Francis Fukuyama's Reading List

"Right now, as you just indicated, what’s probably under the greatest attack is the liberal part of that three-legged stool, that is to say the constitutional rules that limit power. So, if you look at Erdoğan in Turkey or Orbán in Hungary, or Donald Trump in the United States, they’re all elected. The democratic accountability part is working fine and people still think that elections are legitimate and so forth. Even Putin still feels he has to hold fraudulent elections. But what they do, in the first instance, is they try to pack the courts, they put their own people in the bureaucracy, they attack the independent media, who are the watchdogs. It’s the constraints on executive power that have come under severe attack. And I think that’s also the part that needs to be defended because, as I said, the legitimacy of people voting and regimes reflecting popular choice isn’t all that controversial in the present-day world. I don’t think so. I’m in the process of writing a book that will be published by Profile next spring, on liberalism and its discontents. I’m going to focus on the rule of law part of liberal democracy. The reason I’m writing it is that it’s come under severe attack from both the right and the left. So you’ve got this global populist right-wing movement that takes a nationalist form in Hungary and in the United States. It takes a religious form in India and in Turkey. It’s a severe challenge to the basic principles of the rule of law that seeks to concentrate power in the hands of a single executive leader. Vladimir Putin famously said in an FT interview that liberalism is an outmoded doctrine. So that’s one attack. But it’s also coming under attack from progressive people on the left, who are very frustrated that liberalism has not brought about greater racial equality in the United States, for example, that it’s denied the legacy of colonialism and slavery and a lot of other bad things that have happened under liberal regimes. It’s led to an intolerance of certain forms of speech, which begins in elite places—like universities and in Hollywood and in the arts—but is gradually spreading to other parts of society. Liberalism itself, as a principle, needs to be defended against both the critiques from the right and the left. That’s what I’ve been trying to do in the last few years and I think it’s a pretty urgent agenda right now. That’s a very hard question to answer because, obviously, it depends on how you define liberal democracy. Freedom House has an annual “Freedom in the World” survey that scores different countries. My colleague Larry Diamond keeps track of this and I think that he would say that the number has gone from about 35 back in 1970, to maybe 115-120 in the early 2000s. But, since then, it’s fallen by perhaps 15-20 countries. “Liberalism itself, as a principle, needs to be defended against both the critiques from the right and the left” But I think that quantitative estimate doesn’t really capture the seriousness of what’s happened. Freedom House this year downgraded both the United States and India, two of the world’s largest democracies. India fell out of the ‘free’ category because of the very illiberal policies that Prime Minister Modi has been following towards Muslims in India. In the United States it was because of Donald Trump’s most recent attacks on American democracy—denying a peaceful transfer of power once he lost an election. Whatever the numbers may say, there’s clearly also a qualitative change that’s going on in the world when the United States, which has traditionally been the world’s leading democracy, is itself leading the way towards all these illiberal, bad practices."

"If it’s okay with you, I put two of Larry’s books on the list. I think they do need to be read in conjunction with one another because they’re written perhaps ten years apart. The Spirit of Democracy still reflected the optimism of what Samuel Huntington labeled ‘the third wave of democratization’. This is the wave that began with Spain and Portugal in the early 1970s. It peaked with the collapse of the Berlin Wall and the transition of a lot of former communist countries to democracy. In the book Larry Diamond is an advocate of what is called ‘modernization theory’. It’s a theory that a lot of social scientists have held that as countries become richer, more educated, more open to a global, cosmopolitan, liberal order they are going to be more democratic—there’ll be a spontaneous shift towards democratic institutions. At the time he wrote it, he would look at a country like South Korea or Taiwan, both of which had been military dictatorships in the 1960s, 70s and early 80s but then, as they hit a certain level of income, became pretty good liberal democracies. The hope at that time was that there was this connection between economic modernization and liberal values that would eventually lead a country like China to democracy. But he wrote the book right at the moment when things were beginning to shift towards what he labeled a ‘democratic recession’ in his second book and is now, I think he might say, even heading towards a democratic depression."

