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The credit crisis, beginning in 2008 and still hammering the advanced industrial world today, is distinct from other postwar recessions not only in its magnitude but also in its root causes. Previous business cycles were driven by over and under-utilization of labor and capital investment - sometimes with demand for goods and services outpacing supply, sometimes with demand collapsing and workers and products left unwanted. In other words, the business cycle that current generations of voters and politicians grew up with was the ebb and flow of the product market. The 'Great Recession' has been fundamentally different - it has been a financial crisis in the asset market. Few advanced industrial countries have experienced this type of crisis since the 1930s, though they have been regular occurrences in the developing world. The current crisis germinated in a decade-long house price boom that burst with collapsing asset values, frozen credit markets, and finally a broader economic slowdown. A small cottage industry of recent books has argued that the roots of the crisis are similar to those bedeviling countries in the developing world, problems that have burrowed now to the core of the global economy: for example, Simon Johnson and James Kwak's Thirteen Bankers, Menzie Chinn and Jeffry Frieden's Lost Decades, and Raghuram Rajan's Fault Lines. These authors all highlight the political roots of the crisis in cozy relations between politicians, lobbyists, and bankers, and in the use of cheap credit as an electoral tool. The dire consequences of these kind of financial shocks has been brought home best in Ken Rogoff and Carmen Reinhart's ironically titled This Time is Different, where they show that recovery from financial crises is far more slow and precarious than the recoveries industrial countries typically experienced in postwar business cycles. In sum, many prominent scholars have argued that the recent crisis is distinct from previous crises and, moreover, that many of the causes of the crisis are political. But these arguments largely center on the dealings of political elites and business influence. Voters and their preferences and demands are largely absent from these stories. Moreover, we know very little empirically about how citizens react to asset booms and busts nor how politicians might use credit policies to promote booms, and bailout and stimulus policies to bulwark against busts. In this short paper I provide a corrective lens through which to view political behavior in an era of volatile asset markets and some suggestive evidence, drawn from my work and that of others, about how citizens view the role of government, and how governments try to respond to citizens, during asset booms and busts. The postwar world was one of 'Employment Dominance', where macroeconomic policies had larger effects on the product market - in terms of prices, wages and employment - than they did on the value of assets like equities and housing. Price inflation in this era was both high and volatile. Between 1956 and 1985 the average level of price inflation in the OECD was 6.9% with a within-country standard deviation of 4.9%. Cycles in prices were mimicked by cycles in unemployment as factories adjusted their labor demands to fluctuations in the aggregate demand and supply for goods. However, between 1985 and 2006, the average level of price inflation more than halved to 3.3%, as did the standard deviation - to 2.4%. Moreover, while price inflation of goods and services was dormant, another form of volatility was waking. From the mid-1980s, housing markets became substantially more volatile. The period between 1985 and 2006 had three times the average level of real house price inflation as that between 1970 and 1985 and, even before 2006 and the downturn in housing prices, a higher level of volatility. Cycles in the asset market were driving a macroeconomy that had hitherto been based around cycles in the product market. This pattern has been more pronounced in some states than others. Liberal market economies such as the United Kingdom and the United States have tamed price inflation but also witnessed unprecedented housing booms and busts over the past two decades. By contrast, German house prices were stagnant during most of this period, a situation shared by several other central European countries. Nonetheless, not all coordinated market economies followed the German model: the Netherlands and Sweden, for example, had housing bubbles rivaling the Anglo-American economies. Despite the variation of cross-national experiences, a shift towards the macroeconomic (and hence political) importance of assets has occurred broadly. Changes in interest rates now have fairly dramatic effects on housing prices, and through them the health of economies ever more centered on construction and finance. Citizens, especially in an era of curtailed unemployment benefits and defined contribution pensions, rely ever more on asset valuation for their financial security. Putting these changes together, there appears to have been a shift in the structure of the political economies of the advanced industrial world from 'Employment Dominance' to 'Asset Dominance'. What do I mean by these terms? I use the concept of 'Employment Dominance' to refer to political economies in which macroeconomic policies (or shocks) have their strongest effect through changing supply and demand in the product market and hence, by altering the employment of capital and labor, affect national income, investment, and unemployment. In these political economies, citizens rely on wage employment for income and face heterogenous risk in the labor market of losing this income. Per the current consensus in political economy (for example, Rehm 2011 and Iversen and Soskice 2001), this risk should translate into demand for social insurance from the government. Policymakers in turn respond to this demand by implementing various Keynesian counter-cyclical fiscal and monetary policies to smooth the effects of the business cycle on citizens' labor market welfare. By contrast, the ideal type political economy of 'Asset Dominance' is one where macroeconomic policies (or shocks) have their greatest impact on the price level and volatility of assets like