This Is Why It's So Hard To Cut Public Spending

Summary

Podcast Summary: Odd Lots – "This Is Why It's So Hard To Cut Public Spending"

Podcast Information:

• Title: Odd Lots
• Host/Author: Bloomberg
• Description: Bloomberg's Joe Weisenthal and Tracy Alloway explore the most interesting topics in finance, markets, and economics. Join the conversation every Monday and Thursday.
• Episode Title: This Is Why It's So Hard To Cut Public Spending
• Release Date: February 10, 2025

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Introduction

In the February 10, 2025 episode of Odd Lots, hosts Joe Weisenthal and Tracy Alloway delve into the complexities surrounding public spending cuts in democratic governments. The discussion is enriched by insights from Fritz Bartel, an assistant professor of International Affairs at the Bush School at Texas A&M and author of The Triumph of Broken Promises: The End of the Cold War and the Rise of Neoliberalism.

The Challenge of Cutting Public Spending

Joe Weisenthal opens the conversation by highlighting the current political momentum towards reducing government spending:

"Scott Besant, I think he has something the 333 plan part of it. I think he wants 3% growth, 3% more oil production and then 3% deficit... there does seem to be this impulse for better or worse and other people can be the judge of that, to cut spending. But on the other hand, it's very difficult." [02:37]

Tracy Alloway probes into the difficulties associated with implementing austerity measures, referencing historical contexts:

"Wait, why do you say that? Because early in my career there was the Eurozone crisis and I think there was some austerity imposed in places like Greece ultimately. So why do you say it's difficult?" [02:37 – 02:49]

Joe responds by differentiating between discretionary and non-discretionary spending, underscoring the political ramifications of cutting entitlements:

"Anytime people talk about cuts, there is not a ton of discretionary spending in the US Government budget. There's the entitlement, Social Security, Medicare, Medicaid, and then there's defense, which there's usually not much political appetite to cut." [03:57]

Guest Introduction and Context

Joe introduces Fritz Bartel, setting the stage for a deep dive into the historical and political nuances of public spending:

"We really do have the perfect guest. We are going to be speaking with Fritz Bartel... his book is about exactly this topic, how governments break promises." [04:54]

Fritz Bartel joins the conversation, bringing his expertise on the economic and political shifts that made spending cuts both necessary and challenging.

Historical Perspectives on Austerity

Fritz Bartel provides a historical backdrop, explaining the global economic stagnation of the 1970s and the resultant push for austerity:

"The post World War II economic boom had run aground in the 1970s... the energy shock of 1973 again in 1979. The monetary confusion and shocks of the 1970s also spurred a great deal of inflation and crisis across the world." [05:25]

Tracy seeks clarification on the commitments governments made to their citizens during this period:

"So what exactly were the commitments or the promises that different governments made to their citizens? Because you know, I think about America... And then in the East..." [06:46]

Fritz elaborates on the contrasting promises in the West and East, emphasizing abundance and equality:

"The west had more abundance from the start... They created broad welfare states that invested in cradle to grave type of state intervention... In the east... access to housing... a future of both material abundance and some form of equality." [07:21]

The Soviet Union and Western Perceptions

Joe touches upon Western confidence in the Soviet economic model during the 1970s:

"It's funny... I think today we think of the Soviet Union's economic model as sort of having been a basket case and a disaster... Western financial analysts were really excited about these investments." [09:12]

Fritz explains the Western belief that authoritarian regimes like the Soviet Union could enforce economic discipline more effectively:

"Western bankers definitely believe that the communist world had a nice recipe for making secure loans... It was assumed that the Soviet Union would kind of come to their financial rescue." [09:50]

The Decline of Soviet Economic Power

Tracy inquires about the shift in the Soviet Union's economic fortunes from the 1970s to the 1980s:

"Explain how we got from the 1970s, where Russia is kind of impressive, at least to Western investors and analysts, to the 1980s, where it's unable to do what it had promised to some of its allies." [10:47]

Fritz attributes the decline to oil price fluctuations and inefficiencies in energy production:

"The Soviet Union had significant oil reserves... By the 1980s, the forces of supply and demand start to send the price of oil... Soviet production couldn't keep up, leaving the Soviet bloc looking much less economically powerful." [11:03 – 12:43]

Authoritarianism vs. Democracy in Austerity Measures

Joe raises a critical question about why authoritarian regimes failed to manage spending cuts as effectively as anticipated:

"Why doesn't authoritarian ease end up working out?" [12:43]

Fritz challenges the assumption that democracies are inherently less capable of breaking promises, using Poland as a case study:

"In Poland in the early 1980s... People openly revolt because they don't trust their government to break promises... In the United States, Paul Volcker enacts painful recession measures without resulting in full-blown revolt." [13:39 – 17:00]

The Role of Political Legitimacy

Fritz highlights how democratic legitimacy allows for policy shifts without societal collapse, contrasting it with the Eastern Bloc's instability:

