Text 2. Government and the economy

In the relationship between government and the economy, ideas influence policies and policies shape outcomes. This three-way connection is sometimes direct, sometimes tenuous, sometimes perverse. Of the three elements, the easiest to evaluate historically is outcomes. By almost any measure, the American economy is the most successful the world has ever known. Even in colonial times the standard of living was generally better in America, at least for whites, than in Europe or Asia. In the decades following the American Revolution, economic growth remained high and remarkably steady. By the end of the nineteenth century, the United States surpassed all other countries in both agricultural and industrial output.

For most of the twentieth century, gross national product per capita has remained higher in the United States than in any other country, with the occasional exception of small advanced economies such as Switzerland and Denmark or oil-rich nations such as Kuwait. Only in the 1980s was the United States overtaken by countries such as West Germany and Japan, and even then only by the measurement of gnp per capita at exchange rates favorable to the deutsche mark and yen. By any other index of quality of life, the American standard of living was still the highest in the world.

If this outcome of unique affluence is clear, the ideas and policies behind it remain open to interpretation. How much did American economic success derive from laissez-faire ideas and policies, how much from governmental intervention? How much did it stem from neither of these but from the simple fact of a wealthy, isolated, and sparsely inhabited continent ready for exploitation? Assuming, for the sake of argument, that the early policies can be characterized as laissez-faire, then how much of the letting alone originated in the reasoning of Adam Smith and Thomas Jefferson, how much in the practical impossibility of effective public administration over a far-flung country?

In tracing the ideas behind American economic policies, the colonial period is the proper starting place. As the historian Carl Degler once remarked, «Capitalism came in the first ships.» The English settlers of North America brought with them clear convictions about the nature of sovereignty and the rights of property. These ideas, and the resulting policies, then interacted with the circumstances of a rich and underpopulated continent to set the context of economic activity.

During most of the colonial period, the hand of government lay lightly on the economy. This was true even allowing for such exceptions as the harshness of Puritan rule in early New England, the heavy taxation of Chesapeake tobacco by the English Crown, and the odious institution of slavery. When the colonists did revolt in 1775, it was in large measure against Britain’s new revenue policies of the 1760s and 1770s, which conveyed to American shores a fresh corps of administrative officials. This new regime brought taxation without representation, together with other violations of the «rights of Englishmen.»

The intellectual contours of the American Revolution suggest that the United States was born in a broad outburst of anti-authoritarianism that transcended any temporary disaffection from George III, the British monarch. This anti-authoritarianism is plainly reflected in the texts of contemporary documents: the scores of revolutionary pamphlets calling upon Americans to throw off the British yoke, the Declaration of Independence, the Constitution, the Federalist Papers, and the Bill of Rights. All of these late-eighteenth-century documents express the deep-seated aversion to absolute authority, the hostility to centralized power in which the Union was born. Even though the Constitution seemed to many revolutionaries to imply an unduly centralized government, it still vested ultimate sovereignty in «the people» and divided governmental power among three branches, each possessing the power to check the other two. In still another balancing act, the federal government as a whole both checked and was checked by state governments. As Charles Evans Hughes once remarked, the Founding Fathers had designed «the most successful contrivance the world has ever known for preventing things from being done.»

Given these institutional limitations on authority, can it be said that the government of the United States historically followed a policy of laissez-faire? Perhaps, but only as measured against Soviet-style command economies or the statist developmental policies of Napoleonic France, Bismarckian Germany, or Meiji Japan. Compared with liberal regimes such as that of Victorian Britain, the American government violated laissez-faire as often as it practiced it.

Broadly speaking, both federal and state governments were active in the economic sphere during the first half of the nineteenth century, passive in the second half, and then active again throughout the twentieth century. In the first half of the nineteenth century, state governments chartered numerous banks and expended public funds liberally for internal improvements such as canals, turnpikes, and railways. Meanwhile, the federal government promoted agricultural exports, protected domestic industry through tariffs, subsidized commerce through a generous postal rate structure, and encouraged the building of railways. Equally important, and often overlooked in analyses of government-business relations, the national government pursued an energetic and relentless policy of land acquisition and development. During the nineteenth century, more individual Americans made their fortunes from the exploitation of newly annexed lands than from any other source. «Manifest destiny» was an operative economic policy as well as a slogan of nationalism and empire, as the geographical extent of the United States was multiplied severalfold by the addition of the Old Northwest, the Louisiana Purchase, the Florida Cession, the Mexican Cession, the Gadsden Purchase, the Oregon Territory, and the acquisition of Texas, Alaska, and Hawaii.

In less visible ways, the legal order of the United States was shaped so as to lubricate the operations of private enterprise. Decade by decade, the states relaxed requirements for the privilege of incorporation, far in advance of parallel developments in Europe. In bankruptcy law, incentives were fashioned so as to favor debtors more than creditors, a reversal of common European practice. Similarly, contract law became highly refined in America, facilitating commerce among the disparate populations of strangers who came to American shores and pushed ever westward. Meanwhile, taxation remained light, a circumstance made possible by ample revenues from the sale of public lands and from customs duties on goods imported from Europe. All of this added up to a situation uncommonly hospitable to what the legal historian Willard Hurst has called «the release of energy.» Policymakers had systematically designed a fertile setting for private entrepreneurship – a greenhouse for business. So long as individual companies stayed small, no real conflict between the welfare of the American people and that of its business units became serious. Unfortunately, that happy situation endured only until the 1880s.