"This book reflects all of the bad things that have gone on in the last 10 years. That includes the rise of Russia and China as consolidated authoritarian states. China doesn’t make any apologies, it doesn’t pretend to hold elections like Russia does, it simply says the Communist Party represents China and it’s going to rule regardless. And it’s been very successful, both economically and in terms of political stability. Russia, which looked like it might be heading towards democracy back in the early 2000s, has made a clear turn, under Putin, not just towards authoritarian government, but also a very aggressive foreign policy. It has occupied the territory of Georgia and Ukraine and Moldova, it has tried to interfere in the politics of the United States and Britain and a lot of other democratic countries. It sent troops to Venezuela. So that has changed. Get the weekly Five Books newsletter But I think that Larry would point to the rise of populist nationalism as an equally grave threat. In a sense, we’ve always been dealing with these external threats. In the 20th century there were very powerful authoritarian countries. Today, the threat is really an internal one that was captured by the January 6, 2021 riot, where pro-Trump protesters occupied the US Congress . Larry wrote the second book, Ill Winds, before that happened, but I think that it would simply confirm the kinds of anti-democratic trends that he saw arising in the United States. And that, in a way, caps a very bad turn in which people have lost confidence in basic democratic institutions, both on the right and on the left. The real question is about modernization theory because China disproves that social science theory. China is already past the per capita income point that South Korea and Taiwan hit in the 1980s when they became democracies. And if that theory is true, there should be greater grassroots demand for democracy in China, because a lot of Chinese are very rich, they surf the internet, they purchase stuff on Alibaba, they communicate with each other using the Chinese versions of social media, and they’re increasingly well educated. But there doesn’t seem to be much enthusiasm for democracy in China right now, people seem to be pretty satisfied with the regime that’s given them stability and jobs and economic prosperity. And so it seems to me that we need to question the underlying theory. I’m not arguing that it is. I do think that they have long-term weaknesses in both their economic model and in their political model. However, I think in terms of the theories that have been guiding Western policy, we really need to rethink whether a richer China is going to be a friendlier or a more democratic China. In Bill Clinton’s day, that was the theory, that we could engage with China, we could trade with it, we could invest in it, because as China got richer, it would be more like us, it would become more liberal. And in fact, since the rise of Xi Jinping in 2013, just the opposite has happened. It’s become a more aggressive, more authoritarian country. And that’s the reality we’ve got to deal with. I think I agree with him. Polarization in the United States and in other countries has a lot of different sources. It has economic roots; it has cultural roots. Nobody would deny that. But political institutions also make a big difference. And in the United States, as in Britain, we’ve got a plurality voting system or, as it’s sometimes called, a ‘first past the post’ system. In Britain, in one of Tony Blair’s elections, he got less than 40% of the popular vote, and yet he got a very powerful majority in Parliament, because his vote was spread out over enough districts that he got the seats. It creates a winner-take-all politics, because winning that majority becomes an important source of power. In the United States, it’s made worse by our presidential system, where a winner inherently takes all—I mean, you can only have one president, you can’t have a coalition presidency. And I think that that has been one of the factors that has made American politics so bitter and divided. Ranked-choice voting was introduced first by Australia. It allows people to rank order their preferences while keeping single member districts. The theory is that you would then avoid something like what happened in the United States in 2000 in Bush v. Gore, where George Bush lost the popular vote and would have lost but for a third-party candidate, Ralph Nader. Nader was to the left of Al Gore, and a lot of Gore’s potential voters instead voted for him and threw the election to Bush. Under ranked-choice voting, that wouldn’t have happened because all those Nader voters would have put Gore as their second choice, and he would have won a clear majority. It’s an example of how a change in the institutional rules may create a more multi-party and therefore more representative form of government."

