The “investment theory of party competition,” advanced by political scientist Thomas Ferguson, holds that investors exert influence through monetary contributions but also through organizations [...]

[...] The strength of the New Deal, he argues, came from the alliance between labor and the bloc of “capital-intensive industries, investment banks, and internationally oriented commercial banks” that had emerged in the early 20th century. Because these businesses were less labor-intensive than their predecessors, and their profit margins thus less affected by rises in wages, they could “afford” to have a coalition with organized labor as long as they could still advance their goals on trade. This isn’t to say that labor didn’t have a role to play — but wealthy investors played an equal if not bigger role, helping convert FDR and the Democrats to internationalism and free trade. What made the New Deal coalition viable for a time was the uneasy harmony of this bloc.

Ferguson also explains how this bloc dissolved. Conventional arguments tend to point to the failure of organized labor to incorporate “new social movements” into its ranks, or to argue that those social movements were responsible for pushing the party toward “identity politics,” leaving economic justice by the wayside. Centrist Democrats’ preferred explanation for the realignment of the party holds that Americans simply became more conservative during the Carter years, as the working classes fractured over issues like busing and welfare. But this doesn’t stand up to scrutiny. According to polling data, from the time and since, most Americans haven’t moved right at all: for the most part, they supported (and still support) the types of programs advanced by the New Deal.

Investors, however, did not. By the early 1970s, military spending on the Vietnam War had strained the budget, leading to inflation, while growing competition from other strong economies, like Germany and Japan, was putting pressure on American manufacturing. The American economic picture was already profoundly uncertain before the decade’s oil crises struck. The 1973–75 recession — at the time, the worst since the Depression — prompted business leaders to temper wage increases (which meant attacking organized labor) and oppose any tax increases to pay for existing social programs (which would mean reduced spending power for already cash-strapped consumers). The Republican Party was historically the party of balanced budgets, and it was divided on issues of trade. With the rise of Ronald Reagan, however, the party gradually moved toward the magical solution of low taxes and drastically expanded military spending, combined with greater internationalism on trade — this latter move helping to siphon off the free trade bloc that had backed the New Deal. The 1980 Reagan campaign, Ferguson and Rogers write, thus “opened the way for virtually all of American business to mass behind its candidate.”

The Democrats panicked, and left their constituents behind. Over the next decade, they would decide again and again that the only response to the business friendliness of Reaganism was more business friendliness. [...]