Big business (trusts) appeared in the United States during that decade, a good deal earlier than in most other countries. Once established, it grew faster and to a larger size than it did elsewhere. One reason was the absence of any countervailing force in America. A new country made up entirely of immigrants (except for the Native Americans), the United States had no established church, no standing army, no hereditary aristocracy, no mandarin class, no feudal tradition. Because of the nation’s individualistic ideology, almost no government ownership of business enterprise existed, in contrast to substantial public undertakings even in other market economies, let alone socialist ones. The exceptions to this rule became famous largely because they were exceptions: the Erie Canal in the nineteenth century, the Panama Canal Company and the Tennessee Valley Authority in the twentieth. Throughout American history, including the present time, the total tax bite of all governmental units has typically been less than in comparable industrial countries such as Britain, France, and Germany. Until the twentieth century, the absolute size of the national government remained minuscule, and even today it is relatively smaller than those of other countries. In 1871, at the dawn of the age of big business, the federal government employed only fifty-one thousand civilians, of whom thirty-seven thousand were postal workers. The remaining fourteen thousand constituted the entire national government of a country with a population of 41 million. This amounted to one federal worker per twenty-nine hundred inhabitants in contrast to about one per hundred in the late twentieth century.

Of all major market economies, the rise of big business preceded that of big government only in the United States. And when big business came, no countervailing force resisted its initial impact. Thus, the manifold problems it raised provoked a powerful public response that immediately moved into the realm of politics. In the closing years of the nineteenth century, the United States became the only major industrial power to enact legislation explicitly designed to curb the power of large corporations. Congress passed the Interstate Commerce Act in 1887, the Sherman Antitrust Act in 1890, and the Federal Trade Commission and Clayton acts in 1914. The United States was the only country to attempt such a thoroughgoing regulation of railroads as that embodied in the Hepburn Act of 1906, which gave new teeth to the Interstate Commerce Act of 1887. In other nations, railroads were either publicly owned or smaller than the gigantic American companies, several of which employed more than 100,000 persons. Although many other countries eventually adopted antimonopoly laws, the Sherman Antitrust Act remains the most stringent in the world.

American regulatory practice during the twentieth century was shaped by three outbursts of legislation: during the Progressive Era (1901–1914), the New Deal (1933–1938), and the later period of focused concern for safety, social justice, and environmental protection (1964–1971). Although several exceptions might be noted, this legislation and the agencies it created generally were designed to restrain the power of business. An appropriate symbol is the giant statuary outside the Federal Trade Commission building in Washington, which depicts powerful, unruly horses being held in check by the hand of a man. American agencies with direct authority over business practices, such as the Securities and Exchange Commission, remain far stronger than their foreign counterparts.

In the United States, then, regulatory behavior in the twentieth century was typically restrictive. In other countries it was more often promotional. In some ways this represents a reversal of nineteenth-century practice, when the United States was the most hospitable of all countries to the conduct of business enterprise. The more precise point is that during the twentieth century, the promotional activities of the American government differed in kind from those elsewhere. In other countries, such measures focused on industrial planning, sectoral growth, and targeted key industries. Seen most clearly in the post-World War II activities of Japan’s Ministry of International Trade and Industry, industrial planning had many counterparts elsewhere: in French indicative planning of the 1950s and 1960s, in the corporatist interlocks of German banks, labor unions, and large firms, even in the experiments under Labour governments in Britain. None of these practices, all of which fall under the general rubric of «industrial policy,» took firm root in America, with the sole exception of what pejoratively has been called «Pentagon capitalism.»

In America, nearly all promotional management of the macroeconomy was a post-New Deal phenomenon and was Keynesian in outlook. It looked not to individual firms, industries, or sectors but to aggregates of the major national income accounts: consumption, investment, and government spending. It operated primarily on the demand side through management of fiscal policy. Its general aim was to counteract violent swings of the business cycle such as those that brought severe depressions in the 1890s and 1930s. The ideas that motivated it were complex, involving such Keynesian arcana as equations designed to compute the «autonomous spending multiplier» as a tool for setting tax policy. At the height of its influence in the 1960s, some Keynesians spoke confidently of fine-tuning the entire national economy. Subsequent events, including the Vietnam War, the combined high inflation and high unemployment of the 1970s, and the soaring fiscal and trade deficits of the 1980s, brought an embarrassed silence on the subject of fine-tuning.

Yet the fact remained that in the decades after World War II, the American state explicitly accepted the principle of a mixed economy and with it governmental responsibility for national economic well-being. This became evident starting with the Employment Act of 1946, an avowedly Keynesian measure, and it continued through all postwar presidencies – even that of Ronald Reagan, who, though no Keynesian, oversaw the most drastic (and hazardous) changes in fiscal policy since World War II. This overt acceptance of responsibility for economic performance epitomized the revolution in thinking about the connections among ideas, policies, and outcomes in the relationship between government and the economy.

Thomas K. McCraw

EXERCISES

Exercise 1. Answer the following questions:

1. Why there was no serious conflict between the welfare of the American people and that of its business units until 1880s? 2. Was the percentage of federal workers in the U.S. in the 19^th century different from that in the late 20^th century?

Exercise 2. Translate into English.

1. Даже в 19 веке уровень жизни в США, в целом, был выше, чем в Европе или Азии, по крайней мере для белых. 2. В 20 веке такой показатель, как валовый национальный продукт на душу населения, почти всегда сохранялся выше, чем в любой другой стране; редкое исключение составляли лишь малые высокоразвитые государства такие, как Швейцария и Дания, а также богатые нефтью государства такие, как Кувейт. 3. По всем другим показателям уровня жизни США превосходили и Германию, и Швейцарию. 4. В заключительные годы 19 века США стали единственной крупнейшей промышленно развитой державой, принявшей законодательство, явно расчитанное на свертывание могущества крупных корпораций. 5. Ни одна из этих стратегий не укоренилась в США.

Exercise 3. Subjects for discussion:

1. Can the Government influence in any way a nation’s economy?

2. Is Government’s interference in the country’s economy good or bad for the economy?