, was characterized by Keynesian

management of the macroeconomy, centrality and autonomy of the great

corporations, and a constrained financial sector. With banks subservient to industry,

leaders of industry underwrote an informal compact with a residually powerful

working class. In the presence of rapid growth in productivity, wages rose

impressively and progressive taxation financed increasing welfare spending. The

policy invariants of the system – fixed-exchange rates made possible by the quasi-

! The internationally-oriented firms could not maintain their market shares in Europe unless 16

the Europeans could earn dollars by selling their wares in the US market through the tariff walls set up to protect the nationally-oriented US manufacturers.

public international financial order, ceilings on interest rates that depository

institutions could offer (mandated by Regulation Q), expansion of the welfare state,

and Keynesian management of the macroeconomy to maintain high employment

rates – reinforced each other, were co-dependent; and were, in the final analysis,

predicated on the competitiveness of US firms in the global markets.  17

The neoliberal counter-revolution

The neoliberal counter-revolution has its origins in the re-emergence of

global finance with the eurodollar market in the City of London that undermined the

quasi-public international financial order of the early post-war period.  Thus freed-18

up, capital flows undermined the Bretton Woods system of fixed exchange rates that

had already come under pressure with the onset of inflation in the late sixties.  By 19

1975, the center countries – the United States, Germany, Japan, and the United

Kingdom – had to abandon fixed exchange rates and relinquish capital controls

under pressure from unregulated capital flows.

The stagflation crisis of the seventies exposed the inability of Keynesian

! Regulation Q, which had been law since 1933, imposed a ceiling on what interest rate 17

could be offered by depository institutions. When the economy overheated market rates rose above the ceiling, prompting a rapid outflow of funds from depository institutions. This “disintermediation” contracted capital available for lending, especially mortgage lending, thereby reigning in the overheating economy. During a slowdown, market rates fell below the ceiling, drawing capital into depository institutions, which increased lending, boosting the economy. No matter the fairness of what we would now call a draconian law, as a stabilizer of the economy it functioned with ‘hydraulic efficiency’.[See Krippner, Ibid.]

! Burn, Gary. The Re-emergence of global finance. Palgrave Macmillan, 2006.18

! Speculators used the eurodollar market to attack currencies of the center countries and 19

forced them to devaluate: the pound sterling in 1967, the Deutschmark in 1969, and finally, the biggest fish in the tank, the US dollar in 1971.

policies to stabilize the macroeconomy. The structural crisis – the secular decline of

profit rates and global market shares of US manufacturers facing relentless Japanese

competition – caused a precipitous decline in the wealth and revenues of the upper

classes as a whole.  The share of wealth of the wealthiest 1 per cent of Americans 20

halved during the seventies.  21

The decisive moves towards the neoliberal order took place when the Senate,

the House, and the White House were controlled by the Democrats. As the dollar

plunged in 1979, a panicked White House was cornered into appointing a known

monetary hawk, Paul Volcker, to the Federal Reserve. Volcker immediately started

delivering the bitter medicine. He kept raising interest rates in a bid to kill

inflationary expectations, with total disregard for employment and the fortunes of

industry. The long-term effect of the Volcker shock – what Duménil and Lévy call

‘the 1979 coup’ – was to decisively alter the balance of power between finance and

industry, as the sky-high interest rates led to a massive transfer of surplus from

industry to finance.  22

The macroeconomy continued to deteriorate during the rest of Carter’s term.

With unprecedented inflation rates eroding the value of their savings, a variety of

groups started clamouring for the removal of interest rate ceilings mandated by

! Brenner, Robert. The boom and the bubble: the US in the world economy. Verso, 2003.20

! Duménil, Gérard, and Dominique Lévy. Capital resurgent: Roots of the neoliberal 21

revolution. Harvard University Press, 2004.

! Volcker’s appointment represents a major milestone towards the establishment of financial 22

hegemony whereby the monetary and financial-regulatory apparatus of the US state – the New York Fed-US Treasury-US Fed triumvirate – was virtually taken over by Wall Street.

