In chapter 3 we examine the neoliberal shift in macroeconomic policymaking, from the Keynesian focus on full employment towards a ‘sound money’ consensus about the necessity to pursue low inflation and public debt levels. Monetary policy was delegated to politically independent central banks with a principal mandate to maintain price stability, leading to a regime of monetary dominance in which fiscal policy was subordinated to that mandate. The shift towards neoliberal macroeconomic policy is often interpreted as the result of the deficiency of Keynesian ideas during the 1970s stagflation crisis and the fiscal crisis of the welfare state during the 1980s, which set the stage for monetarist and neoclassical views on macroeconomic policymaking that eventually culminated in the New Keynesian macroeconomic policy paradigm. We go beyond such an ideational interpretation by pointing to new institutional constraints on Keynesian macroeconomic policymaking, as well as to the distributional effects of neoliberal macroeconomic policy. By subordinating fiscal policy to the inflation target of central banks, governments became entirely dependent on foreign investors in transnational sovereign bond markets to fund their public deficits. This put new constraints on the capacity of governments to pursue reflationary Keynesian macroeconomic policies, making governments more attentive to the preferences of sovereign bond investors and credit rating agencies for low inflation and public deficits. Drawing on class-based perspectives, we will clarify why restrictive macroeconomic policies served to weaken the bargaining power of workers and labour unions, allowing firms to restore their profitability (and contributing to a falling labour income share in the industrialized economies). Drawing on sectoral perspectives, we will explain why the transition towards low inflation particularly advanced the interests of banks, asset managers and their wealthiest clients.
Conflict between employers and labour unions during the 1970s resulted in a crisis of the wage-led growth model that had been central to the Keynesian Golden Age of capitalism. From a neoliberal perspective, the crisis of wage-led growth and the ensuing rise in long-term unemployment rates were caused by structural rigidities in labour markets – for example, the excessive influence of labour unions in the wage-setting process – and overly generous welfare states. While there continue to be persistent institutional differences between the Anglo-Saxon LMEs and the European CMEs in terms of social policy, the crisis of the wage-led growth model put pressure on all the advanced capitalist countries to liberalize their labour markets and dismantle their social security systems. In chapter 4 we will review different theoretical perspectives on these liberalization pressures. Class-based power resource approaches maintain that globalization and regional integration have forced the CMEs to liberalize their social model by strengthening the exit power of capital and weakening the power of labour and left-wing political parties. Employer-centred varieties of capitalism (VoC) approaches contend that pressures for liberalization predominantly arose in the domestically oriented service sectors, since employers in the internationally exposed industrial sectors of the CMEs continue to benefit from centralized labour markets and relatively generous social security systems. The chapter subsequently traces different pathways to liberalization in the Scandinavian social-democratic CMEs, the conservative-corporatist CMEs and Anglo-Saxon LMEs. By surveying these diverse trajectories of neoliberalization, it will become clear that all varieties of capitalism – even the more social and redistributive CMEs – have evolved into less egalitarian forms.
Neoliberal globalization also fostered a shareholder model of corporate governance, according to which the maximization of shareholder value and returns should be the principal objective of firms’ business strategy. The shareholder model of corporate governance was more eagerly adopted by firms in the Anglo-Saxon LMEs than in other countries, which explains why the national income share of the top 1 per cent rose much faster in the former than in the latter economies. In chapter 5 we will trace these divergent patterns by looking at institutional differences in corporate governance and associated executive compensation practices. First of all, we will attribute the neoliberal shift towards shareholder value maximization in the US economy to growing international economic pressures faced by large US vertically integrated corporations, financial ideas (the growing popularity of the neoliberal agency theory of corporate governance) and interest group politics (weakening of labour unions and rent-seeking by managers). Subsequently, we will link divergences in corporate governance and executive compensation practices in the CMEs and LMEs to the distinctive institutional complementarities between their financial systems (bank-dominated versus capital market-dominated), labour markets (centralized versus decentralized), educational systems (promoting industry-specific versus general skills) and firm innovation strategies (incremental versus radical innovation). By linking the shareholder model of corporate governance to the increasing financialization of non-financial firms, we go beyond overly functionalist and static VoC approaches of corporate governance and discuss regulatory changes – for example, the European Union’s promotion of the shareholder model as part and parcel of its efforts to integrate European financial markets – that portend an at least partial erosion of the institutional complementarities of CMEs.
Financial globalization promoted a shift towards market-based banking in ways that increasingly blurred the boundaries between national financial systems dominated by capital market financing and those predominantly reliant upon banking credit. Whereas, in the traditional model of financial intermediation, banking credit is funded by retail deposits, market-based banks increasingly rely on the market to enable their lending (e.g. by financing themselves in wholesale funding markets and/or by developing ‘originate-to-distribute’ techniques like securitization). In chapter 6 we will discuss the emergence of market-based banking since the 1980s and its distinctive manifestation in the Anglo-Saxon LMEs and European CMEs, linking diverging dynamics in household debt and housing markets to diverging patterns of income inequality and growth models. In the United States and the United Kingdom these dynamics have been linked to the formation of asset-based welfare regimes that allowed poor and middle-class households to extract easy credit from the rising market value of their homes. In this chapter we will also explain how large banks from the European CMEs were deeply implicated in these dynamics, as they massively invested in these complex securitized assets and funded these investments by borrowing from other banks in short-term US money and eurodollar markets. By offering an overview of these developments in the European financial system, we will challenge the core assumptions on which the bank-based/capital market-based dichotomous framing in the comparative political economy (CPE) literature – especially in the VoC tradition – rests. Moreover, we will highlight strong growth