"The legitimacy that democracy itself bestowed on Western states turns out to be the mechanism by which they were able to break promises... In the Eastern Bloc, authoritarianism was too weak at this task." [17:00 – 21:19]

Tracy connects this to Ronald Reagan's policies, noting the impact of electoral legitimacy on austerity measures:

"Ronald Reagan... redefines the state as the problem itself... His popular mandate gives him political capital to enact policies." [18:58 – 21:19]

Shifting Responsibility: Politics vs. Economy

Tracy brings up Gorbachev’s perspective on the interplay between politics and the economy:

"Gorbachev has a famous Quote, I think it's something like politics always follows the economy, not vice versa... which one has the most influence on the other." [25:53]

Fritz discusses the fluid relationship between political ideas and economic realities, emphasizing that neither is categorically dominant:

"Political economy... provides windows of opening and closing for political possibilities... Economic forces underpin political movements and their viability." [26:13 – 27:28]

Contemporary Relevance and Reflections

Joe queries the relevance of Bartel's historical analysis to present-day economic challenges, especially in light of recent inflation:

"As you were writing it, how much you were thinking about this is a lesson for contemporary times." [27:28 – 28:02]

Fritz reflects on the sustainability of the U.S. political-economic system, tracing its roots to the early 1980s policies:

"The book examines how the United States arrived at its current political-economic arrangement, tracing back to the combination of Volcker and Reagan in the early 1980s." [28:10 – 30:07]

Research Insights

Tracy expresses interest in Bartel's research process, particularly his archival work:

"I wanted to ask you about the actual research process of writing a book like this because I read on the back that you did a bunch of new archival research. What was that like? What did you find?" [32:05]

Fritz shares his experience digging into archives across Washington D.C., East Germany, and Russia, uncovering the intertwined nature of international finance and energy in governmental promise-breaking:

"There was an entire story... officials on both sides of the Iron Curtain were obsessed with international finance and energy... an exuberant story unfolding in archives across North America and Europe." [32:18 – 33:46]

The Collapse of the Soviet Union

Joe brings up the enduring mystery of the Soviet Union's collapse, seeking Bartel's insights:

"What promises did the Soviet Union ultimately have to break... how did that contribute to the ultimate collapse of the whole project?" [33:46 – 34:19]

Fritz explains how Gorbachev's policies and economic mismanagement led to broken promises and the eventual dissolution of the Soviet Union:

"Gorbachev and others viewed the imperial relationship as a bad economic deal... In 1989, the Iron Curtain comes down... perestroika introduced market mechanisms, leading to increased unemployment and job insecurity." [34:19 – 37:17]

Societal Responses to Market Reforms

Tracy inquires about societal reactions to the abrupt economic transitions in post-Soviet states:

"Can you maybe give us a little bit of color on how the market opening played out among people? Specifically about price increases." [36:46]

Fritz describes the implementation of "shock therapy" in Poland, emphasizing the societal pain and restructuring involved:

"Poland introduced shock therapy in 1989, pushing through economic transformation swiftly... Resulted in dramatic price increases and industrial restructuring, though unemployment was somewhat mitigated by companies retaining employees." [37:17 – 39:37]

Conclusion and Reflections

Joe summarizes the key takeaway that cutting spending and breaking promises is inherently challenging, even for highly legitimate democratic governments:

"Cutting spending, breaking promises is extremely hard... sometimes if the government enjoys a high degree of public credibility across the aisle, maybe sometimes it's possible without destroying society public credibility." [39:56 – 40:21]

Tracy adds that democracy presents unique challenges, as it combines political and economic spheres in ways that can complicate austerity measures:

"In communist systems, the state is mixed with everything... In the west, the politics versus economy distinction is a fundamentally important one for how and why capitalist societies work." [42:23]

Joe expresses concerns about the current political climate and the legitimacy of government, drawing parallels to historical contexts discussed:

"The question... the state itself and the legitimacy of government is coming under fire. So some difficult challenges if we're gonna go down that path." [42:38]

Tracy and Joe wrap up the episode by reflecting on the intricate balance between political legitimacy and economic policy, highlighting the enduring relevance of historical lessons to contemporary economic challenges.

Notable Quotes

• Joe Weisenthal [02:37]: "Anytime people talk about cuts, there is not a ton of discretionary spending in the US Government budget."
• Fritz Bartel [05:25]: "The post World War II economic boom had run aground in the 1970s."
• Fritz Bartel [13:39]: "In Poland in the early 1980s... People openly revolt because they don't trust their government to break promises."
• Fritz Bartel [21:19]: "The legitimacy that democracy itself bestowed on Western states turns out to be the mechanism by which they were able to break promises."
• Fritz Bartel [26:13]: "Political economy... provides windows of opening and closing for political possibilities."