Regulation Q. Congress passed the Depository Institutions Deregulation and

Monetary Control Act of 1980 that deregulated interest rates – the central pillar of

the New Deal order that had for decades regulated the economy with ‘hydraulic

efficiency.’  This was all for naught, as far as Carter’s prospects for re-election 23

were concerned. There were no short-term solutions to be found for the stagflation

crisis and no way to save Carter as the election approached. Ferguson describes the

critical election of 1980:  24

The atmosphere of intensifying crises enormously advantaged the only political party for which massive welfare cuts were thinkable – the GOP. Multinationals which were perfectly prepared to support Democrats during the New Deal era abruptly cut off their support, or intensified their commitment to Republicans. At the same time so did the traditional protectionist bloc. Not surprisingly, the first result was confusion, as all sorts of “New Right”, “Old Right”, and “neoconservative” cultural and political entrepreneurs competed to tap the rivers of cash that rapidly began flowing. Under the inflexible pressure of political deadlines, however, a more or less articulate compromise emerged in the candidacy of Ronald Reagan.

Writing in the immediate aftermath of the election of 1980, Ferguson notes Reagan’s

modulation of his policy platform to attract major investors.  In particular, the 25

candidate, hitherto the flag-bearer of the nationally-oriented traditional protectionist

bloc of the GOP, moved decisively to the internationalists. Ferguson failed to

recognize the birth of financial hegemony and the coming to power of this bloc,

arguing that “what the Reagan victory represents most, in fact, is not critical

realignment, but an almost equally fateful dealignment.”

! Krippner, Greta R. Capitalizing on crisis: The political origins of the rise of finance. 23

Harvard University Press, 2011.

! Ferguson, Thomas. Ibid.24

! Ferguson, Thomas and Joel Rogers. The hidden election. Random House, 1981.25

Hindsight is twenty-twenty of course. If we pay attention now to this critical

juncture in US political history, we can discern the birth of the system of 1980. On

the floor of the Republican Party convention, the crowd was first treated to Jesse

Helms attacking Henry Kissinger and the un-American Eastern Establishment

internationalists. Ferguson describes what happened next:  26

Only a few hours later, millions of Americans watched in stunned disbelief as the world's most famous multinational foreign policy analyst, the chairman of the international advisory committee of the Chase Manhattan Bank, consultant to Goldman Sachs, director of the Council of Foreign Relations and [the] Atlantic council, member of the Bilderberg steering committee, senior fellow of the Aspen Institute, consultant to the National Broadcasting Company, and Trilateral Commission executive committee member materialized again at the center of the Republican Party.

The system of 1980 is characterized by a hegemonic bloc led by big banking firms

in alliance with multinationals. The vital interests of this bloc are embodied in the

globalist-neoliberal consensus over trade, monetary, financial, security, and foreign

policies. This is the most highly-organized sector of US society. The World

Economic Forum, the Bilderberg group, the Trilateral Commission, the Council of

Foreign Relations, and other related internationalist institutions where core policies

of the US state are formulated, were all bankrolled by this bloc.

The core elements of the globalist-neoliberal consensus are: freely-flowing

global capital markets, monetary management of the macroeconomy, unconstrained

financial sector, muscular foreign policy, stringent global investor rights regime,

austerity for the masses whenever the fiscal situation requires belt-tightening, low

! Ibid.26

taxes on capital, benign neglect of offshore secrecy jurisdictions that allow capital to

largely escape taxes and regulation in the center countries, and so on and so forth.  27

Financial hegemony

A rather under-appreciated aspect of the reign of Wall Street is the primacy

of finance over industry. The Chandlerian firms were incubators of long-term value

run by an autonomous managerial elite.  The autonomy of these great corporations 28

depended on their ability to self-finance their expansion with their internal

surpluses. The uncertainty in the cost of capital and foreign exchange, induced by

the deregulation of currency markets and interest rates, forced these firms to

disgorge their surplus to capital markets. Many were simply taken over by Wall

Street. Financiers pooled their resources into private equity firms to amplify their

capital power, seizing control of industrial firms reeling under the impact of the high

cost of capital and the strong dollar.  Nonfinancial firms were forced to reorient 29

themselves towards capital markets, in what amounted to a ‘Copernican

revolution.’  CEOs now dutifully report to Wall Street analysts every quarter. 30

! A muscular foreign policy geared towards opening up world markets for exploitation by 27

Western capital, with the attendant commitment to prolonging US primacy in the international system, is a centerpiece of the bipartisan neoliberal consensus.

