History of American Political Economy

History of American Political Economy
0 Markets need government to maintain order, enforce contracts, create
currency, provide other public goods
0 Require protective, facilitating political order
0 “Invisible hand” of market requires “visible hand” of state
0 While less extensive, government deeply implicated in U.S. economy
from start (e.g., commercial code, legal framework, common currency,
military and police, roads and bridges, social services, etc.)
0 In U.S. (and elsewhere), tension between capitalism (economic system
of profits for few) and democracy (political system of democratic rights
for many) depends on outcome of political struggles
0 In U.S., business successful in limiting government’s ability to influence
behavior of private firms, shaping institutions involved in intervention, and
influencing policies
0 Under popular pressure, state policy has sometimes diverged from business
0 Pendulum swings over time
0 More expansive role for government during 1930s (New Deal) – 1970s
0 Reagan revolution (1980s-2000s) power shifted to market forces
0 Present = massive government action to bailout private financial sector
Competitive Capitalism
0 First expansionary phase (starting in 1840s) driven by revolution in
transportation (roadways, canals, railroads)
0 Classic era of competitive capitalism = small firms competed in local markets
0 Federal government’s role limited (tariff policy, banking and monetary policy,
public land management, collecting taxes, maintaining order)
0 State governments actively involved in shaping pre-Civil War political economy
0 Some built and operated railroads; others invested heavily in private railroads
0 Regulated railroads through charters, commissions, rates
0 Downturn (1873) initiated wave of business consolidations and emergence
of large corporations seeking to dominate markets
0 Working people forced to accept wages and prices = prompted emergence of
organized political movements
0 Farmers Alliance and the Grange wanted fairer rates from railroads; joined Populist
0 Railway workers struck to protest wage cuts, mobilized Great Uprising (1877)
0 Disparate movements opposed growth or large corporations and dominance
of markets at expense of farmers, workers, and consumers
0 United with belief in equality, sense that labor created wealth, big business had
captured political power, and majority could tame corrupting influence of capital
0 Left local heritage of radicalism; political program basis of later Progressive
reforms; created alternative to dominant culture of competitive individualism
(based on dignity of labor, benefits of rough equality, value of solidarity, virtues of
Rise of Corporate Capitalism
0 Progressive era (1900-1916) marked profound change in American
political economy
0 Rise of large corporations with power to dominate markets and exploit
consumers, farmers, and workers generated demands for government
0 Under popular pressure, federal government assumed increasing
responsibility for regulating business activity (although limited to
preventing unfair business practices)
0 World War I (1917-1919) government intervention increased
0 Formed tripartite committees (business, labor, and government) to
develop policy to coordinate production for war
0 Quickly disbanded at business insistence with end of war
0 1920s witnessed a boom marked by increasing inequality in income
and wealth
0 “Roaring Twenties” ended with market crash (1929)
0 Great Depression produced increasing unemployment, wage cuts,
increasing strain on government relief
0 Depth and persistence of Depression undermined faith in capitalism,
business, and government
0 Demand for large-scale change increased
0 Farmers struck, workers organized unions and conducted strikes
A New Deal
0 FDR (elected in 1932) promised New Deal = government end
depression, provide relief, and manage economy to restore growth
0 With WWII, FDR administration shifted from promoting growth through
greater state intervention to increased consumption
0 New economic paradigm based on Keynesianism = depression
caused by inadequate consumer demand
0 “Vicious cycle” -- mass unemployment reduced demand for goods
0 Government could run budget deficit to increase money in circulation
and increase demand
0 Government spending in times of slack demand promotes “virtuous
cycle” of growth
0 Business preferred this to more radical proposals (e.g.,
redistributing power between government and business, structural
reforms and government planning)
0 Welfare state offered citizens protection from swings of business
Unemployment insurance, social security created safety net
Labor market regulated to outlaw child labor and impose minimum wage
Labor unions grew increasing worker power relative to management
Federal expenditures increased as did number of federal employees
Conservative New Deal
0 No push to nationalize basic industries (as occurred throughout
0 Keynes argued full employment necessary to increase aggregate
0 Conservatives opposed Truman’s Full Employment Act (1945)
0 Keynes believed redistribution of income necessary
0 Welfare spending lower and less redistributive than in Europe
0 Deficits in U.S. (under Democrats and Republicans) driven by
cutting taxes rather than increasing government spending
0 Demand stimulated through private consumption rather than
promoting public goods
0 Government spending increases geared toward military rather
than welfare state spending
0 Conservative form of Keynesianism (new economic orthodoxy
after war accepted by Democrats and Republicans)
0 Symbolic commitment to full employment
0 Economic stimulation through military spending (not
0 Deficit spending through tax cuts not public investment
Rise and Fall of Golden Age
0 Golden age of capitalism (1950s-1970s)
Pent-up consumer demand fueled postwar economy
