@libertylynx suggested to me that the GOP is primarily responsible for the current unpopularity of capitalism in the US. I agree that this is largely the case. Here’s my first stab at an explanation.
At root it is due to a yawning gap between rhetoric and action. The GOP poses as the party of small government and free markets, but it is not, really. The disconnect was somewhat present during the Reagan administration, but it became progressively (pun alert!) more pronounced starting with Bush I, and particularly during the George W. Bush administration.
Bush II in particular was a big spender. Some of it was war-driven, but he was also profligate domestically. Perhaps most importantly, given the salience of housing to the 2008-2009 financial crisis which inflicted the most grievous blow to belief in the efficacy and efficiency of markets since the Great Depression, was that the Bush administration perpetuated the bias towards investment in housing exemplified by Fannie and Freddie. A truly market-oriented administration would have terminated Fannie and Freddie with extreme prejudice, but it grew apace during the Bush II administration. When combined with an expansive Fed and a flawed banking regulatory framework, the groundwork for a disaster was in place.
In many respects, this is similar to what happened during and after the Great Depression. That event was widely viewed as a failure of capitalism and the market system, when it was actually the result of a combination of bad Fed policy and a dysfunctional banking system that was the result of a political bargain that resulted in the proliferation of small unit banks that could not withstand a broad shock: see Friedman and Schwartz for an analysis of the former, and Calomiris and Haber for an examination of the latter. The banking system that collapsed in the 1930s was a political artifact, and would have not developed the way that it did in the absence of a regulatory framework that was tailored to benefit very specific political constituencies.
The strong bias towards housing investment in the United States in the 1990s-2000s was also the result of a political bargain: alas, the same is true today, even despite the crisis. This political bargain was based on a coalition of politically connected firms (Fannie, Freddie, major banks, and construction) and populists. This bargain created incentives that led market participants to invest excessively in housing. When this came a cropper, the blame attached to those market participants who responded to incentives, rather than the political agents and political process that created those incentives.
In DC, Republicans talked a pro-market, small-government game, but did not govern that way. Republicans in Congress liked living a comfortable life in DC. They did not have a stomach for fighting the battle that a true pro-market, small government policy would have caused. They liked the sinecures of power too much to risk them, knowing in particular that pursuing such policies would unleash a storm of media criticism and make them unpopular with the bureaucrats and lobbyists who infest the place. So they made a few symbolic gestures, and spouted pro-free market, small government rhetoric, but really did nothing. The continued existence, let alone the growth, of Fannie and Freddie is testament to that.
When the storm hit in 2008, this came back to haunt them. More importantly, it came back to haunt the cause of free markets and smaller government. Since those giving lip service to those ideals were in charge when the storm hit, it was easy to blame the ideals, even though those spouting the rhetoric had done virtually nothing to advance them. Indeed, they had perpetuated, and in fact exacerbated, the market distortion that was the ultimate cause of the crisis. This presented a perfect opportunity for those in politics (the Democratic Party) and the media (an appendage of the Democratic Party) to attack the ideals that they despised. It would have been better had the Republicans not pretended to be pro-market, as at least that would have limited some of the damage to popular beliefs and opinions about markets.
There are at least a couple of reasons for the Republican reluctance actually to fight the statist DC consensus, despite their rhetorical embrace of that fight.
One is the scars left by the struggles over the government shutdown in 1995-1996, and the impeachment battle that followed. Both fights were a distraction, and what’s worse, the Republicans handled both badly. They took a horrible beating in the media and elections–rightly so, in retrospect–and it got their minds right. The 1994 insurgents were supplanted by time servers and apparatchiks. Hasterts and Boehners and McConnells, and other assorted boneless wonders you’ve never even heard of. They were masters at the Kabuki performance of pretending to be pro-market and pro-smaller government, but really doing nothing to stem the tide.
The second reason is more fundamental, but in a way can explain the first. Politicians respond to incentives too. A good model for them is a pigeon in a Skinner Box. They soon learn to push the lever that results in the magical appearance of a food pellet, and not to push the lever that doesn’t.
