The American Political Economy Lecture Notes

1. Questions
1. What is the political significance of the capitalistic economy?
2. How does capitalism affect democracy? Are the two compatible or in conflict? If in conflict, how can the conflict be resolved? How has it been resolved historically?
2. Review
1. What is capitalism?
1. Definition: Capitalism is an economic system in which all the elements of production (equipment, labor, material resources, knowledge & information, ecosystems and living organisms) are employed (by individuals, corporations, worker-owners, or other entities) to produce goods and services for sale in a competitive market with the intention of garnering a profit for the enterprise, a portion of which is reinvested in new, and typically intensified, production.
2. Important features of capitalism:
1. Private property
2. Profit motive
3. Contracts and their protection by law
4. Market competition
5. Technical innovation
6. Growth imperative
7. Economic cycles
3. Historical development of capitalism:
1. mercantilism: state dominated, pursuit of favorable trade balances, efforts to establish national monopolies over trade with peripheral regions, often intensive state regulation of economic activity, persistence of medieval doctrine of organic society resulting in efforts by the state to provide for the poor.
2. industrialization: beginning in the 1750s in England, later elsewhere, and characterized by a predominance of individual/family ownership, laissez-faire state, intense competition, acute business cycles, extremes of poverty and wealth).
3. regulated national capitalism: the state becomes manager of the macro-economy in the interests of stability and engages in social regulation to lessen or prevent harmful social and environmental consequences of capitalism.
4. contemporary globalization: globally integrated production, global financial flows, globally distributed ownership, weakening of nation-states, dominance of neoliberalism, weakness of global regulatory and political infrastructure, threat of global overproduction and economic crisis.
3. Conflicting views of the relation of capitalism to democracy
1. Elite democratic -- economic liberalism
2. Popular democratic critique
3. See table, "Conflicting Views of the Relationship of Capitalism to Democracy", contrasting elite and popular democratic views of the market, human nature, the state, corporate power, and labor unions.
1. Notes:
1. Almost no one (excepting libertarians) defends a pure laissez-faire government. Conservatives advocate a limited role for the government in the economy, including:
1. Supplying public goods, including national defense, education, and highways;
2. Macroeconomic management (interest rates, money supply).
4. The current problems of economic globalization
1. Background: The post WWII boom and the social accord on which it was based.
1. Demand stimulation--Keynesian economics. The problem of the Great Depression was economic paralysis: lack of demand meant that factories lay idle, workers were unemployed, food was destroyed. The economic orthodoxy of the time counseled patience and reducing the costs of production, but this meant lower wages and less revenue for government programs, which in turn kept demand low (a vicious circle). The Keynesian solution was government expenditures designed to stimulate demand and, more generally, to manage the business cycle. A full-employment, moderate to high growth economy with only the mildest downturns seemed possible.
2. In the United States, Keynesianism is sometimes associated with the New Deal (the domestic policies and political coalition of the Democratic Party from Franklin Delano Roosevelt to Lyndon Johnson) even though Roosevelt only became convinced that deficit spending by the government was necessary to stimulate recovery in 1937, when his attempt to balance the budget undermined a tentative recovery.
3. The New Deal did, however, establish many of the key features of the social accord that characterized the period of prosperity after World War II:
1. The New Deal established legal protection for labor's the right to organize and gave unions a place in the political system. The informal but enduring capital-labor accord guaranteed unionized workers a rising standard of living and job security in exchange for relative labor peace, job intensification, and exclusive control of investment decisions by capital. In turn, rising living standards sustained the vibrant domestic market for the consumer capitalism of the post-war era.
2. Social welfare programs such as Social Security, unemployment compensation, food stamps, and aid to families with dependent children reduced social conflicts and divisions, engendered support for the political and economic system, and also helped sustain consumer capitalism. They also institutionalized the distinction between programs based on "entitlement" and those based on "need."
