History of American Political Economy

0Markets need government to maintain order, enforce contracts, create currency, provide other public goods0Government deeply implicated in economy

0Tension between capitalism (economic system of profits for few) and democracy (political system of democratic rights for many) depends on outcome of political struggles0More expansive role during 1930s (New Deal) –

1970s0Reagan revolution (1980s-2000s) power shift to

market0Present = massive government action to bailout

private financial sector (2007-)

Competitive Capitalism0Expansionary phase (1840s) revolution in

transportation (roadways, canals, railroads)0Era of competitive capitalism = small firms

competed in local markets0 Federal government’s role limited; state governments

more active0Downturn (1870s) initiated emergence of large

corporations and organized political movements (e.g., farmers, workers) opposed to market dominance by corporations0 Believed in equality; labor created wealth; big business

captured political power; majority could tame corrupting influence of capital

0 Radicalism basis of later Progressive reforms

Rise of Corporate Capitalism0Progressive era (1900-1916) marked profound

change0 Rise of large corporations demands for government action0 Federal government assumed increasing responsibility for

regulating business activity

0World War I (1917-1919) government intervention0 Tripartite committees (business, labor, and government)

coordinated production; disbanded at business insistence

0Boom (1920s) marked by increasing inequality0 “Roaring Twenties” ended with market crash (1929)

0 Great Depression increasing unemployment, wage cuts, strain on government relief; undermined faith in capitalism, business, and government; demands for change

A New Deal0 FDR (1932) promised New Deal = end depression, provide

relief, manage economy/restore growth0 Keynesianism = depression caused by inadequate

consumer demand0 Government should run budget deficits to increase money in

circulation and increase demand0 Preferred by business to more radical proposals

0 Welfare state offers citizens protection from swings of business cycle0 Unemployment insurance, social security creates safety net0 Labor market regulated to outlaw child labor, impose minimum

wage0 Labor unions grew increasing worker power relative to

management0 Federal expenditures and number of federal employees

increased

Conservative New Deal0 No push to nationalize industries0 (Keynes) Full employment necessary to increase demand

0 Conservatives opposed Truman’s Full Employment Act (1945)0 (Keynes) Redistribution of income necessary

0 Welfare spending lower, less redistributive0 Deficits driven by cutting taxes rather than increasing

government spending0 Demand stimulated through private consumption rather than

promoting public goods0 Government spending increases geared toward military rather

than welfare state spending0 Conservative Keynesianism

0 Symbolic commitment to full employment0 Economic stimulation through military spending (not

redistribution)0 Deficit spending through tax cuts not public investment

Rise and Fall of Golden Age0Golden Age of Capitalism (1950s-1970s)

0 Consumer demand soared; businesses expanded; labor relations improved; government spending climbed; emergence of global dominance

0 Bargain between business and government strategic decisions left to corporate capital; government encourage corporate investment and job creation

0 (1970s) Stagflation (unemployment and inflation)0 Slower productivity growth squeezed profits0 Workers asked to work more for less0 Businesses engaged in union busting

0Conservative Keynesianism collapsed (1970s)0 Unemployment, inflation, lower productivity growth,

rising trade deficits

Rise of Extreme Market Capitalism0 Extreme market capitalism = markets rational, self-

correcting, beneficial0 Reagan (1980) = Conservative Keynesianism Extreme

Market Capitalism0 Prosperity no longer dependent on welfare of workers whose

wages drove demand0 Supply side economics = prosperity depends on welfare of

affluent whose savings supply capital for investment0 Insufficient investment capital (not insufficient demand)0 Boost investment capital through tax cuts, especially for rich0 Tax cuts reward wealthy, bind them to the party; impose fiscal

restraint on government0 Policy of Deregulation

0 Environmental standards, consumer protections rolled back in name of global competitiveness

0 Cut regulatory agencies’ budgets, reduce effectiveness

Effects of Extreme Market Capitalism0 Large budget deficits due to tax cuts0 Growing inequality (see Table 3.1)

0 Biggest losers under Conservative Keynesianism biggest winners under Republican Extreme Market Capitalism

0 Tax cuts for rich, spending cuts for poor0 Unions in decline, wages/living standards for working class

stagnated0 Wealth created by increasing productivity captured by

corporations in form of increasing profits, not rising wages0 Shift from industrial capitalism to finance capitalism

0 Banks “too big to fail,” politicians reluctant to challenge financial industry

0 Financial sector = influence over policy creating new profits for banks but increasing risk, debt, and instability

0 Debt-fueled consumption contributes to trade deficits

Crisis of Extreme Market Capitalism0 Great Recession (2007-present)

0 Driven by Housing Bubble0 Low interest rates set by Federal Reserve Board0Banks gave out loans to generate fees and interest0 Lowered lending standards; subprime lending increased0Banks bundled loans and sold them as securities0 Securities bought and sold with AAA ratings

0 Housing bubble burst0 Investors became skeptical of housing values0 Prices began to fall, more houses put up for sale, many foreclosed0Highly leveraged banks with debts exceeding assets0Banks collapsing, commerce ground to halt0 Crisis in housing threatened entire economy

0 Government stepped in to bail out banks; passed stimulus bill to ward off recession, guarantee loans, reorganize auto industry

A New Foundation (?)0 Extreme market capitalism discredited

0 Markets not rational, self-correcting, nor beneficial0 President Obama (2008- ), rescued failing banks but minimized

government influence0 Regulatory proposals weak

0 Banks “too big to fail” not broken up; derivatives go unregulated; taxpayers not protected from excessive risk taking

0 Aggressive fiscal policy0 Used federal budget to stimulate economy; deficit spending0 Federal spending increased toward economic recovery (stimulus,

jobs bill), social welfare programs, and defense0 Unclear whether government will be used to restore and stabilize

economy or push beyond to include “social democratic surplus” that redistributes power and rewards to those at the bottom0 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