Chapter Six—Political Economy

Learning Objectives

 

After reading and studying this chapter, students should be able to:

Analyze the tensions between liberalism and democracy in the American political economy.

Outline the development of the liberal economy from the founding debates between Hamilton and Jefferson to the 21st century.

Describe the impact of laissez-faire, the corporation, populism, progressivism, and the New Deal on the liberal political economy.

Analyze the impact of cartels and the labor union movement on the American economy.

Define the role and activities of institutions such as the Federal Reserve Board, the Federal Trade Commission, the Securities and Exchange Commission, the National Labor Relations Board, and the Council of Economic Advisors.

Analyze the impact of Keynesianism and the deficit on American politics from the 1970’s through the 1990’s.

Understand the role of “rights” in the American political economy.

Describe the influence of inflation, unemployment, stagnation, and welfare in American political development.

Chapter Summary

The American political economy springs from the words of the Declaration of Independence that outlines an individual’s right to the “pursuit of happiness.”  It also rests on a foundation of Hamiltonian principles and Jeffersonian unease.  Hamilton viewed the United States as a potential industrial power and advocated measures such as repayment of debt, a National Bank, high tariffs on imports, and governmental expenditures to encourage economic growth, to achieve the manufacturing economy he envisioned.  Jefferson opposed Hamilton with a democratic defense of the agrarian democratic spirit he espoused.   This opposition became the basis of Andrew Jackson’s attacks on economic privilege and any government intrusion into the economy, which he believed benefited only the wealthy.  Still, the early years of the American economy rested on liberalism’s defense of the private property, competition, and promise keeping.  But like liberalism itself, the liberal economy also had to accommodate democratic and religious principles that were often opposed to the structure of the liberal economy.

The history of the political economy in the nineteenth century was the debate between laissez faire principles and government intervention.  Jackson set an early tone by vetoing the Second National Bank and reducing government expenditures.  The Civil War, with its increase in demand for goods, and the Republican defense of government intervention resurrected Hamiltonian principles.  And the slavery controversy and the incomplete nature of rights for former slaves represented the dark side of the liberal political economy.  The laissez faire principles that were the offspring of Darwin’s theory of evolution and which had their greatest impact in the rise of the modern corporation was dominant in the postwar era but its prominence was fleeting.

Union agitation and political unrest in the form of the populist movement began to redirect the American political economy.  The Sherman Anti Trust Act, though liberal in its policy direction, began a process of government oversight of the market economy.  As the leader of the populist movement, William Jennings Bryan’s use of Christian rhetoric to attack laissez faire principles highlights the uneasy coexistence of liberal and religious principles.

Populism failed to fundamentally change the nature of the political economy but it was the beginning of a grand movement to resurrect governmental intervention in the economy.  Progressives build on populism and achieved important institutional changes, such as the creation of the Food and Drug Administration and the Federal Reserve Board, the importance of which would be truly realized later in the twentieth century as it took the lead in combating inflation and controlling the money supply. 

The New Deal was the zenith of government intervention, going so far as to attempt to replace competition with government planning of the economy.  Franklin Roosevelt’s reforms launched the modern labor movement and encouraged the cartelization of the American economy.  Emerging from the Great Depression and World War II, Americans enjoyed an unprecedented level of prosperity and also an unprecedented level of government intrusion in the market economy for the purpose of providing economic security as a right of citizenship.

The New Deal model of government intervention would come into direct conflict with the economic turmoil of the 1970’s that would again raise the issue of laissez-faire, in the form of deregulation, a decrease in federal expenditures, and a reduction in tax rates.  High unemployment, stagnation, and inflation did not end all government attempts to intervene in the economy, as Congress, worried about market failures, passed the National Environmental Protection act that further regulated the market. 

But the deficits of the 1980s and 1990s did bring an end to major governmental programs to intervene in the economy.  Indeed, the most significant policy development in the modern era was the extension of the free trade through the North American Free Trade Agreement and the General Agreement on Trade and Tariffs.  Economic policy in the 1990s differed markedly from earlier eras, such as the Civil War and World War II, when protectionist policies prevailed.  Still, free trade consideration do often take a back seat to political necessity and the protection of workers.  This was best illustrated by the decision of President George W. Bush in 2002 to impose tariffs of up to 30% on imported steel.