Final Thoughts

This episode of Odd Lots offers a profound exploration of the intricate relationship between political legitimacy and economic policy-making, using historical precedents to shed light on contemporary challenges in cutting public spending. Fritz Bartel's insights bridge the past and present, emphasizing that the difficulties in implementing austerity measures are deeply rooted in the structural interplay between political systems and economic realities.

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For more detailed discussions and episodes, visit Bloomberg Odd Lots.

Transcript

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[Tracy Alloway]

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[Fritz Bartel]

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[Joe Weisenthal]

Hello and welcome to another episode of the Odd Lots Podcast. I'm Joe Weisenthal.

[Tracy Alloway]

And I'm Tracy Alloway.

[Joe Weisenthal]

Tracy, spending cuts in the air these days?

[Tracy Alloway]

You could say that it's a vibe shift.

[Joe Weisenthal]

It's a vibe shift for sure.

[Tracy Alloway]

So under the Trump administration, obviously there is a stated ambition to reduce spending and make the government more efficient overall.

[Joe Weisenthal]

Yeah, Scott Besant, I think he has something the 333 plan part of it. I think he wants 3% growth, 3% more oil production and then 3% deficit. And I think deficits are around 6% currently, which is really high by historical standards, especially because we're at what, 4.1% unemployment? Usually when the economy is running this hot or this tight, you don't expect to see deficits this large and in rates as high as they are. There does seem to be this impulse for better or worse and other people can be the judge of that, to cut spending. But on the other hand, it's very difficult.

[Tracy Alloway]

Wait, why do you say that? Because early in my career there was the Eurozone crisis and I think there was some austerity imposed in places like Greece ultimately. So why do you say it's difficult?

[Joe Weisenthal]

So actually there's two things Here. And I think there's really apartment I think this is a fascinating question in its own right, which is why is it that in 2009, 2010, in the aftermath of the great financial crisis, when we had widespread unemployment, why was the appetite for austerity so high then at a time when there was so little aggregate demand and. And now at a time when obviously inflation has been running hot and so forth, why does it seem more difficult? That in itself is a fascinating question. But I guess what I would say to answer your question specifically is that anytime people talk about cuts, there is not a ton of discretionary spending in the US Government budget. There's the entitlement, Social Security, Medicare, Medicaid, and then there's defense, which there's usually not much political appetite to cut. And then when you have leftover, it's hard to move the dial. And so the theory is that if you actually want to move the dial on spending and deficits, you have to, like, cut into some areas. You have to break promises, perhaps that you've made to various constituencies, like seniors.

[Tracy Alloway]

Right. Ultimately, you're inflicting pain on someone. And at least in democratic governments, because it's all about a numbers game. It's all about getting votes. That would be a bad thing.

[Joe Weisenthal]

Well, we have to then talk about how do the stars align if you actually want to meaningfully cut spending? How does that actually happen? How do democratically elected governments sort of build the political capacity to inflict pain, perhaps on groups that obviously have some stature? We really do have the perfect guest. We are going to be speaking with Fritz Bartel. He is an assistant professor of International affairs at the Bush School at Texas A and M. And he is the author of the book came out in 2022, the triumph of Broken the End of the Cold War and the Rise of Neoliberalism. And it's kind of about exactly this topic, how governments break promises. So, Professor Bartel, thank you so much for coming on odd lots.

[Fritz Bartel]

Thanks so much for having me.

[Joe Weisenthal]

Your book is really interesting because you talk about the sort of resource constraints and spending constraints in the US The UK and the Soviet Union. All of it was sort of building up to a head in the late 1970s, early 80s. Before reading your book, that hadn't clicked to me that all of these different economies were sort of facing the same stresses at the same time. What was going on that suddenly around the world, governments felt this impulse like, we have to cut, we have to constrain ourselves.

[Fritz Bartel]

Yeah. So I guess the short answer is that the kind of post World War II economic boom had run aground in the 1970s. Obviously there was the kind of birth of stagflation. There was a decline in productivity growth across Western economies. The Soviet economy and the Eastern bloc more generally. The Communist bloc had run into the end of their growth model. Kind of this hyper industrialization growth model had started to produce fewer and fewer results. So in both the Eastern bloc, the communist world and the west, the growth model, one largely based on kind of industrialization, certainly based on cheap energy resources, it started to run aground roughly at similar kind of moments in the early 1970s. And then these crises that kind of came to define the 1970s, the energy shock of 1973 again in 1979. The monetary confusion and shocks of the 1970s also spurred a great deal of inflation and crisis across the world. And so in both east and west, the societies had largely concluded that they did not have the resources to meet the commitments that they previously had made to their constituencies. Or at least that's how it became framed and understood.

