AMERICA’S EVOLUTION FROM A LAISSEZ-FAIRE STATE TO AN INTERVENTIONIST STATE:

KAYJATTA

The United States economy, like many Western economies today, is mixed. That means it is largely capitalist, but has some elements of socialism or government intervention. To be more precise, the United States has a mixed free enterprise economic system characterized by private ownership, private enterprise, and market-place competition (Sabato, et al 2010).

The extent of government involvement or intervention in the economy has fluctuated widely throughout the history of the United States. During the 19^th century, the Federal government played a limited role in economic activity. The basic functions of the federal government were to collect tariffs, fund public works (improvements), and encourage private development (Sabato, pg. 570).

During the Progressive and New Deal eras of the first half of the 20^th century, the federal government became more involved in the economy by way of regulation.

Recently, the federal government has expanded its role beyond economic regulation to social regulation.

The democratic regime of President Obama that came to power in the middle of the greatest financial (economic) crisis since the Great Depression of the 1930s, embarked on historic government intervention programs in terms of spending and regulation of industries. Because of these, many critics, largely conservatives have labeled President Obama and his ambitious agenda “socialist”.

But perhaps, the collapse of Enron and the subsequent prosecution and incarceration of Ken Lay and Jeffery Skilling during the Bush administration tilted public opinion toward more government regulation.

This paper is in two parts. In the first part, I will attempt to discuss United States’ economic transformation from a laissez-faire state to an interventionist state in six parts:

1.       The 19^th century period

2.       The progressive and the New Deal era

3.       Social regulation

4.       Deregulation

5.       Fiscal policy

6.       Monetary policy

In the second part, I will examine the major political ideologies and their positions on the economic policy of the United States.

The 19^th century period:

During this period, until the Civil War, the United States practiced a laissez-faire economic philosophy, effectively leaving economic decision-making about production and distribution of goods and services in the invisible hands of the market forces. The government’s role was limited largely to:

1.       The maintenance of law and order

2.       The conduct of foreign affairs

3.       The provision of necessary public works

4.       Setting of tariffs

5.       Creating a conducive environment for economic growth

The American Civil War of 1861 and the rapid industrialization of the post-war economy exerted enormous pressure on the American political and economic structures. Problems of labor-management conflicts, industrial accidents, disease, unemployment, merciless exploitation of workers and consumers, resulted in the government intervening to regulate economic activity.

According to Sabato, the first major government intervention was a result of the growing power of the railroads (2010). Congress passed the Interstate Commerce Act in 1887 requiring railroad rates to be “just and reasonable”. The Interstate Commerce Act of 1887 also prohibited pooling, rate discrimination, and charging more for shorter hauls of goods than longer hauls.

Then followed the Sherman Anti-Trust Act of 1890, aimed at large monopolies such as oil, sugar, whiskey, salt, and meatpacking. Which prohibited (attempts at) monopolization through price-fixing, market allocation, and bid-rigging?

The progressive and the New Deal era:

The Progressive movement in many respects was a middle class movement. It was motivated by the desire to curb the unbecoming corporate power so that it is responsive to the needs of the citizens.

The progressive regimes of Theodore Roosevelt and Woodrow Wilson both reined in on “Big Business”-railroads, banking and meatpacking.

In a move toward consumer protection, the federal government enacted the Food and Drug Act and the Meat Inspection Act in 1906. This two acts outlawed adulteration (tampering with the content) and mislabeling of food and drugs, and established sanitary standards in food handling.

In 1913, the federal government enacted the Federal Reserve Act and the Federal Reserve System to regulate the banking industry. The Federal Trade Commission Act (FTC) and the Clayton Act passed a year later bolstered the anti-trust law.

However, the growing role of the federal government in the economy came with enormous financial pressure requiring new ways to generate revenue. After the Supreme Court’s initial ruling as unconstitutional in 1895, the 16^th Amendment was adopted usurping Supreme Court’s power and authorizing the federal government to levy and collect income and corporate taxes.

Throughout the 1920s, the U.S. economy boomed bringing prosperity to many citizens. But in 1929 during the Hoover administration, the stock market collapsed setting off a world-wide chain reaction of economic crash called the Great Depression. The Great Depression was characterized by low production, banking failure, and high unemployment of up to 25% by 1933.