"This book was published early on in the Trump administration, and it was a very useful warning. Maybe it was mainly useful to political scientists like me, because we used to have this idea of a ‘consolidated democracy.’ Basically, democratization is a one-way ratchet and once you became a democracy, you didn’t fall back. What Levitsky and Ziblatt have done in this book is to show that that’s not true, that you actually can have consolidated democracies that do decay and revert to authoritarian government. As you said, the thing they point out is that today it doesn’t happen through a military coup or through an overtly authoritarian takeover of power, it happens in a much more subtle way. So, for example, Viktor Orbán in Hungary has gradually been putting all of the Hungarian mainstream media under the control of his cronies. He can say, ‘Yes, we still have a free press, the newspapers are owned by private individuals, we have lots of competition’ but, in fact, he has eroded the ability of opposition parties and figures to criticize him because his friends control the media. Similarly, the Law and Justice Party in Poland has been appointing party stalwarts to positions. It abolished the tenure system in the Polish Supreme Court and is gradually politicizing that institution. We see this in spades in the United States where, for example, Donald Trump, even before he was elected, wanted to use the justice system in the United States to go after Hillary Clinton . At his rallies, everybody would start chanting, ‘Lock her up, lock her up.’ This is really something that we thought only happened in young democracies that weren’t mature and didn’t have the strong institutions that would separate law enforcement from politics as they’re supposed to. “It’s the constraints on executive power that have come under severe attack” What Ziblatt and Levitsky do in the book is give you a checklist you can go down of the different warning signs of a slide towards authoritarian government. This is a big debate we’ve had in the United States, because a lot of people who didn’t like Donald Trump—and that meant a lot of mainstream Republicans—over the past four years kept saying, ‘Well, yes, I mean, he may not be that great a guy, but he’s not an authoritarian, he’s not a threat to the American system, we’ve still got a really strong set of institutions.’ What Ziblatt and Levitsky are arguing is, ‘No, you’ve got to look at these little danger signs where there’s an authoritarian instinct at work. It may not come on in a full-blown way at first, but what’s been going on in all these different countries is it gradually creeps up on you, and then at a certain point, you can’t do anything about it.’ That’s where we are now, after what happened on January 6, 2021. There was no Republican repudiation of the big lie that Trump had won the election. Now, every single Republican legislature in the United States on a state level is trying to make access to the vote more difficult because, as Trump has said himself, if everybody in the United States voted, you’d never have another Republican elected. In a sense, they’ve accepted the authoritarian premise that if democracy doesn’t yield the right results, we should discard it. It’s an overt slide back into authoritarianism that we should have recognized some time ago. They do. I think one of the things that’s happened is that the elite in the Republican party has abdicated any leadership role in terms of turning the party away from this overt authoritarianism, except for certain noble exceptions, like Liz Cheney, who was just dethroned as the third ranking Republican in the House of Representatives. It is the result of a moral failure on their part, but it’s also a reflection of the Republican base. Any elected Republican official is terrified that at the next election there’ll be a primary and one of these Trump supporters is going to run against them if they take a stance that’s remotely critical. This is the situation that we’re in right now."

"I was trying to think of a single book that would be a good both as a description and a primer on democracy. Frankly, I couldn’t find one, but this book is quite famous because Robert Dahl was one of the greatest students of democracy. In Polyarchy , he indicated that a democracy is a lot more than just elections and voting and the formal institutions that we associate with it and that democracy really is about pluralism. Pluralism has to exist on a variety of levels. It’s not just multiple political parties that compete against each other. It’s not just a free press in which you have different voices contending. It’s also a vigorous civil society in which people can organize and there have to be real connections between that civil society and the top-level institutions if the democracy is going to succeed. That leads to his title, Polyarchy , which is a kind of awkward term that few people would adopt. But it comes from the Greek and it means ‘many leaders’. It’s an indication that liberal democracy is really about diversity. It’s a means of governing over diverse societies and representing that diversity, but also coming up with means of compromising, deliberating, and coming to common decisions, despite the fact you have numerous divisions within the society. Right now, we’ve got a big problem in the United States with that understanding, and there are two different forms of it. On the right, there is this discomfort with the changing American national identity. Part of it has a racial dimension. Part of it is deeply cultural—a lot of conservatives don’t like gay marriage and LGBTQ rights. On the left, it’s a different sort of hostility to diversity. They don’t like conservatives. When they hear the word diversity, it’s only related to race, gender, sexual orientation. They’re not very tolerant towards people who are Christian conservatives, for example. This book is a good reminder that there are many forms of diversity in a democracy, and that you need the institutions that somehow manage to bridge those differences. I wrote two very long books, The Origins of Political Order and Political Order and Political Deca y . In them, I laid out the tripartite framework—about needing to understand that you’ve got these three components: the state (and hopefully a modern state), the rule of law, and democratic accountability, and that they are all separate. Historically, they appeared at different times. And you can mix and match. So Iran has kind of democratic elections—they just had one. They’re not so free and fair but sometimes there’s a surprise. What they don’t have is anything like a real rule of law that constrains their state. Singapore doesn’t have elections—or has kind of fake elections—but it has a pretty strong rule of law. It’s a way of understanding the diversity of political forms around the world, and also where they came from. The disadvantage is these two books, together, are around 1100 pages long. It’s not like you can go to them for a quick summary and get all that content in a really easy way. That’s right. In fact, more than that, because it takes it all the way back to the primates that were the predecessors of human beings."