! Chandler, Alfred D. The visible hand: The managerial revolution in American business. 28

Harvard University Press, 1977.

! A major innovation was the leveraged buyout that allowed financiers to borrow money to 29

acquire a firm using the targeted firm’s assets as collateral.

! Davis, Gerald F. Managed by the Markets: How Finance Reshaped America. Oxford: 30

Oxford UP, 2009.

The Great merger wave of 1897-1901 created a ‘unity of interests,’ so that

policymaking became considerably easier, as in 1909, when J.P. Morgan fine-tuned

the tariff bill from his yacht by telegraph. A similar process unfolded in the

aftermath of the Great merger wave of 1983-1986. The strong dollar and sky-high

interest rates were in the interest of Wall Street, which had vast sums invested

overseas and in the bond market. On the other hand, they were devastating for

industrial firms. Nonfinancial firms pushed in vain to bring down the mighty dollar

for years.  As the merger wave crested, a decisive section of the financial sector 31

acquired an interest on the other side of the equation. This created the political

momentum for the Plaza Accord of 1985, whereby the United States negotiated a

depreciation of the dollar against the Japanese yen and the German mark. As Robert

Brenner notes in his authoritative economic history of the period, the relief was

immediate.  32

Unlike other major investors, Wall Street has usually kept a bipartisan

portfolio of politicians on its payroll. This is not just because bankers like to hedge

their bets. An investment bank may overnight acquire a stake in a nuclear energy

firm, giving it an interest in the protection of that sector from competition by natural

! The ‘Caterpillar report’ by the Business Roundtable argued that the yen was being 31

deliberately held down by the Japanese and that liberalizing Japanese capital markets would solve the problem. Treasury knew that the dollar was strong because of Volcker’s sky-high interest rates and that deregulating the Japanese capital markets would increase the upward pressure on the dollar since Japanese controls were holding down further capital flight to the US. Treasury played along with the Roundtable in order to placate the losers, going so far as to launch a diplomatic offensive aimed at liberalizing Japanese capital markets.

! Brenner, Robert. Ibid.32

gas and coal. Another one may have invested in a gas company and thus be on the

other side of the tug-of-war over energy policy and environmental regulation. Thus,

financial interests can usually be found to be aligned on both sides of the equation.

The Logic of Money-Driven Political Systems

In the framework of the investment theory of party competition, blocs of

major investors compete with each other to control the policies of the state. The

platforms of political parties reflect the interests of their major investors. Therefore,

political parties are best seen as coalitions of major blocs. The goal of each bloc is,

first and foremost, to defend its vital interests. Blocs mobilize resources and try to

recruit allies when they compete over policy with rival blocs. Such balancing and

alliance formation are suggestive of great power competition. We can therefore

borrow the logic of balance-of-power theory from international relations and apply it

within the investment theory of politics.  As we will see, such a strategy will be 33

useful in teasing out the logic of money-driven political systems.

To wit, a political system consists of highly-organized societal actors called

! This is natural since neorealism is just market theory applied to international politics in the 33

first place. See Waltz, A theory of international politics.

blocs that compete over state policy.  Power is the aggregate capacity of a bloc to 34

mobilize politically. In a money-driven political system, this is more or less

equivalent to the aggregate financial resources at the disposal of the bloc. Blocs

worry about defending their vital interests and balance more powerful blocs by

increasing their mobilization efforts or seeking alliances with other blocs. One may

restrict attention to the most powerful blocs of the system without loss of generality,

since minor blocs are incapable of influencing policy in any significant way.