3. The New Deal involved the federal government much more extensively in regulating and stabilizing the economy. This included an array of other measures besides deficit spending: public works projects to build infrastructure (two of the largest being the Grand Coulee dam and the Tennessee Valley Authority) and employ millions; economic regulation (of banking, the stock market, agricultural commodities, communications, and much else); mortgage relief for both farmers (the Farm Credit Administration) and homeowners (Federal Housing Administration); and for a time price stabilization (National Recovery Administration).
4. Military Keynesianism: New Deal policies failed to lift the country out of Depression-only the enormous economic stimulus of World War II did that. After dropping off at war's end, high levels of military expenditure resumed during the Korean war (1950-1953) and continued throughout the Cold War and into the present. Military expenditures have served as a form of demand stimulus-"military Keynesianism"-in a country where the social-welfare role of government was ideologically much more circumscribed than in Western Europe. They have also functioned as state subsidies to industries in key technological areas (computers, aviation, missiles and satellites, etc.).
5. Key economic indicators of the boom and subsequent downturn in the US:
1. Rising unemployment, rising inflation, declining productivity growth and declining GNP growth.  See the "Postwar Boom and Long Downturn: United States--Phase Averages" chart.
2. Stagnating or declining real wages:
   1. 1890-1996 (chart not available online);
   2. 1965-1996 (see text, p97).

1. 1973--mid-1990s: the long downturn after the post World War II boom
1. Evidence of the downturn in the US, Germany, Japan, and the G7 countries combined (see linked bar charts):
1. declining net profits;
2. declining annual increase in total output;
3. declining rate of productivity growth;
4. declining rate of increase in real wages;
5. rise in unemployment rate.
2. Explanations
1. The dominant, and conservative, supply-side explanation: The problem is a lack of investment capital due to (a) tax structure; (b) government regulation; (c) welfare expenditures (indirectly); and (d) excessive demands by labor.
1. According to this view, the New Deal social accord locked corporations into wage commitments that continued to rise despite a decline in the rate of productivity increase. There was thus a wage squeeze on profits.
2. Reaganism, with its tax cuts disproportionately benefitting the wealthy, cutbacks in social welfare, and deregulatory and anti-labor union policies, was a supply-side approach to the downturn.
3. Some of the social and political consequences of Reaganism.
2. Left democratic diagnoses emphasize
1. mounting international competition;
2. military expenditures as contributing to a loss of competitiveness by the US;
3. erosion of the postwar social accord:
1. declining union membership;
1. See chart, "Membership in Labor Unions, 1900-1996" (text, p91)
2. expansion of social welfare and regulation--Medicaid, Medicare, environmental legislation, Occupational Safety and Health Administration (1970), Consumer Safety Administration (1972), etc. raised business costs and soon provoked a counterattack;
4. the tendency of American corporations to place greater emphasis on supervisory control versus accommodation with workers with the result that higher supervisory costs and reduced worker involvement handicapped them in international competition.
3. A specific theory of the long downturn (Robert Brenner).
1. Brenner argues, against both conservatives and some leftists, that neither wage pressure nor the increasing costs of government regulation can explain the long downturn. In an era of globalization, he claims that capital can always outflank national governments and labor movements.
1. Capital can transfer investment in new plants to places where labor is weak.
2. Governments cannot afford to alienate capital, since this will cause economic misery and a fall in government revenues.
2. Brenner insists that the growth of global competition was responsible for the economic downturn. He traces its beginning to the spectacular growth of trade beginning in the early 1960s, which put US manufacturers under tremendous pressure from lower cost producers (Brenner 1998, 36).
1. An essential part of the background for this is the contrast between plant, equipment, and labor relations in the US versus its new competitors (chiefly Japan and Germany). US manufacturers had large fixed investments in factories from whose output they hoped to profit for years. Their new competitors had to build new factories, which enabled them to take better advantage of cost-cutting innovations.
2. US manufacturers did not, for the most part, pull out of sectors under extraordinary competitive pressure, but instead:
1. launched an attack on wage costs and regulatory costs;
2. restructured and reinvested;
3. took advantage of dollar devaluations to increase exports.