"Well, The Old Regime and the Revolution is a pretty good book too, for somewhat different reasons. That book is actually one of the reasons why the Chinese regime doesn’t want to reform. They translated Tocqueville’s book on the French Revolution and what they gleaned from it is that if you liberalize a little bit, you set off this cascade of rising expectations, and you won’t be able to control what happens later. It’s one way of summarizing that book. Democracy in America is important for the following reason: Tocqueville , in a way, was the first sociologist, though that field didn’t exist in the 1830s, when he wrote the book. In it, he looks at the formal institutions of American democracy—Congress, and the presidency, and so forth—but what everybody really takes away from it is that those institutions ride on top of the morals and mores and habits of the underlying society. So, for example, probably one of the most important observations he makes in the book is about what he calls the ‘art of association’. In The Old Regime and the Revolution he writes that before the French Revolution, there weren’t 10 people in France who could collaborate on a common project, because they were too individualistic and unwilling to work with one another. In the United States, he said, it’s different. Americans don’t like top-down organization by the state and they’re really good at collaborating in all sorts of (what today we would call) civil society organizations. That’s churches, clubs, bowling leagues, lots of different voluntary associations that give society a real texture. Support Five Books Five Books interviews are expensive to produce. If you're enjoying this interview, please support us by donating a small amount . And I think that remains the case. Some of it is not so great. The Tea Party is an example of a voluntary association where all these people who are mad at the government came together in a way that gave them a lot of political power. But I do think it’s something that doesn’t exist in all societies. In many places, you really do need the state to organize people. But in the United States, you have a kind of spontaneous organization. Regardless of whether you think it’s good or bad, Tocqueville gives you a different analysis that looks beneath the surface of the visible institutions and tries to understand the moral habits that underlie the workings of those institutions. It’s really looking at the society rather than just the formal laws and whatnot. Well, that’s true but I wouldn’t write home about how great our civic education in the United States is. There’s been poll data that shows that a majority of teenagers cannot identify what the three branches of government are, or that they can’t name a single one of the rights in the Bill of Rights. I think that’s one of the sources of our problems—that people simply don’t know how their own government works, where their institutions came from, and how they’re supposed to function. That’s part of what’s been ailing our society in recent years. That’s exactly right and it’s a really important point. Take checks and balances. Every American says, ‘our Constitution has lots of checks and balances.’ But nobody, in recent political memory, challenged any of those checks. For example, when Congress issues a subpoena to the President or to the executive branch, and they have to answer it. Nobody really violated that rule until Trump came along. All of a sudden it made people realize, ‘Yes. There’s something to these rules that limit the power of a president.‘ I think that that’s probably the biggest global problem brought on by this rise of populism in the United States. American influence is, of course, underpinned by its military power, its economic might, and so forth. But I think it’s what Joe Nye called ‘soft power’ that’s been the most powerful source of influence. It’s the positive attraction of American democracy. And quite frankly, right now, people in China or Nigeria aren’t saying, ‘We want to be more like the United States because that’s our model.’ I just think it’s impossible to say that, given what’s been going on here in recent years. That book started out as a series of conversations I had with the author Mathilde Fasting, who runs a liberal think tank in Norway. It was a way to expand on a lot of ideas that I’ve had on different subjects. In terms of what you can do, it really does all come down to politics in the end, because it comes down to power. I hate to say this, but you can’t really get anything done in any country if you don’t have enough power. Now, fortunately, if you are living in a democracy, that power is constrained, and it’s channeled into certain institutions. But, ultimately, it comes down to elections and voting. And if you elect the wrong people, you’re not going to get the results you want. There was a lot of cynicism prior to 2016, about democracy and the importance of voting because, for the past few decades, it didn’t matter all that much who won a particular election. “Democracy really is about pluralism” But with the sharpening of polarization in recent years a lot of people, and especially a lot of young people, have realized, ‘Yes, it actually does matter. If the wrong people come to power, they’re going to do all sorts of things that will affect my life and the things that I care about.’ And that’s led, personally, to a number of my students going into politics. They’ve run for Congress, some of them successfully. They’re now occupying positions of power and influence. I don’t think everybody needs to run for Congress, but I do think that a democracy presupposes a level of political participation where citizens need to inform themselves about issues. Obviously, they can’t know everything about really complex issues like health care reform, but they need to inform themselves about what’s going on and about their own government. They need to take part—even if that only means going out to vote every two or four years. Ultimately, that’s what people can do if they are disturbed about the way things are going in their politics. Yes, though there is a double-edged sword to political participation and activism—because activists oftentimes have more extreme views than ordinary voters. One of the problems in a democracy is that policies reflect the opinions of the activists much more than the general public. But that doesn’t belie the basic premise that you need informed citizens who are willing to participate. In both those countries, a lot of the people I knew that were dissidents or opponents of the regime have gotten out, if they’ve had the ability, because it’s too dangerous for them. Especially since the attempted murder and then the arrest of Alexei Navalny, his followers have all been desperately trying to get out of the country. The same thing is true of democracy activists in Hong Kong after the extension of China’s security law. They’re basically having to undertake terribly dangerous, covert exits because there really isn’t much they can do if they remain in their countries."