[Tracy Alloway]

So you mentioned commitments. What exactly were the commitments or the promises that different governments made had made to their citizens? Because you know, I think about America, and Obviously in the 1950s, 1960s, there was the American dream of a nice house in the suburbs and a car and 2.4 children or whatever it was. And then in the East, I think there was a promise of economic growth, but maybe the emphasis was more on equality of economic growth versus just pure economic growth.

[Fritz Bartel]

Yeah. So I think as I define in the book, this kind of politics of making promises took different shapes in the west and the East. The west had more abundance from the start, and certainly creating abundance was at the core of what democratic capitalism was all about. But it wasn't, particularly because the west was in this Cold War. You couldn't just be about creating abundance. There had to be some sense of limiting inequality at the very least. And so Western states, not universally and not necessarily with all of their conviction, but they supported labor unions to a much greater degree than they would subsequently. They created broad welfare states that invested in cradle to grave type of state intervention. They largely secured for at least large segments of their population, income security, job security, full employment, even the commitment to full employment was a kind of post war novelty that governments could actually make credible. And in the east it took something, you know, it was a slightly different shape, but there were similar kinds of promises made that your workday would get shorter, your even intergenerational upward mobility would increase. You had access to housing, all of These always very incompletely fulfilled, but they were kind of making progress, incredibly in the eyes of their populations, making more progress towards a future of both material abundance and some form of equality. Not full on equality, certainly much more in communist or state socialist societies, equality was held in higher regard, but also very much in the West. You kind of couldn't come out just as fully comfortable with the levels of inequality that we've reached by today's standards. So this search for both abundance and some measure of equality was there in both the west and the East.

[Joe Weisenthal]

It's funny, obviously, I think today we think of the Soviet Union's economic model as sort of having been a basket case and a disaster. But for many years they were growing, they were industrializing, they had rapid growth. Something that I hadn't realized until I read your book. And maybe we're skipping ahead a little bit here in the story. But even in Western financial markets there was sort of an obsession with Eastern Bloc debt. It was an exciting trade to lend to some of the communist countries in the East. And like financial analysts were like really excited about these investments.

[Fritz Bartel]

Yeah. And I don't know that we can really pin that necessarily on their growth prospects per se, but Western bankers definitely believe that the communist world had a nice recipe for making secure loans. So if things were to come to a crisis, it was believed that authoritarianism was going to be very good at imposing these kinds of cuts, at imposing discipline and breaking promises. And in the background, the Soviet economy itself, in the background of a country like Poland or Hungary or East Germany, the Soviet economy was sitting there, as they literally called it, an umbrella, an economic and financial umbrella over the rest of the Eastern Bloc, where if any of these countries ran into financial difficulties, it was assumed that the Soviet Union would kind of come to their financial rescue, would bail them out, and in the end pay off their debts. And it turned out that that wasn't the case by the 1980s. But in the 1970s in particular, that was a very popular view in the Western financial press.

[Tracy Alloway]

Explain how we got from the 1970s, where Russia is kind of impressive, at least to Western investors and analysts, to the 1980s, where it's unable to do what it had promised to some of its allies.

[Fritz Bartel]

Yeah, so it's largely a story of oil and natural gas kind of. Coming into the 1970s, the Soviet Union has found significant oil reserves in Western Siberia. It's started to develop those reserves over the course of the 1960s. And by the 1970s, it's coming online, so to speak, as an energy Superpower at the same time that world markets are creating multiple crises that send the price of oil and natural gas through the roof. And so throughout the 1970s, it looks like the Soviet Union. And in fact, it does have all of this energy wealth at its disposal. And then the 1980s come and the kind of fortunes reverse. So, you know, when prices go up, people start to look for more supply. They find energy in places like the North Sea, they start to develop much more energy supply. Western countries have done not a great job, but they've done something to create more energy efficient economies. And so the forces of supply and demand start to send the price of oil in the 1980s on a downward trend, pinpointed by a couple of particular moments like 1985, where it really significantly collapses and the Soviet Union itself finds that it's much more difficult to produce the growth in its energy sector that it had produced in the 1960s and the 1970s. And so these two forces, a kind of plateau in production and the collapse in price, all of a sudden leave the Soviet bloc as a whole looking much less economically powerful by the, even the middle of the 1980 than it was, let's say, in the late 1970s.

[Joe Weisenthal]

When we were talking about the intro and you sort of alluded to it when you were talking about the umbrella and this belief in the west that, well, the Soviet Union is authoritarian, centrally planned economy, they don't have to pander to voters, and therefore one might think that that's a more politically conducive environment for cutting spending or making difficult decisions. I'm curious the answer why that didn't turn out to be the case. My guess is part of the story is that while maybe the promises to their own citizens could be taken for granted, that these other satellite countries, East Germany, Poland, et cetera, they have no obligation to stick with the Eastern bloc if they're not getting that support anymore from the Soviet Union. But why don't you sort of explain why that authoritarian ease didn't end up working out?

