George W. Bush
George W. Bush; drawing by David Levine

Is George W. Bush a conservative? Have his administration’s policies reflected conservative principles?

In both 2001 and 2003 President Bush successfully proposed large tax cuts. The President has also provided federal support for “faith-based” social programs ranging from soup kitchens to job training to prison education. And although there is no new legislation to show for it, Mr. Bush has consistently opposed both abortion and same-sex marriage.

But are lower income taxes, government funding of religious groups, and opposition to abortion and homosexuality all there is to American conservatism? What about some of Mr. Bush’s other initiatives? At home, the new Medicare prescription drug benefit is not only a large-dollar government entitlement but the first such program ever put in place without any provision for funding it. The No Child Left Behind Act mandates in exacting detail when states must test their schoolchildren, what should be on the tests, what criteria determine if a school is “failing,” and what its school board has to do when that happens. Abroad, the President has committed virtually the entire military capacity of the United States, along with approximately $1 trillion of government spending, to effecting regime change in Iraq and Afghanistan, followed up by extensive US-funded nation-building efforts of just the kind that Mr. Bush derided when he first ran for president.

Most recently, the Bush administration, armed with new authority it had requested from Congress to use taxpayer money for the purpose, took over the huge mortgage-lending firms Fannie Mae and Freddie Mac. It then approved the Federal Reserve’s $85 billion rescue of insurance giant AIG. At Mr. Bush’s urgent request, Congress has also approved a further $700 billion to aid a wide variety of financial firms by taking off their hands (in exchange for cash) many of the mortgage-backed instruments and other bad credits that they had earned so much money creating.

Nor is the question of who’s a conservative limited to Mr. Bush or his administration. During his first six years as president, Republican majorities in both houses of Congress consistently supported whatever expanded spending programs, new government directives, and foreign adventures the administration proposed. Indeed, the 258 members of Congress who signed the “No New Taxes” pledge in the early years of this decade (almost all Republicans) turned out, on average, to vote for more domestic spending than those who didn’t.1

These lapses from conservative principles have not gone unnoticed. Christopher DeMuth, who is about to step down after twenty-two years as president of the right-leaning American Enterprise Institute, noted in 2006:

In recent years, with the Republicans in charge of both houses of Congress, domestic expenditures (even excluding post-9/11 “homeland security” spending) have been growing faster than during the previous two decades of divided government, and the incidence of pork-barrel projects has reached an all-time high.2

According to Mr. DeMuth, the Medicare prescription drug benefit, enacted in 2003, alone added $20 trillion to the government’s unfunded liabilities. His conclusion:

The 2001–2005 period marks the transformation of the Republican Party from its traditional role as a win-or-lose guardian of limited government to that of a majority governing party just as comfortable with big government as the Democrats, only with different spending priorities.

Other familiar conservative voices have expressed the same consternation. Bruce Bartlett, for example, one of the original advocates of so-called supply-side economics in the Reagan years, was the author of the enthusiastic and influential 1981 book Reaganomics: Supply-Side Economics in Action. His 2006 book is titled Impostor: How George W. Bush Bankrupted America and Betrayed the Reagan Legacy. Anyone listening to this year’s presidential election, especially during the Republican primaries, could not fail to be aware that many Americans who think of themselves as conservatives agree with Mr. DeMuth and Mr. Bartlett that something is amiss. The unwillingness of many Republican congressmen to vote for the Bush administration’s $700 billion bailout, and the widespread criticism of the program by conservatives, only provide further confirmation of such attitudes.

James Galbraith likewise thinks that President Bush—and, for that matter, most other Republican officeholders today—may continue to espouse conservative principles in their rhetoric but have ceased to follow them in their policies. In his new book, The Predator State, Galbraith argues that this departure is not just one president’s, or even one administration’s, failing. Instead he argues that Mr. Bush and other Republicans have ceased being genuine conservatives because the conservative policy agenda has ceased to be helpful, or in most cases even relevant, to today’s issues. In effect, he argues, true conservatism is bankrupt as a source of usable policy ideas. What is left is merely conservative rhetoric, disconnected from any actual policy implications: “The fact is that the Reagan era panoply of ideas has been abandoned as the intellectual basis of a political program.”

