History of American Political Economy
0 Markets need government to maintain order,
enforce contracts, create currency, provide other
public goods
0 Government deeply implicated in economy
0 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 More expansive role during 1930s (New Deal) –
1970s
0 Reagan revolution (1980s-2000s) power shift to
market
0 Present = massive government action to bailout
private financial sector (2007-)
Competitive Capitalism
0 Expansionary phase (1840s)  revolution in
transportation (roadways, canals, railroads)
0 Era of competitive capitalism = small firms
competed in local markets
0 Federal government’s role limited; state governments
more active
0 Downturn (1870s) initiated emergence of large
corporations and organized political movements (e.g.,
farmers, workers) opposed to market dominance by
corporations
0 Believed in equality; labor created wealth; big business
captured political power; majority could tame
corrupting influence of capital
0 Radicalism basis of later Progressive reforms
Rise of Corporate Capitalism
0 Progressive era (1900-1916) marked profound
change
0 Rise of large corporations  demands for government action
0 Federal government assumed increasing responsibility for
regulating business activity
0 World War I (1917-1919) government intervention
0 Tripartite committees (business, labor, and government)
coordinated production; disbanded at business insistence
0 Boom (1920s) marked by increasing inequality
0 “Roaring Twenties” ended with market crash (1929)
0 Great Depression  increasing unemployment, wage cuts,
strain on government relief; undermined faith in capitalism,
business, and government; demands for change
A New Deal
0 FDR (1932) promised New Deal = end depression, provide
relief, manage economy/restore growth
0 Keynesianism = depression caused by inadequate
consumer demand
0 Government should run budget deficits to increase money in
circulation and increase demand
0 Preferred by business to more radical proposals
0 Welfare state offers citizens protection from swings of
business cycle
0 Unemployment insurance, social security creates safety net
0 Labor market regulated to outlaw child labor, impose
minimum wage
0 Labor unions grew increasing worker power relative to
management
0 Federal expenditures and number of federal employees
increased
Conservative New Deal
0 No push to nationalize industries
0 (Keynes) Full employment necessary to increase demand
0 Conservatives opposed Truman’s Full Employment Act (1945)
0 (Keynes) Redistribution of income necessary
0 Welfare spending lower, less redistributive
0 Deficits driven by cutting taxes rather than increasing
government spending
0 Demand stimulated through private consumption rather than
promoting public goods
0 Government spending increases geared toward military
rather than welfare state spending
0 Conservative Keynesianism
0 Symbolic commitment to full employment
0 Economic stimulation through military spending (not
redistribution)
0 Deficit spending through tax cuts not public investment
Rise and Fall of Golden Age
0 Golden Age of Capitalism (1950s-1970s)
0 Consumer demand soared; businesses expanded; labor
relations improved; government spending climbed;
emergence of global dominance
0 Bargain between business and government  strategic
decisions left to corporate capital; government
encourage corporate investment and job creation
0 (1970s) Stagflation (unemployment and inflation)
0 Slower productivity growth squeezed profits
0 Workers asked to work more for less
0 Businesses engaged in union busting
0 Conservative Keynesianism collapsed (1970s)
0 Unemployment, inflation, lower productivity growth,
rising trade deficits
Rise of Extreme Market Capitalism
0 Extreme market capitalism = markets rational, self-
correcting, beneficial
0 Reagan (1980) = Conservative Keynesianism  Extreme
Market Capitalism
0 Prosperity no longer dependent on welfare of workers whose
wages drove demand
0 Supply side economics = prosperity depends on welfare
of affluent whose savings supply capital for investment
0 Insufficient investment capital (not insufficient demand)
0 Boost investment capital through tax cuts, especially for rich
0 Tax cuts reward wealthy, bind them to the party; impose fiscal
restraint on government
0 Policy of Deregulation
0 Environmental standards, consumer protections rolled back
in name of global competitiveness
0 Cut regulatory agencies’ budgets, reduce effectiveness
Effects of Extreme Market Capitalism
0 Large budget deficits due to tax cuts
0 Growing inequality (see Table 3.1)
0 Biggest losers under Conservative Keynesianism biggest
winners under Republican Extreme Market Capitalism
0 Tax cuts for rich, spending cuts for poor
0 Unions in decline, wages/living standards for working class
stagnated
0 Wealth created by increasing productivity captured by
corporations in form of increasing profits, not rising wages
0 Shift from industrial capitalism to finance capitalism
0 Banks “too big to fail,” politicians reluctant to challenge
financial industry
0 Financial sector = influence over policy creating new profits
for banks but increasing risk, debt, and instability
0 Debt-fueled consumption contributes to trade deficits
Crisis of Extreme Market Capitalism
0 Great Recession (2007-present)
0 Driven by Housing Bubble
0 Low interest rates set by Federal Reserve Board
0 Banks gave out loans to generate fees and interest
0 Lowered lending standards; subprime lending increased
0 Banks bundled loans and sold them as securities
0 Securities bought and sold with AAA ratings
0 Housing bubble burst
0 Investors became skeptical of housing values
0 Prices began to fall, more houses put up for sale, many
foreclosed
0 Highly leveraged banks with debts exceeding assets
0 Banks collapsing, commerce ground to halt
0 Crisis in housing threatened entire economy
0 Government stepped in to bail out banks; passed stimulus bill
to ward off recession, guarantee loans, reorganize auto
industry
A New Foundation (?)
0 Extreme market capitalism discredited
0 Markets not rational, self-correcting, nor beneficial
0 President Obama (2008- ), rescued failing banks but minimized
government influence
0 Regulatory proposals weak
0 Banks “too big to fail” not broken up; derivatives go unregulated;
taxpayers not protected from excessive risk taking
0 Aggressive fiscal policy
0 Used federal budget to stimulate economy; deficit spending
0 Federal spending increased toward economic recovery (stimulus,
jobs bill), social welfare programs, and defense
0 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
0 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