Private Debt and the Anglo-Liberal Growth Model

Was there really a debt-fueled 'liberal growth model' preceding the 2008 financial crisis? The accepted narrative about the pre-crisis boom is that some liberal countries relied on domestic consumption to fuel economic growth, and on household debt to fuel this consumption. In this, they contrasted with coordinated economies. While eventually unsustainable, the growth strategy was politically necessary, to maintain middle class living standards in the context of increasing income inequality. In this article, I take these contentions to the data. Economic evidence from 1995-2007, and political data from the Manifesto Project Database undermine this received wisdom: while household debt increased in the liberal countries, it does not differentiate this particular growth model. Further, there is no evidence that politicians in liberal countries advocate different economic policies, including surrounding borrowing, to claim credit and stay in power. Differences in the importance of finance across countries, however, suggest a more elite-driven divergence. * This work was supported in part by a Prize Post-doctoral Fellowship at Nuffield College, Oxford. I am grateful to my colleagues there, and Charlotte Cavaille, Marek Naczyk, Georg Picot, and Anne Wren for useful feedback on this project. All remaining errors are my own. Private debt and the Anglo-liberal growth model Explaining the financial crisis of 2008 brought the key themes of comparative political economy to the world at large. 'Global imbalances' between export-oriented and domesticdemand-driven economies featured in popular explanations and reflected differences across countries long-articulated in the comparative study of advanced economies. Highly financialized, consumption-oriented, highly indebted economies such as the United States and United Kingdom contrasted with export-oriented countriesincluding other advanced economies such as Germany. Popular and scholarly accounts shared a narrative of the 'liberal model' 1 in the boom: these countries relied on domestic consumption to fuel economic growth, and on household debt to fuel consumption. In this, they contrasted with coordinated economies whose exportoriented strategy provided the goods to be bought, and the capital borrowed to buy it. 2 The political necessity of this (ex post, unsustainable) dynamic in the liberal countries was that debt expansion was the only way to maintain the living standards of the politically important middle classes in the context of increasing inequality. This characterization, and in particular the pathologies ascribed to the liberal model, permeated the political as well as the academic sphere. For example, in his 2011 budget speech, U.K. Chancellor George Osborne described the pre-crisis situation in Britain in precisely these terms: "We gambled on a debt-fuelled [sic] model of growth that failed" (U.K. House of Commons 2011). No doubt this account is thus familiar to the reader. In this article, I document that it is not, in fact, true. Using comparative cross-national data from the Organization for Economic Cooperation and Development (OECD) and comparative Manifesto Project Database (CMP) I show that there is no evidence of distinctive liberal economy levels or increases in household indebtedness in the boom years from 1995 to 2007. Neither is there any evidence that politicians maintained support for the liberal strategy by claiming credit for the expansion of borrowing, when considered in comparative perspective relative to other countries. There are differences between the liberal and coordinated models, however, which may have driven the inaccurate perception. In particular, the growth of the financial sector has been much more pronounced in liberal than coordinated economies. This suggests a perhaps more cynical explanation of the ongoing survival of the liberal growth model, rooted more in the interests of producers than in its ability to deliver economic growth to voters. As such, some of the economic conventional wisdom survives empirical scrutiny: there are differences between liberal and coordinated regimes in terms of financialization, even if not in terms of household debt. However, the political mechanism by which these regimes are sustained needs reconceptualization in light of the empirical evidence. In addition, the role of irresponsible household borrowing in driving the crisis has been overstated. THE LIBERAL GROWTH MODEL The financial crisis led to increased attention on the macroeconomic strategies of advanced industrial economies, and particularly the perceived pathologies of Anglo-American policy choices in this regard (Rajan 2010; Hay 2011; Gamble 2009). However, much of the new-found attention echoed existing accounts in emphasizing the distinction between the 'liberal' economies of the English-speaking OECD, and the coordinated, export-oriented strategies of northern Europe in general, and Germany in particular. As will already be clear from the language of comparing liberal with coordinated regimes, I examine the role of private debt through the lens of varieties of capitalism (VoC) and its descendants both recognized and implicit (Hall and Soskice 2001). In particular, debt is not the only motor for growth in the liberal model. A global imbalance in investment flows, fueling rising asset prices in liberal countries, has also been highlighted as a driver of consumption (Iversen and Soskice 2012). As this VoC literature is voluminous, broad and well-known, I provide only a brief discussion of the aspects most relevant to household debt.