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Outline of the U.S. Economy

2009 Edition

Published in 2009 by: Bureau of International Information Programs

United States Department of State

http://www.america.gov/publications/books.html#outline_economy

STAFF

Editor in Chief: Michael Jay Friedman

Managing Editor: Bruce Odessey

Design: David Hamill

Graphs: Vincent Hughes

Photo editor: Maggie Sliker

FRONT COVER: top illustration © Dave Cutler / Stock Illustration Source

bottom illustration © Jane Sterrett / Stock Illustration Source

ABOUT THE AUTHOR

This edition of Outline of the U.S. Economy has been completely revised by Peter Behr, a

former business editor and reporter for the Washington Post. It updates several previous

editions that were issued first by the U.S. Information Agency and then by the U.S. Department of State beginning in 1981.
iii

Outline of the U.S. Economy

CHAPTER 1: The Challenges of this Century 1

The world’s largest and most diverse economy faces

the most severe economic challenges in a generation

or more.

CHAPTER 2: The Evolution of the U.S. Economy 10

The economy has expanded and changed, guided by

some unchanging principles.

CHAPTER 3: What the U.S. Economy Produces 48

The large U.S. multinational firms have altered their

production strategies and their roles in response to

globalization as they adapt to increasing competition.

CHAPTER 4: Competition and the American Culture 62

Competition has remained a defining characteristic of

the U.S. economy in the American Dream of owning a

small business.

CHAPTER 5: Geography and Infrastructure 76

Education and transportation help hold together widely

separated and distinct regions.

CHAPTER 6: Government and the Economy 90

Much of America’s history has focused on the debate

over the government’s role in the economy.

CHAPTER 7: A U.S. Economy Linked to the World 114

Despite political divisions, the United States shows

no sign of retreat from global engagement in trade

and investment.

CHAPTER 8: A New Chapter in America’s Economic Story 130

The United States, in its democratic way, faces up to

immense economic challenges.

C O N T E N T S
iv
Outline of the U.S. Economy

v

P R E F A C E

“The panic itself was felt in every part

of the globe,” The Wall Street Journal reported.

“It was as if a volcano had burst forth in New York,

causing a tidal wave that swept with disastrous

power over every nation on the globe.” One of the aftereffects: “an accumulation of idle money in the banking

centres.” The date of this item? January 17, 1908.

Given the sobering news that of late has arrived with distressing frequency, preparing this edition of Outline of the U.S.

Economy has been a real challenge. We have tried to approach

the task with a sense of historical consciousness. In addition

to the 1908 events depicted above, the United States has endured a Great Depression (began 1929), a Long Depression

(began 1873), a Panic of 1837—“an American financial crisis,

built on a speculative real estate market,” says Wikipedia—

and assorted other recessions, panics, bubbles, and contractions, and emerged from each with its economic vigor

restored and its republican institutions vibrant.

We hope that our readers will find this new entry in our

Outline series frank, informative, and above all useful. We offer

it in the spirit of optimism embedded deeply in American life.

—The Editors

The

Challenges

of this

Century

The world’s largest

and most diverse

economy currently faces

the most severe economic

challenges in a generation

or more.

C H A P T E R

© photosbyjohn/Shutterstock
2

© AP Images

Above: From left, Vice President-elect Joe Biden and his wife, Jill, President-elect

Barack Obama and his wife, Michelle, stop in January 2009 on their way to inauguration and big challenges. Previous spread: Times Square in New York City, the

U.S. financial capital, is reeling from the global financial collapse but still pulsating with economic energy.
3

The United States “continues to surprise...

It continues to renew itself.”

SECRETARY CONDOLEEZZA RICE

U.S. Department of State

2008

The financial crash of 2008 brought a sudden,

traumatic halt to a quarter-century of U.S.-led global

economic growth. The final consequences of this shock for

the U.S. and world economies remain uncertain at this writing.

But in the midst of the crisis, Americans chose new national leadership in a peaceful transfer of power that demonstrated again

the strength of the country’s democratic process and the people’s

confidence in the ultimate resilience of the American economy.

Since the election of Ronald Reagan as president in 1980, the United

States had championed globalization of trade and finance. It opened its

doors wider to foreign products and investment than any other major

economy. America’s entrepreneurial culture was the world’s model. The

synergy of U.S. political freedoms and free markets appeared vindicated

by the Soviet Union’s collapse in 1991. At home, a bipartisan consensus

emerged in favor of further economic deregulation, which, in turn,

spurred a freewheeling expansion of new types of investments that

helped fuel a vast increase in international finance and commerce.

But America’s growth came to rely increasingly on debt. Consumers,

businesses, home buyers, and the U.S. government itself borrowed heavily in the belief that the value of their investments—including, fatefully

for many, their homes—would continue to grow. The ready availability

of credit on easy terms drove home prices, in particular, ever higher.

When the housing boom finally collapsed in 2007, it exposed a fragile

layer of high-risk home loans made over a decade to families that could

not afford them, particularly if the economy weakened. Some borrowers

had purchased homes they could not afford, trusting that in a rising market they could always sell their properties at a profit. As housing prices

fell, homeowners who no longer could keep up with their mortgage payments were unable to pay their debt by selling their homes. These home
4

loans thus were the unstable foundation for a massive but largely

invisible speculation on mortgage

securities and financial contracts

sold around the world.

Triggered by the housing collapse, this edifice toppled in 2008.

Foreclosures grew, and panic followed. Giant Wall Street financial

firms fell, reorganized, or were

combined with larger competitors.

Stock markets plunged, and the

world’s economies headed into

the worst crisis since the Great Depression of the 1930s.

The catastrophe revealed weaknesses unheeded during the boom.

U.S. consumption had for too long

outpaced savings. Financial regulators’ faith in the efficiency of economic markets led them to

underestimate the mounting risks.

Optimism and ambition among

many Americans bred excess and

recklessness. Lessons from past

booms and crashes were ignored as

many focused only on the present.

But the crisis also revealed the

ability of the American government to respond quickly and decisively to the challenge. Even at

a peak of the crisis in the last two

months of 2008, foreigners

viewed the United States as

among the most economically

safe and politically stable investment arenas. So eager were they

to purchase U.S. Treasury securities that the return on these investments dropped nearly to

zero: Once again, the dollar was

a refuge in financial storms.

Washington officials responded

with unprecedented measures to

head off a global collapse of lending. The federal government and

the Federal Reserve central bank

seized control of the two largest

U.S. home mortgage firms and

bailed out leading banks and a

major insurance company, actions

that would have been politically

unthinkable before the crisis. An

initial $700 billion bank rescue

plan won bipartisan support in the

U.S. Congress.

Since the start of the global

crisis in 2008, U.S. government

agencies and the central bank

had pledged an astonishing

$12.8 trillion—equal to nearly

the entire U.S. annual economic

output—in loans, loan purchases, and credit guarantees

seeking to halt the financial

freefall. The Federal Reserve also

promised to buy more than $1

trillion in bonds backed by devalued home mortgages. A leading

economist observed that “no one

else—not even China—had a big

enough balance sheet” to mount

such a response.

The crisis erupted in the

midst of the 2008 presidential

election and helped clinch victory

for Senator Barack Obama, the

Democratic Party candidate.

Many interpreted the electoral

triumph of the United States’

first African-American president,

a man who rose rapidly from

humble origins, as an affirmation

of the nation’s signature traits of

optimism and faith in this country. As President George W. Bush’s

secretary of state, Condoleezza

Rice, put it, one can “go from
5

modest circumstances to extraordinary achievement.”

This edition of the Outline of

the U.S. Economy is a primer on

how the U.S. economic system

emerged, how it works, and how

it is shaped by American social

values and political institutions.

Always present, given the trying

times during which this edition

neared completion, is a sense of

how all these factors may guide

the nation’s responses to the extraordinary economic challenges

that lie ahead.

