0
0
0
0
Markets need government to maintain order, enforce contracts, create currency, provide other public goods
0
0
Require protective, facilitating political order
“Invisible hand” of market requires “visible hand” of state
While less extensive, government deeply implicated in U.S. economy from start (e.g., commercial code, legal framework, common currency, military and police, roads and bridges, social services, etc.)
In U.S. (and elsewhere), tension between capitalism (economic system of profits for few) and democracy (political system of democratic rights for many) depends on outcome of political struggles
0 In U.S., business successful in limiting government’s ability to influence
0 behavior of private firms, shaping institutions involved in intervention, and influencing policies
Under popular pressure, state policy has sometimes diverged from business interests
Pendulum swings over time
0 More expansive role for government during 1930s (New Deal) – 1970s
0 Reagan revolution (1980s-2000s) power shifted to market forces
0 Present = massive government action to bailout private financial sector
(2007-)

0
0
0
0
First expansionary phase (starting in 1840s) driven by revolution in transportation (roadways, canals, railroads)
Classic era of competitive capitalism = small firms competed in local markets
0
0
Federal government’s role limited (tariff policy, banking and monetary policy, public land management, collecting taxes, maintaining order)
State governments actively involved in shaping pre-Civil War political economy
0
0
Some built and operated railroads; others invested heavily in private railroads
Regulated railroads through charters, commissions, rates
Downturn (1873) initiated wave of business consolidations and emergence of large corporations seeking to dominate markets
0 Working people forced to accept wages and prices = prompted emergence of organized political movements
0
0
Farmers Alliance and the Grange wanted fairer rates from railroads; joined Populist
Party
Railway workers struck to protest wage cuts, mobilized Great Uprising (1877)
Disparate movements opposed growth or large corporations and dominance of markets at expense of farmers, workers, and consumers
0
0
United with belief in equality, sense that labor created wealth, big business had captured political power, and majority could tame corrupting influence of capital
Left local heritage of radicalism; political program basis of later Progressive reforms; created alternative to dominant culture of competitive individualism
(based on dignity of labor, benefits of rough equality, value of solidarity, virtues of self-sufficiency)

0
0
0
Progressive era (1900-1916) marked profound change in American political economy
0
0
Rise of large corporations with power to dominate markets and exploit consumers, farmers, and workers generated demands for government action
Under popular pressure, federal government assumed increasing responsibility for regulating business activity (although limited to preventing unfair business practices)
World War I (1917-1919) government intervention increased substantially
0 Formed tripartite committees (business, labor, and government) to develop policy to coordinate production for war
0 Quickly disbanded at business insistence with end of war
1920s witnessed a boom marked by increasing inequality in income and wealth
0
0
0
0
0
“Roaring Twenties” ended with market crash (1929)
Great Depression produced increasing unemployment, wage cuts, increasing strain on government relief
Depth and persistence of Depression undermined faith in capitalism, business, and government
Demand for large-scale change increased
Farmers struck, workers organized unions and conducted strikes

0
0
0
0
FDR (elected in 1932) promised New Deal = government end depression, provide relief, and manage economy to restore growth
0 With WWII, FDR administration shifted from promoting growth through greater state intervention to increased consumption
New economic paradigm based on Keynesianism = depression caused by inadequate consumer demand
0
0
“Vicious cycle” -- mass unemployment reduced demand for goods
Government could run budget deficit to increase money in circulation and increase demand
0 Government spending in times of slack demand promotes “virtuous cycle” of growth
Business preferred this to more radical proposals (e.g., redistributing power between government and business, structural reforms and government planning)
Welfare state offered citizens protection from swings of business cycle
0
0
0
0
Unemployment insurance, social security created safety net
Labor market regulated to outlaw child labor and impose minimum wage
Labor unions grew increasing worker power relative to management
Federal expenditures increased as did number of federal employees

0
0
0
0
0
0
No push to nationalize basic industries (as occurred throughout
Europe)
Keynes argued full employment necessary to increase aggregate demand
0 Conservatives opposed Truman’s Full Employment Act (1945)
Keynes believed redistribution of income necessary
Welfare spending lower and less redistributive than in Europe
Deficits in U.S. (under Democrats and Republicans) driven by cutting taxes rather than increasing government spending
0
0
Demand stimulated through private consumption rather than promoting public goods
Government spending increases geared toward military rather than welfare state spending
Conservative form of Keynesianism (new economic orthodoxy after war accepted by Democrats and Republicans)
0
0
0
Symbolic commitment to full employment
Economic stimulation through military spending (not redistribution)
Deficit spending through tax cuts not public investment

