Personal Reflections on U.S. Economic Policy Since 1900.
Throughout the 20th century, the United States flip-flopped on government intervention regulating the market economy. By the early 1900s, American firms saw a fair share of labor movements, conservation quotas, and anti-trust laws impacted by a broadening of executive power. The Roaring Twenties ruled on an unyielding philosophy of laissez-fair economics and rugged individualism, effectively placing government in the dark until the stock market crash of 1929. A few years later, the rise of Franklin D. Roosevelt, his New Deal reforms, and the marble cake federalism he inspired grew the federal government to its most interventionist state in American history.
Social welfare programs and comprehensive federal regulations persisted throughout the 1950s and 60s – albeit less so as markets flourished with a growing middle class.[1] Over time, interventionist policies began to wear out its welcome. By the 1980’s, the “Reagan Revolution” spearheaded a complete reversal on the public’s perception of government, advocating for deregulation, decentralization, and personal responsibility. In the 40 years since, limited government and a free market has remained in modern U.S. economics. In the last several years, however, public interest toward social programs have begun to gain momentum again, such as universal healthcare and the Green New Deal.[2]
Why does the United States consistently shift course on economic policy? Some historians argue that these fluctuations are the result of the government and their constituency “getting into their own way.” For example, many political commentators attribute Ronald Reagan’s rise to the racist cultural backlash of the Civil Right Movement more so than the nation’s criticism of high taxes and over-regulation.[3][4]
This is not a novel concept. Thomas Jefferson, in a 1789 letter to James Madison, suggested that a nation’s constitution would expire after one generation (19 years), otherwise its enforcement would be “an act of force and not of right.”[5] In context, Jefferson’s observation that future generations of Americans would ideologically differ from their ancestors only sought to suspect changes in regimes and individual liberties, not the capitalist economy. However, does a lifespan exist for economic systems? Does a free market or centralized economy have an expiration date over time? More importantly, if economic systems inevitably fail, can governments address it preemptively?
In the several months that I have studied modern international development, I observed a reoccurring pattern of public and private systems disrupted by their own institutional structures; what I would refer to as “stagnation.” For instance, governments are accustomed to centralizing power when there is perceived market failure in their economies. Over time, centralization can become too bureaucratic and bottlenecked with work, stifling progress. Likewise, economies that are “free” from centralization tend to make private firms exploitative, resulting in market failure and stifling progress. Thus, the cycle continues. Neither governments nor private firms want to deliberately fail or become inefficient, yet it seems to become inevitable. To elaborate on this, we can tie this phenomenon with a few international examples and case studies.
One of the most prevailing cases of foreseeable stagnation today comes from Venezuela. In the aftermath of World War II, several underdeveloped countries sought to mend their lack of interconnected markets, poor human capital, and low-skilled labor to make themselves autonomous from colonizing nations.[6] This was done with robust government intervention, including large infrastructure projects, public investments in education, job creation, and polices to discourage imports on goods.[7] Venezuela, whose territory sits under enormous crude oil reserves, sought to nationalize its oil industry in 1975 to receive billions in additional public revenue.[8] As the country became one of the largest oil exporters in the world, the intervention was beneficial to its peasant population. In the late-1990’s, the government redirected its oil revenue to finance education, health, and housing programs for the poor.[9] This effectively reduced extreme poverty to 8.5% by 2011, compared to 23.4% in 1999.[10]
Yet, in the midst of all the goodwill the social programs had to offer, Venezuela was evidently headed for an economic disaster. The government’s gripping dependency on oil exports, coupled by the 2008 global financial crisis, U.S. sanctions, a global demand for cheap crude, and higher social service costs shifted the country’s thriving economy into hyper-inflation, unemployment, and severe instability.[11] Why didn’t President Hugo Chavez or Nicolas Maduro diversify government revenue streams during their rule? Economist Anne O. Krueger, who had written about the causes of “government failure” in 1990, noted that public institutions can be rather oblivious to disrupting natural economic growth, including mismanaging resources for government projects and monopolizing skilled laborers out of the private sector.[12] For Venezuela, public institutions fought to keep their oil export system running even if failure was certain.
