Golden Rule: The Investment Theory of Party Competition and the Logic of Money-Driven Political Systems

463 Pages·1995·5.883 MB·English

by  Thomas Ferguson

THOMAS FERGUSON is professor of political science at the
University of Massachusetts, Boston.

The University of Chicago Press, Chicago 60637
The University of Chicago Press, Ltd., London
© 1995 by The University of Chicago
All rights reserved. Published 1995
Printed in the United States of America
04 03 02 01 00 99 98 97 96 95 5 4 3 2 1
ISBN 978-0-226-16201-0 (e-book)
ISBN (cloth): 0–226–24316–8
ISBN (paper): 0–226–24317–6
Library of Congress Cataloging-in-Publication Data
Ferguson, Thomas, 1949–
Golden rule : the investment theory of party competition and the logic of money-
driven political systems / Thomas Ferguson.
p. cm.—(American politics and political economy)
Includes bibliographical references and index.
ISBN 0-226-24316-8
1. Business and politics—United States. 2. Campaign funds—United States. 3.
Political parties—United States. 4. United States—Economic policy. I. Title. II.
Series.
JK467.F47 1995
324′4′0973—dc20
94-40580
CIP
The paper used in this publication meets the minimum requirements of the American
National Standard for Information Sciences—Permanence of Paper for Printed Library
Materials, ANSI Z39.48–1984.
Golden Rule

The Investment Theory of Party Competition and the
Logic of Money-Driven Political Systems

Thomas Ferguson

THE UNIVERSITY OF CHICAGO PRESS
Chicago and London
AMERICAN POLITICS AND POLITICAL ECONOMY SERIES

Edited by Benjamin I. Page
Contents

PART ONE
THE INVESTMENT THEORY OF PARTY COMPETITION
Introduction. Politics, Social Science, and the Golden Rule:
Reading the Handwriting on the Wall
1. Party Realignment and American Industrial Structure: The
Investment Theory of Political Parties in Historical Perspective
PART TWO
STUDIES IN THE LOGIC OF MONEY-DRIVEN POLITICAL
SYSTEMS
2. From ‘Normalcy’ to New Deal: Industrial Structure, Party
Competition, and American Public Policy in the Great Depression
3. Monetary Policy, Loan Liquidation, and Industrial Conflict:
The Federal Reserve and the Open Market Operations of 1932 (with
Gerald Epstein)
4. Industrial Structure and Party Competition in the New Deal: A
Quantitative Assessment
5. By Invitation Only: Party Competition and Industrial Structure
in the 1988 Election
6. ‘Real Change’? ‘Organized Capitalism,’ Fiscal Policy, and the
1992 Election
Conclusion. Money and Destiny in Advanced Capitalism: Paying
the Piper, Calling the Tune
Postscript
APPENDIX
Deduced and Abandoned: Rational Expectations, the Investment
Theory of Political Parties, and the Myth of the Median Voter
Notes
Index
PART ONE

The Investment Theory of Party Competition
INTRODUCTION

Politics, Social Science, and the Golden Rule:
Reading the Handwriting on the Wall

In the same hour came forth fingers of a man’s hand, and wrote over against the
candlestick upon the plaister of the wall of the king’s palace. . . . MENE, MENE,
TEKEL, UPHARSIN. This is the interpretation of the thing: MENE; God hath
numbered thy kingdom, and finished it. TEKEL; thou art weighed in the balances, and
art found wanting. PHERES; thy kingdom is divided and given to the Medes and the
Persians.
Book of Daniel

A REVERENT and quite nonsectarian nod to the charitable
deduction is about as close to religious themes as the Public
Broadcasting System’s Nightly Business Report ever comes. One
memorable evening in late October 1992, however, the talking heads
who normally find inspiration on Wall Street decided suddenly to
borrow their evening story line from the famous tale of Belshazzar’s
feast in the Book of Daniel.
Just as in the Old Testament original, a ceremonial royal banquet
provided the setting—in this instance, the regular fall meeting of the
Business Council at Hot Springs, Virginia, where a special camera
crew had been dispatched. And, again, as in the older episode, the
sumptuous repast was significant less in its own right than as the
artistic backdrop for reflections on a mighty empire’s succession crisis
—in this case, the 1992 presidential campaign, about which a select
group of Business Council leaders had agreed to be interviewed on
camera.
First on the air that night was Ford Motor Chair Harold Poling. In
contrast to many others in his industry, the auto executive still
enjoyed not only honor but profits. Nevertheless, his view of the
campaign of incumbent President George Bush was not sanguine. To
many, indeed, it sounded like a last judgment on the man whom he
had accompanied only a few months before on an ill-fated trip to
Tokyo. Poling was, according to the introductory voice-over,
“pointedly” maintaining neutrality, pending further clarification of
the candidates’ views on trade and other issues. After him came
Bethlehem Steel Chair Walter Williams, who offered the evening’s
first real revelation: that deep “disillusionment” with one of the most
ardently free enterprise–oriented regimes in American history was
“pushing [many businesses] to [Democratic nominee Bill] Clinton.”
John Young, chair of Hewlett-Packard and a longtime Republican,
followed. Some days before, Young and Apple Computer Chief
Executive Officer John Sculley had led a phalanx of Silicon Valley
executives in a mass public endorsement of the Arkansas governor.
Now, once again on camera, Young sonorously reaffirmed his new
convictions. Next in the parade was another onetime Republican
stalwart, Southern California Edison Chair Howard Allen. The utility
executive came startlingly to the point:

It’s contrary to my basic instincts as a Republican and the way my father reared me,
but there are certain things that government should have oversight on and not just sit
back and say that competition will solve everything . . . it hurts me to say that and my
father would turn over in his grave if he heard me say it.
It fell to Martin-Marietta CEO Norman Augustine to sum up the
evening’s discussion. “I think,” the defense industry executive
observed, “the Democrats are moving more towards business, and
business is moving more toward the Democrats.”1
In the account in the Book of Daniel, King Belshazzar did not
initially get the message. But at least he recognized there was one: as
soon as he saw the moving hand, he “cried out loud to bring in the
astrologers, the Chaldeans, and the soothsayers.” When they proved
unable to decipher the inscription, he had the good sense to heed his
queen. He summoned the prophet Daniel.
No such lucidity attended 1992’s high-tech reenactment of the
incident. This time, when the handwriting flashed on the electronic
walls of some 2 million homes, no one batted an eye (apart from
viewers of the program, who dialed up a specially advertised 900
number, seeking more information in disproportionately heavy
numbers).
Instead, a few months later, President Clinton—with Apple’s
Sculley and Federal Reserve Chair Alan Greenspan ensconced in the
audience next to Hillary Rodham Clinton—unveiled his long-awaited
economic program in a special address to a joint session of Congress.
Although his proposed five-year deficit reduction plan strikingly
resembled a scheme put forward by Ross Perot that candidate
Clinton had attacked all during the campaign, and was shortly to win
a public endorsement from many of America’s largest businesses, the
president’s call to raise taxes on the very wealthiest Americans struck
a strangely sensitive nerve. Somehow, in a miracle of doublethink,
many of the astrologers, Chaldeans, and soothsayers who provide
most of what passes for political analysis in America descried
ominous signs that the new administration was flirting with the
specter of class war.2
If war had in fact been declared, it was certainly of a novel kind.
Only one side seemed to be mobilizing. As Japan, with an
unemployment rate far below that of the United States, prepared to
embark on a much larger fiscal stimulus program, the president
scaled back his own promised stimulus initiative to a paltry $16
billion—an amount less than the measurement errors in many parts
of his new budget. Then, as some of his own Treasury appointees
questioned the need for any action, the president dropped the
measure altogether after a single rebuff by the Senate. With members
of his economic team putting out word that a key indicator of their
success would be the state of the bond market, the president also
postponed action on two additional campaign promises: to raise the
minimum wage, which had stayed fixed for more than a decade, and
to require American employers to invest in training workers. He also
withdrew (or declined to send forward) the nominations of several
prominent liberal activists whose views piqued conservative critics,
and handed the hot potato of labor law reform to a special
commission not due to report for a year. In the midst of these
switches, the president also struggled to find a compromise that he
and the top military brass, if not necessarily gay Americans serving
their country in the armed forces, could live comfortably with.
By abandoning plans for a fiscal stimulus as economic growth
slowed in the rest of the world and cutbacks in military spending and
massive exports of American jobs overseas continued, the president
was in effect throwing the entire burden of reviving the economy on
the bond market and the Federal Reserve. The hope was that a
credible deficit reduction program would induce the Fed to lower
short-term interest rates, and reduce investors’ fears of inflation.
With the Fed cooperating, investors would then buy quantities of
long-term bonds and push down long-term interest rates. Despite its
short-run plausibility, however, this strategy carried with it a self-
defeating catch-22 that guaranteed that ordinary Americans would
feel increasingly beleaguered for a long time to come, regardless of
what happened to the deficit: given their virtual paranoia about
inflation, both the Fed and financial markets were certain to demand
a return to higher rates at the first signs of a recovery.
But that was a problem for the future. In the meantime, the
Cheshire-cat economic upturn—now you see it, now you don’t—was
fanning widespread anxieties about a “jobless recovery,” and the new
round of stridently partisan wrangling on the budget could not fail to
stir up additional unease. As consumer confidence plunged, and the
White House stumbled from one snafu or scandal to another, the
president’s popularity went into free fall.
Once again, a mighty empire was in crisis. Amid savage media
attacks, a siege mentality enveloped the White House. With the
president ordering air strikes against a successor of the Medes and
the Persians, more calls went out to the astrologers, Chaldeans, and
soothsayers. Their replies were all but unanimous. As though an
invisible hand were directing them, the sages brushed off public
concerns about the slow pace of economic recovery. Instead, they
chorused, the president was in trouble because he had strayed too far
to the left of center. To have any hopes of salvaging his presidency,
the chorus continued, the president must repudiate the liberals who
had hijacked his programs and recruit experienced, senior “centrist”
advisers who could help him get back on track in the middle of the
road.3
Bombarded with this advice for many days by newspapers,
magazines, television, and many private sources, the White House
eventually got the message. On May 29 came a stunning
announcement: David Gergen, an intimate of many of the top
business figures most opposed to Clinton in 1992 and a premier
architect of the Reagan agenda that Clinton was pledged to reverse,
was rejoining the White House as a special counselor to the
president.
With this much-heralded “return to the middle of the road,” the
logjam that had held up the president’s budget in Congress now
began to break up. After further trimming to please conservative
critics, the new “government of national unity” (as it would be styled
in Italy or Latin America) secured passage of a markedly deflationary
budget that even many proponents admitted would weigh heavily on
the economy for a long time to come. Then it set about scaling down
plans for sweeping reform of the health-care system while cranking
up a campaign in favor of a particularly rigid and uncompromising
version of the controversial North American Free Trade Agreement
(NAFTA).4 Though many details remained to be ironed out, three