"Reinhart and Rogoff are two macroeconomists who have done a marvellous job in bringing together a lot of historical and international data about how unstable financial systems are. The title of their book, This Time is Different , tells you the whole theme. In many respects, the Wall Street crisis was not at all different from Argentina or Britain in the early 1990s or any number of other crises that have been fuelled by credit bubbles and mismanaged macroeconomic policy. The reason that it was so surprising is that a lot of Americans in the 2000s believed that the US financial system was so deep and well developed that it would never be subject to the kind of instability that happened in Latin America during the 1980s. In a way they were victims of complacency. The other thing that is disturbing about the book is that it really shows how long it takes for a country to recover from this kind of a crisis. This suggests that the US and Europe, which is involved in a separate financial crisis of its own, are in for a prolonged period of low growth and stagnation. That’s one of its advantages. It’s written by two academic economists, it’s got a lot of data and you’ve got to plough through that. It’s a good reference, but it’s not the easiest book to read and it presupposes a certain amount of knowledge of macroeconomics. One of the great ironies that the book points to is the fact that a lot of the Asian governments were a lot wiser than the US. The US – through the US Treasury and its proxies, like the International Monetary Fund – put very heavy pressure on a lot of the emerging economies in Asia in the 1990s to liberalise. That had the effect of leading to a big influx of liquidity into Asia as a result of the Asian miracle, which then flowed out again in the mid-1990s and led directly to the Asian crisis in 1997. “ Just like these Asian governments, we didn’t have an adequate regulatory system in place, and we got into even bigger trouble than they did as a result.” The American reaction to that was to say, “Oh, this shows that the Asian governments are involved in crony capitalism! There’s not enough regulation, they don’t have mature institutions.” They patted themselves on the back that our system was much better than that. But in fact, in many respects, the financial crisis was simply a repeat of the Asian crisis. Instead of the money coming from the outside world into Asia, it flowed from Asia into the US, particularly from surplus countries like China. So there has been a certain amount of poetic justice. Just like these Asian governments, we didn’t have an adequate regulatory system in place, and we got into even bigger trouble than they did as a result. I don’t think there’s ever been a full acknowledgement of that on the part of Western policymakers. What’s happened in Asia is that all of those countries have gotten much more cautious about allowing free financial flows into their economies since 1997. That history – which we’ve managed to forget – is one that is pretty well covered in the Reinhart-Rogoff book. Yes, it was coming from the IMF, but the real pressure behind that was Wall Street. So, for example, in Korea, what we call the Asian financial crisis they labelled the IMF crisis. There is still a lot of bitterness. They believe that essentially the IMF took advantage of their liquidity crisis – that’s really what it was, it wasn’t fundamentally an economic crisis – and used that as an excuse to force open capital markets in Korea to the benefit of all the Goldman Sachses, Citigroups and so forth that wanted access to that market. All the American policymakers – Larry Summers, Bob Rubin – still swear that they had very pure motives in doing all of this, that this was just what was good for Korea. But behind that was, in fact, a tremendous amount of lobbying on the part of these big banks that had a direct self-interest in Asian financial liberalisation."