This chapter offers a brief

over-view of the U.S. economy

today. Chapter 2 follows the historical evolution of the economy

from colonial times to the present. Chapter 3 concerns the beliefs, traditions, and values that

underpin the United States’ representative democracy and its

economy. Chapter 4 profiles the

makeup of the U.S. economy—

what it produces, exports, and

imports. Chapter 5 focuses on

the major regions of the country

whose cultures are responsible for

much of America’s diversity, and

the linkages of infrastructure and

education that have tied the

country together. Chapter 6 describes the ongoing debate over

the government’s role in the

economy. Chapter 7 examines

the impact of globalization and

trade on the U.S. economy, its

companies, and its workers. And

Chapter 8 sums up the hurdles

that confront the American economy in a fast-changing and lesspredictable world.

An Economy Driven by Competition

Many economists agree that

an understanding of the American economy begins with Adam

Smith’s concept of the “invisible

hand.” Smith, considered the father of economics, wrote in his

1776 book The Wealth of Nations

that an economy performs best

when buyers and sellers seek the

best outcome for themselves, as if

guided by an unseen hand. The

sum of their many independent

transactions is the most efficient

use of a nation’s resources, he

reasoned. In freely operating

markets, prices are determined

by the interactions of buyers and

sellers. Competition results in

better products and wider prosperity on average than a government-run economy could deliver

—as the failure of communism in

Russia so clearly attests, market

economists say.

An American version evolved

from Smith’s doctrine and other

features of Britain’s merchant

economy. Its centerpiece remains

a matrix of laws, institutions, and

traditions that have shaped the

American economy. The framers

of America’s 1776 Declaration of

Independence from Britain and

1789 U.S. Constitution had

given the new United States

“stars to steer by,” in historian

David McCullough’s words,

meaning the basic political freedoms and restraints on governmental power that Americans

have prized—and debated—

since the country’s founding.
6

But even the strongest supporters of market capitalism acknowledge that it does not

provide all the answers. “For various reasons, the invisible hand

sometimes does not work,” said

economist N. Gregory Mankiw, a

former member of President

George W. Bush’s Council of Economic Advisers. A manufacturer

won’t pay the environmental and

health costs of the pollution emitting from its smokestacks unless

government requires that it do

so. A monopolist or group of

dominant companies can charge

higher prices than a competitive

market would allow. Another former White House adviser, Nobel

Prize winner Joseph E. Stiglitz,

says, “The reason that the invisible hand often seems invisible is

that it is often not there.”

Every generation of Americans

has produced critics of the nation’s economic arrangements.

Historian Henry Steele Commager, writing in the 1950s, said

that “whatever promised to increase wealth was automatically

regarded as good, and the American was tolerant, therefore, of

speculation, advertising, deforestation, and the exploitation of

natural resources, and more patient with the worst manifestations of industrialism.”

Others have pointed to numerous contradictions both seeming and real in the American

economic formula: a consumerled society long on materialism

but short on saving for the future;

a nation of abundant natural resources that has at times abused

this bounty; a political system

grounded in civic equality but reliant on income inequality to motivate citizens to work hard and

invest in learning; a nation with

astonishing wealth at the top and

more relative poverty than in

many of the world’s rich countries.

But the large majority of

Americans subscribes to the idea

of a dynamic economy that embraces competition, invites striving and invention, heaps rewards

on winners, and gives second

chances to those who fail. With

all its contradictions, the United

States has achieved a highly flexible economic system that arguably offers more choices and

opportunities than any other,

and one that has displayed repeatedly its capacity to repair

mistakes and adapt to recessions,

wars, and financial panics, gaining strength from its trials. The

United States “continues to surprise,” Secretary Rice said, following Obama’s election. “It

continues to renew itself.”

The U.S. Economy Today

Even in crisis, the America’s

economy remains the world’s

largest and most diverse. The

total output of U.S. goods and

services—the gross domestic

product—stood at $14 trillion in

2007, nearly three times the size

of Japan’s economy and five times

China’s, based on the purchasing

power of each country’s currency.

With just 5 percent of the world’s

population, the United States is
responsible for 20 percent of total

economic output.

The U.S. gross domestic product per person was nearly $45,000

in 2007, compared to a worldwide

average of $11,000. The economy

poured out $40 billion a day in

goods and services that year,

drawing its fuel from the knowhow of the 150 million Americans

who make up the workforce. Capital provided more fuel: the $5.5

billion in nongovernmental funds

that Americans invested daily in

their businesses and homes. And

there are the nation’s resources of

minerals, energy, water, forests,

and farmland.

The productivity of American

working men and women remains a standard for the world.

The average American worker

produced more than $92,000

worth of products and services in

2007. This is nearly 20 percent

more than that of the average of

a dozen leading European countries and 85 percent higher than

that of China, according to the

U.S. Conference Board. U.S. productivity expanded by an average

2 percent a year from 2000

through 2006, twice the gain in

most of Europe. In one study of

16 major industrial economies,

only South Korea, Sweden, and

Taiwan had higher productivity

growth than the United States

over the same years. These increases in productivity have

helped the United States maintain relatively low unemployment

and inflation.

The World Economic Forum,

whose annual conferences are a

gathering of top international

government and corporate leaders, has regularly ranked the

United States as the world’s most

competitive economy. Major U.S.

companies have stayed atop international markets through a determined focus on innovation, cost

reduction, and the return of profits to shareholders. Of the 2007

Fortune magazine list of the 500

7
8

largest corporations worldwide,

162 were headquartered in the

United States. Japan was second

with 67, and France third with 38.

American technology leadership continues to expand from

current foundations in computers, software, multimedia, advanced materials, health science,

and biotechnology into the frontiers of nanotechnology and genetics. Although the euro is

gaining support as a currency of

choice, the American dollar remains the centerpiece of international commerce.

When Barack Obama took office as president in January 2009,

the immediate crisis dominated

his agenda, and beyond that lay

grave, longer-range challenges.

Record federal budget deficits

stemming from the government

lending in the crisis could challenge the stability of the U.S. dollar. The federal government’s

Above: U.S. companies keep their technological edge at places such as this nanotechnology center at Bell Labs in New Jersey.

© AP Images
9

rising retirement and health care

commitments to an aging population will test the government’s

ability to pay for itself. American

businesses, shareholders, and

consumers could face heavy costs

in adapting processes and products to conserve natural resources

and meet the challenges of climate change. Disparities in educational attainment could

increase. Foreign competition

and technological change could

displace more U.S. jobs.

Harvard University economist

Benjamin Friedman and others

warn that America’s continued

political support for a free flow of

trade and finance and its openness to the world hinge critically

on a continued prosperity for the

large majority of its citizens.

President Obama acknowledged the severity of the challenge in a speech shortly before

his inauguration. But he also reminded the nation of its heritage

and of its inherent strengths. “We

should never forget that our

workers are still more productive

than any on Earth. Our universities are still the envy of the world.

We are still home to the most brilliant minds, the most creative entrepreneurs, and the most

advanced technology and innovation that history has ever

known. And we are still the nation that has overcome great

fears and improbable odds.”

Courtesy of Library of Congress

The

Evolution

of the U.S.

Economy

The economy has

expanded and changed,

guided by some

unchanging principles.

C H A P T E R
12

Courtesy of Library of Congress

Above: Harper’s Weekly published scenes of U.S. farm life in the 1860s, years when

America was poised to become a world manufacturing power. Previous spread:

Salem, Massachusetts, in New England, was one of the most important seaports in

the American colonies at the time of the Revolutionary War.
“Those who labor in the earth are the chosen

people of God, if ever he had a chosen people.”

THOMAS JEFFERSON

1787

13

By the time that General George Washington

took office as the first U.S. president in 1789, the young

nation’s economy was already a composite of many diverse

occupations and defined regional differences.

Agriculture was dominant. Nine of 10 Americans worked on farms,

most of them growing the food their families relied on. Only one person in 20 lived in an “urban” location, which then meant merely 2,500

inhabitants or more. The country’s largest city, New York, had a population of just 22,000 people, while London’s population exceeded one

million. But the handful of larger cities had a merchant class of tradesmen, shopkeepers, importers, shippers, manufacturers, and bankers

whose interests could conflict with those of the farmers.