However, Krueger’s observation seems to imply that economies would not fail if public institutions merely restrained themselves. By the end of the 20th century, several regimes that used highly interventionist policies to prosper on the world stage led to stagnation and recession, including the Soviet Union, Argentina, and Brazil.[13][14] Again, historians and academics alike attributed their fall to the government getting in its own way, seemingly overlooking the economic success they originally mustered. There is, of course, merit to government failure. Michael Blumenthal, whose 1979 reflection as U.S. Secretary of the Treasury foreshadowed the Reagan era, described government as too bureaucratic to directly administer objectives, which differed from the straightforward top-down management given to business leaders.[15]
Yet, neither Krueger or Blumenthal note that stagnation exists outside of interventionism and the public sector. One can look, for example, at the recent downturn of General Motors Company, which was once the embodiment of U.S. industrial and capitalist might. The automobile manufacturer rose to global prominence through its innovative mass production system from the early to mid-20th century, only to file bankruptcy for its stubbornness to evolve with foreign manufacturers.[16] Or one can look at Henry Farrell’s take on “Silk Road,” a libertarian experiment built around an online market for illegal drugs that ultimately collapsed from its own thievery, corruption, and absence of authority.[17] Unlike public institutions, General Motors and Silk Road stagnated despite their incentive to compete and profit.
In reality, resolutions to break economic inefficiency away from government have historically produced the same stagnation effect in the long-term. Despite Milton Friedman’s pencil allegory, which famously concluded that the international machination to produce a pencil can only come from the “magic of the price system,” free market advocates tend to minimize public institutions for their role as key intermediaries between firms.[18] It is difficult to imagine what a capitalist economy would look like without any consumer protection rights, contracts, property rights, or the ability to file civil or criminal charges.
Here we can assess the legacy of the Reagan Revolution and the principal philosophy of trickle-down economics. First, the short-term impact of government decentralization had demonstrable success. From 1981-1989, Reagan’s administration saw job creation rise by 17.7%, the second largest uptick in modern American history since Jimmy Carter.[19] This market stimulation was second only to Bill Clinton, a democrat who was so influenced by Reagan that it led him to adopt a “third way” centrist platform.[20]
But the lasting legacy of “Reaganomics” nearly 40 years later is far more mixed and critical. Decentralization disproportionately advantaged corporations and the nation’s top-earners, who were the prime targets of financial, environmental, labor, and consumer protection regulations. Today, the purchasing power of the average American worker has remained the same since the 1980’s, with wage increases mostly benefiting those already wealthy.[21] For CEOs, earnings have increased twelve-fold compared to their employees despite the nation’s increased productivity.[22] But perhaps more astonishing is the wealth gap between the top 1% of American earners relative to the middle class. By one estimate, only three billionaires – Jeff Bezos, Bill Gates, and Warren Buffet – control as much money as the bottom half of all U.S. workers in 2019, a distinction not seen since the Gilded Age.[23] Compound this with cuts to social services, and it is clear that the policy for non-intervention has contributed to market failure. Today, 54% of U.S. adults favor more government intervention.[24]
Flip-flopping attitudes toward government involvement seems like a paradox. There is no wrong answer between interventionist nor non-interventionist economic policies despite being on opposite ends of the spectrum. The Roosevelts and the Keynes of the world had greatly progressed state development the same way Reagan and Friedman did in their times. On the other hand, these schools of thought cannot both be right either because both have consistently failed without being reformed or eventually overthrown. Based on these historical patterns, at least two theories can be hypothesized on the fundamental nature of economies.