The American political economy in the 21st century still rests on its liberal foundations with private markets the preferred mechanism for providing goods and services.  Though economic security has blunted some of the side effects of the market, the goal of the American economy remains the commitment to the pursuit of happiness.

Major Concepts

Bonds
Homestead Act of 1862
Share-cropping
Laissez faire
Limited liability
Price discrimination
Economies of scale
Sherman Anti-Trust Act
American Federation of Labor (AFL)
Carter Glass
Discount rate
Open market operations
Federal Reserve Board (the Fed)
Food and Drug Administration (FDA)
Federal Trade Commission (FTC)
National Recovery Administration (NRA)
John L. Lewis
United Steel Workers of America (USWA)
United Automobile Workers (UAW)
Industrial Unions
Congress of Industrial Organization (CIO)
Robert Wagner
National Labor Relations Board (NLRB)
Agricultural Adjustment Act (AAA)
Robinson-Patman Act
Federal Deposit Insurance
Progressive taxation
John Maynard Keynes
Macroeconomics
Microeconomics
Deficit spending
Full Employment Act
Council of Economic Advisors
Inflation
Tax expenditures
Medicare
“Bracket creep”
Market failure
Negative externalities
Stagflation
Organization of Oil Producing Nations (OPEC)
National Environmental Protection Act (NEPA)
North American Free Trade Agreement (NAFTA)

Lecture Outline
This chapter begins with the contemporary debates surrounding the expansion of the Walmart chain.  The debate over the impact of Walmart on the political economy illustrates the tensions that arise between liberalism and its emphasis on economic freedom and democracy, with its commitment to localism and political solidarity.

I. Creating Economic Liberalism
Jefferson’s phrase, “the pursuit of happiness” reflects the essential character of the American liberal economy: it emphasizes private property, competition, and promise keeping.  But liberalism in economic matters has had to confront the other principles of the American creed, democracy and religion.  As the development of the American economy illustrates, liberalism, democracy, and religion in economic life do not always coexist harmoniously.

A. The Constitution and the Liberal Economy
The Constitution provides the underpinnings of the liberal economy by giving the federal government authority over interstate and foreign commerce and protecting individual rights to property against arbitrary governmental intrusion.

B. Debtors and Creditors
Alexander Hamilton, the first Secretary of the Treasury, proposed to pay in full those who held bonds used to finance the Revolutionary War.    Many of the bondholders sold their original bonds to speculators.  Jefferson and Madison opposed Hamilton’s plan as a benefit to the wealthy who could afford not to have sold their original bonds.

C. The Case for Government Intervention
Hamilton was an early economic liberal and unlike the democratic defense of agriculture and the virtuous farmer, he stressed manufacturing as the key to the economic health of the young nation.  In order to promote the manufacturing sector, Hamilton proposed a National Bank and high tariffs.  He defended his proposals as “necessary and proper” activities of the federal government whereas Jefferson opposed Hamilton’s schemes as  unconstitutional and titled toward those who were wealthy.  Still, Jefferson did reluctantly agree that the national security considerations of the United States did require it to industrialize.

D. The Attack on Economic Privilege
The later attacks by Andrew Jackson on the National Bank underscore the tensions between liberalism and democracy.  Jackson’s opposition was rooted in the liberal principle of equal opportunity and a bank primarily benefited those who could invest.

E. The Democratic Defense of Manufacturing
Supporters of Hamilton’s bank eventually formed the Whig Party.  The Whigs maintained that democratic principles were not threatened by government intervention in the economy.  Whigs promoted the Hamiltonian principles of manufacturing and government intervention but moderated the message by removing its elitist aspects.

II. The Economic Impact of the Civil War
Abraham Lincoln built on the Whig defense of free labor but attached it to the principle to the abolition of slavery.  This commitment and the military exigencies of the Civil War turned the Union into an economic powerhouse.