[Fritz Bartel]

Yeah, so it kind of corresponding to this belief in the west that authoritarians would be good at breaking promises. Those same people and many others believe that democracies would be very bad at breaking promises because as you mentioned in the intro. Right. Would seem to make sense that if you're trying to get elected, it's just not in your interest to try to break promises to your own citizens. The turn of the 1980s, both events in the United States and Great Britain and events in the Eastern bloc suggest that this might not be true and in fact, democratic elections and the kind of legitimacy that it bestows on governments, at least that it did bestow in the past, we can talk about whether or not that's still true. In the 1980s, it turned out that democracy and competitive elections provided a sense of legitimacy that made the, let's say, the sales pitch of breaking promises more credible in the eyes of Western populations than it turned out to be in communist societies. So the specific case that I think is probably most illustrative is Poland in the early 1980s. People will probably know, or if they're old enough, remember the Polish labor union Solidarity? Its famous leader, Lech? It's born in the summer of 1980 precisely because the Polish government tries to increase consumer prices, basically, which in communist societies was one of the foundational promises that had been made to the population. We will keep your basic basket of goods, the price of those goods, very stable. They try to increase the prices in order to repay their debts partially in order to solve some of their financial problems. And people openly revolt because they don't trust that their government, that the state, socialist state, is essentially telling them the truth, that you need to go to the people to break these promises, to get some sacrifice from them in order to repay debts. That's not a credible and legitimate claim in the eyes of Polish society. In contrast, when someone like Paul Volcker in the United States says essentially that the United States needs to go through a very painful recession in order to fix the problem of inflation that had come to define the United States over the course of the 1970s, lots of people are unhappy about that. He gets death threats, there's protests, he's on the COVID of Time magazine. He's kind of public enemy number one in a sense. But it does not result in a kind of full blown revolt against the system as it did in the Eastern bloc. And so the legitimacy that democracy itself bestowed on Western states turns out to be the mechanism, I think, by which they were able to break promises to their people. Whereas in the Eastern Bloc, authoritarianism proved to be very weak at this task because the only thing people had come to expect from their government, they didn't have any political role in it. The only thing they'd come to expect was some kind of material improvement year over year, meager though it was. And that was lacking in the Eastern block.

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[Carol Massar]

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[Tracy Alloway]

Can you say more about this maybe in the context of Ronald Reagan? Because I think that would be a good example of I guess, the role of free elections and competition between political candidates in basically letting the population like let some of their frustration out. Right. It's kind of like, okay, the current politicians have failed to keep their promise and so we are willing to try anything, even if it means short term pain in order to get what we want again.

[Fritz Bartel]

Yeah, so Reagan is a kind of quintessential figure for this turn. He's not a political outsider necessarily, certainly on the level of Trump in the 1970s. But he does come to D.C. wins the 1980 election with a distinctly different message. Right. He famously says in his inaugural address in 1981, government does not the solution to the problem. It is the problem. And that kind of message, which is already one that is then conducive to breaking promises because it's redefined the state as the problem itself. The popular mandate that he has by winning the 1980 election in turn gives him, I guess the term would be more political capital and certainly more receptivity even from his enemies or from his political enemies to accept the policies that he then enacts. Right. So I think that's one of the key factors is, yes, he has certain people who agree with many people who agree with him, but even those who disagree with him work within the bounds of the system where they accept, again, this is where it gets a little different in the recent years. They accept the outcome of the election. Right. And they view the process itself by which this was decided as legitimate. And so he's not particularly successful, and he and his team are not particularly successful in cutting spending, in particular in breaking promises. Much more of that in the US case comes from the Federal Reserve. But he dramatically alters the rhetorical landscape of the United States and does so by bringing this movement from outside Washington D.C. and redefining what the kind of terms of the debate will be in the 1980s.

[Joe Weisenthal]

You make a compelling argument that at least 40 something years ago that something about the democratic system was more conducive to cutting spending. But a, a lot of the sort of austerity that was imposed in the US came more from the Fed rather than actual spending cuts. And of course we know that deficits actually widened quite a bit. So it sort of relied on the fact that we sort of have this sort of outside of government, undemocratic enforcer in the form of the Federal Reserve. But then also the UK example, which as your book lays out, there was fights with the coal miners. And maybe you can explain that. But ultimately what allowed Margaret Thatcher to have the political capital to cut was the Falkland islands war in 1982, which gave her a burst in popularity, which, okay, maybe that allowed for some breaking promises, but sort of, I don't know, deus ex machina does not sound like a great triumph of like, oh, this is the democratic process working smoothly with the mandate?

