Coping with Crisis: Government Reactions to the Great Recession

Chapter 1. Coping with Crisis: An Introduction

1 The chinese ideograph for crisis combines the image of danger with the image of opportunity. This makes good sense. Crises are surely periods of peril, but they also facilitate change. This simple observation is the essence of the punctuated equilibrium model in economics. It is also the foundation of the social science literature on critical junctures. Whether they take the form of wars, depressions, deep recessions, or natural disasters, crises give leaders the opportunity to turn policies, and sometimes polities, in new directions. Thus, crises threaten but they also enable, and the economic crisis that erupted in 2007 and 2008 was no exception. When the toxic assets of the U.S. mortgage market began to weaken financial institutions in the United States, Ireland, Germany, and Britain in 2007, policymakers in each state swiftly crafted a variety of policy reforms. Ruling party ideology proved a poor predictor of what transpired as the staunchly pro-market Bush administration engineered the largest government intervention in capital markets in U.S. history. Yet, on this occasion, as on so many others, reform opportunities were neither unconstrained nor uniformly utilized. As the financial crisis spread and morphed into the Great Recession, different governments responded in different ways, reacting to a mix of domestic and international pressures and incentives. What forms did government responses take? How might they best be explained and who, if anyone, has seized the opportunity for change thus far? The essays in this volume address these questions from a variety of perspectives. Taken as a whole, the volume maps the varied nature of national responses, sheds light on the extent to which policies were shaped by international actors and international coordination and explores how Chapter 1 Coping with Crisis: An Introduction Nancy Bermeo and Jonas Pontusson 2    Coping with Crisis responses were affected by institutional complementarities, party politics, and organized interests. This opening chapter previews what lies ahead and sets government responses to the Great Recession in historical perspective through a comparison with government responses to the global economic crisis running from 1974 to 1982. The Long Recession, as we shall call it here, provides an appropriate comparison for the contemporary crisis, for it too was an extraordinarily sharp economic downturn that called into question core features of prevailing growth models in the advanced industrial (or postindustrial) economies. Although our authors were not constrained by a single analytic framework , the collection as a whole highlights three major themes. The first is that international institutions have generally failed to play the ameliorative role that many envisioned: international financial institutions proved incapable of preventing the U.S. mortgage crisis from becoming a global recession; the EU failed to take the early measures that might have prevented the crisis from growing worse, and its inability to foresee and then forestall a series of sovereign debt crises has severely curtailed the autonomy of decision-making in debt-ridden member states and generated political disenchantment with the European project in general. The collection ’s second theme emerged when we, as editors, set the policy responses outlined by our authors in historical perspective. Comparing the responses to the Great Recession with the responses to the Long Recession of the 1970s and early 1980s, we found that the contemporary menu of policy choices had not only narrowed considerably but also changed in content. The third theme is that economic policymaking between 2008 and 2011 is only partially explained by the factors invoked to explain economic policymaking in better times and in previous crises: the institutional complementarities of liberal versus coordinated market economies, the ideology of ruling parties, and pressures from traditional interest associations carry less explanatory weight than the current literature in comparative political economy would lead us to expect. Our themes have been shaped, no doubt, by our project’s regional and temporal boundaries. Geographically, the volume deliberately focuses on advanced capitalist democracies. Its essays trace and explain policy responses in the EU, Britain, France, Germany, Greece, Ireland, Japan, Portugal , Spain, the Nordic countries, and the United States, and include references to Italy as well. Although the Great Recession has certainly been felt globally, the crisis started in the most developed economies, and much is to be gained by beginning our inquiry where the crisis began. In addition , an extensive literature exists on government responses to previous economic crises in advanced capitalist democracies, providing us with the An Introduction   3 opportunity to engage in cross...