The Interwar American Economy: the Rise of Government: Lecture 1

1. The Interwar American Economy: the Rise of Government: Lecture 1 • The objective of the course is to examine the forces underlying the growth of government, particularly the central government, in the American economy. • This began in the interwar period. • View government intervention as legal cartelization—other types as well. But this narrows our approach for analysis.

2. The Interwar American Economy: the Rise of Government • The vehicle for this will be through examination of agriculture, perhaps the most regulated and subsidized sector of the American economy, despite inherent productivity advantages vis a vis producers elsewhere in the world for most commodities. There is a puzzle—why this sector and why so much? • We will view this process of government growth using a public choice perspective—that is, view government actions as initiated by self-interested politicians and bureaucrats.

3. The Interwar American Economy: the Rise of Government • Series of 4 lectures. • Supervisions—to be scheduled, but will be immediately after the last lecture on February 17th. • Short essay due electronically March 3rd. Will provide a topic shortly. • http://fiesta.bren.ucsb.edu/~glibecap/ • All materials are available either on line—journals and one chapter each from the volumes, and the volumes are on reserve at the library. • You can contact me any time at glibecap@bren.ucsb.edu or come by my office in the Austin Robinson Building, No. 34.

5. The Interwar American Economy: the Rise of Government • Politicians as vote maximizers (in a more despotic context) maximizing support from key constituents) • Bureaucrats as budget and mandate maximizers, with some oversight by politicians, but considerable discretion. • Discretion from cost of oversight by politicians. • Discretion from actions of the bureaucracy itself in mobilizing constituent support for greater budgets and mandates that benefit both the constituency and the agency.

6. The Interwar American Economy: the Rise of Government • Public choice/self-interested motivation--most actions will be taken by government in response to constituent group politics. • Not necessarily provision of public goods. • Public goods are non rival goods that will be under provided by the market: money supply, national defense, primary education, aspects of health care, weights and measures, etc. • Public goods provided by government, as a result of the spinoff from private goods provided to key constituencies. • Politicians may also provide some public goods due to ideological commitments.

7. The Interwar American Economy: the Rise of Government • Generally, however, we will view the rise of government through the interaction of self interested politicians and bureaucrats and constituent group politics. • Why it would be difficult for self interested politicians and bureaucrats to primarily provide pure public goods? • Trade offs? • Rewards from constituents with non-rival goods? • Free ride and hence under provide? • Constituents demands--subsidies, price supports, local monopolies, access to inputs, trade protection.

8. The Interwar American Economy: the Rise of Government • Impact of private goods provision on public goods? • Constraints on self interested politicians/bureaucrats for protecting a more efficient economy? • Characteristics of successful interest groups? Size, wealth, homogeneity, probability of voting. • What are transfers and why rarely cash? What forms? • Information distortion? Private transfers as public goods. • Impact on general taxpayers? • Monitor? Focused benefits, diverse costs problem. • Important efficiency and equity outcomes.

9. The Interwar American Economy: the Rise of Government • Why would naturally competitive industries be more politically attractive to regulate than oligopolistic ones? • Why might regulation or transfers be implemented at a time of other exogenous shocks? • Why might producer protection be more likely during downturns in the economy while consumer protection more likely during expansions? • Why will interest groups get less than they desire? • Why are competitive interest groups important for efficiency and limiting government? • Why might log rolling or trades among politicians lead to expansion of government programs?

10. The Interwar American Economy: the Rise of Government • Use these notions to examine the growth of government. THE HISTORICAL ISSUE AT HAND • Until the post WWI period, government (however measured) was small in the American economy. • Continent of natural resources and costly labor: high wages and opportunity. • Less demand for government subsidies. • Large local markets. Less demand for monopoly privileges.

11. The Interwar American Economy: the Rise of Government • Government actions were dominated by local and state. • Central government was small. • By the end of WWI, several factors had changed: • End of the frontier. • More complex, capital intensive production, economies of scale. • Larger manufacturing units. Lower internal transport costs. Increased competition. Small vs large firms. • New technologies. Information. Competitive issues. • Rise of anti trust concerns. Standard Oil. Chicago Packers. • Complex consumer products. Information costs. • Labor unions. • WWI mobilization and regulation demonstrated the potential for government to provide transfers and fix prices.

12. The Interwar American Economy: the Rise of Government • Series of legislation enacted in late 19th and early 20th centuries. Basis for subsequent expansion. • Interstate Commerce Act, 1877 • Sherman Anti trust act, 1890; Clayton Act, 1914 • Meat Inspection Act, 1906 • Pure Food and Drug Act, 1906 • Federal Trade Commission, 1910. • Federal Reserve Bank, 1913. • WWI regulation—US Food Administration, Railroads, Coal, Steel

14. The Interwar American Economy: the Rise of Government • The initial push for regulation in agriculture. • Other industrialized economies have similar patterns. • Due to same forces? • The focus of lecture 2—the 1920s--agriculture.