Not that Galbraith, following in the footsteps of his father, the late John Kenneth Galbraith, whom he frequently invokes here, views the disappearance of conservatism from American policymaking as any great loss. The question is what should replace it. Galbraith therefore is not addressing conservatives, either the disappointed true believers or the pragmatically lapsed policymakers, but liberals—or at least those who used to call themselves liberals before conservatives’ campaign to demonize the label succeeded (the currently fashionable usage is “progressives”). Specifically, he argues that liberals today remain intellectually anchored to the ideas that conservatives continue to recycle in their rhetoric but ignore in practice. They are willing, for example, to accept “regulation only where it can be shown that ‘markets fail.'” The reluctance of liberals to reject this form of fundamentalism has, he believes, crippled their attempts at policymaking. His goal is to change both their thinking and their policies.


Galbraith, an economist who teaches at the University of Texas, focuses his argument primarily on economic issues. His leading examples of principles in which American conservatives once believed, but which they no longer pursue in practice, include free trade, a balanced federal budget—Ronald Reagan’s notion of the government as a responsible household (from which Reagan’s own policy was the most dramatic departure)—and keeping inflation in check by limiting the increase in the supply of money. In each case, he shows, President Bush, members of his administration, or his appointees at agencies like the Federal Reserve have either quietly dropped these ideas or made a virtue of rejecting them.

For Galbraith, that today’s conservatives have left these and other once favorite policies behind is good news. The problem, as he sees it, is twofold. First, conservatives, relieved of any sense of obligation to their traditional principles, have simply turned government policy into an instrument of private financial gain, on a grand scale, for themselves and their allies in the business and political lobbying world; hence the “predator state” of the book’s title. Although he did not foresee the current financial crisis in what he wrote, the Bush administration’s eagerness to bail out troubled banks, while mostly leaving troubled homeowners to their own devices, only bolsters his argument. The second problem, as he sees it, is that liberals have so little to offer in place of conservative policies: “Liberals have yet to develop a coherent post-Reagan theory of the world, let alone a policy program.” In this book he seeks to provide both.

The alternative worldview Galbraith proposes rests on the belief that markets—the private interplay of supply and demand, unencumbered by interference from government—generally do not achieve the favorable outcomes, for consumers as well as business, that elementary economics textbooks and conservative politicians and their supporters claim. According to the standard view, free markets are supposed to allocate scarce resources efficiently and distribute the goods and services that they produce to whoever values them most. Galbraith believes they fail, often spectacularly, at both tasks.

The “cult of the free market,” as Galbraith calls it, has important political consequences. What has happened, he writes, is that the political world has become

divided into two groups. There are those who praise the free market because to do so gives cover to themselves and their friends in raiding the public trough. These people call themselves “conservatives,” and one of the truly galling things for real conservatives is that they have both usurped the label and spoiled the reputation of the real thing.

In contrast, he argues, liberals, who do not actually believe in the efficacy of markets, nonetheless continue to

praise the “free market” simply because they fear that, otherwise, they will be exposed as heretics, accused of being socialists, perhaps even driven from public life.

Only if liberals acknowledge forthrightly the failure of markets to deliver what’s promised on their behalf, he argues, can they begin to construct both the coherent theory and the alternative policy program that he believes are urgently needed.

Here Galbraith self-consciously echoes his father’s famous critique of what had become, by the early post–World War II era, conventional economic thinking. In many respects, the question posed by this argument is from which end of the conceptual spectrum to begin in thinking about how our economy works. The standard textbook view of a market economy pictures atomistically small buyers and sellers—specifically, small enough that none can have any effect on the price of what they’re buying or selling—interacting with one another on a strictly individual basis, with no cooperation or collusion and hence no room for any strategy to influence the market as a whole.

The analysis then advances, by degrees, toward a more realistic description that takes into account some of the relevant features of the modern economic world: that sometimes these buyers or sellers are large enough to affect prices, even acting on their own; that they often cooperate among themselves, sometimes via organizations explicitly established for that purpose (trade associations and labor unions, for example); that some large actors in markets also have the ability to determine not just whether they will buy or sell any particular product but whether it will be produced at all; that sellers can use advertising to influence buyers’ behavior; that government at many levels not only sets the “rules of the game” but also often intervenes in favor of individual buyers or sellers (for example, the AIG rescue and the new bailout program); and that those private parties, not content to accept whatever decisions government may reach, sometimes seek to influence both the government’s rule-setting and its more targeted interventions, using means of influence both legal and not. What mostly distinguishes economists from one another, then and now, is how far their thinking goes toward taking these “complications” into account.