equities and housing - in other words not on citizens' income but on their wealth. Citizens rely increasingly on the value of their assets - from stock portfolios making up their defined contribution pensions to their own houses - for their welfare, particularly in old age. Policymakers concern themselves with the provision of credit in good times, and ensuring liquidity and asset price stability in bad times. Clearly, these different political economies are ideal types and both sets of forces coexist. As I discuss in the conclusion, it would be foolhardy to deny the importance of unemployment in contemporary Europe. Nonetheless, in terms of thinking about the fundamental determinants of business cycles and about how citizens value their labor market income versus their wealth from asset ownership, they provide us with two poles to center our thinking about public opinion and policymaking over the past few decades. How do citizens behave as assets like housing become more important to their economic security? In particular, what are the effects of surges, and collapses, in asset prices on what citizens demand from government? Is this distinct from preference formation in the immediate postwar era? Most political science research on the public's preferences over redistribution and social protection programs emphasizes individuals' labor market status: their income, occupational class, or risk of unemployment. Few scholars would argue that these do not remain important but focusing on the 'stream' of income risks neglecting the 'stock' of income built up in owned assets such as housing or pension plans. When individuals can use these assets as a form of 'private insurance' against the vagaries of old age or job loss, wealth may become an important component of opinion about redistribution and social insurance. In other work (Ansell 2012b) I have argued that changes in house prices strongly affect individuals' attitudes towards social insurance programs. Specifically, people who experienced substantial house price appreciation become significantly less supportive of government spending on public pensions and unemployment insurance. This finding holds up regardless of whether we compare individuals with differently valued properties or the same individual with their house valued at different amounts over time. What is the implication of these findings for how we should think about the political effects of the housing boom and bust over the past decade? The long housing boom between 2002 and 2007 coincided with growing retrenchment in welfare spending in Europe and in the Anglo-American countries with debates over privatizing state pension systems and other social insurance - particularly that over the introduction of private accounts in the Social Security retirement program in the United States. It is notable that the ebbing of support of redistributive policies was happening despite a general stagnation in labor market income in the Anglo-American economies and high structural unemployment in many European countries. What explains the gap between the redistributive preferences one might expect from labor market stagnation and the neoliberal tilt of public opinion? A number of authors have suggested that mass availability of consumer credit and rising house prices might have filled the gap between citizens' aspirations and their labor market income (Rajan 2010; Schwartz 2009). My own work suggests a direct connection between rising asset prices and reduced support for social insurance programs (Ansell 2012b). The obvious question then is what now? As house prices fall around the industrialized world, have citizens become more supportive of redistributive policies? The tricky thing about answering this question is that the labor market has collapsed along with the housing market (whereas during the boom the housing market covered over cracks in the labor market) making splitting out effects more difficult. Moreover, even if citizens demanded protection from the whims of the market it is not obvious that governments could protect them given the mistrust of debt and deficits in European sovereign bond markets. Finally, since citizens' preferences over redistribution are not mercurial, one might expect the process of preference reversal to be slow, perhaps driven by cohort effects not individual changes of heart. Still, we can get some sense of the aggregate relationship between house prices and support for redistribution during the credit crisis from the Inter- national Social Survey Program conducted in 2009, which asked citizens how much they would receive if they sold their house today (including the possibility of negative equity) and normalizes answers on a twelve point scale. Figure 1 shows the average survey responses by country for this question plotted against the average support for redistributing income to reduce the gap between rich and poor (a much-used question in the redistributive preferences literature, which uses a five point scale). The figure shows a negative relationship between the two questions, with countries that have higher average house 'equity' also having lower average support for redistribution. There are of course outliers, particularly the USA, on which more in a moment. Still, this bivariate relationship is in fact statistically significant, at the five percent level even when including the USA, and at the one percent level when excluding the USA.1 The position of the USA is especially interesting since its housing bust began earlier and was faster and deeper than most other countries. Indeed by 2009 it had almost bottomed. By contrast the housing crash was smaller in countries like the UK and Denmark, even with equivalent (or larger) booms than the USA. In other words, a similar question asked in 2006 (which unfortunately it was not!) would likely have placed the USA further to the right and in line with the overall scatter. More broadly this raises questions of whether countries like the USA that have had dramatic housing busts will move up the figure - in other words, whether their redistributive preferences will align with reduced wealth. A further question is whether countries that have not yet experienced a bust in line with the size of their boom will have major further shifts in both asset prices