Thomas Jefferson, a Virginia planter and principal author of America’s Declaration of Independence, spoke for an influential group of the

country’s Founding Fathers, including many from the South. They believed the country should be primarily an agrarian society, with farming

at its core and with government playing a minimal role. Jefferson mistrusted urban classes, seeing the great cities of Europe as breeders of

political corruption. “Those who labor in the earth are the chosen people of God, if ever he had a chosen people,” Jefferson once declared.

Opposing Jefferson and other supporters of a farm-based republic

was a second powerful political movement, the Federalists, often favored by northern commercial interests. Among its leaders was Alexander Hamilton, one of Washington’s principal military aides in the

American Revolutionary War (1775-1783), in which the American

colonies had won recognition of their sovereignty from Britain. Hamilton, a New Yorker who was the nation’s first secretary of the Treasury,

believed that the young, vulnerable American republic required strong

central leadership and federal policies that would support the spread

of manufacturing.

In 1801, Jefferson became the third U.S. president and headed the

Democratic-Republican political party, later to be called the Democratic
14

Party. In 1828, war hero Andrew

Jackson from Tennessee won election as the candidate of Jefferson’s wing, becoming the first

U.S. president from a frontier region. His combative advocacy for

“ordinary” Americans became a

main theme of the Democrats.

He declared in 1832 that when

Congress acts to “make the rich

richer and the potent more powerful, the humble members of society—the farmers, mechanics,

and laborers” who lack wealth

and influence—have the right to

protest such treatment.

Hamilton argued that America’s unbounded economic opportunities could not be achieved

without a system that created capital and rewarded investment.

Hamilton’s Federalists evolved

into the Whig Party and then the

Republican Party. This major

branch of American politics generally favored policies to spur the

growth of U.S. industry: internal

infrastructure improvements, protective tariffs on the import of

goods, centralized banking, and a

strong currency.

A Balancing of Interests

The U.S. Constitution, ratified

in 1788, sought to ground the

new nation’s experiment in

democracy in hard-won compromises of conflicting economic and

regional interests.

“The framers of the Constitution wanted a republican government that would represent the

people, but represent them in a

way that protected against mob

rule and maximized opportunities

for careful deliberation in the best

interests of the country as a

whole,” says professor AnneMarie Slaughter of Princeton University. “They insisted on a

pluralist party system, a bill of

rights limiting the power of the

government, guarantees for free

speech and a free press, checks

and balances to promote transparent and accountable government,

and a strong rule of law enforced

by an independent judiciary.”

The lawmaking power was divided between two legislative

houses. The Senate, whose membership was fixed at two senators

from each state (and until 1914,

who were chosen by the state legislatures rather than by direct

election), was assumed to reflect

business and landholder interests. The Founders created the

House of Representatives, with

membership apportioned among

the states by population and

elected directly by the people, to

adhere more closely to the views

of the broader public.

Another essential constitutional feature was the separation

of powers into three governmental branches: legislative, executive,

and judicial. James Madison, a

primary author of the Constitution and, beginning in 1809, the

nation’s fourth president, said that

“the spirit of liberty...demands

checks” on government’s power.

“If men were angels, no government would be necessary,” he

wrote, in defense of the separation

principle. But Madison also be-
15

lieved that the separations could

not be absolute and that each

branch ought properly to possess

some influence over the others.

The president thus appoints

senior government leaders, chief

federal prosecutors, and the top

generals and admirals who direct

the armed forces. But the Senate

may accept or reject these candidates. Congress may pass bills, but

a president’s veto can prevent their

becoming law unless two-thirds of

each congressional house votes to

override the veto. The Supreme

Court successfully claimed the

right to strike down a law as unconstitutional, but the president

retainsthe ability to nominate new

Supreme Court justices. The Senate possesses an effective veto over

those choices, and the Constitution assignsto Congressthe power

to fix the size of the Supreme

Court and to restrict the court’s

appellate jurisdiction.

The Constitution outlined the

government’s role in the new republic’s economy. At Hamilton’s

insistence, the federal government was granted the sole power

to issue money; states could not

do so. Hamilton saw this as the

key to creating and maintaining

a strong national currency and a

creditworthy nation that could

borrow to expand and grow.

There would be no internal

taxes on goods moving between

the states. The federal government could regulate interstate

commerce and would have sole

power to impose import taxes on

foreign goods entering the country. The federal government was

also empowered to grant patents

and copyrights to protect the

work of inventors and writers.

The initial U.S. protective tariff

was enacted by the first Congress

in 1789 to raise money for the

federal government and to provide protection for U.S. manufacturers of glass, pottery, and other

products by effectively raising the

price of competing goods from

overseas. Tariffs immediately became one of the young nation’s

most divisive regional issues.

Hamilton championed the

tariff as a necessary defensive

barrier against stronger European manufacturers. Hamilton

also promoted a decisive federal

hand in the nation’s finances,

successfully advocating the controversial federal assumption and

full payment of the states’ Revolutionary War debts, much of

which had been acquired at low

prices by speculators during the

war. These measures were popular among American manufacturers and financiers in New York,

Boston, and Philadelphia, whose

bonds paid for the country’s industrial expansion.

But the protective tariff infuriated the predominantly agricultural South. It raised the price of

manufactured goods that southerners purchased from Europe,

and it encouraged European nations to retaliate by reducing purchases of the South’s agricultural

exports. As historian Roger L.

Ransom observes, western states

came down in the middle, object-
16

ing to high tariffs that raised the

prices of manufactured goods but

enjoying the federal tariff revenues that funded the new roads,

railroads, canals, and other public works projects that their communities needed. The high 1828

barriers, dubbed the “Tariff of

Abominations” by southern opponents, escalated regional anger

and contributed to sectional tensions that would culminate in the

U.S. Civil War decades later.

By 1800, the huge tracts of

land granted by British kings to

colonial governors had been dispersed. While many large landholdings remained, particularly

the plantations of the South, by

1796 the federal government had

begun direct land sales to settlers

at $2 per acre ($5 per hectare),

commencing a policy that would

be critical to America’s westward

expansion throughout the 19th

century. The rising tide of settlers

pushed the continent’s depleted

Native American inhabitants

steadily westward as well. President Jackson made the displacement of Indian tribes government

policy with the Indian Removal

Act of 1830, the forced relocation

of the Choctaw tribe to the future

state of Oklahoma over what came

to be called “the trail of tears.”

The first regional demarcations followed roughly the settlement patterns of various ethnic

immigrant groups. Settlers from

England followed the path of the

first Puritans to occupy New England in the northeastern part of

the country. Pennsylvania and

other Middle Colonies attracted

Dutch, German, and Scotch-Irish

immigrants. There were French

farmers in some of the South’s

tidewater settlements while Spain

provided settlers for California

and the Southwest. But the

sharpest line was drawn by the

importation of African slaves,

which began in America in 1619.

In the South, slave labor underpinned a class of wealthy

planters whose crops—first tobacco, then cotton, sugar, wool,

and hemp—were the nation’s

principal exports. Small farm

holders were the backbone of

many new settlements and towns

and were elevated by Jefferson

and many others as symbols of

an “American character” embodying independence, hard

work, and frugality.

Some of the Founding Fathers

feared the direction in which the

unschooled majority of Americans, a “rabble in arms” in one

author’s famous description,

might take their new country.

But the image that prevailed was

that of the farmer-patriot, once

captured by the 19th-century

philosopher Ralph Waldo Emerson’s depiction of the “embattled

farmers” who had defied British

soldiers, fired “the shot heard

round the world,” and sparked

the American Revolution.

President Jefferson’s purchase

of the Louisiana territory in 1803

from France doubled the nation’s

size and opened a vast new frontier that called out to settlers and

adventurers.
17

The South and Slavery

The South’s economy relied on

the labor of slaves, a fundamental

contradiction of the principle of

equality on which America was

founded. Congress outlawed the

importation of slaves in 1808 but

not slavery itself, and the domestic

slave population kept expanding.

