Journey Into The Unknown: How The Bailout Trend Is Upending Politics

While Republicans and Democrats argue over whether the 2008 election signals the dawn of a new political era, the ground is changing under both parties.

The economic crisis has prompted the Bush administration and Congress to significantly expand the role and authority of government in the private sector -- in some cases taking ownership positions in individual corporations, in addition to pushing for more aggressive regulation. A similar degree of government intervention in the auto industry, including the creation of a federal "car czar," is considered likely -- if not immediately, then after January 20.

The success or failure of such policies will obviously influence the future political strength of the Republican and Democratic parties. Beyond that, the growing involvement of government in the economy will, in ways small and large, change the character -- for lack of a better word -- of the 'free enterprise' political system. It will alter the relationship between citizens and the state and challenge American attitudes toward the scope of government. It has already shifted the boundaries between the corporate and the public sectors.

Conservatives and liberals generally agree that the burst of government spending and regulatory intervention during the Great Depression of the 1930s helped cement majority loyalty to the Democratic Party and strengthen the link between voters and their government, most powerfully through creation of the Social Security system. This linkage was reinforced in the 1960s by a burst of liberal innovation resulting in the enactment of Medicare and Medicaid, expanded rights for women and minorities, a right to aid for the poor, and federal aid to education.

Now, the question is how much this year's massive government intervention under a Republican administration -- certain to be followed up with similarly dramatic proposals by the Obama White House - will transform the United States' commitment to free markets and its struggle to balance economic freedom and efficiency with America's enshrined rights to "life, liberty and the pursuit of happiness."

There is no consensus on future developments. Some downplay the longer-term impact of new federal policies and initiatives, while others see impending Armageddon.

University of California-San Diego political scientist Gary Jacobson argues that the new interventions "won't change the character of the political system. Americans tend to be pragmatic about such things -- approving of government doing all sorts of specific things intended to make people's lives better and address immediate problems, but disliking 'big government,' bureaucratic meddling, taxes, and deficits."

Over time, Jacobson said, there will be some backlash as "the inevitable downsides of increased regulation reappear and the costs of intervention have to be paid (by taxes or inflation)." But, he declared, the "U.S. is not about to become Canada or Europe."

Not everyone is so sanguine. The immediate prospects are very worrisome to some conservatives who see the likelihood of a European-style statist philosophy supplanting the American competitive-entrepreneurial ethic.

Chris Cox, chair of the Securities and Exchange Commission, warned that the "U.S. government is now a major shareholder in banking and financial institutions and other private firms across the United States. Recipients of federal funding and guarantees are naturally coming under scrutiny by Congress, which rightfully believes it should control the purse strings in our government. As a result, there will be demands for compliance with congressional investment preferences and corporate governance policies, which will grow in direct proportion to the length of time that the federal investments and guarantees remain outstanding. For all of these reasons, it is incumbent upon federal policy makers to ensure that the extraordinary actions of the past months are understood to be temporary, and constructed so that they are self-liquidating."

Arguing along parallel lines, the American Enterprise Institute's David Frum wrote: "The United States is moving to a new form of social and economic organization, the general outline of which is only just now coming into focus....Today's emergency decision-making will create tomorrow's institutions. We may not like them much. They will be costly and dangerous. But withdrawal will demand an intense act of political will--and the courage to defy some of the most powerful constituencies in Washington, including the Democratic Party."

John Ferejohn, a Stanford political scientist, pointed out that "you can already see that the prospect of bailouts has changed expectations in the business world about what role policy makers will or should play. The boundaries between markets and politics have gotten very fuzzy." The result, according to Ferejohn, will be a sharp increase in government micromanaging, adding, however, that he is unsure "how long it needs to go on."

A carefully modulated analysis of likely trends by Princeton political scientist Nolan McCarty suggests modest gains for proponents of intervention.

"Whether intervention changes attitude toward government more broadly depends whether the public perceives that intervention primarily benefits 'haves' or the 'have nots.' Free markets and deregulation have long been justified by the notion that markets will provide discipline by punishing bad decisions. If it appears that government is stepping in only to protect those responsible for those mistakes, Americans could become even more cynical about government and trusts it less," says McCarty. Conversely, "government intervention that tries to hold bad executives accountable has its own problems. It generates huge incentives for companies and executives to cultivate political favoritism to avoid punishment -- pay-to-play writ large." The net outcome, according to McCarty, is likely to be "somewhat more support for macroeconomic intervention and broad forms of regulation, but continued skepticism about government ownership and microeconomic planning."

Robert Shapiro, Columbia University political scientist, argues that the aggressive government intervention taking place now will "move the policy agenda to the left in the short term" while in the long term, the "success or failure of the efforts will determine whether the political center on the big government front stays leftward."

The last time there was a furor of significant dimension over the ideological consequences of federal policy was during the first years of the Clinton presidency, when conservatives fought tooth and nail against the administration's health care proposal.

The circumstances then were strikingly different. Clinton, a Democrat, initiated the health care proposal. Conservatives saw it, in the words of William Kristol, as "the rebirth of centralized welfare-state policy....Any Republican urge to negotiate a 'least bad' compromise with the Democrats, and thereby gain momentary public credit for helping the president 'do something' about health care, should also be resisted. ...The plan should not be amended; it should be erased."

Today, in contrast, the huge -- $700 billion, to start -- federal leap into the private sector has been initiated by the administration of George W. Bush. Instead of railing against this Republican-inspired "rebirth of centralized welfare-state policy," Kristol, editor of the Weekly Standard, has been reduced to hoping for help. "Republicans will be blamed for an economy in free fall....Can Bush do anything in his last weeks to change this dynamic?"