What Comes After the Bailout State?

October 14, 2022   •   By Martijn Konings

WHY DO PROGRESSIVES often seem so helpless, forever committed to not rocking the boat and reaching across the aisle? We tend to contemplate this question when such helplessness becomes particularly farcical (e.g., on one of the many occasions when President Biden insists that we should meet radicalizing white supremacy with a reaffirmation of our commitment to political decency and bipartisan consensus), but then it quickly becomes a rhetorical question, meant to organize a collective eye roll.

It’s important to dig deeper. One key factor shaping such helplessness is the tendency of progressive politics to orient itself by a deceptive lodestar — specifically, by the image of the early postwar order as a civilized capitalism, a stable balance between the forces of money and the public interest that we should work to restore. When trying to understand what has happened since the 1970s, and when assessing the present, they perceive primarily loss and decline. Such nostalgia is a massive problem: it does far more to hold us hostage to an inaccurately imagined past than to offer guidance to better political futures.

That is not to say that nothing has been lost by anyone over the past decades. The post–New Deal welfare state gave its core constituency of white men access to a living wage, lifetime employment, high levels of consumption, a pension, and home ownership. In this way, it transformed wage labor from a futureless condition of social marginality into a ticket to a middle-class lifestyle. But the idea that capitalism simply destroyed the institutions of the mid-20th century welfare state is misleading. Out of the crisis of the welfare state arose a “bailout state.” This new form has generated its own new middle-class politics, no longer organized around stable wage growth but around speculative investment, asset ownership, and capital gains.


No conspiracy theory is required to understand how the bailout state was built. The 1970s made the problem with pursuing social integration on the basis of full employment clear: inflation. The idea of the wage-price spiral, which has recently made a comeback even though it has little application to today’s situation, was entirely real in the 1970s. The free-market ideologies that found traction in that context might not have changed the course of history had it not been for the help of Paul Volcker, the Federal Reserve chairman. Volcker was appointed by a Democratic president desperate to get inflation under control. He did not come bearing any new policy techniques. He just decided to do the very thing — steer the economy into a recession by imposing strict limits on credit growth — that previous Federal Reserve chairmen had been reluctant to do because they had no playbook for managing the instability that was bound to ensue.

The effects of the policy shift were perfectly predictable: financial strain, failure, and crisis. And there is equally no reason to assume that Volcker was naïve enough to think that the American state could afford to let large, systemically important financial positions collapse. In other words, the purpose of the Volcker shock was to force American authorities to take a more selective approach to risk management — to bail out where needed while letting enough positions fail so as to make sure inflation was contained.

Volcker’s provocation paid off. Over the next decades, as the destruction of organized labor ensured that wage growth came to a halt, the logic of bailout — i.e., shifting risk away from large financial institutions — evolved into a key technique of economic policymaking. The idea of using bailouts to stabilize the financial system has a long history, and for most of that history was viewed in explicitly negative terms as a source of “moral hazard” (i.e., rewarding irresponsible risk-taking encourages that very behavior). But over the past decades, policymaking has largely freed itself from such concerns. As policymakers learned that using the faith and credit of the American state to guarantee the value of systemically important financial positions allowed them to stabilize financial expansion without producing inflation, the bailout evolved from a last-resort option into a proactively implemented policy principle — a backstop.

Such underwriting by the American state serves to put a floor under key markets and select asset classes. By blocking market downturns, it invalidates the commonsensical notion that what must goes up must come down: backstopped asset categories will go up much more than they will ever go down. This implicit guarantee of indefinite lift is to a large extent what has made possible the seemingly self-propelling world of endless financial innovation and growth. Bailouts are the banal foundation of the exciting world of speculative investment and capital gains.


It’s not just the big banks and venture capitalists that get to enjoy the benefits of bailout policies. Many members of the middle class have investments in relevant asset categories and, benefiting materially, they are part of the constituency that maintains these policies. “Trickle-down” thinking (Reagan’s belief that tax cuts for the rich would set in motion an economic chain reaction that eventually would benefit ordinary people just as much) has always been a cruel joke when it came to wages. But in the area of asset politics, it has been significant enough to create a middle-class politics centered on asset inflation. If the welfare state was organized around the possibility of ordinary people enjoying the benefits of capitalism through wage labor, the bailout state holds out the promise of direct participation in the logic of capital gains.

But if the propertied middle class is invested in the bailout state, the logic of implication does not end there. Many people currently excluded from access to capital gains aspire to entry. And the havoc that a financial meltdown can wreak on everyday economic life means that to some extent all of us are implicated: even those who have no hope whatsoever of accessing capital gains are still exposed to the downside risk. Through this institutional blackmail, a politics of speculative investment and asset appreciation has acquired a definite democratic anchorage.

