Counterrevolution

Cooper adopts the conventional Keynesian framing of the crisis of the 1970s according to which wage demands from workers squeezed industrial profits. While these demands could be mitigated by calling on the “reserve army” of primarily racialized members of the working class who had been left out of the New Deal bargain, the spread of the revolt in the form of the civil rights movement undermined this strategy. In order to recover profits, industrial firms were compelled to raise prices, leading to a wage-price inflationary spiral. Rising inflation, in turn, eroded financial asset values. In response, industrial and financial capitalists banded together to restore discipline, waging class war to take back control of the state by expanding and intensifying their lobbying efforts. As they did, these elites and their political allies were armed with a range of new economic ideas.

The politics of the “counterrevolution” that followed consisted of implementing a combination of “supply-side” and “Virginia School” economics. Cooper traces how “Virginia School” austerity politics, on the one hand, and what she refers to as supply-side “tax expenditure,” on the other, came together to form the economic policy at the heart of the Republican and Democratic Parties. Supply-side economics revolves around the use of tax incentives to direct investment into particular asset classes. Since providing tax breaks means forfeiting tax revenues, in economic terms they constitute a form of spending — effectively transferring public money into the pockets of asset owners, including corporations, real estate developers, and wealthy individuals. Yet on the other hand, the Virginia School emphasized budget discipline and austerity, prominently calling for constitutional limits on taxation and spending.

Cooper shows that there was no necessary contradiction between these two ideologies. Rather, austerity for workers and spending for the wealthy emerged as complementary pillars of a coherent policy paradigm for restoring the power of asset owners following the crisis. Hence the peculiar mix of “extravagance and austerity” that defined neoliberalism and reshaped class politics in the United States: massive deficit spending and low interest rates to drive up asset values, on the one hand, and ever-deeper cuts to social spending, on the other. To be sure, the implementation of this paradigm depended on reining in inflation and restoring class discipline, which required the draconian hike in interest rates known as the “Volcker Shock.” Skyrocketing interest rates raised the costs of borrowing, thereby slowing investment and consumption, leading to layoffs and high unemployment. By the 1990s, confident that the working class had been subdued, Federal Reserve chairman Alan Greenspan felt it was safe to reduce rates and hold them there — ensuring a flow of investment into state-funded asset classes, further boosting their prices.