[Fritz Bartel]

No, and I don't think it's ever a, let's say, clean and easy process. And Reagan was one of those elected, I guess, with that most in his mandate, Thatcher another one. And even those who were elected with spending cuts as part of their mandate found it a very difficult thing to actually enact. So in, in Thatcher's Case, yes, cutting spending is an important part of what she does. They also have a whole series of state owned industries that they're trying to either close down or privatize. And the coal miners of Great Britain are the ones who ultimately try to fight back against this. And Thatcher, I argue, I think partially because of the kind of legitimacy that democracy bestows upon her, doesn't end up with British society in full revolt against her. Right. So I compare in the book the course of the minor strike in Great Britain versus the course of Solidarity in Poland. Solidarity starts as a strike among workers and builds out into a kind of society wide revolt against the state socialist system. Whereas the miners in the uk, for a series of contingent, but also, I think, structural reasons, they are unable to form a broader coalition that would ultimately thwart Thatcher's action. And so the strike fails. Ultimately, the coal industry in the UK declines throughout the 1980s. And I think it is the kind of democratic system, the legitimacy of the system itself, that allows this process to unfold. So, for instance, Thatcher in this period is a very divisive figure. Her approval ratings are something in the range of 45%. But the police who are kind of carrying out her actions and doing the actual work to break up the minor strike have an approval rating somewhere in the 92, 93% range. So the state itself is deemed to be legitimate, even if the politician who is enacting these policies is still a highly divisive figure. And that's the kind of deep legitimacy that democratic states had in this period and that state socialist countries did not have, I think, is what ultimately produced the break or allowed the process of breaking promises to go ahead in the United States and the Western world more broadly.

[Tracy Alloway]

The sort of distinction between politics and the economy, I guess.

[Fritz Bartel]

Well, that's a whole nother, Yes. I mean, that's another way by which states, particularly capitalist states, have found ways to break promises is to shift responsibility for social and economic outcomes from the government itself to the market. Right. So even processes of privatization, although technically a change in ownership, were also the kind of consequences of those were often downsizing, unemployment, things like that. So you've shifted responsibility over to the marketplace, over to this realm called the economy. And then the negative social consequences that stem from that process of privatization appear to be the product of the market. They appear to be the product of the economy rather than a political decision itself. And so that distinction, yeah, the politics versus economy distinction, is a fundamentally important one for how and why capitalist societies work.

[Tracy Alloway]

So Gorbachev has a famous Quote, I think it's something like politics always follows the economy, not vice versa. And you actually, you mentioned that in your book, but I'd be curious to get your take about the relationship between politics and the economy and which one has the most influence on the other.

[Fritz Bartel]

Yeah. So I've wrestled with this for quite a long time as I was writing this book, and I don't think I have a categorical answer. I think it can be different things in different moments. Generally speaking, I do think that political economy, the kind of economic forces of our world and of the late 20th century did provide, let's say, windows of opening, windows of possibility and also closed other possibilities in the realm of politics. So if you take something like supply side economics in the United States on its face, in terms of whether or not it actually could have succeeded on its own terms, the idea that you cut taxes, you'll unleash economic growth, and it will essentially pay for itself, that idea has continuously been disproven, and yet it continues to exist in US political discourse, largely because the United States has been able to borrow more money than anyone from the 1980s onwards thought possible. And so I think political ideas and political formations, political movements, their lifespan and their popularity and then their moments of coming to an end do kind of have an economic underpinning that makes them possible or not.

[Joe Weisenthal]

I'm curious. This book came out, I think 2022, during the peak of the recent inflation wave. When you wrote it, I mean, I imagine this is years and years of research in your career, but how much were you thinking about the present day? And I recognize you keep sort of hinting at, well, maybe democratic governments in the west don't have the same perceived legitimacy to do unpopular things or to do things at all. But I'm curious, as you were writing it, how much you were thinking about this is a lesson for contemporary times.

[Fritz Bartel]

Yeah, it was part of it, certainly as the book came out. So when did the Fed start hiking? You two would probably know better was.

[Joe Weisenthal]

That the first hike was in March 2022.

[Fritz Bartel]

Yeah. So it was about to come out. And I think had that happened much more as I was writing it and researching it, I think the book may have taken a different shape. Basically, it took on a new kind of resonance as the book was about to come out. As I was crafting it, it wasn't so much, I guess the present day analogy, the present day comparison I was making was how the United States was able to exist with a system of political economy that didn't seem to me to be sustainable in the sense of everything I had thought I learned about economics, and I was not a PhD in economics or anything, but four decades of current accounts deficits and budget deficits. Many times it had been predicted that this type of system, this type of arrangement, could not go on and would one day come to an end. And yet all of those predictions have continuously been pushed back or been to this point haven't come to fruition. And so I was trying to find the origins in one way of at least for the part about the United States in the book, trying to find the origins of where that political economic arrangement came from. And it turned out to have its origins, at least I think, in the early 1980s with the combination of Volcker and Reagan. So yeah, I didn't go in search of a kind of recipe of how do you go about breaking promises? Because I ultimately don't think the contemporary world is one where more breaking promises is a solution to anything, but more how the United States as a political economic system arrived at the arrangement that it has had for the past four decades.

