The Interactions Between Neoliberal Intervention and Neoliberal Governance: "Policy Credibility" and Macroeconomic Policy Following the Great Recession

The analysis of the rise of neoliberalism as an institutional transformation has been a central concern for both economic sociologists and political economists. The importance of this topic has only risen since the Great Recession, in view of what seems to be a remarkable resilience of neoliberal institutions. I suggest that in their analysis of neoliberalism, both approaches would benefit from distinguishing two dimensions – intervention and governance – and by examining the contingent interaction between them. Both economic sociologists and political economists commonly focus on neoliberaIism's intervention dimension, namely the unleashing of market competition. But though crucial, this dimension of neoliberalism interacts with its governance dimension, namely the limitation of democratic government. I demonstrate this by analyzing how and why macroeconomic policies in advanced economies have evolved following the Great Recession.

Looking at the pattern of macroeconomic policies of advanced economies during the Great Recession through this lens reveals a multifaceted evolution. Intervention-wise, there has been a dramatic transformation, from a minimalist pro-market approach to an interventionist approach. Pre-crisis logic assumed that markets with stable prices are self-correcting and accordingly prescribed limited monetary intervention and completely rejected fiscal intervention. Expansionary monetary and fiscal interventions during the Great Recession reflect a clear break with this pre-crisis logic. No such transformation was registered at the governance dimension, in which the basic logic of institutionalized depoliticization was maintained. The two main institutional arrangements – central bank independence and fiscal rules – were preserved and changes that did take place have either conformed to or reinforced pre-crisis logic of macroeconomic governance.

Such multifaceted evolution of macroeconomic policy is remarkable, and rather unexpected given past experience. Historically, institutional depoliticization and the pro-market macroeconomic intervention took place concurrently, possibly reinforcing each other and supposedly following the same neoliberal paradigm. The turn to interventionist macroeconomic policies enacted within a depoliticized institutional context seems to defy such unified interpretations of the neoliberal paradigm (and perhaps of any "paradigmatic" approach to policymaking analysis). This situation calls for explanation: why were macroeconomic policymaking institutions maintained while the pre-crisis logic of intervention was transformed?

I approach this question by utilizing a discursive-institutionalist framework that distinguishes between the different economic ideas that inform each policy dimension and highlights the unique political power of governance-related ideas. I argue that in the context of the Great Recession it was the influential governance-related idea of "policy credibility" that played a crucial role in shaping the multifaceted evolution of macroeconomic policy.

The notion of policy credibility is rooted in rational expectations theory and essentially suggests that stable economic growth requires credible and time-consistent macroeconomic policy (e.g. Alesina 1987; Alesina and Tabellini 1990; Barro and Gordon 1983; Kydland and Prescott 1977). It had gained substantial intellectual and political influence since the 1970s and had driven the restructuring of macroeconomic policymaking institutions. More concretely, it was the "instruction sheet" for shifting macroeconomic decision-making locus to "independent" central banks and the concurrent limits of elected officials' policymaking discretion. Crucially, enhancement of macroeconomic policy credibility essentially meant depoliticizing it, or de-democratizing it, by insulating it from electoral and societal pressures, and by subjecting it to long-term "rules" and/or (politically) autonomous decision-makers.

I argue that when the crisis erupted, the discursive and institutional power of policy credibility shaped the evolution of both macroeconomic intervention and governance. Macroeconomic intervention was carried out within the pre-crisis credibility-enhancing ideational and institutional context, which gave preference and advantage to independent central bank action upon actions that require politicians' discretion. Additionally, in the monetary domain, where credibility was based on the more flexible autonomous discretion, intervention was far more substantial relative to fiscal intervention, where credibility was rules-based and rigid. At the same time, depoliticized macroeconomic policymaking institutions was maintained and even strengthened as means to maintain policy credibility in a context of "unorthodox" and "unconventional" policy interventions.

I demonstrate this by process-tracing the paradigmatic case study of Israel. While Israel did not suffer its own financial meltdown, economic decision-making between late-2008 and mid-2009 was characterized by substantial uncertainty. Furthermore, as a small and open economy, Israel was immediately affected by the global recession. Following the Great Recession macroeconomic policy in Israel had evolved in a multifaceted manner like other countries: surprisingly and rather unprecedented expansionary intervention has combined with the further depoliticization of macroeconomic governance. By process-tracing macroeconomic decision-making in Israel from 2008 to 2010 I demonstrate the crucial role played by the notion of "policy credibility" in shaping these policy developments.