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 • Government deeply implicated in economy • Tension between capitalism (economic system of profits for few) and democracy (political system of democratic rights for many) depends on outcome of political struggles • More expansive role during 1930s (New Deal) – 1970s • Reagan revolution (1980s-2000s) power shift to market • Present = massive government action to bailout private financial sector (2007-)

2. Competitive Capitalism • Expansionary phase (1840s)  revolution in transportation (roadways, canals, railroads) • Era of competitive capitalism = small firms competed in local markets • Federal government’s role limited; state governments more active • Downturn (1870s) initiated emergence of large corporations and organized political movements (e.g., farmers, workers) opposed to market dominance by corporations • Believed in equality; labor created wealth; big business captured political power; majority could tame corrupting influence of capital • Radicalism basis of later Progressive reforms

3. Rise of Corporate Capitalism • Progressive era (1900-1916) marked profound change • Rise of large corporations  demands for government action • Federal government assumed increasing responsibility for regulating business activity • World War I (1917-1919) government intervention • Tripartite committees (business, labor, and government) coordinated production; disbanded at business insistence • Boom (1920s) marked by increasing inequality • “Roaring Twenties” ended with market crash (1929) • Great Depression increasing unemployment, wage cuts, strain on government relief; undermined faith in capitalism, business, and government; demands for change

4. A New Deal • FDR (1932) promised New Deal = end depression, provide relief, manage economy/restore growth • Keynesianism= depression caused by inadequate consumer demand • Government should run budget deficits to increase money in circulation and increase demand • Preferred by business to more radical proposals • Welfare state offers citizens protection from swings of business cycle • Unemployment insurance, social security creates safety net • Labor market regulated to outlaw child labor, impose minimum wage • Labor unions grew increasing worker power relative to management • Federal expenditures and number of federal employees increased

5. Conservative New Deal • No push to nationalize industries • (Keynes) Full employment necessary to increase demand • Conservatives opposed Truman’s Full Employment Act (1945) • (Keynes) Redistribution of income necessary • Welfare spending lower, less redistributive • Deficits 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 Keynesianism • 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) • Consumer demand soared; businesses expanded; labor relations improved; government spending climbed; emergence of global dominance • Bargain between business and government  strategic decisions left to corporate capital; government encourage corporate investment and job creation • (1970s) Stagflation(unemployment and inflation) • Slower productivity growth squeezed profits • Workers asked to work more for less • Businesses engaged in union busting • Conservative Keynesianism collapsed (1970s) • Unemployment, inflation, lower productivity growth, rising trade deficits

7. Rise of Extreme Market Capitalism • Extreme market capitalism = markets rational, self-correcting, beneficial • Reagan (1980) = Conservative Keynesianism  Extreme Market Capitalism • Prosperity no longer dependent on welfare of workers whose wages drove demand • Supply side economics = prosperity depends on welfare of affluent whose savings supply capital for investment • Insufficient investment capital (not insufficient demand) • Boost investment capital through tax cuts, especially for rich • Tax cuts reward wealthy, bind them to the party; impose fiscal restraint on government • Policy of Deregulation • Environmental standards, consumer protections rolled back in name of global competitiveness • Cut regulatory agencies’ budgets, reduce effectiveness

8. Effects of Extreme Market Capitalism • Large budget deficits due to tax cuts • Growing inequality (see Table 3.1) • Biggest losers under Conservative Keynesianism biggest winners under Republican Extreme Market Capitalism • Tax cuts for rich, spending cuts for poor • Unions in decline, wages/living standards for working class stagnated • Wealth created by increasing productivity captured by corporations in form of increasing profits, not rising wages • Shift from industrial capitalism to finance capitalism • Banks “too big to fail,” politicians reluctant to challenge financial industry • Financial sector = influence over policy creating new profits for banks but increasing risk, debt, and instability • Debt-fueled consumption contributes to trade deficits

9. Crisis of Extreme Market Capitalism • Great Recession (2007-present) • 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 • Banks bundled loans and sold them as securities • Securities bought and sold with AAA ratings • Housing bubble burst • Investors became skeptical of housing values • Prices began to fall, more houses put up for sale, many foreclosed • Highly leveraged banks with debts exceeding assets • Banks collapsing, commerce ground to halt • Crisis in housing threatened entire economy • Government stepped in to bail out banks; passed stimulus bill to ward off recession, guarantee loans, reorganize auto industry

10. A New Foundation (?) • Extreme market capitalism discredited • Markets not rational, self-correcting, nor beneficial • President Obama (2008- ), rescued failing banks but minimized government influence • Regulatory proposals weak • Banks “too big to fail” not broken up; derivatives go unregulated; taxpayers not protected from excessive risk taking • Aggressive fiscal policy • Used 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 “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