Blocs care much more about certain subsets of the policy spectrum than

others. That is, they occupy a specific ‘territory’ in the policy spectrum. Proximity in

in the policy spectrum is the best predictor of alliance formation. Blocs that compete

over the same policy portfolios are likely to be found in opposing alliances. The rise

and fall of blocs – the law of uneven growth – undermines the stability of the

political system. Rising blocs seek to challenge the status quo upheld by dominant

blocs, until a ‘hegemonic war’ reorders the political order, determining which blocs

will govern the system.

! The international system consists of sovereign states that interact in anarchy. That is, each 34

state fends for itself and there is no night-watchman to protect the states against their militarily stronger rivals. States try to maximize power in order to ensure their long-term survival. They balance their rivals by increasing their internal efforts or seeking alliances with other powers. One may restrict attention to great powers without loss of generality, since minor powers don’t matter in the global balance of power. Moreover, power decays over large distances. The best predictor of alliance formation is proximity. States fear powerful neighbours more than faraway great powers. Therefore, states that compete over the same territory are likely to be found in opposing alliances. The rise and fall of great powers – the law of uneven growth – undermines the stability of the international order. Rising powers seek to change the status quo upheld by dominant states, until a hegemonic war determines which states will govern the system. The principal explanatory variable of the theory is the system structure. That is, the distribution of power among units. To evaluate the stability of a given system, one analyzes the evolution of the system structure.

Therefore, in order to evaluate the stability of a given party system, one

must analyze the evolution of the system structure: the distribution of power among

blocs. Evaluating the capabilities of blocs is, by necessity, an imperfect exercise. We

shall use a proxy variable, corporate profits, to measure the relative power of

different blocs.  As we will see, this will shed light on both the stability of the party 35

system and the gridlock in Washington.

The competition between rival blocs over policy goes beyond party

competition and permeates the entire edifice of the juridico-regulatory regime. For

instance, the paper of record reported this summer that Goldman Sachs had

essentially taken over aluminum warehouses, moving the metal around to dodge

regulations against hoarding.  In the aluminum market, the “premium” – the cost 36

of physical aluminum above the futures price, has risen from $93 to $265 per ton

this year. MillerCoors, a brewer, complained to the Senate that its supply chain had

been hampered by the long queues to take delivery of the metal from warehouses

owned by Goldman and other banks and traders.  37

This battle pits the banks and the aluminum smelters against brewers and

other end users, illuminating at the micro-local level the central feature of the

political economy of US policy. Namely, ‘politics as organized combat’ between

! The data is taken from The Economic Report to the President, 2013. 35

! Kocieniewski, David. “A Shuffle of Aluminum, but to Banks, Pure Gold.” New York Times. 36

July 20, 2013.

! “Goldman Relents in Metals Warehousing Row.” Financial Times. Web. 15 Oct. 2013.37

rival blocs.  The maneuvering for oil, tea, cotton, coffee, and other commodities 38

has brought billions to investment banks like Goldman Sachs, JP Morgan, Bank of

America, Barclays, and Morgan Stanley. The Federal Reserve is now considering

whether to revoke a series of approvals allowing banks to trade not only commodity

derivatives from computer screens, but actual commodities from docks, tanks and

pipelines. It is unlikely to reign in the banks, or so one would expect given the

balance of forces in play. In 2012, the combined profits of the food, beverage, and

tobacco industries were only $45 billion, while that of the financial sector were half-

a-trillion dollars.

The attached chart shows the share of corporate profits of the three major

sectors of corporate America. The three-year-periods are chosen so as to exclude

recessions and bubbles. In 1967-69, the dominance of manufacturers is manifest.

Comparing 1977-1979 and 1986-88, we can see the take-over by the new hegemonic

bloc of finance and multinational firms with significant earnings overseas. The

situation is unchanged in 1995-1997, while 2010-2012 reveals the rise of a new

power on the scene. This is the nationally-oriented mercantile interests comprised of

retail trade, wholesale trade, transportation, utilities, and other nonfinancial

corporations.