American politics in the half-century preceding the Civil War

(1861-1865) were increasingly

dominated by the South’s tenacious defense of its “peculiar institution” and growing northern

demands for slavery’s abolition.In

1860, in the 11 southern states

that would secede from the

Union, create their own Confederacy, and launch the Civil War,

four out of 10 people were slaves,

and they provided more than half

of all agricultural labor.

One crop stood out above all

others in the region. “Cotton is

king,” declared James Henry

Hammond, a South Carolina senator and defender of slavery, in

1858. Cotton wasthe nation’s most

important export, vital to the

economies of North and South.

The low cost ofslave-produced cotton benefited U.S. and British textile manufacturers and provided

cheaper clothing for the urban

centers. Southerners bought the

output of northern manufacturers

and western farmers.

The Civil War’s devastating

economic impact widened the

disparities between the victorious

North and a defeated South. An

earlier generation of historians

argued that the war stimulated

the great manufacturing and

commercial expansion of the

decades that followed. More recent research asserts that the U.S.

economy would have expanded

greatly with or without the war.

The victorious North, in any case,

moved to new heights, stumbled

during a series of financial panics, but recovered and continued

to advance.

The South mostly adopted a

system of tenant farming that effectively broke up the plantation

system on which the region’s

economy had previously depended. While the Reconstruction years immediately following

the Civil War saw real efforts to

improve the lot of former slaves,

the political will to see through

these reforms ebbed, especially

after 1877. The promised political and economic freedoms thus

were not delivered. Instead the

repressive system of “Jim Crow”

segregation took hold throughout

the South. By the end of the 19th

century, poverty was widespread

among blacks, as it was among

many rural whites.

The Civil War marked the

greatest threat to the Union’s survival, but it was also an opportunity for the war-time Congress—in

the absence of representatives

from the rebellious southern

states—to expand the power of the

national government. The first

system of national taxation was

passed; a national paper currency

was issued; public land-grant universities were funded; and con-
18

struction of the first transcontinental railroad was begun.

A Spirit of Invention

Across the country, a flow of

inventions sparked dramatic increases in farm output. Jefferson

himself had experimented with

new designs for plow blades that

would cut the earth more efficiently, and the drive to improve

farming equipment never slackened. In Jefferson’s time, it took

a farmer walking behind his plow

and wielding his sickle as many as

300 hours to produce 100 bushels

of wheat. By the eve of the Civil

War, well-off farmers could purchase John Deere’s steel plows

and Cyrus McCormick’s reapers,

which cut, separated, and collected farmers’ grain mechanically. Advanced windmills were

available, improving irrigation.

In the next 40 years, steam

tractors, gang plows, hybrid corn,

refrigerated freight cars, and

barbed wire fencing to enclose

rangelands all appeared. In

1890, the time required to produce 100 bushels of wheat had

dropped to just 50 hours. In

1930, a farmer with a tractorpulled plow, combine, and truck

could do the job in 20 hours. The

figure dropped to three hours in

the 1980s.

Eli Whitney’s cotton gin, introduced in 1793, revolutionized

cotton production by mechanizing the separation of cotton

fibers from sticky short-grain

seeds. Cotton demand soared,

but the cotton gin also multiplied

the demand for slave labor. Whitney, a Massachusetts craftsman

and entrepreneur, fought a long,

frustrating battle to secure patent

rights and revenue from southern

planters who had copied his invention, one of the earliest legal

struggles over the protection of

inventors’ discoveries.

Whitney did succeed on another front, demonstrating how

manufacturing could be dramatically accelerated through the use

of interchangeable parts. Seeking

a federal contract to manufacture

muskets, Whitney, as the story

was told, amazed Washington officials in 1801 by pulling parts at

random from a box to assemble

the weapon. He illustrated that

the work of highly trained craftsmen, turning out an entire product one at a time, could be

replaced with standardized

processes involving simple steps

and precision-made parts—tasks

that journeymen could handle.

His insights were the foundation

for the emergence of a machine

tool industry and mass production processes that made U.S.

manufacturing flourish, eventually producing “a sewing machine

and a pocket watch in every

home, a harvester on every farm,

a typewriter in every office,” journalist Harold Evans notes.

The 19th century delivered

other startling inventions and advances in manufacturing and

technology, including Samuel

Morse’s telegraph, which linked

all parts of the United States and

then crossed the Atlantic, and
19

Alexander Graham Bell’s telephone, which put people in direct

contact across great distances. In

1882, Thomas A. Edison and his

eclectic team of inventors introduced the first standard for generating and distributing electric

energy to homes and businesses,

lighting offices along New York’s

Wall Street financial district and

inaugurating the electric age.

And a transportation revolution was launched with the

completion of the first transcontinental railroad, when converging rail lines from the East and

the West met in Utah in 1869.

“The American economy after

the Civil War was driven by the

expansion of the railroads,”

writes historian Louis Menand.

During the war, Congress made

158 million acres (63 million

hectares) available to companies

building railroads. Railroad construction fed the growth of iron

and steel production. Following

the first connection, other lines

linked the country’s Atlantic and

Pacific coasts creating a national

economy able to trade with Europe and Asia and greatly expanding U.S. economic and

international political horizons.

Convulsive Changes

Convulsive changes caused by

industrialization and urbanization

shook the United States at the end

of the 19th century. Labor movements began and vied for power,

with immigrants helping to adapt

European protest ideologies into

American forms.

By the 1880s, manufacturing

and commerce surpassed farm

output in value. New industries

and railroad lines proliferated

with vital backing from European

financiers. Major U.S. cities shot

up in size, attracting immigrant

families and migration from the

farms. A devastating depression

shook the country in the first half

of the 1890s, forcing some

16,000 businesses to fail in 1893

alone. The following year, as

many as 750,000 workers were on

strike, and the unemployment

rate reached 20 percent.

Farmers from the South and

West, battered by tight credit and

falling commodity prices, formed

a third national political organization, the Populist Party, whose

anger focused on the nation’s

bankers, financiers, and railroad

magnates. The Populist platform

demanded easier credit and currency policies to help farmers. In

the 1894 congressional elections,

Populists took 11 percent of all

votes cast.

But American politics historically has coalesced around two

large parties—the Republican

and Democratic parties have

filled this role since the mid1800s. Smaller groupings served

mostly to inject their issues into

either or both of the main contenders. This would be the fate of

the 1890s Populists. By 1896, the

new party had fused with the Democrats. But significant parts of

the Populist agenda subsequently

found their way into law by way of

the trans-party Progressive move-
In the post-Civil War Gilded Age, a generation

of immensely wealthy industrialists rose to prominence.

Hailed as “captains of industry” by admirers and as

“robber barons” by critics, these titans dominated entire sectors of the American economy. By the end of the 19th century, oil had its John D. Rockefeller, finance its J. Pierpont

Morgan and Jay Gould, and tobacco its James B. Duke and

R. J. Reynolds. Alongside them were many others, some born

into wealthy families, and some who personified the selfmade man.

None climbed further than Andrew Carnegie. He was the

son of a jobless Scottish textile worker who brought his family

to the United States in the mid-1800s in hopes of better opportunities. From this start, Carnegie became “the richest

man in the world,” in the words of Morgan, who along with

his partners would in 1901 purchase what became U.S. Steel. Carnegie’s personal share of

the proceeds was an astonishing $226 million, the equivalent of $6 billion today, adjusted for

inflation, but worth much more than that as a percentage of the entire U.S. economy then.

Carnegie’s life exemplifies how an industrializing America created opportunities for

those smart and fortunate enough to seize them. As a teenager in Pennsylvania, Carnegie

taught himself the Morse code and became a skilled telegraph operator. That led to a job

as assistant to Thomas A. Scott, a rising executive in the Pennsylvania Railroad, one of the

nation’s most important lines. As Scott advanced, becoming one of the most powerful railroad leaders in the country, his valued protégé Carnegie advanced too, sharing lucrative financial investments with Scott before going into business himself to build iron bridges for

the railroad. By the age of 30, Andrew Carnegie was a wealthy man.