The elder Galbraith began instead from the opposite end of the analytical spectrum. His starting point was a world populated by three large and powerful entities: big business, big labor, and big government. These three interacted with one another in ways more readily characterized by negotiation, compromise, and (when necessary) muscle than by competition among atomistically small buyers and sellers. This interaction, importantly including the ability of one or perhaps two of these forces to block the third, was what Galbraith senior called “countervailing power.” Further, in line with the principles that he had inherited from John R. Commons and the other “institutional” economists of the previous generation, he argued that the specific forms of economic organization mattered: that the key business entities were corporations; that labor did its negotiating and lobbying through unions; and that both operated subject to specific laws and regulations. All this was what John Kenneth Galbraith, in his 1967 best seller, called The New Industrial State.

James Galbraith now proposes his vision of the Predator State in place of the New Industrial State. In short, he argues, the key elements of the early postwar economy are now gone. Big labor has disappeared; only 7 percent of Americans who work in the private sector now belong to labor unions. The big corporations are fatally weakened, sapped of strength by their own folly and the forces of international competition that they could not or would not resist, and especially by the ascendency of what the younger Galbraith sees as the greatly increased power of financial markets; corporations are now openly vulnerable to the ambitions of their top managers, who may have only their personal financial and career interests in mind. Big government still exists, but the growing need for campaign funds and the lax treatment of contributions and lobbying have rendered it no longer an independent force; it merely works for the executives who run the surviving corporations.

On all three counts, John Kenneth Galbraith’s countervailing power no longer operates. And without countervailing power, the American social compact—the idea that the fruits of the country’s expanding economic production should be divided to the benefit of both rich and poor, both to those who work and to those who through ownership of shares and other instruments have financial claims to the economy’s capital stock—is dead as well.

What, then, is the Predator State? What the younger Galbraith envisions is the consequence of the emergence of a “new class—endowed with vast personal income, freed from the corporation,” who

set out to take over the state and run it—not for any ideological project but simply in the way that would bring to them, individually and as a group, the most money, the least disturbed power, and the greatest chance of rescue should something go wrong.

This behavior is not, in his mind, an incidental aspect of today’s US economic and governmental system that becomes evident only at times like the current financial mess. It is not a “complication,” to be taken into account if the analysis proceeds far enough along the road from abstract simplification toward concrete reality. It is endemic, and it is central. In the same way that his father took as a starting point elements of the reality of his day that other economists recognized but mostly ignored or downplayed, James Galbraith has likewise placed “predation”—“the systematic abuse of public institutions for private profit or, equivalently, the systematic undermining of public protections for the benefit of private clients”—at the center of his proposed substitute.

Much of the evidence Galbraith adduces in support of this alternative worldview will be familiar to many readers. Income inequality in America is again widening, as it did for two decades before the Clinton years. The majority of American families earn less today (after adjusting for inflation) than they did at the beginning of this decade. Pay for CEOs and other top corporate executives has exploded. A very large proportion of tax cuts goes to families at the top of the income scale. The government rushes to bail out big firms, and to protect their creditors (and their executives’ pensions), but declines to help ordinary citizens, including those bilked by questionable lending practices or even outright deceit. The government awards rich contracts to companies either owned or run by political supporters and former colleagues, often in violation of rules requiring competitive bids. This is only a sampling of the inequities cited by Galbraith.

The particular focus of much of Galbraith’s argument, and the object of his greatest scorn, is the financial markets. In an echo of the early-twentieth- century lament that financiers had replaced inventors and entrepreneurs as the captains of American industry, Galbraith believes that a similar transformation has again occurred in recent decades. The outcome has been disastrous, he argues, because financial firms and their leaders, once in charge, have neither the desire nor the ability to ensure that the businesses they now control are productive or honestly run—and still less interest in whether they deliver benefits to their customers, their workers, their communities, or anyone other than whoever controls them. Had his book appeared just a short time later, the recent breakdown of the US financial markets could have served as his primary case in point.

What the scandals surrounding Enron, WorldCom, and other firms “most exposed,” he writes, “was the complete incapacity of the financial markets to oversee from the outside the inner workings of a complex financial structure.” The explosion of CEO pay, and other failures of corporate governance, are natural consequences of the lack of oversight by the financial powers. From there, “the step to looting is not large,” and “the constitution of top corporate officers into a predator class” follows too. At each step of the way toward the emergence of the Predator State, “the influence and hegemony of the financial markets lay at the very root of the problem.”

