Is basic political science being turned on its head?

I think it's safe to say that the financial regulation bill has not evolved the way that Simon Johnson predicted last year.  Johnson's thesis was pretty simple -- because of the structural dependence of politicians on financial capital, neither the executive nor the legislative branches would be willing to regulate that sector. 

Johnson wasn't necesaarily wrong in making that prediction -- when in doubt, political scientists follow the money as well.  Still, the regulation that is likely to emerge is clewarly stronger than expected.  In The New Republic, Noam Scheiber has offers his explanation for why

Basic political science tells us that, when Congress targets a complex industry with billions of dollars at stake, the legislation should weaken as it moves toward passage. The industry will plead its case with vehemence, while voters will be oblivious to the importance of subtle changes. “Words on the page are not that critical to the public,” one derivatives industry lawyer told me in March, conveying a general truism. But something unforeseen is happening as Congress wraps up its overhaul of Wall Street: Key elements of the bill are getting tougher—in some cases markedly so....

What explains the unexpected success? The financial-services industry had counted on public passion subsiding with time. As the derivatives lawyer told me a few weeks ago, “The current strategy you’re hearing is basically to keep Republicans together till cooler heads prevail.” But cooler heads aren’t prevailing. As the bailed-out banks have surged back to profitability while unemployment hovers near 10 percent, the public has, if anything, grown crankier. By holding the line on a tougher reform package, the White House has been able to ride the anger rather than get trampled by it. In a moment of rising public frustration, the populist argument gains force the longer the debate continues.

So does this contradict basic political science?  Yes and no.  The outcome is still consistent with political science odels -- just not the ones that focus on interest groups.  Any Americanist will tell you that interest group politics matters a lot.  If public opinion is pretty unified around a high-profile issue, however, then there are hard political constraints that block the ability of lobbyists to do that voodoo that they do so well.  And it's pretty clear that the public is thermonuclearly pissed at the financial sector. 

Still, this is pretty surprising, because financial regulation is so friggin' arcane.  Quick, what's a credit default swap?  A collateralized debt obligation?  Are they examples of derivatives or not?  Sure, readers of this blog likely know the answers to those questions, but I guarantee you that 99% of registered voters do not know the answer.  The fact that public pressure and attention is still mobilized on this issue is unusual. 

I think it's tied into the one part of the story that Scheiber failed to mention -- the SEC indictment of Goldman Sachs.  Whether what Goldman did or not was actually illegal is not the issue.  There was a lot of reporting about what Goldman actually did -- and it seems like they weren't acting like  just a couple of bookies.  The indictment changed the political optics of financial regulation and dramatically reduced the utility of lobbying from the financial sector. 

Finreg isn't law yet, and experts like Johnson might argue that their "capture" story works on other dimensions of the regulation.  Still, I don't think this is a case where basic political science failed -- unless you think that poli sci should have predicted the SEC indictment. 

What do you think? 

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Daniel W. Drezner

Can the EU continue to muddle through?

Steve Walt is pessimistic about the future of the European Union: 

There are in theory two ways that the EU could go in response to these events. One possibility is that these recent failures will eventually prompt a further expansion of all-European institutions.  This view is the modern version of old-style functionalism: if Europe needs certain institutions to work properly, it will eventually create them. 

The second possibility-which I'd deem more likely -- is that we have in fact seen the high-water mark of the EU project.  Nationalism is still alive and well in Europe, the Cold War is over and there is thus less need for unity against an external threat, Germany is gradually shedding its post-World War II reticence, and the consequences of over-expansion and excessive ambition have been fully exposed. I'm not saying the Union is headed for the dust-heap of history or anything like that (no bureaucracy goes out of business that quickly, especially when there are thousands of pages of laws involved), but a significant consolidation of power in the near future seems most unlikely.

Given that the EU Union has been one of the more interesting political experiments in recent decades, this is going to be fascinating to watch. Time for IR theorists to place their bets?

It's really in vogue to predict the downfall of the European Union, and for good reason -- they have had a truly awful 2010.  Steve, like any good realist, predicts the stalling out of the European project.  And he may very well be right. 

There are two things that hold me back from making a similar prediction, however.  First, the EU has had significant policy reverses in the past -- and the institution has always responded with further economic and political integration.  If I had said, the day after Black Wednesday, that the EU would create a single currency in less than a decade, all my realist IR friends would have bared their teeth in an effort to simulate laughter laughed.  Similarly, the failure of the EU constitution last decade did not deter the EU from creating new offices designed to centralize foreign policy coordination.  These offices haven't really been put to good use yet -- but new leadership could change that. 

Second, I'm not sure the eurozone can go backwards -- the common currency might be locked in.  There are suggestions that Greece needs to exit the eurozone for a spell, but there's no mechanism and/or infrastructure to make that transition (let me add here that the functionalist argument would predict that there should be a few departurues from the euro, for reasons that Paul Krugman laid out last Friday).  Since Greek debt is denominated in euros, and since I doubt the French and Germans will allow that debt to be devalued because it will kill their financial institutions holding Greek debt, Athens has strong incentives to stay in the euro fold. 

When going backwards isn't an option, and muddling through is no longer viable, the only thing left to do is move further along the integration project. 

It's entirely possible politics will get in the way of this -- but my 51/49 prediction is that come 2020, the European Union will look more centralized than it does today.  

What do you think?