After quitting the railroad, Carnegie also prospered in oil development, formed an iron

and steel company, and shrewdly concentrated on steel rails and steel construction beams

as railroad, office, and factory construction soared. His manufacturing operations set standards for quality, research, innovation, and efficiency. Carnegie also availed himself of secret alliances and advance knowledge of business decisions, practices forbidden by today’s

securities laws as “insider” transactions but legal in Carnegie’s era.

Andrew Carnegie was a study in contrasts. He fought unionization of his factories. As

other industry leaders did, Carnegie imposed hard, dangerous conditions on his workers.

Yet his concern for the less fortunate was real, and he invested his immense wealth for society’s benefit. He financed nearly 1,700 public libraries, purchased church organs for thousands of congregations, endowed research institutions, and supported efforts to promote

international peace. When his fortune proved too great to be dispensed in his lifetime,

Carnegie left the task to the foundations he had created, helping to establish an American

tradition of philanthropy that continues today.

The Richest Man in the World

Andrew Carnegie. ca. 1886

Above: (Detail) A 1910 panoramic photograph of a Carnegie steel plant in Youngstown, Ohio.

© Getty Images

Courtesy of Library of Congress

20
21

ment of the 20th century’s first

two decades. Among the innovations were direct popular election

of senators and a progressive national income tax.

American Progressivism reflected a growing sense among

many Americansthat, in the words

of historian Carl Degler, “the community and its inhabitants no

longer controlled their own fate.”

Progressives relied on trained experts in the social sciences and

other fields to devise policies and

regulations to reign in perceived

excesses of powerful trusts and

other businessinterests. Writing in

1909, Herbert Croly, author of the

hugely influential The Promise of

American Life and first editor of the

New Republic magazine, expressed

the Progressive’s credo in this way:

“The national government must

step in and discriminate, not on

behalf of liberty and the special individual, but on behalf of equality

and the average man.”

The influence of Progressive

thought grew rapidly after the assassination of President William

McKinley in 1901 thrust Vice

President Theodore Roosevelt

into the White House. Adventurer, naturalist, and scion of

wealth, “Teddy” Roosevelt believed the most powerful corporate titans were strangling

competition. Businesses’ worst

excesses must be restrained lest

the public turn against the American capitalist system, Roosevelt

and his allies argued.

The New York World newspaper, owned by the influential publisher Joseph Pulitzer, editorialized that “the United States was

probably never nearer to a social

revolution than when Theodore

Roosevelt became president.”

Roosevelt responded with regulations and federal antitrust lawsuits

to break up the greatest concentrations of industrial power. His

administration’s antitrust suit

against the nation’s largest railroad monopoly, Northern Securities Company, was a direct attack

on the nation’s foremost financier, J.P. Morgan. “If we have

done anything wrong,” Morgan

told Roosevelt, “send your man to

my man and they can fix it up.”

Roosevelt responded, “That can’t

be done.” The Supreme Court’s

ultimate decision against Northern Securities was a beachhead in

the government’s campaign to restrict the largest businesses’ power

over the economy.

A Modern Economy Emerges

Electric power surged

throughout the U.S. economy in

the first decades of the 20th century, steadily replacing steam and

water power in industrial plants.

It lit offices and households, illuminated department stores and

movie theaters. It reshaped cities,

lifting elevators in new skyscrapers and powering street cars and

subways that enabled people to

work farther from home. By

1939, electricity provided 85 percent of the primary power for

U.S. manufacturing. The ability

to transfer power easily over thin

electric wires spurred totally new
22

manufacturing processes favoring automation, the use of specialized parts, and the rise of

skilled labor.

But the Great Depression of the

1930s brought economic expansion to a devastating halt.Its causes

were complex. After a decade of increasingly reckless stock speculation, the stock market crash of 1929

wiped out millions of investors and

crippled confidence among business executives and consumers.

The United States and other

economic powers waged a destructive battle over trade, raising tariff

barriers against each other’s imports and pushing their currency

values down in an unsuccessful effort to make their exports more

competitive. Prices collapsed, impoverishing businesses and families. Drought and poor planting

practices led to dust storms in the

U.S. farming heartland and drove

thousands of farmers from their

homes. The nation’s worst banking crisis shut down 40 percent of

the banks doing business at the

Depression’s beginning. The national unemployment rate exceeded 20 percent.

Some desperate and disillusioned Americans looked to communism and socialism as better

alternatives, others eyed the fascist

alternative pioneered in Italy by

Benito Mussolini, and many feared

the United States was approaching

a breaking point politically.

The New Deal

The inability of President Herbert Hoover (1929–1933) to meet

demands for economic relief set

the stage for the 1932 election of

Democrat Frank-lin D. Roosevelt

as president and the enactment

the following year of the first of

his “New Deal” economic programs. The president, known by

his initials, FDR, was a wealthy patrician from New York State with

a gift for communicating his message to Americans in those hard

times. He used the new medium

of radio to do so directly. In his inaugural speech upon assuming

the presidency, Roosevelt assured

the country, “The only thing we

have to fear is fear itself.”

Roosevelt then launched a

tide of new laws and programs to

halt the paralyzing banking crisis

and create jobs. New agencies

such as the Civilian Conservation

Corps, the Works Progress Administration, and the Public

Works Administration put millions of unemployed Americans

to work on government projects.

The Agricultural Adjustment Administration worked to support

farm prices by reducing output,

fining farmers in some cases for

excess production. Overall, the

programs marked “the return of

hope,” said long-time Democratic congressman Emanuel

Celler of New York.

FDR was far more an improviser than an ideologue, historians agree. His budget policies

were inconsistent: Spending cuts

in the middle of his presidency

probably extended the Depression. Some New Deal measures

proved contradictory or hugely
Above: The Social Security retirement pension system was part of President Franklin

Roosevelt’s New Deal.

Courtesy of Library of Congress

23
24

controversial. The National Recovery Administration negotiated

a series of industry-wide codes establishing minimum prices,

wages, and other particulars.

Many small businesses complained that the codes favored

larger competitors. Others saw in

the close NRA-engendered ties

between government and big

business a “corporatist” outlook

fundamentally at odds with America’s traditionally looser, more

free-wheeling economic arrangements. The Supreme Court agreed,

declaring the law establishing the

NRA unconstitutional, an exercise of Congress delegating

power to the president beyond

that granted by the Constitution’s

commerce clause.

But other New Deal measures

proved long lasting. The federal

government tightened regulation

of banking and securities, and it

provided unemployment insurance and retirement, disability,

and death benefits for American

workers under a social security

program funded by payroll taxes

on employees and employers.

The New Deal established a federal social safety net that has

helped Americans through hardships, but whose costs today pose

huge future financial challenges

for the government.

Before Franklin Roosevelt’s

administration, the federal government had taken a predominantly hands-off attitude toward

business, except for its regulation

of banking and the railroads,

and the campaigns against the

monopolistic trusts. FDR took

the country far in the other direction, injecting the federal government into economic activities

previously deemed the domain

of the private sector. One notable

example was his creation in 1933

of the Tennessee Valley Authority, a federally chartered corporation formed to control

flooding and generate electric

power in an impoverished region

of the South.

Roosevelt and his supporters

saw the government-run TVA as

a way to set a benchmark for fair

pricing of electricity that would

show whether customers were

being overcharged by electric

power companies. The TVA

stood for the New Deal’s confidence in government’s ability to

define and solve society’s problems. David Lilienthal, whom

Roosevelt appointed as a TVA director and later its chairman,

once said, “There is almost nothing, however fantastic, that a

team of engineers, scientists, and

administrators cannot do.”