Organized constituencies provide the food pellets in DC. There is no organized constituency for freer markets or substantially smaller government. There are constituencies for particular businesses and industries, and for government largesse. The benefits of free markets and smaller government are large, but diffuse. As Olson and Stigler and Becker and others showed long ago, diffuse and unorganized beneficiaries have little incentive or ability to influence policy. In contrast, particular businesses and industries do. Thus, careerist politicians intent on re-election and a comfortable life have little incentive to pursue market-oriented policies, but instead pursue policies that favor particular constituencies, including business constituencies.
Which means that even though many Republicans talk/talked about being pro-market, they are/were at most really pro-business. And there is a difference. A huge difference, as Adam Smith pointed out centuries ago, and Friedman repeated often decades ago. But that difference is not well-understood, which means that failures that occur when Republicans are in power tend to get blamed on the market system, or capitalism.
The S&L crisis of almost 30 years ago provides a good example. The S&L industry was the creation of law and regulation resulting from a political bargain: again see Calomiris and Haber. Inflation devastated the industry, and in response it called for elimination of restrictions on how S&Ls could invest. This was done in the name of deregulation and freeing markets, but the most important government interventions were left in place. In particular, deposit insurance remained, and government regulators refused to shut down insolvent thrifts. The mixture of freeing up the asset side of the balance sheet when (a) liabilities were insured, and (b) S&Ls had no equity, was toxic in the extreme. With insured liabilities and no equity, S&Ls had a tremendous incentive to add risk, and the deregulation of the asset side of the balance sheet gave them the ability to do so. They took on said risk, it ended badly, and taxpayers were on the hook for $200 billion or so as a result. Real money back then!
Was this a failure of deregulation, and a damning verdict on markets? I would say no: the fraught condition of the S&Ls was the product of previous government regulation and policy, and the perverse incentive to take on risk was inherent in another policy—deposit insurance. An organized political constituency (S&L operators) influenced Congress to loosen some regulations that made the perverse effects of the other regulations and policies even more acute.
In other words: they wanted to deregulate in the worst way, and they did. They did so because the deregulation was designed to benefit particular businesses, not to create a free market in banking. Pace the theory of the second best, elimination of something (restrictions on S&L investment) that would be an imperfection in the absence of other imperfections made things far worse when other imperfections (deposit insurance, forbearing regulators) remained in place.
But the narrative that came out of the S&L debacle was one of market failure, not government failure. Deregulation and markets took the blame, when what had really happened is that politicians responding to incentives (the importuning of an organized constituency) changed the laws in ways that created perverse incentives for business, and ultimately all this perversity begot something wretched indeed. The crisis was played out on Main Street, but its origins lay squarely on Pennsylvania Avenue.
The takeaway from all this is rather depressing. It means there is an inherent political bias against pro-market policies because markets, and the beneficiaries of markets, do not form an organized political force. The difficulty of voters to distinguish pro-business policies from pro-market rhetoric often used to advance them means that economic crises (the Great Depression, the S&L collapse, the 2008 Crisis) that are strongly rooted in government failure are blamed on markets instead, which perversely results in even more government intervention.
So this is why Republicans damage the cause of free markets and small government. They spout pro-market and small government rhetoric, but for reasons of political economy, really do little that actually advances free markets or reduce the size of government. But when some government policy creates incentives that lead to a bad market outcome, their rhetoric boomerangs on markets, not government.
The post-crisis years have been a period of slow growth and economic sclerosis. This is largely attributable to the explosion of regulation that has taken place since 2009. The narrative that helped spark this explosion is that markets failed. Alas, Republicans did much to advance that narrative, albeit inadvertently. But advance it they did, and the malign effects will be felt for decades to come.
In brief, Republican politicians may be subjectively pro-market and pro-capitalism, but objectively they have done grievous harm to markets and capitalism.