The New Deal of the 1930s by the Franklin D. Roosevelt (FDR) administration would be a major shift in the economic history of the United States. FDR started by closing out troubled banks, and then the Glass-Steagall Act of 1933 was enacted separating commercial and investment banking, and establishing the Federal Deposit Insurance Corporation (FDIC) which insures depositor’s money.

The Securities Act also of 1933 and the Securities Exchange Commission the following year (1934) intended to check abuses and fraud in the stock market.

The expanding role of the United States government during this period extended to farmers as well. The Second Agricultural Adjustment Act (AAA) of 1938 provided subsidies to farmers growing certain crops and acreage. Farmers also received relief in terms of direct payments and commodity loans.

The labor unions that have been early proponents of the New Deal were boosted by the enactment of the National Labor Relations Act, also called the Wagner Act and the National Labor Relations Board (NLRB). This act guaranteed workers’ right to organization (join unions) and collective bargaining without any fear of reprisal or discrimination by employers. Recently the Wisconsin legislature under the administration of Governor Scott Walker repealed the collective bargaining rights of union workers and several Republican governments across the nation threatened to do the same claiming budgetary reasons. This attempt by the newly elected Republican majority lawmakers to crackdown on labor in favor of businesses might be the beginning of a new shift toward less government regulation.

The Fair Labor Standards Act (FLSA), also a legacy of the New Deal era set the minimum wage and prohibited child labor. Congress also passed several other laws that targeted specific industries such as:

·         The Federal Communications Commission (FCC), 1934 to oversee radio, telephone, and telegraph industries.

·         The Civil Aeronautics Board (CAB), 1938 regulates the commercial aviation industry.

·         The Motor Carrier Act, 1935 regulates the trucking industry.

The Social Security Act (1932), Disability Insurance, Unemployment Insurance, Supplemental Security Income, earned Income Tax Credit, family and Child Support programs were all implemented in the New Deal approach.

The outbreak of World War II in 1939 marked the end of the New Deal era. However, many of the programs that were initiated in the New Deal (and the progressive era before that) remain permanent features of the United States economic and social policy to now.

SOCIAL REGULATION:

The 1960s and ‘70s were the era of social regulations. This is the period were the federal government moved away from a purely economic reform (regulation) to a more focused social reform (regulation). Several laws were passed throughout the ‘60s and ‘70s to protect consumers and the environment, and to safeguard health and safety of Americans:

·         The Clean Air ACT (1970)- protects the environment from pollution and hazardous dump.

·         The Employee Retirement Income Security Act (1974)-protects workers’ pensions from private employers.

·          The Lead-Based Paint Poison Prevention Act

The Egg Products Inspection Act

Some of the important agencies that created to enforce these new regulatory laws during this period are:

·         Consumer Product Safety Commission

·         The Occupational Safety and Health Administration (OSHA)

·         The Environmental Protection Agency (EPA)

·         The Mining Enforcement and Safety Administration

·         The National Transportation safety Administration (TSA)

The roots of the social regulations of the ‘60s and ‘70s are perhaps many. However, Sabato, et al (2010) has identified three main causes, namely:

·         Social activism- the ‘60s and ‘70s were a turbulent time characterized by advocacies of various kinds; social and civil rights. The Consumer Union, Common Cause, the Environmental Defense Fund, the Sierra Club, for example instrumental creating the agenda for social regulation.

·         Public awareness- the rapid industrialization has led to a heightened awareness of consumer, environmental, and occupational hazards among the general public.

·         Good politics- politicians {Presidents Lyndon B. Johnson (D) and Richard Nixon (R), as well as members of Congress} took advantage of the new trend in public expectation and rallied behind the cause for environmental and consumer protection. After all, it was good politics and could increase one’s prospects of re-election.

DEREGULATION:

The regimes of President Gerald Ford (R) and his successor Jimmy Carter, in a response to the high inflation of the mid 1970’s and early ‘80s, took several measures to cut back on social regulation. Competition in the market place was highly favored by these administrations. Commercial airlines, railroads, motor carriers, and financial institutions were all liberalized. For example:

·         The Airline Deregulation Act (1978) removed economic regulation of airlines.

·         The Agricultural price support programs of the ‘80s and ‘90s (subsidies) was repealed in 1996. However, the 2002 farm Bill (under the Bush administration) did not only restore farm subsidies but actually increased it substantially (up to 70%).