! Hacker, Jacob S., and Paul Pierson. “Winner-take-all politics: Public policy, political 38

organization, and the precipitous rise of top incomes in the United States.” Politics and Society 38.2 (2010): 152-204.

!

The gridlock in Washington is being driven by the resurgent reactionary wing

of the Republican Party. A careful look at the changing GOP coalition reveals the

dynamic in play. A number of rising mercantile interests are behind the insurgency

in the GOP. At the forefront are retail interests led by Walmart and Home Depot,

followed closely by transportation, chemical (Koch brothers), gambling (Sheldon

Anderson), wholesale trade, and the food and beverage industry. The traditional

major investors in the GOP coalition – oil, defence, agribusiness, and the nationally-

oriented manufacturers – are more than happy to help in bankrolling the insurgency.

The theory thus allows for a novel perspective on the gridlock in Washington.

Duménil and Lévy expected the financial crisis to undermine the neoliberal

order.  Thus far, there are no signs that the neoliberal coalition is unravelling. 39

Indeed, it has proven considerably more robust than previously recognized. The fact

of the matter is that finance and multinational firms still constitute a hegemonic bloc

of investors. Indeed, the big banking firms have emerged stronger than ever. Which

is hardly surprising, after all, “in a recession, assets return to their rightful

owners.”  40

Decomposing the policy spectrum into uncontested and contested spectra, we

observe that the core politico-economic policies of the US state are themselves

uncontested: security, foreign, finance, monetary, and trade portfolios. This is

because the hegemonic bloc is decisive over this vital subset of the policy spectrum.

The stability of the system of 1980 is closely-tied to the primacy of Wall Street. It is

a major investor in both parties which makes the party system more stable than

previously recognized.  Foreign and security policies – institutionalized at the 41

Council of Foreign Relations – are largely uncontested by other blocs. The

institutional capture of the holy trinity of the monetary-financial apparatus of the US

state by Wall Street makes the core policies of the neoliberal order robust to

! Duménil, Gérard, and Dominique Lévy. The crisis of neoliberalism. Harvard University 39

Press, 2011.

! This quote is attributed to New York investment banker Andrew Mellon, who served as the 40

Treasury secretary from 1921-1932.

! The system of 1860 was dominated by the Republican Party. The hegemonic bloc, the 41

railroads, only had to bankroll the Republicans. This made the system less stable. Grover Cleveland, the only Democrat to occupy the White House between the Civil War and the First World War, rose to power by attacking the declining railroad interests. Such an opening is unavailable in the present system, since finance bankrolls both parties.

secondary instability in the party system.  In particular, partisan fights over fiscal 42

and health policies do not threaten to spill over into the domain monopolized by the

hegemonic bloc.

The existence of a hegemonic bloc does not mean that other blocs cannot

contest secondary features of the policy regime. However, critical realignments

mark the take-over of core elements of the policy spectrum by ascendant industries.

The rising mercantile interests, as yet, do not pose a significant threat to the primacy

of the hegemonic bloc led by Wall Street. However, if this bloc continues to rise, we

may see the system of 1980 unravel. Like the prospect of China’s rise to primacy in

world affairs, this is not altogether appetizing. 43

! The holy trinity that governs the global monetary-financial order is the United States 42

Federal Reserve, the US Treasury, and the Federal Reserve Bank of New York. The last is effectively the liaison office of the US state with the big banking firms.

! The prospects for a revolution from below are even dimmer. Consider the most serious 43

mass-based challenge in US history. In the run up to the 1896 election, the Populists were highly organized, with a solid base in community organizations. They tried to secure control of the Democratic Party but were knocked over single-handedly by the mining interests. The Populist candidates were defeated in primary after primary and the mining firms installed an editor of one of their own newspapers, William Jennings Bryan, as the Democratic Party’s nominee for the Presidency. “The largest, best-organized, and most cohesive mass political movement in American history could not compete with even a part of the business community.” [Ferguson, Golden Rule.]