To its opponents, the TVA was

socialism, violating the basic principles of free enterprise. Roosevelt’s Republican predecessor,

Herbert Hoover, had opposed

earlier proposals for government

power projects and economic development programs in the Tennessee Valley, saying it would

“break down the initiative and enterprise of the American people.... It is the negation of the

ideals upon which our civilization

has been based.”
25

Americans differed as well

over more practical questions:

How could any private power

company compete with the virtually unlimited resources of the

federal government? And once a

federal agency determined to act,

what would be the check on its

authority? The same hand of

government that built dams to

produce power and limit floods

also uprooted thousands of people from their farms. Although

the TVA complex of dams was

built and the TVA remains the

largest U.S. public power producer, Roosevelt’s efforts to adopt

the TVA model in other parts of

the country were shelved by

growing political opposition and

by World War II.

American industry and offices

mobilized to fight Germany,

Japan, and the other World War

II Axis powers. The last U.S.-

made automobile of the war years

left its factory in February 1942.

In its place, industry produced

30,000 tanks in 1943 alone,

nearly three per hour around the

clock, more than Germany could

build in the entire war. A piano

manufacturer produced compasses, a tableware company

turned out automatic rifles, and a

typewriter company delivered

machine guns, author Rick Atkinson notes. The weight of U.S. industrial might was irresistible.

American factories supplied

armed forces in both the European and Pacific theaters, with

more to spare for the British, the

Soviets, and other Allied armies.

At the war’s end, much of Europe and Asia were in ruins, and

America stood alone as the

world’s economic superpower.

Organized Labor:

Prosperity and Conflict

The end of wartime economic

controls unlocked pent-up demands by American workers for

better wages, leading to a series

of major labor strikes that polarized American attitudes toward

unions, as in the 1890s. In 1935,

the Democratic-controlled Congress had enacted the National

Labor Relations Act of 1935 establishing the right of most private-sector workers to form

unions, to bargain with management over wages and working

conditions, and to strike to obtain

their demands. A federal agency,

the National Labor Relations

Board, was established to oversee

union elections and address unfair labor complaints. The Fair

Labor Standards Act of 1938 established a national minimum

wage, forbade “oppressive” child

labor, and provided for overtime

pay in designated occupations. It

declared the goal of assuring “a

minimum standard of living necessary for the health, efficiency,

and general well-being of workers.” But it also allowed employers to replace striking workers.

After World War II, a Republican-controlled Congress passed

the Taft-Hartley Act of 1947, which

reduced union power in organizing disputes, strengthened the

rights of employees who didn’t
26

want to join a union, and allowed

the president to order striking

workers back on the job for an

80-day “cooling-off” period if he

determined a strike could endanger national health or safety.

United Mine Workers president

John L. Lewis called it a “slave

labor” law. President Harry S.

Truman vetoed it, but was overridden by the required two-thirds

congressional majorities.

Together, the Fair Labor Standards Act and the Taft-Hartley

Act established the broad legal

parameters within which organized labor contended with business

leadership and union opponents

for economic and political influence. In 1950, when American

automobile companies enjoyed

substantial global market share,

General Motors Corporation and

the United Auto Workers union

negotiated a contract affording

workers extensive health care and

retirement benefits. From the employer’s perspective, generous pay

and benefits ensured freedom

from strikes and motivated the

employees. The costs of these

benefits, the companies reasoned,

could be passed on to consumers.

With the rise of competition from

Japanese, European, and other

foreign auto-makers, American industry became less willing or able

to pass through such labor costs.

These issues played out in the

political realm as well. As a generalization, labor unions mostly

supported Democratic candidates with money and manpower,

while businesses backed Republicans. Each side hoped that electoral victories would secure more

favorable treatment. But global

economic developments intervened. With the recovery of industry in other nations, U.S.

industrial unions generally declined in membership. At the end

of World War II, one-third of the

workforce belonged to unions. In

1983, it was 20 percent. By 2007,

the figure had dropped to 12

percent, with union membership

totaling 15.7 million.

Union growth today is mostly

in arenas less susceptible to foreign competition: the services sector, particularly among public

services employees such as teachers, police officers, and firefighters. In 2007, just over one-third of

public-services workers belonged

to unions, only 7.5 percent of private-sector workers were in

unions, and union membership

among workers under 24 years of

age was less than 5 percent.

One symbol of organized

labor’s relative decline came in

1981, when President Ronald

Reagan fired striking air traffic

controllers. Public employees

such as the controllers typically

enjoyed great job security but, in

turn, were prohibited from striking “against the public.” This is

not to say that public employees

never struck: Sometimes they

did, and usually the illegality of

the strike was forgiven as part of

the settlement. Not this time.

Reagan ordered the controllers

back to work, citing the federal

law against government em-
27

ployee strikes. He then fired

more than 11,000 controllers

who refused to return, replaced

them with new workers, and

broke the union.

Even as unions gained, then

lost, influence, other major currents helped shape the postwar

American workforce. The civil

rights movement began in the

mid-1950s with demands to end

state and local laws in the South

that segregated schools, public facilities, and public transportation,

separating blacks and whites, as

well as restrictions on AfricanAmericans’ voting rights. After a

strife-filled decade, the non-violent campaign for racial justice

led by the late Dr. Martin Luther

King Jr. led to passage of federal

laws to combat racial discrimination and poverty. A wide-ranging

series of laws that Democratic

President Lyndon Johnson called

his Great Society program followed. Education and employment opportunities for minorities

expanded. While Americans have

debated the fairness of “affirmative action” preferences for minorities in hiring and college

admissions, the 1960s’ laws

opened increasing workplace opportunities for minorities.

The 1960s civil rights movement also led to laws forbidding

discrimination in employment

against women, emerging from a

far-reaching movement by

women to gain equal status with

men in the economy and society.

Only one-third of adult women

had jobs in 1950, but by the end

of the century three of every five

women were in the workforce. Female chief executive officers have

led such major corporations as

technology giant HewlettPackard and the Ogilvy & Mather

advertising firm. Other women

have built careers in virtually

every arena, from academia, politics, and medicine to manufacturing, the construction trades,

and the military. A wage gap between men and women is shrinking, but still remains. In 2000

women working full time earned

77 cents for every dollar paid to

men throughout the workforce,

while 20 years earlier women

earned just two-thirds of what

men received.

Another major impact was the

arrival of the “baby-boom” generation in the workforce. Between

the end of World War II and 1964,

76 million Americans were born,

an unprecedented surge that may

have reflected the nation’s postwar optimism. This population

bulge, in the midst of a long upward economic trend, triggered a

sustained boom in housing construction and the expansion of a

consumer-focused economy.

The Political Pendulum Swings

The 1960s Great Society legislation, comprising 84 different

new laws, was the crest of a wave of

political action begun by Franklin

Roosevelt to use government’s

power to set economic and social

agendas. Voting rights for minorities, employment opportunity,

public education, the safety of con-
28

sumers and motorists, environmental protection, and health insurance for the elderly and poor

all were addressed by the new laws.

The adoption of Lyndon

Johnson’s agenda was based on

his landslide victory in the 1964

presidential election and the decisive majorities his Democratic

Party achieved in Congress that

year. But Johnson’s policies energized opposition from conservatives who felt the government

had intruded too far in the lives

of private citizens and had put

too great a burden on employers,

threatening the vitality of the

economy. The civil rights measures Johnson championed embittered many southern whites,

whose allegiance shifted to the

Republican Party.

The 1970s was a trying decade

for the U.S. economy. In the middle of his first term in office, President Richard M. Nixon was

confronted with rapidly rising

prices, triggered in part by the

costs of the Vietnam War waged

during his and Johnson’s administrations. Nixon broke with his

Republican Party’s traditional

support for balanced budgets to

accelerate federal spending to

stimulate economic growth, even

though that swelled federal

budget deficits.

Nixon similarly embraced

wage and price controls in an effort to halt an inflationary cycle in

which rising wages led corporations to increase prices, and

higher prices then led to new demands for higher pay by workers.

“Now, I am a Keynesian,” Nixon

said in 1971, putting himself in

the camp of British economist

John Maynard Keynes, who had

advocated deficit spending during

times of slow economic growth.