Businesses expanded capacity and invested in new plants and equipment
Labor relations improved following 1946 strike wave
Government spending climbed steadily
Emergence of U.S. global dominance
0 Informal national bargain between business and government
0 Strategic decisions governing American economy would be made by corporate
0 Government would not intrude on corporate decision making or engage in
economic planning
0 Government would create environment to encourage corporate investment and
job creation (by smoothing out business cycle, educating workers, stimulating
consumption, funding research, protecting corporate markets and investments
0 By 1970s, economy began to experience stagflation (unemployment and
inflation simultaneously)
0 Slower productivity growth squeezed profits
0 Workers asked to work more for less
0 Businesses threatened plant closures unless collective bargaining was weakened
and engaged in union busting
0 Conservative Keynesianism collapsed in 1970s
0 Unemployment, inflation, lower productivity growth, rising trade deficits
Rise of Extreme Market Capitalism
0 Extreme market capitalism = markets are rational, self-correcting, and
0 Prices set by markets reflect actual value of goods and assets (rational)
0 Business cycle tamed, government regulation unnecessary (self-correcting)
0 Leaving markets alone to work their magic good for society (beneficial)
0 Election of Reagan (1980) = shift from conservative Keynesianism to
Extreme Market Capitalism
0 Prosperity no longer dependent on welfare of workers whose wages propelled
aggregate demand
0 Supply side economics = prosperity depends on welfare of affluent whose
savings supplied capital for investment
0 Economy suffered from insufficient investment capital (not insufficient demand)
0 Boost investment capital through tax cuts, especially for the rich who are more
likely to save and invest (Reagan introduced massive tax cuts; as did Bush)
0 Tax cuts rewarded the wealthy (Republican base) and bound them to the party;
imposed fiscal restraints on government (reduced government revenues and
0 Republicans adopted policy of deregulation
0 Environmental standards, consumer protections need to be rolled back if business
is to be competitive in global marketplace
0 Cut regulatory agencies’ budgets, reduced their effectiveness
Effects of Extreme Market Capitalism
0 Large budget deficits due not to increased federal spending but
tax cuts (declining revenues)
0 Growing inequality (see Table 3.1)
0 The biggest losers under the democratic party program of
conservative Keynesianism had become the biggest winners
under the Republican program of extreme market capitalism
0 Tax cuts for the rich, spending cuts for the poor
0 Unions were in decline, and wages and living standards for
working class people stagnated
0 Wealth created by increasing productivity captured by
corporations in form of increasing profits, not rising wages
0 Shift in basis of economy from industrial capitalism to finance
0 Banks “too big to fail” and politicians reluctant to challenge policy
preferences of financial industry
0 Financial sector has extraordinary influence over policy that
creates new profits for banks but increases risk, debt, and
instability for economy
0 Debt-fueled consumption has contributed to rising balance of
trade deficits
Crisis of Extreme Market Capitalism
0 The Great Recession (2007-present)
0 Collapse of housing market in 2007, stock market tumble
0 $12 trillion of wealth evaporated
0 Driven by housing bubble
Low interest rates set by Federal Reserve Board
Banks gave out loans to generate fees and interest
Lowered lending standards; subprime lending increased dramatically
Banks bundled loans and sold them as securities
Securities bought and sold with AAA ratings
0 Then the housing bubble burst
0 Investors became skeptical of housing values
0 Prices began to fall, more houses put up for sale, many foreclosed,
continue to fall
0 Highly leveraged banks had debts far exceeding their assets
0 Banks were collapsing, and commerce ground to halt
0 Crisis in housing threatened entire economy
0 Government stepped in to bail out the banks, passed stimulus bill to
ward off recession, guarantee loans, reorganize auto industry
A New Foundation (?)
0 Extreme market capitalism discredited
0 Markets do not behave rationally (subject to emotion and unwarranted outbreaks of
confidence leading to speculative bubbles)
0 Markets are not self-correcting (government regulation necessary to prevent firms from
acting badly and in ways safe for them and the public)
0 Leaving decisions to market does not always lead to best results for society
0 Contributes to instability and inequality
0 Volatility creates insecurity and demoralizes people’s ability to plan
0 Inequality undermines social cohesion and corrupts democracy
0 President Obama (2008- ), rescued failing banks but minimized government influence
0 Banks have increased checking account charges and credit card fees; continue to lavishly
compensate executives; little difference between Fed’s efforts to stabilize financial
system and interests of banks
0 Regulatory proposals weak
0 Have not broken up banks “too big to fail”; now bigger than before
0 Have not regulated derivatives market
0 Have not protected taxpayers from excessive risk taking
0 Aggressive fiscal policy
0 Using federal budget to stimulate economy; deficit spending
0 Federal spending increased toward economic recovery (stimulus, jobs bill), social
welfare programs, and defense
0 Unclear whether government will be used to restore and stabilize economy or push
beyond to include a “social democratic surplus” that redistributes power and rewards
to those at the bottom
0 Depends on political struggle: politics of power will determine who benefits and where
new frontier of public power of government and private power of capital is set

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