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[Carol Massar]

This is the Bloomberg businessweek Minute, brought to you by Amazon Business. I'm Carol Massar. Green stocks have had a rough few years as the industry has struggled due to high interest rates, which made it more costly for green companies to get financing. Homeowners to buy solar panels and drivers to buy EVs. Add on top of that pandemic lockdowns and supply chain issues, and the S and P Global Clean Energy Index is down by almost Two thirds since 2021. And yet some green investors are finding a silver lining in the presidency of Donald Trump, despite his anti green policies. And that's because of low market valuations and improving earnings outlook. Investors single out battery producers as more electric grids install them to manage loads and store power when solar or wind installations are idle. Others say check out clean energy companies outside the US Noting China's strong support for green tech. That's the Bloomberg businessweek minute brought to you by Amazon Business, your partner for smart business Buying.

[Tracy Alloway]

This reminds me, actually, I wanted to ask you about the actual research process of writing a book like this because I read on the back that you did a bunch of new archival research. What was that like? What did you find?

[Fritz Bartel]

Well, it was fascinating at every turn. So I started in Washington, D.C. i went to spent a year in East German archives, which I think are the best kind of archives you can have because there's no more state left to defend its secrets, and then spent a summer in Russia as well, before the war in Ukraine, or at least the 2022 next step of the war in Ukraine. So at every turn, right, I started with a view of the Cold War. I began this project once I learned that when the Berlin Wall came down, the Eastern Bloc was $90 billion in debt to the West. And that didn't make any sense to me. It didn't seem to accord with our understanding of what the Cold War was, at least from an economic point of view, where these two sides were supposed to be relatively independent of each other. And then once you get into the archives, whether it's in D.C. at the IMF, whether it's in Berlin at the East German archives, or in Moscow, there was an entire story there of officials on both sides of the Iron Curtain. I don't think the word is too strong. Literally obsessed with questions of international finance and energy and questions of how do you go about legitimizing posterity or breaking promises to your own population. And so it was an exhilarating experience, at least for a historically minded person like me, to find this story in archives, you know, all over North America and Europe, at least going back to.

[Joe Weisenthal]

The Soviet Union for a second. So obviously we could do 100 episodes of the podcast and never arrive at a definitive answer of why the Soviet Union collapsed. And everyone has their various theories. The Berlin Wall comes down in 1989. What promises did the Soviet Union ultimately have to break, and how did those go down? What were the specific sort of decisions made out of Moscow to the satellites to the domestic citizenry that they actually had to bite the bullet. And how did that contribute to the ultimate collapse of the whole project?

[Fritz Bartel]

So the international promise, I think promise is one word for it, but in a sense that they're kind of dictating to their fraternal allies, but certainly promising to the socialists, the state socialists in their allied countries, that they will come to their defense if there's ever a kind of domestic revolt or a movement for domestic reform. This had happened in 1953, in 1956, the Prague Spring, in 1968, almost to a certain degree in Poland, in 1980 and 81. The Soviet Union was always standing there in the background, either literally intervening militarily or threatening to intervene to, in their frame of reference, save state socialism, save socialism from its capitalist enemy. That kind of gets encased in this idea of the Brezhnev doctrine, named after Leonid Brezhnev, that the Soviet Union will always intervene to save its allies from domestic unrest or counter revolution. That promise gets broken in the late 1980s as Gorbachev and many, many others beyond him end up viewing their imperial relationship as a bad economic deal. So they're subsidizing their satellites in all kinds of ways, but particularly with low cost energy. And they're not getting, in their view, anything in return, or certainly not getting a fair deal in that alliance relationship. And so he eventually says, essentially, you handle your own problems, we'll handle our problems. I placed that moment in 1986, and within a couple of years, of course, they're testing the limits. And in 1989, the Iron Curtain comes down and the Berlin Wall collapses. Domestically, the Soviet economy at least, there's a kind of Soviet social contract that the state will provide. Right. In exchange for your political silence, the state will provide you with low cost consumer basics, job security. Right. There's no unemployment in this society, at least no official unemployment. So you're going to get kind of a lower level, but certainly socioeconomic security in exchange for your political silence. And that he too, also, through perestroika, tries to start to break those promises, introduce more market mechanisms, even eventually coming to the idea that there would need to be unemployment and more job insecurity in Soviet society.

[Tracy Alloway]

I know your book stops with the end of the Soviet Union, but can you maybe give us a little bit of color on how the market opening played out among people? And I'm thinking specifically about price increases. Right. So the social contract for such a long time is, as you said, you'll have subsidized energy and low cost basic goods and a job. And then suddenly all of that becomes very uncertain what happened and what was the sort of response from society.

