Download Chapter Six—Political Economy

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.
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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
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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
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“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.
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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 AfricanAmericans 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.
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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 AntiTrust 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
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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.
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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.
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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
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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)
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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
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