And the emergence of this new economic edifice has important political implications. What accounts for the complaints of conservatives like Christopher DeMuth and Bruce Bartlett is that the leaders of the private-sector firms that dominate the Predator State have no interest in limited government, since government is now a tool of their program. Galbraith writes:

None of these enterprises has an interest in diminishing the size of the state…. For without the state and its economic interventions, they would not themselves exist…. Their reason for being, rather, is to make money off the state—so long as they control it.

To Galbraith, the Democrats are complicit as well; part of the problem, as he sees it, is “a new and historic compromise between the leadership of the Democratic Party and the very rich”—a compromise that he traces to the economic policies of the Clinton administration, in particular its support of the technology sector and of the financial markets. His answer to Mr. DeMuth’s question “Whatever happened to small government?” is that the “new class” that runs the Predator State killed it.

Is all this convincing as an alternative view of how our economy now works—an alternative not only to John Kenneth Galbraith’s New Industrial State but also to the way most economists today think? Parts of the argument are persuasive, and, in fact, economists (like others who necessarily rely on simplification to make any scientific progress at all) mostly skip over many of the phenomena that the younger Galbraith takes to be central. Similarly, the mantra of mainstream economists today, especially those who think of themselves as conservatives, is that incentives matter. This is the basis of both their positive analysis and their policy recommendations. (Perhaps this will now change at least somewhat, in light of Wall Street’s financial collapse and the subsequent bailout.) But most economists are strangely limited in the scope of their vision about where incentives apply.

For example, a very large literature explores how awarding corporate managers stock options, or otherwise tying their pay to their company’s stock price, motivates them to run the company in ways that will improve earnings, both now and in the future, and more generally brings their incentives better in line with those of their shareholders. The enhanced incentive to falsify the company’s earnings, or lobby the regulators to let them treat what are really the same financial flows differently for reporting purposes, is almost uniformly ignored in such analyses.

The question is whether these and other similar phenomena are “complications” that economic thinking should strive to take into account, when appropriate, or are instead central to how the economy works. No one really thinks that such tendencies do not exist, or do not matter. At the same time, even with his frontal attack on the efficacy of markets, surely Galbraith does not think the self-dealing and market failures that he emphasizes characterize all firms, or all transactions. As was the case with the alternative world-view that his father proposed, what is at issue for economists and those interested in economic policy is where to start one’s analysis—from which end of the spectrum to begin and then proceed toward some middle ground. But The Predator State is not aimed at the younger Galbraith’s fellow economists, and so that question remains to be addressed.

At the same time, Galbraith’s ar- gument in The Predator State often relies on generalizations that would probably strike many of those fellow economists as surprising and at best unsupported, at least not in this book: when a person saves and a firm invests, he writes, any benefit accruing to anyone other than that individual or that firm “would have to be counted an inefficiency.” (To the contrary, most economists think investment also makes a firm’s workers more productive and hence leads to higher wages.) Money growth was slow during Paul Volcker’s anti-inflation campaign in the early 1980s, he asserts, not because of the Federal Reserve’s restrictive policy “but because the slump in activity was so dramatic that demand for additional credit practically disappeared.” (Most economists think Volcker’s tight-money policy was a key part of the story.)

The relationship between the trade deficit and the budget deficit is such, Galbraith writes, that the increasing trade deficit after 1980 “ensured that the budget deficit would not go away”; and more generally that “the realized budget deficit no longer depends on federal budget policy decisions, but rather on international trade and the financial position of the private sector.” (Most economists think the government can set its tax and spending policies to run either a deficit or a surplus, regardless of the economy’s international trade balance.) “Foreign bank credit cannot generally fund industrialization when capital markets are free.” (Most economists believe free capital markets do not necessarily get in the way of industrialization.) And there are other examples.

To repeat, Galbraith’s intended audience here is not professional economists, and so this book is presumably not the place to provide the support, both in concept and in evidence, that many of his generalizations lack. But without such support, most economists would probably find the argument as a whole—the wholesale rejection of markets as well as many of Galbraith’s other more specific propositions—not persuasive.

The policy program that Galbraith bases on his new worldview will probably not attract a lot of support from his fellow economists either. He is articulate in showing that many of the policy ideas pushed by liberals today amount to trying to make markets work better. To his dismay,

reputable liberals in modern America thus operate on a narrow ledge, differentiated from the conservatives by one basic premise. Both groups accept that policy must work through markets. They differ only on what it takes to make markets work.

