US economic myths. Part one, government intervention

Written by Warwick Lightfoot Monday, 22 August 2011 11:52
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Traditionally America has seen itself and been seen as ‘exceptional’ in many ways including in its attachment to free enterprise.

In this caricature America was able to produce great wealth through rugged individualism and unbridled capitalism, with little in the way of a welfare state or social safety net.

America did not have many of the structural problems of other advanced OECD economies caused by expensive public spending on social welfare. Although it may exhibit economic inequality its markets were not held back by excessive regulation or a historically heavy burden of public expenditure. This difference between America and other economies was most vividly exhibited in the flexibility of its labour market compared to that of Europe.

The United States over the last thirty years appeared to have fewer structural rigidities and created more jobs and lower rates of unemployment over the economic cycle than other comparable western European economies.

This picture of rugged individualism and unbridled markets has always been something of a caricature.

Long tradition of public intervention

President Franklin Delano Roosevelt’s New Deal fundamentally changed the American economy.

At the high point of his administration’s peacetime interventionist policies in the mid-1930s wages and prices in large parts of the economy were directed by the Federal Government.

The New Deal’s principal legacy, the creation of Social Security a Federal pension and social insurance scheme drew on the Progressive political legacy.  Progressives at the end of the 19th century and in the early 20thcentury had established pension schemes in many states, resulting in the extensive regulation of working conditions in states such as New York to tackle sweated labour and dangerous working conditions. At the level of the Federal Government the Progressive legacy was the formidable combination of the Sherman and Clayton anti-trust legislation on competition motivated by the desire to rein in the so-called robber barons, the creation of the Federal Reserve System and the establishment of the Federal Income Tax in 1913.

If FDR built on an older Progressive legacy of public intervention his political successors looked to the New Deal.

President Truman had the Fair Deal and Presidents Kennedy and Johnson legislated for the New Frontier.

In the 1960s Medicaid was established for low income families of working age and Medicare was created to finance health care for elderly people. In the 1970s after a protracted debate stimulated by Milton Friedman’s suggestion for helping the working poor by giving them a negative income tax during Johnson and Nixon administrations, President Ford signed legislation creating the Earned Income Tax Credit that assists low income working families. It was tripled by President Clinton in 1995 and has become of the principal transfer payments in the United States.

Whatever else America may be it is not a paradigm of unregulated markets.

In Part 2, Warwick will look at the US labour market.

Warwick Lightfoot is author of the forthcoming: America's Exceptional Economic Problem

Last modified on Tuesday, 23 August 2011 09:33

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