"Michael Lewis is terrific both at picking topics and in his exposition. What I thought was most interesting about this book was that there is, to this day, a view about the whole pathology of collateralised debt obligations (CDOs) – these highly complex, packaged mortgage securities – as well as the credit default swaps – the insurance contracts written on those securities – that Wall Street created them and they simply got out of hand. They didn’t anticipate it would be hard to value them, how they would be misused, and so forth. “So what this book does quite brilliantly is show that there was actually a high degree of intentionality in creating the crisis. ” What Michael Lewis points out very forcefully is that they were deliberately created by Wall Street banks in order to produce non-transparent securities that could not be adequately evaluated by the rating agencies, which then could be sold to less sophisticated investors, who would buy the idea that this junk debt actually had triple A ratings. So what this book does quite brilliantly is show that there was actually a high degree of intentionality in creating the crisis. The worst of all these securities are the so-called synthetic CDOs. A CDO is a bond that represents maybe a couple of thousand mortgages; a synthetic CDO is a group of hundreds of CDOs, all packaged into a single security. When you get to that level of complexity, no one can evaluate what this thing is worth. You can come up with sophisticated rationales for why this might actually follow some kind of market logic, but I think Lewis shows that the reason this happened is that they didn’t want anyone to be able to rate it. Yes, but it raises this issue of intentional fraud, which has been at the root of a lot of the charges against banks like Goldman. The book is a story about these five or six weird individuals that realise what’s going on – that this housing bubble was expanding and then eventually would burst – and the other thing it makes very clear is that it undermines any kind of notion that the crisis was not foreseeable. In fact, you can see that a lot of the big banks began to understand that it was not going to be sustained, and did a lot to promote it, hoping that they would be able to get out before the whole thing collapsed. It depends what you mean by systematic. Lloyd Blankfein doesn’t get up in the morning and say, “OK. How are we going to defraud people today?” but I do think the relationship of these banks to social rules is fairly dodgy. Rules are viewed as potential obstacles that you try to get around if that maximises your profit. This is a deeper social issue that I think has to do with the economisation of a lot of thinking. Economists have this model of rational utility maximisation – that social benefit comes out of everybody pursuing their private rational self-interest. This has shaded over – imperceptibly over the past couple of generations – to a downplaying of social norms as constraints on behaviour. You see this in a number of places. In business schools, for example. “ When everyone was part of a partnership, there was more of a normative sense that you had a responsibility to customers and that your long-term reputation mattered a great deal.” Back in the 1960s and 70s, business schools regarded themselves as professional schools along the lines of law schools or architecture schools. They were meant to inculcate a certain sense of professional responsibility, that you have obligations to society at large. But as a result of the economisation of a lot of what was taught in these schools, individual profit maximisation began to displace this normative sense, and this spilled over into the behaviour of the people who went on from these programmes into the financial sector. In their minds, they weren’t deliberately trying to defraud people, but if they saw an opportunity to take advantage of less sophisticated buyers of subprime mortgages, they would go ahead and do it. A lot of people on Wall Street itself say that the norms were quite different 30 years ago. When everyone was part of a partnership, there was more of a normative sense that you had a responsibility to customers and that your long-term reputation mattered a great deal. This shorter-term trading mentality has really displaced that in many firms. Whether you can get that back or not is another big social challenge in the future. It’s a lot of things. As the industry has got bigger and more competitive, and involved more money, the kind of clubby, elite-run brokerages and investment banks that existed a generation or two ago have just disappeared. More competition, more participation and less elite control don’t always lead to the best outcomes."

"The book was written a couple of years ago now, but he begins by pointing to the issue that’s being raised now by the Occupy Wall Street movement. A major fact of the last 30 years is growing income inequality in the US. He argues that in many respects the housing bubble was the direct outcome of this growing inequality because, for various reasons having to do with political culture, Americans don’t like outright redistribution. They’re not comfortable with it the way the Europeans are and therefore they did a stealth redistribution through subsidised mortgage lending, which is the origin of Fannie [Mae] and Freddie [Mac] [US government-sponsored mortgage companies]. He accepts the fact that the crisis had multiple causes but he argues that redistribution done through subsidised lending is one of the most inefficient and dangerous ways to do redistribution. He wouldn’t actually disagree with the notion that the country needs more redistribution, but he would call for different social policy remedies. The book is interesting because it puts the subprime housing market in this larger context of growing social inequality. Yes, it’s clearly right. There was such a bipartisan consensus – which we now forget about – in favour of expanded credit opportunities of home ownership for low-income people. Everybody wanted to create an ownership society, and was willing to take a lot of risks, not apparent at the time, in order to do this. This is not something that only Democrats favoured, this is something George Bush got behind in a big way as well. Rajan says it’s a very American approach to dealing with a problem of this sort. “While nobody wants to have a crisis, it does serve as an opportunity for reform. I would say that one of the big tragedies is that in many