A. Economic Stimulus
During the Civil War, Congress followed the Hamiltonian prescription for governmental intervention in the economy.  The Homestead Act of 1862 encouraged the ownership of private property and high tariffs increased the resurgent manufacturing sector of the economy.  The war necessitated the building of weapons, uniforms, and other war related materials that encouraged industrialization.  At the same time, the haste that was required to conduct the war effort encouraged corruption such as profiteering.

B. Fostering Inequality
The war created tremendous economic opportunity but neglected the one demographic group in whose name the war was conducted, former slaves.  The slave system of the south was destroyed but what emerged was a system of sharecropping in which former slaves worked the land of white owners and paid the owners a share of the harvest.  Combined with the Jim Crow laws of the south, African-Americans in the South did not achieve a decent level of economic freedom.  This story of war and freedom and racial exclusion would be repeated in later eras, as Box Four on the plight of African-Americans during World War II makes clear.

III. Laissez Faire and the Attack on Laissez Faire
Sheer exhaustion set in among the American people after the Civil War and it manifested itself in the economic theory of laissez faire.  The idea was that government intervention in the economy would disrupt the natural rhythm of markets, though Congress continued to subsidize railroads and tariff protection for industries.

A. The Creation of Laissez Faire: The Modern Corporation
The modern corporation benefited from laissez faire doctrine.  It was also defended as an advance of democracy as successful corporations would employ more workers and the principle of limited liability allowed ordinary people to invest their income.

B. Trust and Anti-Trust
Others criticized corporations, particularly the railroads which had been engaged in price discrimination, as affronts to democracy.  Their very size and limited liability was a threat to American traditions of democracy and localism.  Much of the public criticism was directed at the large, and largely uncontrollable, trusts, such as Standard Oil. Congress responded to this concern in a liberal fashion by passing the Sherman Anti-Trust Act of 1890.

C. Populism
Democratic reform of the American economy was also the theme of the Populist movement and its key leader, Williams Jennings Bryan.  Opposed to laissez faire and the gold standard, Bryan defended his movement with an emphasis on the Christian virtues of justice, forgiveness, and charity.

D. Organized Labor
The desire to reign in the laissez faire doctrine was also the goal of the labor movement, though the post Civil War movement largely avoided direct involvement in electoral politics.  The American Federation of Labor, and its leader Samuel Gompers, implemented the process of collective bargaining and craft unions as a way to curtail the power of the corporations and to advance the cause of workers’ rights.

E. The Federal Reserve
Because Andrew Jackson vetoed the Second National Bank of the United States in 1832, the United States had no central banking authority until the creation of the Federal Reserve in 1913.  The Reserve Banks were located in twelve U.S. cities and they were allowed to change the discount rate and engage in open market operations.  Thus would monetary policy be shielded from the bank panics that had occurred in the nineteenth century.

IV. Reigning in the Market
Laissez faire as an economic principle continued to fall out of favor in the early twentieth century.  A key part of the Progressive movement was to motivate the federal government to become more strongly involved in the affairs of the market economy.  Progressives greatly influenced the New Deal that would seek to replace the competition of the market with government planning. The first attempt of the New Deal to institute planning was with the National Recovery Administration.  Though it was declared unconstitutional by the Supreme Court, it left two important legacies: 1.  it spawned the modern labor movement and convinced key industries that there were benefits to cooperation. 

A. The Modern Labor Movement
The modern labor movement, far more interested in electoral politics than its predecessor in the nineteenth century, was further aided by the successor to the NRA, the Wagner Act which created the National Labor Relations Board designed to oversee collective bargaining.  The labor movement achieved important power in American politics when the newly created Congress of Industrial Organizations merged with the older American Federation of Labor, creating AFL-CIO.

B. Cartels
The New Deal Convinced key industries to create cartels, which reduced competition and fixed prices.  Coal and oil, aviation, shipping, trucking, and farmers all succeeding in spurring Congress to create cartels in their industry.

V. The New Deal Legacy
The New Deal left in tact the basic framework of the market economy but sought to confine it slightly by providing Americans with a minimum of economic security, by instituting a progressive tax policy, and by manipulating the money supply and levels of taxing and spending.

