Reagan implemented important tax cuts but did not reduce spending as
much, which contributed to an “unprecedented increase in the budget
deficit” and set the stage for a lasting debate on the limits of public
intervention.^39 The new president also increased military spending,
curtailed programs for the poor, undermined trade unions, and weak-
ened the enforcement of health, safety, and environmental regulations.
The world economy was severely hit by the American and British
recessions of 1981–82, and even governments still committed to full
employment had to adjust. In an increasingly integrated capital
market with high interest rates, the use of expansionary monetary and
fiscal instruments had become difficult and costly, and most govern-
ments, including social-democratic ones, adopted anti-inflation, aus-
terity policies.^40 The evolution of France was emblematic. Here was a
country that, in May 1981, after twenty-three years of uninterrupted
rule by the right, elected a socialist president, Franc ̧ois Mitterrand,
who was allied with the communists and promised profound trans-
formations. In its first year in power, the Mitterrand government did
pursue an expansionary economic policy, increasing public spending
just as the rest of the world was responding to the recession with
austerity measures. In this unfavorable context, France soon faced a
balance of payments crisis and strong pressures on its currency. In
June 1982, after a year in power, the French socialists changed course.
The franc was devalued and a severe austerity plan was adopted.
“Keynesianism in one country” had been proven unsustainable.^41
Neoliberalism
The pure monetarist doctrine gradually faded away, because it was
too simplistic to govern economic policy. The Keynesian commitment
(^39) Alesina and Carliner, “Introduction,” p. 13; Krugman,Peddling Prosperity,
pp. 152–53; Paul Pierson, “The Deficit and the Politics of Domestic Reform,”
in Margaret Weir (ed.),The Social Divide: Political Parties and the Future of
Activist Government, Washington, DC, The Brookings Institution, 1998,
40 pp. 126–27.
Scharpf, “Economic Changes, Vulnerabilities, and Institutional Capabilities,”
p. 51; Torben Iversen, “Decentralization, Monetarism, and the Social
Democratic Welfare State,” in Torben Iversen, Jonas Pontusson, and David
Soskice (eds.),Unions, Employers, and Central Banks: Macroeconomic
Coordination and Institutional Change in Social Market Economies,
Cambridge University Press, 2000, pp. 205–06 and 217.
(^41) Hall,Governing the Economy, pp. 192–201.
The triumph of market democracy (1980–2007) 147