[Fritz Bartel]

So it plays out slightly differently in each place, of course. But a place like Poland, for instance, very quickly introduces shock therapy, as it was even called by its proponents in the fall of 1989. Essentially the question on everyone's mind was if we see that there's this, they hoped, very short period, maybe six, eight months, maybe a year of economic difficulty that we have to go through as we enter into the market, then we might as well get it done as quickly as we can. That was the shock therapist's message was also they were fully aware that this was going to be extremely unpopular. Breaking promises is never popular. So again, better to do it quickly. While everyone is kind of in this euphoric moment of having defeated communism or moved past their communist systems. We should use this time to do as much economic transformation as we possibly can. And so in many of these countries there are periods of wrenching economic change, dramatic price increases. Unemployment goes up at a slower rate than people had been anticipating, largely because companies kind of take their employees livelihoods. Luckily much more to heart than standard market models had been predicting. So there was not as much unemployment as people anticipated, but still a great deal, a great deal of industrial restructuring, de industrialization, things like that. And the question, a much broader question that I think is something for open for historical research is how all of that process could have been done much more productively. Let's say that maybe some promises had to be broken in some kind of way. Right? I think there is something about industrial restructuring that is going to be painful. And if you think that entering the global market is ultimately a good thing on some kind of terms, there may be some kind of broken promise within that. But how to do it in a way that is most humane, most pro growth, because economic growth often didn't appear in these places for quite a long time. I think that's something that we'll need to to focus on as historians for quite a long time to see where the better routes may have been passed over.

[Joe Weisenthal]

Fritz Bartel, fascinating conversation, very timely. Thank you so much for coming on odd lots.

[Fritz Bartel]

Thanks.

[Joe Weisenthal]

So Tracy, my takeaway is that cutting spending, breaking promises is extremely hard. And even if you have very popular, incredibly talented politicians, you still might have a hard time doing it. But maybe sometimes if the government enjoys a high degree of public credibility across the aisle, maybe sometimes it's possible without destroying society public credibility.

[Tracy Alloway]

And I guess ironically democracy yeah.

[Joe Weisenthal]

At least in that specific period of time.

[Tracy Alloway]

But I do think this is sort of like, it's a funny one because we're used to thinking of humans as very short termist.

[Joe Weisenthal]

Yeah.

[Tracy Alloway]

And yet, you know, people are voting for short term pain in order to have longer term gains. But I think there's still an element of short termism at play in the sense that, like, it's a pendulum swinging. Right. So like you go from one candidate or one system that failed to deliver what you wanted, and then you just swing to the other one in the hopes that they're able to do it. And again, in the US at least there's only two systems, so you get that pendulum swinging quite a lot.

[Joe Weisenthal]

I don't know. Listening to that conversation again, I don't have an opinion on what the optimal size of government spending or the optimal size of the deficit. It's hard for me to imagine a meaningful change in the spending or deficit trajectory under the current political environment in the U.S. you know what I thought was maybe one of the most interesting points? This idea that when Margaret Thatcher, she didn't have high approval rating, but the police that ultimately had to sort of carry out actions against the coal miners, they had very high approval rating. So this idea that like the politician may not be popular, but the state apparatus still enjoys a lot of credibility. And this distinction between the politician and the state apparatus, a distinction that didn't exist in the Soviet Union, that that was really the key to at least making it so that once the thing has been carried out, it doesn't destroy society.

[Tracy Alloway]

Yeah, I think this is exactly it. So in communist systems, the state is mixed with everything. Right. Including the economy. So you don't get that political economic distinction, whereas in the west that exists. It's a useful thing for politicians to blame and manipulate to their own ends.

[Joe Weisenthal]

I guess the question, we know that politics is very divisive in this country. I also worry that the state itself and the legitimacy of government is coming under fire. So some difficult challenges if we're gonna go down that path.

[Tracy Alloway]

Yeah. Shall we leave it there?

[Joe Weisenthal]

Let's leave it there.

[Tracy Alloway]

This has been another episode of the Odd Thoughts podcast. I'm Tracee Alloway. You can follow me, Tracy Holloway.

[Joe Weisenthal]

And I'm Jill Wiesenthal. You can follow me. Hestalwart. Follow our guest, Fritz Bartel. He's Fritzbartel and check out his book the Triumph of Broken Promises. Follow our producers, Carmen Rodriguez Armanarmen, Dashiell Bennett at Dashbot and Kell Brooks at Kalebrooks. For more Odd Lots content go to bloomberg.com oddlots we have transcripts, a blog and a newsletter and you can chat about all of these topics 24. 7 in our Discord Discord Ggodlots lot.

[Tracy Alloway]

And if you enjoy Odd Lots, if you like it when we talk about historical examples of governments cutting costs, then please leave us a positive review on your favorite podcast platform. And remember, if you are a Bloomberg subscriber, you can listen to all of our episodes absolutely ad free. All you need to do is find the Bloomberg Channel on Apple Podcasts and follow the instructions there. Thanks for.

[Carol Massar]

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