respects this was a completely wasted crisis. It wasn’t deep enough.” The other thing that I found interesting about that book is that Rajan is a former chief economist of the International Monetary Fund. He is quite aware – and gives quite a lot of evidence in the book – that ultimately one of the big causes of this crisis was Asia, and all the surplus countries that have been following this export-driven growth model. He says that that growth model is destabilising and is not sustainable for the countries that engage in it. One of the fascinating points he makes is that countries that grow using that model never grow up, in a sense. So Japan, all the way back at the time of the Plaza Accord in 1985, understood that they couldn’t keep exporting to the United States based on a weak yen for ever and that they would have to boost domestic demand. It’s now nearly 30 years later and they still have not succeeded in re-orienting their economy towards greater domestic consumption. That raises some very interesting problems for China because China is even larger than Japan and has been completely dependent on that same export-oriented model. Chinese authorities have been claiming that they understand they’ve got to re-orient towards domestic demand, but I suspect that even though it is an authoritarian state they’re not going to be any more successful than the Japanese were in bringing about this shift. When you grow in that fashion, you create all these big, powerful vested interests, which, in China’s case, are these big coastal export industries. The state is in bed with these people and that’s why I think they’re going to continue to run this extremely unbalanced economy. In the US, we have increasingly concentrated economic and political power. In a democracy, that should get balanced out by the voting power of ordinary people, but that mechanism seems to have broken down. First, there has not been enough recognition of the inequality of power, and second, the way people have mobilised to deal with it, there’s something missing in that as well. The initial response, according to the Rajan book, was to subsidise lending. That is, in effect, a way of not facing the inequality problem openly but trying to deal with it in a covert way. That, for me, is the central puzzle of this whole crisis. You have a crisis that starts on Wall Street and implicates a lot of the deregulated free market institutions that were created since the Reagan revolution. The crisis also had roots in the increasing maldistribution of income in the US. Despite all that, there’s been no mobilisation of people on the left. I really don’t believe Occupy Wall Street represents a broad mobilisation. The particular demographic at issue are the white working or lower-middle class in the US, the so-called Reagan Democrats. In the 1930s, they voted for the New Deal coalition – if they were Europeans, they’d be voting for Social Democratic parties. But in the US, in most elections over the past 30 years, they have voted for Republicans who have pursued policies that largely hurt their interests. That’s the big sociological puzzle about the US, why that phenomenon exists. That’s right. The economist Tyler Cowen has made the point that, in a sense, inequality matters less than it did 100 years ago. If you were at the bottom in terms of income distribution 100 years ago, it was literally a life-threatening situation, in terms of your life expectancy, your vulnerability to setbacks. It’s still the case in large parts of the developing world right now. But here in the US the level of people at the bottom is sufficient that they can still enjoy their smartphones and cheap clothing at Wal-Mart. The issue of inequality becomes much more abstract. They know there are people making billions of dollars, but it doesn’t bother them as directly."

"Obviously that’s way overstated, but it is remarkable that here we are in 2012, the fourth year after the crisis. We still don’t have an adequate regulatory system in place to prevent a crisis like this from happening, and the recent collapse of MF Global indicates that in many respects Wall Street hasn’t learned lessons either, in terms of the kinds of risks they’re willing to take. I’ve got this very simple view, which is that I don’t think regulation of the Dodd-Frank sort is going to work. The investment banks have got way too much talent, are way too creative and way too nimble for regulators ever to keep up. Therefore the real solution all along should have been to break these big banks up into smaller pieces, which is essentially what Glass-Steagall and the interstate banking regulations of the 1930s did. Once the banks are no longer too big to fail, then you can just let the market work the way it’s supposed to. If people take outsized risks and they get into trouble, then they just go bankrupt, and that is essentially what happened to MF Global. It hurts people, but it’s not a systemic crisis. “You get these windows of opportunity that are created by big external shocks like the financial crisis, and if you use the opportunity and direct all that anger at the right moment you can accomplish certain things.” That option was never seriously considered. We briefly toyed with the idea of nationalising the banks in the depths of the crisis. In the debate leading up to Dodd-Frank, there was actually one really interesting roll call vote. There was an amendment proposed that would have limited the size of financial institutions. It was defeated something like 60 to 30, and if you look at the list of the people who voted against it, it includes Chuck Schumer and all of these liberal Democrats. They’re the ones who should have been leading the charge against this kind of concentrated power, but given where they get their money, they weren’t willing even to consider it. That’s why we still haven’t solved this problem. In that one specific respect, Johnson is completely correct. It’s not just a matter of corrupt money bribing people; it’s also a case of intellectual capture. People just can’t think outside the parameters that are set by this community and just don’t entertain certain kinds of potential solutions to it. It’s not going to happen. That’s the nature of politics. You get these windows of opportunity that are created by big external shocks like the financial crisis, and if you use the opportunity and direct all that anger at the right moment you can accomplish certain things. Right now that window has slammed shut, and