A. Economic Security
Just as Social Security sought to provide a measure of economic security, so to did the Federal Deposit Insurance which minimizes a person’s risk if a bank fails.

B. Progressive Taxation
Progressive Taxation forces the wealthy to pay a higher share of their income in federal taxes.

C. Macro-economics
The brainchild of economist John Maynard Keynes, macroeconomics is the study of how economies function as a whole.  Keynes advocated deficit spending as the key creating an economic recovery.  The Full Employment Act of 1946 made Keynesianism and official part of government policy.  The New Deal also furthered government involvement in the economy by manipulating the monetary supply by strengthening the power of the Federal Reserve Board Chair.  The Fed Chair and the Federal Reserve Board increased its power by strengthening its independence from the Executive branch in order to fight inflation.

VI. The Political Economy of Prosperity
The United States went through a economic boom from the end of World War II until the late 1960s as the energies unleashed by the war and defense spending during the Cold War contributed to a level or prosperity unheard of in history.

A. The Role of Government
Government aided the prosperity by allowing tax expenditures such as employee pensions, the G.I. Bill, and large increases in government spending due to the creation of the Interstate Highway System and Medicare.

B. Prosperity’s Blind spots: pockets of poverty, environmental damage
Not all Americans shared in the prosperity.  There existed significant “poverty pockets” as described by the author Michael Harrington.  Antipoverty programs that already existed were briefly expanded by the War on Poverty under Lyndon Johnson. 

A side effect to the prosperity of the era was environment degradation, an example of market failure that further spurred congressional intervention in private markets.

VII. Disillusionment with Big Government
The stagnating economy of the 1970s combined with a high rate of inflation was fueled in part by the expense of the Vietnam War as well as the OPEC boycott in 1973.  Government proved ineffectual in dealing with the crises and once again Americans began to question the capacity of the federal government to improve the economy.

A. Deregulation
The crises of the 1970’s led to a rise in a type of laissez faire theory: deregulation.  The trucking, airline, and telephone industries were all deregulated in the hopes that increased competition and less government intrusion in these industries would combat inflation.

B. New Regulation
Inflation led to deregulation of certain industries but higher rates of regulation in others, as Congress responded to continued environmental degradation with the National Environmental Protection Act, which regulated all future governmental projects, such as airports and highways.

C. Are You Better Off?
Because of stagflation, conservative arguments in favor of lower taxes and less government became persuasive in the 1980 election, the greatest symbol of which was Ronald Reagan’s question to the American people, “Are you better off today than you were four years ago?”

D. The Reagan Revolution
Reagan sought to quickly and massively reduce federal taxes and only then did he seek to reduce spending, leading to a massive increase in the federal deficit.  Still, inflation was brought under control and even though unemployment increased, Reagan maintained his credibility with the American people.

VIII. Contemporary Political Economy: Consensus and Conflict
Neither party succeeded in bringing the deficit under control and it took a major third party uprising in 1992 by Texas billionaire Ross Perot to make the issue salient.

A. Deficit Reduction
Though it was not a major part of his electoral strategy, Bill Clinton was forced to reach for a major reduction in the federal deficit and his administration introduced no major spending initiatives.

B. Free Trade
Clinton also furthered the cause of free trade that was not supported by a majority of Democratic members of Congress.  Both the North American Free Trade Agreement and the General Agreement on Trade and Tariffs were enacted during his presidency.

C. Enduring Partisan Politics
The success of the Democratic party in the 1990’s rested largely on Clinton’s defense of economic security, while Republican success was tied to their continued call for a reduction in tax rates.

VIIII. Conclusion- Economic Liberty, Political Freedom, Religious Scruple
Despite the changes to the American economy, it remains liberal.  The greatest change to its liberal underpinnings, the rise of economic security, was designed to complement and not undermine the liberal economy.

Alternate Lecture Topics

Below are suggestions for lectures or lecture topics that will complement the text. In general, these topics assume that students will have read the chapter beforehand.