3. The emergence of yet more competitors, from East Asia (Korea, Taiwan, etc.) further intensified competition.
4. With limited options for moving out of competitively saturated areas into newer ones with higher profit margins, most firms elected to stay in place, pursue cost-cutting strategies, and accept a lower rate of profit.
1. Corporate downsizing (text p88-89) is an important part of this. Many leading 'American' multinationals have sought to restore or enhance profitability through massive workforce reductions.
5. The overall result has been to exacerbate the problems of over-capacity and over-production. At the same time, reductions in wages and social welfare threatens to lower demand, making it more difficult to escape from stagnation.
3. The prospects: renewed growth led by the US or worsening crisis?
1. Profitability rebounded significantly in the US over the course of the 1990s, reaching to within 15 percent of its 1960s highs in 1997. This has been accompanied by substantial increases in investment in new plant and equipment, which in turn contributed to spectacular improvements in manufacturing productivity growth, which averaged 5.5 percent a year between 1993 and 1996 (Brenner, 252).
2. The key question, however, is whether the world economy can finally transcend the over-capacity and over-production in manufacturing which have limited economic growth since the end of the 1960s.
3. Optimistic scenario: The US economy leads the world out of its doldrums. The growth of its market spurs rising global investment. Its competitors, having contracted and reorganized their own manufacturing sectors (reducing workforces, adopting 'leaner' production techniques, striving to renegotiate traditional collective bargaining agreements) during the recessions of the early 1990s, are ready to supply cheaper goods to the US market while absorbing (as economic dynamism returned) ever greater quantities of US exports.
4. Doubts about the optimistic scenario:
1. Since "virtually all of the world's leading economies are seeking to emerge from their difficulties through major, simultaneous increases in their reliance on the world market, based on still another and deeper phase of wage repression and macroeconomic austerity, the inevitable flood of exports is more likely to issue in redundancy of output, intensified competition, and over-supplied markets than in the mutual gains from trade" (Brenner, 256).
2. For the US in particular, the growth of manufacturing capacity in 1997 (4.3 percent) was well ahead of the growth of consumption, making export growth essential to the continuation of the boom.
3. The Southeast Asian crisis:
1. Rapid economic development of the region from the mid-1980s onward was fueled chiefly by Japanese investment, motivated by the need to get around the rising value of the yen, which made Japanese exports less competitive.
2. By the spring of 1995, the exchange value of the yen began to fall, opening the way for increased exports from Japan and jeopardizing the Southeast Asian export boom (due both to heightened competition from Japan in the US and other export markets and decreased exports to Japan).
3. Eventually, this led Western and Japanese banks to withdraw their capital. The panicky exit of lenders made it impossible for producers to roll-over their loans, leading to bankruptcies and forced sales.
4. Economic contraction led to a sharp drop in the value of the regional currencies, making it even more difficult for borrowers to repay foreign loans.
5. The IMF, concerned that US, European, and Japanese banks be fully repaid, demanded tighter credit and austerity policies, causing further economic contraction and devastating depressions. Thus between June 1997 and spring 1998 stock markets fell by 89 percent in Indonesia, 75 percent in South Korea, 73 percent in Malaysia, 71 percent in Thailand, and so on (Brenner 259).
4. The crisis in Asia poses a dire threat to Japan:
1. By 1996, Asia absorbed 45 percent of its exports and about the same amount of its direct foreign investment in manufacturing.
2. Japan's banks were responsible for between 30 and 40 percent of the region's outstanding loans from the advanced capitalist countries.
5. The pessimistic scenario: The crisis in Southeast Asia, including Japan, reduces US exports to that region significantly, dampening US growth. At the same time, Asian exports put increasing pressure on US import markets and US prices. US manufacturing profitability falls, leading to a fall in stock prices (already underway), in the rate of investment, and thus in productivity growth (which is dependent on investment). Thus the US boom comes to an abrupt end, leading to a generalized global recession (or worse).
   

References

Brenner, Robert. 1998. The Economics of Global Turbulence. New Left Review. July/August.