But if markets are never going to work in the first place, then neither will policies intended to achieve “efficient market design.” “What does not exist cannot be perfected by minor adjustments.”

What, then, does he offer in the market’s place? To summarize briefly: first, government planning of a much larger range of economic initiatives, including

the choice of how much in the aggregate to invest (and therefore to save), the directions to be taken by new technology, the question of how much weight and urgency are to be given to environmental issues, the role of education, and of scientific knowledge, and culture.

Second, reliance on “standards” for wages and prices, and a far wider use than today of regulation, whether of financial markets, carbon emissions, health care, or utilities. It is clear, however, that Galbraith’s main interest is wage standards, not regulation of these other areas of economic activity. Apart from changes in the wage-setting mechanism, he does not, for the most part, specify the details of what regulation is needed. Especially in light of what has been happening in the financial sector—the particular object of his scorn—this is a pity. For example, Galbraith could have usefully echoed the late Edward Gramlich’s frequent calls, during his service as a member of the Federal Reserve Board, for measures to prevent many of what we now know to have been blatant abuses in the subprime mortgage market.3 Or he could have recommended renewed oversight of banks and other institutions to help ensure that they contained their risks well within their capital. Or even new legislation to preclude financial institutions covered by the government’s ever-expanding safety net from using—as the stockholders of Bear Stearns did—the threat of bankruptcy to extract a sweeter deal in the event of a government-assisted takeover. Any of these ideas, or similar specifics for other areas, would have strengthened his argument.

Looking back fondly on the price controls of World War II—which were administered by his father—Galbraith concludes, “Deregulation of wages and prices in the great move toward competitive market pricing is nothing more than a rearrangement of social power relations”; and since what is involved is social power, not anything to do with efficient allocation of resources and guidance of economic activity, far better that a democratically elected government, not private parties, be in charge. More generally:

Imposing standards, and enforcing them, is thus the general policy response to the rise of the Predator State, which is just a coalition of the reactionary forces within business….

It is the only way to achieve “a more just society.”

As the examples Galbraith gives suggest—he takes the Scandinavian countries as a particular case in point—government planning is hardly a new idea, and some elements of a system of standards for wages and prices (beyond what we already have in the United States) have been successfully implemented elsewhere. But countries differ in many ways, for this purpose most importantly in their political structure and behavior. Hence the success of others in making any particular policy work does not necessarily mean that it will work in the US as well. Even if we set aside the usual considerations of economic efficiency, which Galbraith rejects, we still have to ask whether, in a setting in which political contributions and lobbying loom as large as they do now in America—and with no “countervailing power” such as his father envisaged—it is not all too easy to imagine the very people and institutions Galbraith places at the center of the Predator State similarly capturing control of the planning and regulation he proposes as an alternative. How do we know whether more government planning, and the imposition of government-set standards, would weaken or reinforce the “predator’s drive to divert public resources to clients and friends”?

Moreover, Galbraith notwithstanding, most economists would want to explore the question of efficiency more deeply than he does here. Pointing to the failure of markets, which he acutely does, is not the same as showing that any specific planning or standard-setting process would be superior. Even the Scandinavian experience is the subject of considerable debate along just these lines.4

Perhaps the most surprising element of Galbraith’s policy program is his view that, in the end, the costs don’t matter. As long as the US dollar continues to be the world’s currency of choice for trading purposes and the main reserve asset of other countries’ central banks, he argues, we Americans have no need to live within our means. Wages in excess of workers’ productivity, large-scale environmental cleanup, major investment in new ways of generating and using energy—all can be accommodated by as large an excess of imports over exports as may be required. The idea that even the current privileged US position has limits, or that a sufficiently large and chronic excess of imports over exports might lead other countries to change their behavior in ways that end up impairing or even ending this American privilege, is likewise not his concern (or at least not one expressed here).5

At the conclusion of the book, Galbraith relates the poignant story of its inspiration:

On Wednesday, April 26, 2006, I visited my father in his room at Cambridge’s Mount Auburn Hospital for what would prove to be the last time. I told him a little bit of what I’d been working on, and he said, “You should write a short book on corporate predation….” Then he paused and added, with his usual modesty, “If I could do it, I would put you in the shade.”

In this, the elder Galbraith was wrong. James Galbraith’s powerfully written and urgently argued book holds its own in the proud tradition he has chosen to follow.