This spread of the bailout logic has changed the socioeconomic rules of engagement in profound ways. In his essay “The Sovereignty Effect: Markets and Power in the Economic Regime,” Joseph Vogl has suggested that the very idea of power has undergone a dramatic transformation: defying all classical sociological definitions, power is increasingly defined by the cynical possibility of “transforming [one’s] own risks into the dangers of all others.” Without this infiltration of bailout principles into the everyday conduct and governance of economic life, “neoliberalism” would never have become a real thing.

Homeownership is central to the way a broad middle class has been included in the benefits of the bailout state. The concern with seeing the value of one’s property go up (or at least not go down) militates against the progressive political preferences and opinions that people may hold. Anyone who has spent some time living in large urban centers will have seen this cognitive dissonance in action and spent some time despairing about how to ever get past it. The currently raging debate about NIMBYs and YIMBYs is so exciting to many people because it seems to hold out the hope that our cities may become more equal or inclusive without having to compromise on capital gains for the propertied middle class. That’s just a fantasy.

Homeownership is rapidly becoming the emblematic expression of contemporary capitalism. On the one hand, the past decade has seen growing awareness that the progressive game of broadening homeownership is up and that existing policies are just working to protect vested interests. Although home ownership continues to retain its hold on the way people imagine their life, it is increasingly acknowledged that it will become a reality only for those who can count on assistance from their parents. On the other hand, there is no serious political willingness to break with those policies or any serious discussion about the many other ways in which we could organize housing in modern society. The asset-driven politics of middle-class homeownership has run out of steam yet will not die — much like capital itself, it often seems. Not too long ago, the idea that the future is canceled, stolen, or otherwise foreclosed was mainly a somewhat contrived theoretical idea in cultural studies; however, in recent years, it has found much wider traction as a sort of anthem for a millennial generation entering middle adulthood.

Crucially, these are political issues, not economic laws: they are not the result of “r>g,” Thomas Piketty’s famous formula for the tendency of the capital share to grow at a higher rate than the economy itself, which he thinks will rear its ugly head whenever we’re not paying attention. The proliferation of theories that revolve around stagnation and decline similarly represents above all a way for the propertied middle class to avoid having to reckon with its own role. It is a way for a democratic public to pretend that the problem is external to it, not bound up with its unremitting receptiveness to capitalism’s promises and the way we have allowed the machinery of government to be transformed into a bailout state.


If it increasingly seems there’s no way out of our predicament, that’s mainly because we’re so good at hiding from ourselves the fact that we have blocked all the exits. This is a state of affairs that contemporary critical theory, invested as it is in the postwar mixed economy as a source of normative guidance, is unable to engage productively. The widely publicized exchange between Jürgen Habermas and Wolfgang Streeck is emblematic here: two leading intellectuals — whose mindsets are stuck in the 1970s — debating whether we should look to the European nation-state or to the European Union as a way back to a civilized capitalism feels more like a demonstration of despair or irrelevance than incisive commentary.

The philosopher Peter Sloterdijk recognized the helplessness of critical theory at a much earlier point in time. Around the time of the Volcker shock, he powerfully argued in 1983 that critical theory could only offer moralistic lament, smart observations that had no ability to affect people’s behavior. It just provided another layer to the “cynical reason” that pervaded capitalist society, a way of thinking that could discern some of the things that were wrong with the world but could never engage these problems in a productive way.

Over time, Sloterdijk’s dislike of pious moralizing only grew, and his oeuvre reads like a series of attempts to implement his conviction that the task of philosophers is not to interpret, criticize or change the world, but to provoke it. He offered lyrical descriptions of a world in motion that were insightful and offensive in equal measure, his purposeful exaggerations at times skating dangerously close to far-right sentiments. The piece that turned Sloterdijk from a public intellectual into a famous international philosopher was certainly provocative, but it also misread the times completely. Lashing out at the “grasping hand” of welfare-state dependency and lamenting the state’s willingness to steal from the rich to give to the poor, Sloterdijk’s thought too seemed stuck in the 1970s. In this way, the trajectory of his thinking is a vivid illustration of how neoliberal capitalism can take critical impulses and put them to work for cynical, banal, or reactionary ends — a slippery slope that works to maintain political helplessness as an attractive alternative option.

How should progressives deal with the fact that the terrain of contrarianism and provocation has been occupied so effectively by forces of reaction? Surely, hopefully, we are not condemned to labor forever in the shadow of the Volcker shock as the founding provocation of our time.