Nixon’s wage-and-price control program failed. To cite just

one example, the price of cotton

was not controlled because of the

political influence of cotton farmers. But the price of plain cotton

fabric was regulated, and when

fabric manufacturers’ profits were

squeezed, they cut back on production, causing shortages, according to former Federal Reserve

Chairman Alan Greenspan.

The lesson from Nixon’s experiment was a lasting one: The

U.S. economy was far too complex, chaotic, and fast moving to

be managed in any detail by government officials. A new consensus formed that controls could

not overcome inflationary forces,

but instead stifled innovation,

risk taking, and competition.

Two oil price shocks that followed the Arab-Israeli War of

1973 and the Islamic Revolution

in Iran in 1979 battered U.S. economic performance. Oil prices

tripled. Long lines formed at

gasoline stations. At the end of the

decade, inflation was higher than

at any time since World War I, and

unemployment had jumped to

more than 9 percent. The impact

hit hardest during the administration of President Jimmy Carter, a

Democrat elected in 1976. The

U.S. economy was gripped in a

“malaise,” as Carter’s advisers put
29

it, and nothing government did

seemed an answer to high unemployment, high prices, and stagnant stock markets.

During economic travails,

American voters have often punished the party in power, and

1980 was a case in point. Polls

that year showed two-thirds of

the public believed the country

was faring badly. Many Americans

sought a change in direction, and

they found it in the candidacy of

California’s former Republican

governor, Ronald Reagan. At the

campaign’s only televised presidential debate, Reagan asked the

viewers simply, “Are you better

off than you were four years

ago?” Analysts called it Reagan’s

knock-out punch.

Reagan’s election to the presidency marked another directional

change in government’s role in the

economy. Reagan declared in his

1981 inaugural address that “in

this present crisis, government is

not the solution to our problem;

government is the problem.” He

added, “It is time to check and reverse the growth of government.”

“Reaganomics” sought to cut

U.S. tax rates, even if one result

was growing federal budgetary

deficits. Critics protested that this

was an indirect way of forcing cuts

in domestic social spending and

to programs of which the new administration disapproved.

Reagan and his advisers argued

that lower marginal tax rates

would revive the economy. It was

better, they believed, to leave more

money in the hands of business

and consumers, whose savings,

spending, and investment choices

collectively would generate more

economic growth than would government spending. This theory,

called supply-side economics, held

that the resulting economic growth

also would generate more revenue

than would be lost through the

lower tax rates, and that the federal budget could be balanced in

this manner.

The Reagan tax cuts did help

lift the U.S. economy, but contrary

to the supply-siders’ predictions,

federal budget deficits persisted

and grew. Nevertheless, the “Reagan revolution” was a political

turning point toward smaller government and individualism, and

Reagan left office as one of the

most popular U.S. presidents.

Deregulating Business

The 1980s tax cuts were only

one part of a broad movement to

reduce government’s economic

role. Another was deregulation.

During the 1970s, a number

of thinkers attributed some of the

nation’s economic sluggishness to

the web of laws and regulations

that businesses were obliged to

observe. These regulations had

been put in place for sound reasons: to prevent abuse of the free

market and, more generally, to

achieve greater social equity and

improve the nation’s overall quality of life. But, critics argued, regulation came at a price, one

measured by fewer competitors in

a given industry, by higher prices,

and by lower economic growth.
30

During the economically trying 1970s and early 1980s, many

Americans grew less willing to

pay that price. President Gerald

R. Ford, a Republican who succeeded Richard M. Nixon in

1974, believed that deregulating

trucking, airlines, and railroads

would promote competition and

restrain inflation more effectively

than government oversight and

regulation. Ford’s Democratic

successor, Jimmy Carter, relied

heavily on a key pro-deregulation

adviser, Alfred E. Kahn. Between

1978 and 1980, Carter signed

into law important legislation

achieving substantial deregulation of the transportation industries. The trend accelerated

under President Reagan.

The intellectual and political

trends favoring deregulation were

not limited to the United States.

Movements to empower private

businesses and reduce government’s influence gained momentum in Great Britain, Eastern

Europe, and parts of South America. In the United States, courts

and legislators continued to carve

away government regulations in

important industries, including

telecommunications and electric

power generation.

The most dramatic step was

the 1984 breakup of the American Telephone and Telegraph

Company, the nationwide telephone monopoly. Prior to the

government’s action, AT&T dominated all phone service, both

local and long-distance, and it argued that admitting new service

providers would threaten network

reliability. AT&T obliged Americans to rent their telephones from

its Western Electric subsidiary, a

monopoly that stifled the development of innovative types and

styles of phones. A far smaller

rival, MCI Communications, contended that technology advances

would enable competition to

flourish, benefiting consumers.

The federal government took

up MCI’s cause, filing an antitrust

suit asking a federal judge to end

AT&T’s monopoly. AT&T capitulated, agreeing to split off its local

telephone service into seven new

regional phone companies. This

began an era of intense competition and innovation around the

convergence of phones, computers, the Internet, and wireless

communications. (AT&T maintained its long-distance network,

but in 2005 the company was purchased by one of its former local

phone subsidiaries.) While many

American consumers found the

changes in phone service confusing, they eagerly snapped up a

speedy parade of new communications products.

The loosening of regulations

on electric power service in the

1990s has been far more controversial, and its benefits disputed.

For a century following Thomas

Edison’s time, most Americans

purchased electricity from companies that operated legal monopolies in their regions. State

commissions regulated these utilities’ local rates, while federal regulators oversaw wholesale sales
31

across state lines. Prices were generally based on the costs of making electricity, plus a “reasonable”

profit for the utility.

About half of the U.S. states

chose to open electric service to

competition in the hope that new

products and lower prices would

result. But these moves coincided

with sharp increases in energy

prices beginning in 2000. A political backlash against electricity

deregulation ensued, worsened by

a scandal surrounding the failure

of Enron Corporation, a Texasbased energy company that had

been a key promoter of competitive electricity markets.

The deregulation movement

stopped in midstream after 2000,

leaving an electricity industry partially regulated and partially

deregulated, and divided by divergent regional agendas. Some areas

of the country rely on coal to generate electric power. Elsewhere,

natural gas turbines, hydro-dams,

or nuclear plants are important

sources of electricity, and in the

2000s, wind-generated power

began to grow. These differing regional interests slowed movement

toward a national response to climate change issues, including such

possible measures as the development of renewable electricity generation and an expanded power

transmission grid. Instead, state

governments have been the principal policy innovators.

Technology’s Upheaval

Technology is changing the

fundamentals of economic competition, and often faster than

government, political leaders,

and the public can keep pace.

The computer age grew out of a

confluence of discoveries on

many fronts, including the first

computer microprocessor, created in 1971. This breakthrough

combined key functions of computer processing that had been

separate operations—the movement of data and instructions in

and out, the processing of data,

and the electronic storage of

results—onto a single silicon

chip no bigger than a thumbnail. It was the product of scientists at Intel Corporation, a

three-year-old start-up technology company that had attracted

the support of wealthy venture

capitalists willing to bet large investments on new, unproven entrepreneurs. The raw material

Above: The microprocessor combines

movement of data, processing of data,

and storage of results on a single chip.

© AP Images
32

for semiconductors gave the name

Silicon Valley to the California

region south of San Francisco

that became the center of U.S.

computer innovation.

Before the invention of the silicon computer chip, computers

were massive devices serving

government agencies and large

businesses, and operated by specialists. But in 1976, two secondary school dropouts, Steve Jobs

and Steve Wozniak, developed a

small computer complete with

microprocessor, keyboard, and

screen. They called it the Apple I,

and it began the age of personal

computing and the dispersal of

computer power to every sector of

the economy.

The personal computer rapidly became an indispensable

communications, entertainment,

and knowledge tool for homes

and offices. IBM, the computer

giant that had dominated mainframe computers since the 1950s,

produced a personal computer in

the 1980s that quickly overtook

Apple’s lead. But IBM, in turn,

was driven from PC manufacturing by competitors in the United

States and Asia who outsourced

component fabrication to lowestcost manufacturers and minimized production costs of an

increasingly low-margin item.