The first theory is that all economies strive to evolve into the perfect medium; a mixed system that embraces free markets and public institutions that countermeasures native externalities. Known as “social capitalism,” the system utilizes the best elements of intervention, such as anti-trust laws, wealth redistribution, and safety net programs (e.g. social security) without severely disrupting the autonomy of private firms and markets. Marxist sociologist Erik Olin Wright, distinguished for his scholarly work on anti-capitalism, concurred with this hypothesis in-part by stating that free market economies “tamed by well-crafted state policies” were “the only viable options.”[25]
The second theory, contrived from my research and may or may not be an existing concept among academic circles, is that economies are meant to be dynamic. In layman’s terms, all economic models have a lifespan before it sinks from its own weight, such as expanding beyond what it can realistically control. This theory differs from the first one, which assumes that radical policies pro or against intervention are doomed to fail. Seeing how even radical policies make significant short-term gains, this theory does not exclude their legitimacy. Since economies have a lifespan, countries that implement heavy interventionist or non-interventionist systems can progress faster so long as they are willing to drastically offset polices periodically to avoid stagnation. Using the United States as an example, the economy could theoretically have a New Deal and a Reagan Revolution cycle every 20 years, whereby the markets can apply more short-term gains and little to no long-term slowdowns.
If either of these theories have merit to them, they provide some interesting implications about the future of economic policy. The former has already gained mainstream attraction in contemporary politics across the generous welfare systems of the European Union, Canada, Australia, and Japan. Whether the “taming” programs continue to survive or collapse in the coming decades will be instrumental for third world and developing countries finding an economic endgame. Some impact was already observed by Salo V. Coslovsky and Richard Locke in 2013, who oversaw Brazil monitoring labor violations and environmental damage from their sugar cane industry while protecting its $20 billion USD revenue.[26]
While the alternative hypothesis may seem “ignorant” of how economies function, I believe it is worthy of debate and consideration. Policymakers, for instance, traditionally view corruption as a destructive influence on the public sector. Yet, countries like Ukraine and China have successfully used bribery to keep public officials effective in delivering good results.[27][28] This is an ironic but sobering reminder how our preconceived notions on economic cycles should also be challenged. The idea that the politics of FDR and Reagan are complimentary to one another instead of threats or obstacles may not be necessarily misguided. If the second theory holds weight, it would imply that countries could spotlight stagnation at its infancy and forecast suitable economic policies generations ahead, minimizing – if not eliminating – the impacts of recession and government failure. Could the United States have predicted and prevented the 2007-2008 financial crisis in the 1980s? Could Venezuela have avoided hyperinflation by diversifying their revenue years or decades earlier? This ability could be revolutionary in the face of future international development. It is important that more research explores this subject matter in the years after the Covid-19 pandemic. Only time will tell which interventionist and non-interventionist systems will prevail.
Work Cited
[1] MacLeod, Laurie, Darrel Montero, and Alan Speer. “America’s Changing Attitudes Toward Welfare and Welfare Recipients, 1938-1995 Recipients, 1938-1995.” The Journal or Sociology and Social Welfare 26.2 (1999). Print.
[2] Jones, Bradley. “Increasing Share of Americans Favor a Single Government Program to Provide Health Care Coverage.” Pew Research Center. Pew Research Center, 29 Sept. 2020. Web. 13 Dec. 2020.
[3] Levin, Josh. “Being Right About Reagan’s Racism Was Bad for Jimmy Carter.” Slate. The Slate Group, 01 Aug. 2019. Web. 13 Dec. 2020.
[4] Witcher, Marcus. “Perspective | Why It’s Wrong to Credit Racist Appeals for the Rise of Ronald Reagan.” The Washington Post. WP Company, 07 Aug. 2019. Web. 14 Dec. 2020.
[5] “Thomas Jefferson on Whether the American Constitution Is Binding on Those Who Were Not Born at the Time It Was Signed and Agreed to (1789).” Online Library of Liberty. Liberty Fund Inc. Web. 13 Dec. 2020.
[6] Frank, Andre Gunder. “The Development of Underdevelopment.” Monthly Review 18.4 (1966): 17. Print.