In an early book that went untranslated for a long time, with the enigmatic original title Eurotaoismus, Sloterdijk actually had some helpful things to say about this. He suggested that trying to identify productive ways to engage our world of “infinite mobilization” boiled down to “the classic riddle of how a quiet in the eye of the storm is possible for beings so thoroughly condemned to action.” If contemporary questions of political economy have taken on a distinctive existential dimension, this insight is crucial.

Thinkers like Byung-Chul Han have underscored the need for a spiritual response to the totalizing power of capital. The problem with such approaches is that they present an untarnished spirituality as the antidote to capitalist avarice and superficiality. What Sloterdijk’s image of the eye of the storm suggests is something less platitudinous. It’s not about finding an inner peace that will allow us to ward off all the external intrusions and distractions — there’s no such thing. The requirement here is far more elementary: to cultivate sufficient alertness to one’s own position to be able to delay the activation of one’s blind spots. It’s about learning to “see” rather than merely act out our own implication — to take note of our responsiveness to capital’s constant provocations and so to create space to see them anew and engage them otherwise.

There is, of course, something inherently paradoxical about the idea that effective transformative impulses are only likely to emerge if we first situate ourselves at the heart of capitalism more purposefully. It could be easily dismissed as esoteric nonsense, were it not for the fact that the development of the neoliberal asset economy has made apparent that we already occupy that space. As a democratic public, we are constantly coming to the rescue of too-big-to-fail institutions while imagining that our lives are constrained or facilitated by “markets.” This harkens to much older ideas, such as the Marxist idea that a postcapitalist society would not be a simple replacement of one system with another but would emerge out of capitalism itself, retaining its desirable features. For much of the 20th century, this idea lost some of its urgency, as it appeared that public institutions could regulate capitalism from the outside. The defining feature of our present is that any sense of externality has disappeared and that any politics premised on that condition has lost viability.


The COVID-19 crisis has made clear just how central the logic of bailouts has become to the way contemporary Western societies work. Not too long after the contours of the public health situation and its effects on economic life became apparent, the US government announced a series of measures and programs designed to ensure that the forced slowdown of economic activity would not trigger a cascade of business failures or a wholesale financial meltdown. The Federal Reserve fully reactivated its suite of “quantitative easing” policies (the routine purchase of assets that emerged as the Fed’s formalized backstopping program following the 2007–08 crisis) and essentially declared that it would do whatever it took to stabilize financial markets and maintain asset values. In other words, bailouts have become the go-to option for dealing with the destabilizing effects of major shocks, even when (as during the COVID-19 crisis) the source is external to the economic system.

At the same time, the crisis has fully exposed the contradictions of the existing growth model. The bailout policies that were devised in the heat of the moment were relatively unselective (American friends reported finding it very disorienting to open their bank accounts and see a direct $1,400 payment from the American government). This reflected above all the intense uncertainty of the moment, i.e., the fact that it was difficult to tell exactly how much pressure the situation would place on those on the lower rungs of the economic ladder, in turn making it more difficult to precisely delineate the sources of system risk. In addition, the disruptions of the pandemic made workers slightly less disposable and so put gentle upward pressure on wage levels. These developments quickly set off system-level alarm bells, underscoring just how deeply incompatible the current economic model is with even modest improvements at the bottom of the economic pyramid, let alone broad-based prosperity.

It was not too long ago that Federal Reserve technocrats were starting to emphasize the limits of monetary policy in addressing the problems of an asset-centered economy and advocated a more activist and expansionary approach to government spending as the only way to pull the US economy out of the swamp of stagnation. But over the past year, even progressive media have done double duty associating the threat of inflation with the idea of a wage-price spiral. This has been highly effective in reversing the ideological wind blowing through policymaking circles, even as a torrent of evidence shows that profits, not wages, have skyrocketed. That mainstream progressive outlets like The New York Times should have so willingly embraced neoliberalism’s founding fears is more than a little disappointing. After all, the current round of austerity amounts to nothing less than a new front in an already lethal class war.

Optimistically, we may hope that what we are witnessing is not the death rattle of progressive politics but the emergence of a split in the progressive class. The response to Larry Summers’s opinionating about the danger of inflation is perhaps symptomatic here. Having spent the past decade diagnosing our collective condition as one of “secular stagnation” and even having gone so far as to attribute this to the weakness of organized labor without so much as mentioning his own role in bringing about that state of affairs (having held key roles in both the Clinton and Obama administrations), Summers was now first in line to sound the alarm about inflation and to demand a swift return to austerity. But this hypocritical zigzagging doesn’t seem to have gone over particularly well even with members of the propertied progressive class.

