Preface

In September of 2022, The Economist declared that the world had entered a new era: "Bailouts for everyone!" According to this leading voice of the global business community, the colossal bank rescues in response to the financial crisis of 2007-9 had created a veritable bailout state. During the following decade, governments had failed to roll back these extensive public guarantees for private balance sheets. And during the Covid crisis, when governments had broadened the safety net to prevent the economic hit of the pandemic from turning into a severe economic downturn, the bailout state had positively gone "into overdrive." "We are all bankers now," The Economist lamented, as if the democratization of that profession were a self-evidently bad idea.1

The existence of this bailout behemoth, the magazine went on to argue, meant that those who thought they were living in a "neoliberal" era, governed by free-market principles, were mistaken. That was a remarkable conclusion. During the previous decades, The Economist itself had played a prominent role mainstreaming neoliberal ideas, urging governments everywhere to rescind innovation-stifling regulations and cut back public spending. However, it had no difficulty identifying the appropriate response to the realization that its work was not done, demanding that economic and political leaders everywhere redouble their efforts to rehabilitate the neutral wisdom of markets against overweening state institutions.

Progressives, by contrast, have had a much harder time figuring out how to relate to the bailout state's sprawling infrastructure of backstops, subsidies, and guarantees. The left's understanding of the past century has been deeply shaped by the assumption that the shift from Keynesian state intervention to neoliberal free-market logics has been effective and in fact transformed our society to its core. In that picture, the growth of a bailout state just has no real place.

The resulting blind spot has done much to confuse centrist and left-wing politics. Quick to assume that public things are worth supporting, progressives have often thrown their weight behind programs that benefit primarily business and the affluent. Of course, accepting an uneven distribution of benefits to secure some gains for the less well-off can be a rational political strategy. But in practice this has been a very slippery slope, as the terms of such lopsided compromises are typically quickly assimilated into the default configuration of economic policy. Before long, enormous corporate tax breaks and financial market backstops sit below the public's field of vision, attracting nowhere near the level of attention that comparatively inexpensive social programs do.

Getting the whole bailout edifice into view requires that we retrace how it was built. Only then can we understand how it became untethered from the political objectives that once drove its expansion, and what that growing disconnect means for the present.

The bailout state has deep historical roots. While its expansion to a size that makes it impossible to ignore occurred in recent decades, much of the scaffolding was put in place during what we remember as less economically tumultuous times. From early on in the post-World War II era, public underwriting of private financial risk was a key means for governments to manage the contradictions of welfare capitalism. As it proved an effective way to stabilize the economy and protect select constituencies from the effects of downturns, practices of risk socialization came to reshape the logic of economic policymaking from the inside out. There were significant side effects, however. Chief among these was inflationary pressure - the inevitable result of spreading downside risk across society without doing the same for upside exposure.

For progressively minded people of a certain generation (my own, in any case - old enough to have some sense of historical longue durée, but too young to recall a time when inflation played havoc with our parents' household budgets), the idea of inflation has, until recently, always been abstract and hypothetical. Instead, we have tended to ridicule this peculiar obsession of economists, likening it to a professional deformation. But, while adopting a more nonchalant attitude, we have often ended up using the same technical language and narrow definitions that mainstream economists use to think about inflation, obscuring what is at stake.

Developing a better language to talk about inflation requires some work. This book considers why it has been such a challenge for progressives - specifically, why it was so easy for Keynes to miss its full significance and how it went on to bedevil the Keynesian tradition. Keynes and many of his followers never fully broke with traditional theories of money, which tend to think of it as a freely available infrastructure for private commerce, with any malfunctioning the result of external forces. Such a perspective makes it difficult to recognize inflation when it becomes a chronic affliction, as it would during the twentieth century, not generated by policy mistakes but embedded in the most basic operations of economic life.

Conservatives have typically advocated fighting inflation with monetary contraction and fiscal austerity, but such policies posed a threat to key parts of the progressive agenda. To undercut inflation in different ways, postwar Keynesians looked to supply-side measures such as tax breaks and investment subsidies, intended to incentivize business into delivering economic growth free of inflation. Such policies were expensive and made the impact of economic policy far less egalitarian, but they rarely did much to bring down inflation. Public generosity towards business was invariably followed by measures to tighten the monetary and fiscal screws elsewhere in the system.

By the 1970s inflationary pressures had become difficult to contain, and it proved fertile ground for the rise of free-market ideology. But even though the neoliberal program has reshaped the world in numerous ways, its accomplishments have never included a shrinkage of the bailout state. To the contrary, over the past half century derisking policies have been consolidated into the baseline settings of economic policymaking. And they have been allied to a semi-permanent austerity agenda that has, on the whole, been highly effective - at times too effective, as we will see - in managing inflation.

Just as the dance of bailout and austerity already shaped the landscape of welfare capitalism well before neoliberals ever appeared on the scene, so the expansion of the bailout state during the past decades has enjoyed significant progressive credentials. The stabilization of a growing financial system bolstered, for some time, a middle-class politics that increasingly centered not on wage growth but on asset appreciation and capital gains. It experienced its heyday in the 1990s - a decade that has recently replaced the 1950s as the object of middle-class nostalgia.

Following the 2007-9 crisis, the ties that had bound the expansion of the bailout state to the advancement of broader social and political objectives came undone. Large banks and other too-big-to-fail institutions had long benefitted disproportionately from the arrangement, but since the Global Financial Crisis the bailout state's disbursements have flowed almost exclusively to Wall Street and its clients, benefitting a steadily shrinking group of ever-wealthier property owners. Promises of inclusive economic growth have looked increasingly thin.

True to its laissez-faire roots, The Economist occasionally expressed worry that a financial system depending so heavily on political grace and favor could lose legitimacy and invite ill-advised left-wing experiments. The economic policy response to the Covid crisis provided a taste of what that could look like, a glimpse of what could happen if the democratic public were to get its hands on the machinery of the bailout state. In fact, The Economist had neatly timed the announcement of its discovery to coincide with coordinated action by central banks around the world to get a grip on resurgent inflation, seeking to legitimate renewed financial austerity by publicizing neoliberal common sense. How could an economic system providing everyone with a bespoke bailout not be inflationary?

That question, however, does not have to be asked in a purely rhetorical register. It has actual answers, and one does not have to look too far back in history to find examples of how one can expand the remit of public generosity without undermining the stability of the monetary standard. In recent years, that point has been pressed by Modern Money Theory (or Modern Monetary Theory, but either version is better known as MMT), a theoretical framework that has existed for some time but rose to prominence as during the 2010s the policy formula of "bailouts for banks, not people" became more flagrantly absurd. When inflation made a comeback in the midst of the pandemic, and mainstream economists demanded sacrificial austerity, MMT proponents like Stephanie Kelton pointed out the hypocrisy.2

The idea of democratizing the banking profession is not as absurd as The Economist would have us believe. As Hyman Minsky, an economist whose work has deeply shaped the ideas presented in this book, put it, we can all issue an IOU - the trick is to get people to accept that note in payment for other debts without demanding a massive...