The Lehman Brothers and Democracy

My boss and friend, Lord Russell-Johnston, a Scottish Liberal Democrat, humanist, and bon vivant, often said that the two biggest lies in the English language are: “Of course I’ll still love you in the morning” and “I’m from the government and I’m here to help.” Russell died in July 2008. Had he lived a few months longer, he would have found that joke even funnier—or perhaps sadder.

Even before the September 2008 bankruptcy of the investment bank Lehman Brothers triggered the deepest and longest recession since the 1930s, millions of people in developed Western economies have already understood that, despite all the claims by Ronald Reagan and Margaret Thatcher, money doesn’t trickle down from those who have plenty to those who have the least. The collapse of Lehman Brothers and the taxpayer-funded rescue of financial institutions showed instead that, in moments of crisis, money can very much trickle upward. The state and its institutions, which should have prevented the greedy orgy of Lehman Brothers and their friends with toxic subprime securities, failed to do their job. Deregulation—which tied the hands of supervisory mechanisms—also played a role. After all, the market, including the financial market, supposedly regulates itself best. But when the crisis hit, the "elites" quickly found a way to use state intervention to shift the burden onto those who were not responsible for the crisis and who gained nothing from the financial manipulations that caused it.

This statement is, of course, somewhat simplified, but it contains enough truth to explain the devastating impact this had on public trust and support for politics, the government, and its institutions. The distrust and rejection of these institutions, and the anger felt by the humiliated and insulted toward political and financial elites, didn’t start with the fall of Lehman Brothers, but that event certainly broke the dam. It created fertile ground for cynical hucksterism and manipulation of people’s emotions—people justifiably outraged by the injustices and the economic, social, and political marginalization that had begun long before that fateful September in 2008.

In 1944, British philosopher and Austrian-born economist Friedrich Hayek published The Road to Serfdom in London. In it, Hayek argued that government interference in the economy leads to the loss of freedom, repression of individuals, and political tyranny. The book was quite successful from the start and has sold more than two million copies to date. At least two copies were surely bought by the previously mentioned U.S. President Ronald Reagan and his British counterpart Prime Minister Margaret Thatcher, who, in the 1980s, shaped domestic and international economic policy strongly inspired by Hayek. Out of fear—real or feigned—of the threat of tyranny that supposedly lurked in any state intervention in the economy, they laid the foundations for a neoliberal policy framework built on aggressive privatization, shrinking of the public sector, and deregulation of rules that restricted the free operation of economic actors—including rules that protected the public interest. The centerpiece of it all was tax policy, marked by dramatic reductions in taxes on the wealthiest, under the pretext that this would ultimately bring prosperity to the entire society. You know—the trickle-down theory.

We know what happened. The blind and frantic fetishization of the market as the only effective and legitimate regulator of economic and social relations led to stagnation in living standards for large segments of the population in many developed Western economies. The expectation that capital—once freed from the shackles of state intervention and regulation—would develop a social conscience and act responsibly toward the public interest… well, let’s say that didn’t quite pan out. The shrinking of the public sector hurt those who couldn’t afford paid alternatives to services they had previously received for free or at a lower cost. The middle class—the largest and most reliable voting bloc for social democratic, centrist, and center-right parties that built post-war welfare state models across Western Europe—dwindled and lost its influence. A significant portion of the working class was pushed—if not into poverty—then at least to the brink of human dignity. The traditional electorate of the left thus became easy prey for right-wing chauvinist extremism of the Salvini and Le Pen variety.

The great paradox of the entire story is that the fertile ground for a populist attack on democratic institutions—based on liberal democratic values such as human rights, political freedoms, and the democratic rule of law—was created by the ideas of a man who sought to protect freedom from tyranny. And once again, the money trickled in the opposite direction. Populists are also aided by many—on both the left and right—who equate economic neoliberalism with liberal democracy. This demagogic lumping together makes it easier for populists to deceive the victims of economic neoliberalism, who then believe that their problems stem from democratic institutions, the media, civil society, and human rights. And, of course, migrants. As an alternative, populists offer economic neoliberalism without freedom and without rights. In the end, the biggest victims will be those who support the populists most fervently today.

The truth is that a social state that creates the conditions for a competitive and efficient economy, while maintaining an effective public sector through sound tax policy and regulation and preventing excessive social inequalities, is in no way incompatible with the principles and values of liberal democracy. On the contrary, it is a necessary condition for the normal functioning of such a democracy. This is not about being left or right, but about an economic, political, and social model that, with different emphases, was used by post-war European governments across the democratic political spectrum to build society. Excessive social inequality is not only a barrier to the normal functioning of liberal democracy but also an obstacle to sustainable economic growth, as even the OECD acknowledged in 2014.

Based on this wealth of empirical evidence, one might assume that the doctrine of trickle-down economics has been discredited by time. Fake news! Donald Trump may not have read Hayek’s book, but he probably believes he wrote it. He is encouraged by the current strong performance of the American economy—for which he naturally takes full credit. When that ends, he’ll blame someone else. Boris Johnson is also excited, seeing in the hardest possible form of Brexit a chance for a new Great Britain, where bold tax cuts will create “a happy and dynamic economy that promotes entrepreneurship and rewards the truly hardworking and innovative, where people can hope to bring home higher wages.” The operative word here is, of course, hope. Boris is clearly counting on the fact that the British haven’t yet realized that nothing will trickle down to them.

Of those two million copies of Hayek’s book, a few have clearly been sold in Slovenia as well—at least judging by some of the positions taken in the recent heated debate on tax policy. That those annoyed by the democratic institutions of liberal democracy and the social state are enamored with Hayek’s ideas is no surprise. But perhaps others might take a moment to reflect on how, why, and where the world has drifted over the past thirty years.

If not, we might very well wake up one morning with a splitting headache and a moral hangover—in bed with someone who doesn’t love us.