During the annual budgetary process, Congress and the President usually submit rival budgets with each party claiming the other party’s principles will lead to, at best, an uncertain economic future, or, at worst, a financial calamity.  Use the most recent budget debates as the beginning to a discussion of the impact of the political process on the liberal economy.  Do tax cuts further recession or lead to recovery?  How much can the President or Congress really impact the short term U.S. economy?

Monetary policy is established through the Federal Reserve Board.  During the 1990’s the Fed consistently cut key interest rates, leading many commentators t declare that it, and in particular its Chairman, Alan Greenspan, was responsible for the economic boom of the late 1990s.  Use this argument to discuss the role of institutions and economic conditions.  Do unelected “experts” who are free from the whims and passions of the people better achieve the goal of a strong economy? Should the Federal Reserve continue to set monetary policy or should elected officials take direct control?

Chapter Boxes, Figures and Tables

Box 1- Enduring Issue: The Fragile Underpinning of a Liberal 
Box 2-Contemporary Public Policy A Modern Tax Revolt: Proposition 13
Box 3-Contemporary Public Policy: Subsidizing Steel
Box 4- Civil Rights: War and Freedom
Box 5- Civil Liberties- Unions and Civil Liberties
Box 6- Contemporary Public Policy: Farm Aid
Box 7- Nuts and Bolts –The current Income Tax
Figure 2- Tax Receipts as a percentage of GNP
Table 1- The Web of Economic Policy Making
Table 2- Tax Expenditures vs. Direct Expenditures, 1995
Figure 3- Inflation, Unemployment and Budget Surpluses/Deficits 1970-2000

Suggestions for Course Projects
Encourage students to assess the impact of the federal budget and national economic trends on their states and localities.  Economic statistics for particular areas and cities are published regularly by the Bureau of Labor Statistics in the Department of Labor and their relevant state agencies or the local chamber of commerce will also have pertinent economic statistics available. How do these economic conditions contribute to the political climate of your area?

This chapter has discussed the impact of certain federal institutions on the political economy.  Student can write short papers that further describe the history and functions of institutions such as the Federal Reserve Board, the Department of the Treasury, the Council of Economic Advisors, the Federal Trade Commission, or the Securities and Exchange Commission.  Or, students can write short biographies about the key players in the history of government involvement in the political economy: Samuel Gompers, William Jennings Bryan, John D. Rockefeller, Carter Glass, Mariner Eccles, Robert Wagner, John Maynard Keynes, Michael Harrington, and Alan Greenspan.

How much of the American political economy is dictated by events abroad?  Encourage students to work on in-class presentations that offer an analysis of foreign economic trends that might impact the future of the U.S. economy.  Direct students to study daily English language foreign newspapers and the weekly news magazines online for a certain period of time.  Encourage them to read the testimony of key actors (the Secretary of the Treasury, the Federal Reserve Chair, the U.S. Trade Representative) before congressional committees.   The presentation can take the form of testimony before the class about leading economic indicators abroad and their likely effect on the economy of the United States and why.

Resource List

 

Books

Larry Berman, The Office of Management and Budget and the Presidency, 1921-1797 (Princeton University Press, 1979)

Stephen Breyer, Regulation and its Reform (Harvard University Press, 1982)

William Greider, Secrets of the Temple: How the Federal Reserve Runs the Country (Simon & Schuster, 1987)

Donald E. Kettle, Deficit Politics: Public Budgeting in its Institutional and Historical Context (Macmillan, 1992)

Elizabeth Sanders, The Regulation of Natural Gas (Temple University Press, 1981)

Joel Slemrod and Jon Bakiga, Taxing Ourselves Second Edition (MIT Press, 2000)

Aaron Wildavksy and Naomi Caiden, The New Politics of the Budgetary Process Fourth Edition (Addison Wesley, 200)

Bob Woodward, Maestro: Greenspan’s Fed and the American Boom (Simon & Schuster, 2000)

Internet Resources

The Heritage Foundation
www.heritage.org

Progressive Policy Institute
www.ppionline.org

Federal Reserve Board
www.federalreserve.gov

Office of Management and Budget
www.whitehouse.gov/omb

The Social Security Administration Home Page
www.ssa.gov

The General Accounting Office
www.gao.gov

Bureau of the Census
www.census.gov