History of American Political Economy

1. History of American Political Economy • Markets need government to maintain order, enforce contracts, create currency, provide other public goods • Require protective, facilitating political order • “Invisible hand” of market requires “visible hand” of state • 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.) • 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 • In U.S., business successful in limiting government’s ability to influence behavior of private firms, shaping institutions involved in intervention, and influencing policies • Under popular pressure, state policy has sometimes diverged from business interests • Pendulum swings over time • More expansive role for government during 1930s (New Deal) – 1970s • Reagan revolution (1980s-2000s) power shifted to market forces • Present = massive government action to bailout private financial sector (2007-)

2. Competitive Capitalism • First expansionary phase (starting in 1840s) driven by revolution in transportation (roadways, canals, railroads) • Classic era of competitive capitalism = small firms competed in local markets • Federal government’s role limited (tariff policy, banking and monetary policy, public land management, collecting taxes, maintaining order) • State governments actively involved in shaping pre-Civil War political economy • Some built and operated railroads; others invested heavily in private railroads • Regulated railroads through charters, commissions, rates • Downturn (1873) initiated wave of business consolidations and emergence of large corporations seeking to dominate markets • Working people forced to accept wages and prices = prompted emergence of organized political movements • Farmers Alliance and the Grange wanted fairer rates from railroads; joined Populist Party • Railway workers struck to protest wage cuts, mobilized Great Uprising (1877) • Disparate movements opposed growth or large corporations and dominance of markets at expense of farmers, workers, and consumers • United with belief in equality, sense that labor created wealth, big business had captured political power, and majority could tame corrupting influence of capital • 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 self-sufficiency)

3. Rise of Corporate Capitalism • Progressive era (1900-1916) marked profound change in American political economy • Rise of large corporations with power to dominate markets and exploit consumers, farmers, and workers generated demands for government action • Under popular pressure, federal government assumed increasing responsibility for regulating business activity (although limited to preventing unfair business practices) • World War I (1917-1919) government intervention increased substantially • Formed tripartite committees (business, labor, and government) to develop policy to coordinate production for war • Quickly disbanded at business insistence with end of war • 1920s witnessed a boom marked by increasing inequality in income and wealth • “Roaring Twenties” ended with market crash (1929) • Great Depression produced increasing unemployment, wage cuts, increasing strain on government relief • Depth and persistence of Depression undermined faith in capitalism, business, and government • Demand for large-scale change increased • Farmers struck, workers organized unions and conducted strikes

4. A New Deal • FDR (elected in 1932) promised New Deal = government end depression, provide relief, and manage economy to restore growth • With WWII, FDR administration shifted from promoting growth through greater state intervention to increased consumption • New economic paradigm based on Keynesianism = depression caused by inadequate consumer demand • “Vicious cycle” -- mass unemployment reduced demand for goods • Government could run budget deficit to increase money in circulation and increase demand • Government spending in times of slack demand promotes “virtuous cycle” of growth • Business preferred this to more radical proposals (e.g., redistributing power between government and business, structural reforms and government planning) • Welfare state offered citizens protection from swings of business cycle • 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

5. Conservative New Deal • No push to nationalize basic industries (as occurred throughout Europe) • Keynes argued full employment necessary to increase aggregate demand • Conservatives opposed Truman’s Full Employment Act (1945) • Keynes believed redistribution of income necessary • Welfare spending lower and less redistributive than in Europe • Deficits in U.S. (under Democrats and Republicans) driven by cutting taxes rather than increasing government spending • Demand stimulated through private consumption rather than promoting public goods • Government spending increases geared toward military rather than welfare state spending • Conservative form of Keynesianism (new economic orthodoxy after war accepted by Democrats and Republicans) • Symbolic commitment to full employment • Economic stimulation through military spending (not redistribution) • Deficit spending through tax cuts not public investment

6. Rise and Fall of Golden Age • 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 • Informal national bargain between business and government • Strategic decisions governing American economy would be made by corporate capital • Government would not intrude on corporate decision making or engage in economic planning • 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 abroad) • By 1970s, economy began to experience stagflation (unemployment and inflation simultaneously) • Slower productivity growth squeezed profits • Workers asked to work more for less • Businesses threatened plant closures unless collective bargaining was weakened and engaged in union busting • Conservative Keynesianism collapsed in 1970s • Unemployment, inflation, lower productivity growth, rising trade deficits

7. Rise of Extreme Market Capitalism • Extreme market capitalism = markets are rational, self-correcting, and beneficial • Prices set by markets reflect actual value of goods and assets (rational) • Business cycle tamed, government regulation unnecessary (self-correcting) • Leaving markets alone to work their magic good for society (beneficial) • Election of Reagan (1980) = shift from conservative Keynesianism to Extreme Market Capitalism • Prosperity no longer dependent on welfare of workers whose wages propelled aggregate demand • Supply side economics = prosperity depends on welfare of affluent whose savings supplied capital for investment • Economy suffered from insufficient investment capital (not insufficient demand) • 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) • Tax cuts rewarded the wealthy (Republican base) and bound them to the party; imposed fiscal restraints on government (reduced government revenues and spending) • Republicans adopted policy of deregulation • Environmental standards, consumer protections need to be rolled back if business is to be competitive in global marketplace • Cut regulatory agencies’ budgets, reduced their effectiveness

8. Effects of Extreme Market Capitalism • Large budget deficits due not to increased federal spending but tax cuts (declining revenues) • Growing inequality (see Table 3.1) • The biggest losers under the democratic party program of conservative Keynesianism had become the biggest winners under the Republican program of extreme market capitalism • Tax cuts for the rich, spending cuts for the poor • Unions were in decline, and wages and living standards for working class people stagnated • Wealth created by increasing productivity captured by corporations in form of increasing profits, not rising wages • Shift in basis of economy from industrial capitalism to finance capitalism • Banks “too big to fail” and politicians reluctant to challenge policy preferences of financial industry • Financial sector has extraordinary influence over policy that creates new profits for banks but increases risk, debt, and instability for economy • Debt-fueled consumption has contributed to rising balance of trade deficits

9. Crisis of Extreme Market Capitalism • The Great Recession (2007-present) • Collapse of housing market in 2007, stock market tumble • $12 trillion of wealth evaporated • 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 • Then the housing bubble burst • Investors became skeptical of housing values • Prices began to fall, more houses put up for sale, many foreclosed, continue to fall • Highly leveraged banks had debts far exceeding their assets • Banks were collapsing, and commerce ground to halt • Crisis in housing threatened entire economy • Government stepped in to bail out the banks, passed stimulus bill to ward off recession, guarantee loans, reorganize auto industry

10. A New Foundation (?) • Extreme market capitalism discredited • Markets do not behave rationally (subject to emotion and unwarranted outbreaks of confidence leading to speculative bubbles) • Markets are not self-correcting (government regulation necessary to prevent firms from acting badly and in ways safe for them and the public) • Leaving decisions to market does not always lead to best results for society • Contributes to instability and inequality • Volatility creates insecurity and demoralizes people’s ability to plan • Inequality undermines social cohesion and corrupts democracy • President Obama (2008- ), rescued failing banks but minimized government influence • 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 • Regulatory proposals weak • Have not broken up banks “too big to fail”; now bigger than before • Have not regulated derivatives market • Have not protected taxpayers from excessive risk taking • Aggressive fiscal policy • Using federal budget to stimulate economy; deficit spending • Federal spending increased toward economic recovery (stimulus, jobs bill), social welfare programs, and defense • 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 • 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