This might speak to the exhaustion of the idea that the material interests of this class can meaningfully be separated from the state of society at large. The bailout state is less and less effective in shielding a propertied middle class from the proliferation of risk. At a time of lockdown, there is obviously tremendous privilege in being able to work from home in a decent-sized property that you own — but even that level of security, it turns out, still produces very profound contradictions. In a world of increasingly unpredictable risk spillover, the logic of selective bailout is just no longer reliable. The idea that it is possible to allocate the benefits of capitalist growth to a core constituency in a predictable way is eroding very rapidly.

But if there are opportunities here, a politics centered on full employment and wage increases is unlikely to be able to escape the chokehold that existing institutions have on the claims of wage earners. In that sense, the idea of the welfare state is truly dead. We need to look elsewhere — forward, not backward.


When it comes to questions of finance and debt, the much-lamented crisis of expertise may turn out to be not such a bad thing after all. The period since the crisis of 2007–08 has seen a tremendous growth of economic literacy, and technocratic solutions to a crisis of massive political significance do not command the same degree of acceptance anymore. Considerable excitement swirls around proposals that only recently would have been summarily dismissed.

Perhaps few ideas are currently attracting as much attention as Modern Monetary Theory. Its basic proposition is that we can finance all useful economic activity, and that money is not a constraint unless we treat it that way. MMT represents a strange but inspiring leap from the realization that money is just a symbol to the idea that all the constraints it imposes are figments of our imagination. In that sense, MMT is simply a reversal of how orthodox economic theory thinks about money. Whereas mainstream economic theory works within a scarcity mindset (i.e., because money is nothing but a symbolic convention, it is irrational to imagine that it can produce free lunches), MMT approaches it from an abundance mentality. MMT is no more or less correct about the nature of money than orthodox economics. It just articulates a different fantasy, one that takes the fictitious nature of money and finance not as a reason to join the conclusions of the dismal science, but as a way to open up new futures. As Hannah Appel put it, MMT is “a mind-opening tool, a gateway fantasy.”

This sense of possibility is of course what makes people like Summers so irate, in that visibly unbalanced way that underscores there is much more at stake than just an intellectual disagreement. We should not get drawn into that debate — it’s a setup, meant to divert our attention from real spaces of opportunity. Instead, we should work from the place indicated by MMT: money must liberate and empower, not merely constrain. Of course, there is something inherently paradoxical about the idea that the only way out is through, that effective transformative impulses need to go through the financial heart of capitalism itself. It could be easily dismissed as esoteric nonsense, were it not for the fact that the development of the bailout state has given very concrete content to this existential notion. We already inhabit the heart of capitalism: we are part of a democratic public that constantly comes to the rescue of too-big-to-fail institutions. When seen from that angle, insisting on the transformation of investment by default to investment by design seems eminently reasonable.

The key problem with MMT is that it is relatively uninterested in the strategic changes that are required for its ideas to transition from an imagined future to an accurate description of economic life. It is still looking for a shortcut, a technical fix to a political problem. But if the era of Fordist unionism is over, that does not mean that we can bypass the business of mobilizing and organizing. Such a new politics will have to recognize the extent to which the bailout state has irreversibly changed the rules of engagement. Above all, it needs to be less mournful about the sources of power that have been lost, and do more to work with the sources of leverage that we already enjoy but have yet to exploit. The student debt movement is a good example of how such a politics might take shape: the movement has derived considerable political clout from the sheer size of its debts, using that influence to force Biden to follow through on his promises to cancel them in part. Instead of accepting official judgments, we need to think creatively about who is too big to fail.

But the public does not need to overidentify with the debtor position. Pursuing a kind of counter-blackmail is a strategy, not a goal. It is not so much that we too are entitled to bailouts — as if there is some central source of authority that exists independently from our collective approval and whose permission we need. The point is that it is the people’s tacit agreement and participation — the full faith and credit that we bestow on the existing financial infrastructure — that allows bailout investments to be made in the first place. If we are the de facto owners of the bailout state, a neoliberal sentiment like wanting value for our money may paradoxically not be a bad starting point for its democratization.


Martijn Konings is a professor of political economy and social theory at the University of Sydney.


Featured image: Joseph Schillinger, Area Broken by Perpendiculars, ca. 1934. Smithsonian American Art Museum, Gift of Mrs. Joseph Schillinger, licensed by CC0: public domain.