unfortunately it’s going to take another repeat crisis for it to open up again. In fact, given the way the debate has developed, the idea that we’d actually do more regulation in the US rather than less is off the table because of the right-wing reaction to everything. In general, I think deregulation is a good thing. It’s just that the financial sector is really different. It requires a stronger political muscle to make that sector not be of general danger to society. I think the China alternative is a big red herring. I just don’t think that in the long run the Chinese are going to look nearly as good as they do today. Buried in all that authoritarian decision-making are a lot of time bombs with regard to environmental degradation, with regard to repressed social anger at the way those decisions are made and so on. No matter how smart they are, they’re not that smart. No one can spend that much money in a stimulus and have it all go into productive investment. We’re going to discover in a few years that they’ve overplayed their hand and made lots of mistakes, just like in this much touted high-speed rail system that they have put in place. There’s obviously a tremendous amount of corruption and shoddy workmanship and we’ve only seen the tip of that particular iceberg. But if authoritarian states need more accountability, you can make the case that democratic political systems have been paralysed by the multiplication of checks and balances over time. That really creates a situation of what I call “vetocracy”. There are no forcing mechanisms to make the polity take a difficult choice, but there is enough participation that everybody can block things that they don’t like. In the US we have a particularly severe form of this because our constitution mandates many more checks and balances and many more vetoes in political decision-making than do the constitutions and basic laws of other societies. The economist Mancur Olson was right, I think, that over long periods of peace and prosperity, the vested interests that take advantage of this kind of political system tend to multiply. So I would relate our current problem to a bad institutional set of rules. Yes, every country needs political reform on different levels, but the US needs to trim back the number of these veto points and restore some mechanisms by which difficult trade-offs can be forced on the system. No, as far as I can tell, this is not an issue that anyone is willing to take up. For example, just to give you one possible solution – the super-committee that was formed as a result of the impasse over raising the debt limit. I think it actually points to one possible way of doing future budgets. Right now, an American budget is formulated by Congress. Essentially, 535 members of Congress have a six-month window of opportunity to load budgets up with tax breaks, subsidies, earmarks, exemptions for special interests and so forth. Contrast that to the Westminster system in Britain, where the government writes the budget and because you’ve got party discipline, it’s passed within a week or two of its being proposed by the Chancellor of the Exchequer. Britain also got into trouble for different reasons, but if you had a system in which the budget was formulated by a much smaller group of people, that had a lot of technocratic input and was then sent to Congress for a single up or down vote, you would eliminate many of the opportunities that exist under the current system. Is anybody interested in considering this as a long-term solution? No, there is no political interest in anything remotely like this."

"It’s mostly the dissent, which basically shows this amazing phenomenon, that the Republicans have not been able to learn from the past 30 years. Especially the Wallison dissent , which takes what is a very complex crisis that has multiple roots and lays it all at the door of Fannie and Freddie and government intervention. It seems to me transparently designed to exonerate free markets. I like free markets – I think we benefit from having market competition and the market setting prices and so forth – but this crisis has proved that financial markets are not self-regulating. To draw from this complex analysis that particular conclusion I just find astonishing. That’s where reality, every now and then, intrudes. That’s why, as I said before, in a way the crisis wasn’t severe enough. Because a floor was put under the problem at the right moment, it was possible for people to move on. The other thing is just purely political. As long as the Republicans can get people to vote for these same deregulatory policies, they’re not forced to face the music. I think the election this year is going to be very crucial in either affirming or denying that. If you continue to deny reality for long enough, at a certain point you’re going to have to pay a political price. We can’t know how that kind of counterfactual would have worked. You’re right that there’s a massive inconsistency in the libertarian position. The fact is that it was only very strong action by the Fed, through Congress and the TARP [Troubled Asset Relief Program], that put the floor under the crisis. And yet, there’s still a belief that the government caused this. There is a great deal of anger against the TARP, despite the fact that most informed observers agrees it was a necessary thing to do in order to correct a mistake that was created by private markets. You may be right, I suppose, that even in a more severe crisis, people could still maintain that belief, but it does seem to me that when suffering reaches a certain level, that argument is going to be harder to sustain. It is true that it is a part of the American political culture, but that culture has changed over time. People believed that very strongly in the late 19th century. Then you had the rise of the Progressive movement, which shifted views towards the need for a stronger centralised state. Then it made a big comeback in the 1920s and then the Great Depression again shifted views. It may be a religion, but it’s not a religion that members believe in at all points. It’s what’s an economist would call a low-level equilibrium trap. You don’t want to pay taxes to get better government services because you’re convinced the government will waste any money that you give them. So you’re never in a position to get out of that. A lot of Latin America is basically in that situation, and I’m afraid that the US has now been in this situation for some time."