FISCAL POLICY:

This is the deliberate use of taxing and spending policies to stabilize or keep the economy stable. The fiscal policy is created by the President in partnership with Congress, and executes it through the budget process. Through revenue and expenditures manipulation, fiscal policy can be used to create budget surpluses and deficits

In the 1960s, John F. Kennedy applied Keynesian economic theory to increase government spending at the risk of budget deficit aimed at restoring full employment. This led to the Revenue Act of 1964 signed into law by Lyndon B. Johnson to cut taxes on individuals and corporations. This move contributed to economic expansion and lower unemployment rate (less than 4%) in the late ‘60s.

Republican presidents, Ronald Reagan (1981) and George W. Bush (2001, 2003) pursued a similar economic philosophy.

MONETARY POLICY:

Manipulating the interest rate and money supply constitute the hallmark of the government’s monetary policy. The Federal Reserve System (the FED) is responsible for managing the monetary policy. The FED utilizes several devices to achieve this:

·         Setting reserve requirements for banks-decides the amount of money as a portion of deposits the banks must retain as collateral for their loans.

·         Setting the discount rate-decides the interest rate on monies lend to banks.

·         Maintain open market operations-decides the purchase and sale of government securities to banks.

WHICH POLITICAL PARTY FAVOR A LAISSEX-FAIRE ECONOMIC POLICY AND WHICH A MORE INTERVENTIONIST, WHY?

There are two main political parties with distinct political ideologies in the United States. The two major parties are:

·         Democrats

·         Republicans

However, several minor parties exist and they include:

·         Libertarians

·         The Green party

Of these four political parties, conservatives favor laissez-faire economic policy more than all others. Conservatives (republicans), according to Sabato et al (2010; pg 21), believe that “government is best when it governs less”. Liberals (democrats), on the other hand value equity and believe that government intervention is necessary to remedy the defects of capitalism (market failure). Conservatives prefer less government intervention in the economy. The famous quote of republican president Ronald Reagan that “government is not the solution to our problem, government is the problem” echoes the same conservative believe. They often subscribe to the idea of market-place competition,  free enterprise, self-reliance, lower taxes, state and local control rather than federal intervention, and physical responsibility (balanced budgets) although in practice republican administrations do not have a track record of balancing the budget. The republican regime of George W. Bush perhaps ran the largest budget deficit in history despite inheriting historic surplus from the earlier Clinton administration. The Reagan administration and the two Bush administrations that followed made tax cuts a priority economic policy arguing that tax cuts for the rich will generate a “trickle down” effect in terms of job creation, increased consumer spending and investment.

Conservatives, not surprisingly, opposed the New Deal programs of the 1930s, poverty eradication programs of the 1960s, and almost all civil rights and affirmative action programs, Burns, et al (2004). They also resisted the healthcare overhaul bill by the Obama administration (also called the “Obama care” in conservative circles), and vowed to repeal it in the mid-term elections.

Recently the Wisconsin legislature under the republican administration of Governor Scott Walker repealed the collective bargaining rights of unions, thereby setting off a chain reaction across the nation by the newly elected Republican majority lawmakers to crackdown on labor in favor of businesses might be the beginning of a new shift toward less government regulation since the inauguration of democratic president Barack Obama. The taking away of union’s right to collective bargain will perhaps be, as in the words Professor David Harvey (The Crisis), the last major blow to labor since the Great Depression.

Libertarians, who appear to be ultra-conservatives, have been recently identified with the Tea Party movement. They, like the regular conservatives, believe in a limited government and personal liberties. Only that the Libertarians take it to extreme heights.

The Green party, sometimes referred to as the Environmentalist party is extremely concerned with the environment and social justice much like the democrats. However, it has to be said that, very little is documented about these minor parties.

One has to exercise caution when making these political ideological labels. They are broad generalizations that very few Americans fit into. Most voters tend to be moderates. Also the fact that George W. Bush passed a massive government intervention bill in the economy in 2008 (the economic bail out) and Clinton’s tax cuts in the 1990s are evidence of significant departures from ideological core believes…

REFRENCES:

1.      American Government ( Sabato, O’Connor, and Yanus; 2010)

2.      Government by the People (Burns, Peltason, Cronin, Megleby, O’Brien, and Light; 2004)