0
0
0
0
Golden age of capitalism (1950s-1970s)
0 Pent-up consumer demand fueled postwar economy
0 Businesses expanded capacity and invested in new plants and equipment
Labor relations improved following 1946 strike wave 0
0
0
Government spending climbed steadily
0 Emergence of U.S. global dominance
Informal national bargain between business and government
Strategic decisions governing American economy would be made by corporate capital
0
0
Government would not intrude on corporate decision making or engage in economic planning
Government would create environment to encourage corporate investment and job creation (by smoothing out business cycle, educating workers, stimulating consumption, funding research, protecting corporate markets and investments abroad)
By 1970s, economy began to experience stagflation (unemployment and inflation simultaneously)
0 Slower productivity growth squeezed profits
0 Workers asked to work more for less
0 Businesses threatened plant closures unless collective bargaining was weakened and engaged in union busting
Conservative Keynesianism collapsed in 1970s
0 Unemployment, inflation, lower productivity growth, rising trade deficits

0
0
0
0
Extreme market capitalism = markets are rational, self-correcting, and beneficial
0 Prices set by markets reflect actual value of goods and assets (rational)
0 Business cycle tamed, government regulation unnecessary (self-correcting)
0 Leaving markets alone to work their magic good for society (beneficial)
Election of Reagan (1980) = shift from conservative Keynesianism to
Extreme Market Capitalism
0 Prosperity no longer dependent on welfare of workers whose wages propelled aggregate demand
Supply side economics = prosperity depends on welfare of affluent whose savings supplied capital for investment
0
0
0
Economy suffered from insufficient investment capital (not insufficient demand)
Boost investment capital through tax cuts, especially for the rich who are more likely to save and invest (Reagan introduced massive tax cuts; as did Bush)
Tax cuts rewarded the wealthy (Republican base) and bound them to the party; imposed fiscal restraints on government (reduced government revenues and spending)
Republicans adopted policy of deregulation
0 Environmental standards, consumer protections need to be rolled back if business is to be competitive in global marketplace
0 Cut regulatory agencies’ budgets, reduced their effectiveness

0
0
0
Large budget deficits due not to increased federal spending but tax cuts (declining revenues)
Growing inequality (see Table 3.1)
0 The biggest losers under the democratic party program of conservative Keynesianism had become the biggest winners under the Republican program of extreme market capitalism
0
0
0
Tax cuts for the rich, spending cuts for the poor
Unions were in decline, and wages and living standards for working class people stagnated
Wealth created by increasing productivity captured by corporations in form of increasing profits, not rising wages
Shift in basis of economy from industrial capitalism to finance capitalism
0
0
0
Banks “too big to fail” and politicians reluctant to challenge policy preferences of financial industry
Financial sector has extraordinary influence over policy that creates new profits for banks but increases risk, debt, and instability for economy
Debt-fueled consumption has contributed to rising balance of trade deficits

0
0
0
0
The Great Recession (2007-present)
0 Collapse of housing market in 2007, stock market tumble
0 $12 trillion of wealth evaporated
Driven by housing bubble
0
0
Low interest rates set by Federal Reserve Board
Banks gave out loans to generate fees and interest
0
0
0
Lowered lending standards; subprime lending increased dramatically
Banks bundled loans and sold them as securities
Securities bought and sold with AAA ratings
Then the housing bubble burst
0
0
Investors became skeptical of housing values
Prices began to fall, more houses put up for sale, many foreclosed, continue to fall
0
0
Highly leveraged banks had debts far exceeding their assets
Banks were collapsing, and commerce ground to halt
0 Crisis in housing threatened entire economy
Government stepped in to bail out the banks, passed stimulus bill to ward off recession, guarantee loans, reorganize auto industry

0
0
0
0
0
Extreme market capitalism discredited
0
0
0
Markets do not behave rationally (subject to emotion and unwarranted outbreaks of confidence leading to speculative bubbles)
Markets are not self-correcting (government regulation necessary to prevent firms from acting badly and in ways safe for them and the public)
Leaving decisions to market does not always lead to best results for society
0 Contributes to instability and inequality
0
0
Volatility creates insecurity and demoralizes people’s ability to plan
Inequality undermines social cohesion and corrupts democracy
President Obama (2008- ), rescued failing banks but minimized government influence
0 Banks have increased checking account charges and credit card fees; continue to lavishly compensate executives; little difference between Fed’s efforts to stabilize financial system and interests of banks
Regulatory proposals weak
0
0
0
Have not broken up banks “too big to fail”; now bigger than before
Have not regulated derivatives market
Have not protected taxpayers from excessive risk taking
Aggressive fiscal policy
0
0
0
Using 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 a “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