[7] Amsden, Alice H. “Say’s Law, Poverty Persistence, and Employment Neglect.” Journal of Human Development and Capabilities 11.1 (2010): 57-66. Print.
[8] “Venezuela Nationalizes Her Petroleum Industry.” The New York Times. The New York Times, 30 Aug. 1975. Web. 13 Dec. 2020.
[9] “How Did Venezuela Change under Hugo Chávez?” The Guardian. Guardian News and Media, 04 Oct. 2012. Web. 13 Dec. 2020.
[10] “How Did Venezuela Change under Hugo Chávez?” The Guardian. Guardian News and Media, 04 Oct. 2012. Web. 13 Dec. 2020.
[11] Kiger, Patrick J. “How Venezuela Fell From the Richest Country in South America into Crisis.” History.com. A&E Television Networks, 09 May 2019. Web. 13 Dec. 2020.
[12] Krueger, Anne. “Government Failures in Development.” The Journal of Economic Perspectives 4.3 (1990): 9-23. JSTOR. 2011. Web. 27 Jan. 2011.
[13] Paolera, Gerardo Della, and Alan M. Taylor. A New History of Argentina. Cambridge: Cambridge UP, 2003. Print.
[14] Helfand, Steven M., and Antônio Márcio Buainain. “How Did Brazil Go from Rising BRIC to Sinking Ship?” The Conversation. The Conversation US, 31 Jan. 2020. Web. 13 Dec. 2020.
[15] Blumenthal, W. Michael. “Candid Reflections of a Businessman in Washington.” Time 29 Jan. 1979: 36. Print.
[16] Glass, Ira. “NUMMI (2015).” This American Life. 27 July 2015. Web. 13 Dec. 2020.
[17] Farrell, Henry. “Dark Leviathan.” Aeon. Aeon Media Group, 20 Feb. 2015. Web. 13 Dec. 2020.
[18] Rodrik, Dani. “Milton Friedman’s Magical Thinking.” Project Syndicate. 11 Oct. 2011. Web. 13 Dec. 2020.
[19] O’Keefe, Brian, and Nicolas Rapp. “How President Trump Measures up on Jobs in 6 Charts.” Fortune. Fortune Media, 19 Oct. 2020. Web. 13 Dec. 2020.
[20] O’Keefe, Brian, and Nicolas Rapp. “How President Trump Measures up on Jobs in 6 Charts.” Fortune. Fortune Media, 19 Oct. 2020. Web. 13 Dec. 2020.
[21] DeSilver, Drew. “For Most Americans, Real Wages Have Barely Budged for Decades.” Pew Research Center. Pew Research Center, 30 May 2020. Web. 13 Dec. 2020.
[22] “Income Inequality.” Inequality.org. Institute for Policy Studies, 27 Feb. 2020. Web. 13 Dec. 2020.
[23] “Wealth Inequality.” Inequality.org. Institute for Policy Studies, 28 Aug. 2020. Web. 13 Dec. 2020.
[24] Brenan, Megan. “New High 54% Want Government to Solve More Problems in U.S.” Gallup.com. Gallup, 07 Dec. 2020. Web. 13 Dec. 2020.
[25] Wright, Erik Olin. “How to Be an Anticapitalist Today.” Jacobin. 12 Feb. 2015. Web. 13 Dec. 2020.
[26] Coslovsky, Salo V., and Richard Locke. “Parallel Paths to Enforcement.” Politics & Society 41.4 (2013): 497-526. Sage. Sage Publications, 5 Nov. 2013. Web. 13 Dec. 2020.
[27] Darden, Keith. “The Integrity of Corrupt States: Graft as an Informal State Institution.” Politics & Society 36.1 (2008): 35-59. Print.
[28] Howell, Jen Patja. “The Lawfare Podcast: How Corruption Works in China.” Lawfare. The Lawfare Institute, 24 July 2020. Web. 13 Dec. 2020.