and support for redistribution. The preferences of citizens' over government programs will have little substantive import if politicians remain unresponsive. Thus, the next question is do politicians actually respond to changes in public opinion wrought by the housing cycle? There are two ways of attacking this question. How much did politicians create the boom in the first place (and why)? And how have they responded to the credit crisis and desperate recent economic times? Rajan (2010) has argued that the housing boom of the 'noughties' was a political creation - promoted by politicians seeking to boost citizen welfare in a neoliberal environment that lacked longstanding tools like full employment policies or Keynesian business cycle management. With stagnating incomes and stubborn structural employment, the quickest and seemingly cheapest way to bridge the gap between expectations and outcomes was to provide credit. However, not all politicians across the industrialized world have been similarly constrained in their policy instruments. Nor have all citizens had similar access to cheap credit. What explains the difference between say the USA and Germany, or the UK and Austria? Schwartz and Seabrooke (2008), and Schwartz (2009) argue, concurring with Rajan (2010), that global imbalances in trade and capital flows explain which countries had access to cheap credit and which countries were the providers of the financing. The core 'partnership' in the global imbalance of credit was the uneasy dance between China and the USA, with the for- mer purchasing US treasury bills in order to keep its currency low and its exports competitive. However, other countries with trade deficits such as the United Kingdom and Spain were also able to access cheap credit in order to finance these deficits, causing a boom in asset prices. On the flip side some northern European countries, above all Germany, took advantage of de facto undervaluation within the Euro zone to amass large current account surpluses and capital outflows. Thus currency valuations produced capital account inflows and outflows that led to house price booms in trade deficit countries (and oftentimes asset price stagnation in trade surplus countries like Germany and Japan). Ahlquist and Ansell (2012) take a more institutional tack, arguing that the differences in electoral institutions across the industrialized world help to explain differential credit supply during this period. Drawing on a large literature showing systematically higher levels of redistribution in countries with proportional electoral systems Iversen and Soskice (2006); Persson and Tabellini (2005) and on recent work showing lower consumer prices - including interest rates - in countries with majoritarian systems (Chang et al. 2010; Rogowski and Kayser 2002; Rosenbluth and Schaap 2003), the authors argue that the incentives facing politicians over the provision of credit vary systematically across electoral systems. In particular, policymakers in majoritarian systems face greater demand for credit because of low levels of redistribution and have systematically lower interest rate spreads creating higher supply of credit. Importantly, this insight about the role of electoral institutions in translating voter preferences into policy outcomes is complementary with analysis that takes the effect of asset prices on public opinion more seriously. Finally, how have asset markets affected policymakers' responses to the credit crisis? I argue elsewhere (Ansell 2012a) that the size of housing market bubbles appears to have determined the importance of partisanship in the structuring of stimulus policies. Broadly, countries with larger housing booms both had larger discretionary stimulus packages in the 2009 to 2010 period and greater differences in the structure of those packages as driven by ideological demands. To give a particularly sharp example, both Australia and New Zealand had similarly large housing bubbles and imposed similarly substantive stimulus policies - of 4.1 percent of GDP. Yet, the left-leaning premiership of Kevin Rudd in Australia targeted this spending on government investment and transfers to households, including first time homebuyers, whereas the conservative premiership of John Key in New Zealand spent an almost identical proportion of GDP on income and business tax cuts, while reducing such transfers. By contrast, countries with smaller bubbles like Switzerland and Norway had few partisan distinctions in their stimulus composition. In the wake of the credit crisis, accordingly, scholars can begin piecing together the connections between political institutions, access to finance, political partisanship, and the desires of the public. What we do know is that these connections are in many cases novel and not easy to explain using the theoretical rubrics developed to explain the postwar period. Has this article underplayed the importance of issues of unemployment, under-utilization, and the output gap that surely plague Europe today? Are the macroeconomics of the product cycle reaffirming their importance once more? Clearly, European struggles with the labor market cannot be ignored - nor have individual income and labor market risk stopped mattering for citizens and politicians - indeed they are high on the agenda. But this current recession was different to those experienced by advanced industrial nations since the Great Depression and it is most apparent that the traditional arsenal used to fight business cycle turndowns has proved largely inadequate to the task of deleveraging and liquidity provision facing Europe today. A recession caused largely in the financial markets deserves political economy theories that take asset markets seriously. Access to global financial markets may be in a lull presently but it is sure to rise to unprecedented levels in the near future and it is incumbent on social scientists to understand the opportunities and risks this poses to citizens in their desires to build up lasting stocks of wealth and to governments in their desires to match citizens' aspirations and outcomes. The economic transformation of the last few years merits a transformation in our own understanding of political economy in the contemporary world.
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