The biggest winner in this

competition was Microsoft, a Redmond, Washington-based start-up

Above left: Apple’s Steve Jobs, shown in 1984, was a pioneer in personal computing.

Above right: Mainframe computer manufacturer IBM joined the personal computer competition for a while.

© AP Images

© AP Images
33

grounded in software, not manufacturing. Its founder, Bill Gates,

had seized on the importance of

dominating the internal operating software that made the personal computer work. As rival

computer manufacturers rushed

to copy the IBM model, Microsoft’s software became the standard for these machines, and they

steadily and relentlessly gained

market share at the expense of

other operating system vendors.

Gates’s company wound up collecting half of every dollar of sales

by the PC industry.

Gates moved into a realm of

wealth comparable to that of John

D. Rockefeller and Andrew

Carnegie, two titans of an earlier

age of dynamic economic growth.

Like his two predecessors’ companies, Gates’s Microsoft was attacked

by competitors and governments

for its dominance. And Gates, like

Rockefeller and Carnegie, became

one of history’s most generous philanthropists, committing billions of

dollars to long-term campaigns to

fight illnesses in Africa, improve

education in America, and support

other humanitarian causes.

Rivaling the impact of the

personal computer was another

epochal breakthrough. The Internet, including the searchable

World Wide Web, accelerated a

global sharing of information of

every form, from lifesaving technologies to terrorists’ plots, from

dating services to the most advanced financial transactions.

Like much American innovation, the Internet had roots in

U.S. government science policy.

The idea of a self-standing highly

redundant network to link computers was conceived as a way to

defend government and research

computers against a feared nuclear attack on the United States.

But despite its ties to government, the Internet achieved its

global reach thanks to pioneering

scientists such as Sir Tim BernersLee and Vinton Cerf, who insisted that it must be an open

medium that all could share.

The New Economy

The personal computer and

the Internet were building blocks

for the new economy that took

form in the 1990s. Technology’s

potential to create global markets, to make production and distribution more efficient, and to

expand financial flows attracted

hoards of innovators. At first,

business’s introduction of computer technology did not measurably increase American economic

productivity, to the bewilderment

of government policy makers. By

the end of the 1990s, however,

productivity was increasing, giving hope that a new, sustained

period of economic growth was at

hand for most Americans.

The sense of optimism drew

substantially on the astonishing

gains of technology companies

on U.S. stock markets—particularly start-up companies linked

to commerce over the Internet.

American and foreign investors

threw money at untested Internet companies at the end of the
Unlocking the Internet

I

n 1998, two graduate students at Stanford University in California thought

they saw how to unlock the Internet’s rapidly expanding universe of information. A decade

later, Google—as they called their invention—had become the dominant Internet search

engine in most of the world. Its revenue topped $20 billion in 2008, half from outside the

United States, and its employees numbered 20,000. Its computers could store, index, and

search more than one trillion other Web site pages. So ubiquitous had this search engine grown

that its very name had become a verb: When most people want to find something on the Internet, they “google” it.

Although this astonishing success has rarely been matched, its ingredients are a familiar

part of the U.S. economic story. Google illustrates how ideas, entrepreneurial ambition, university research, and private capital together can create breakthrough innovations.

Google’s founders, Sergey Brin and Larry Page, started with particular advantages. Brin,

born in Moscow, and Page, a midwesterner, are sons of university professors and computer professionals. “Both had grown up in families where intellectual combat was part of the daily

diet,” says David Vise, author of The Google Story. They met by chance in 1995 at an orientation for new doctoral students at Stanford University’s graduate school, and by the next year

they were working together at a new Stanford computer science center built with a $6 million

donation from Microsoft founder Bill Gates.

As with other Internet users, Brin and Page were frustrated by the inability of the existing search programs to provide a useful sorting of the thousands of sites that were identified by Web queries. What if the search results could be ranked, they asked themselves, so

that pages that seemed objectively most important were listed first, followed by the next

most important, and so forth? Page’s solution began with the principle that sites on the Web

that got the most traffic should stand at the top in search reports. He also developed ways

of assessing which sites were most intrinsically important.

At this point, Stanford stepped in with critical help. The university encourages its PhD

students to use its resources to develop commercial products. Its Office of Technology Licensing paid for Google’s patent. The first funds to purchase the computers used for Google’s

34

© AP Images
Above: Google’s agreement to self-censor its search engine in China has raised objections from human

rights groups. Opposite: This Google logo commemorates the visit by Britain’s Queen Elizabeth II to

Google’s London office.

35

searches came from a Stanford digital library project. Their first users were Stanford students and faculty.

The linkages between university research and successful business innovation have not always thrived in regions where technology industries are not well rooted. But Stanford, in Palo

Alto, California, stands at the center of Silicon Valley, a matrix of technology companies, investment funds, and individuals with vast personal fortunes that evolved during the decades of

the computer industry’s evolution.

In 1998, Brin and Page met Andy Bechtolsheim, a co-founder of Sun Microsystems, an

established Silicon Valley leader. Bechtolsheim believed that Brin and Page could succeed. His

$100,000 personal check helped the pair build their computer network and boosted their

credibility. A year later, Google was handling 500,000 queries a day and winning recognition

across the Internet community. Google’s clear advantages over its rivals and the inventors’

commitment attracted $25 million in backing from two of Silicon Valley’s biggest venture

funds. And the founders got the money without having to give up control of the company.

A decade after its founding, Google’s goals have soared astronomically. As author Randall Stross, author of Planet Google, puts it, the company aims to “organize everything we

know.” Its initiatives include an effort to digitize every published book in the world.

Google has emerged as a metaphor for the openness and creativity of the U.S. economy,

but also for the far-ranging U.S. power that so worries foreign critics. Human rights advocates

and journalists blasted Google’s 2006 agreement to self-censor its search engine in China at

the direction of Beijing’s government. Google answers that these kinds of restrictions will fade

with the spread of democracy and individual freedoms. If that proves true, this example of

American entrepreneurship will have been an agent of that change.

© AP Images
36

1990s in search of what author

Michael Lewis called “the new,

new thing.”

Entrepreneurs perceiving a

niche for a new software strategy

or product might determine to

create a business to meet that

need. They might charge initial

costs to their personal credit

cards. Friends and families would

be asked to help. And with the

right connections, such as a degree from a leading U.S. university, the entrepreneurs might get

an audience with some of the

small, critically influential group

of financiers called venture capitalists. These investors typically

had made great wealth from earlier successes in technology markets and were on the lookout for

new prospects. If they liked an

entrepreneur’s idea, they would

invest millions of dollars in advance funding in exchange for

part ownership in the company.

If all continued to go well, the

company would be launched. If it

enjoyed early success—or even if

it was only well promoted—the

entrepreneur and the financial

backers might be able to “take the

company public,” selling shares

of the company to the public on

the stock market through an initial public offering (IPO).

Low interest rates helped the

start-up companies gather headway. The most fabulous of the success stories—such as the rise of

Microsoft, Apple, America Online

(AOL), and, later, eBay, Yahoo, and

other “dot-coms” (so named for the

“.com” terminology incorporated

in commercial Internet addresses)—created a euphoric mood

among investors, who seemed willing to bet on any plausible “e-commerce” strategy, however chancy.

Federal Reserve Board Chairman Alan Greenspan warned of

“irrational exuberance,” but that

did not deflate the dot-com stock

market bubble. In March 2000,

the NASDAQ Composite Index,

a measure of the U.S. stock market specializing in technology

stock listings, had soared to over

5,000—twice its level the year before. Typical of the new breed of

companies was one called

Pets.com, which offered cheap

prices to customers ordering pet

food online in the hope that

growing numbers of consumer

visits to its Web site would attract

paying advertisers.

Opportunism and Credulity

The dot-com boom was a characteristically opportunistic expression of American economic

optimism and credulity. Americans’ fascination with potential

stock market windfalls was not a

new phenomenon. America’s

Founding Fathers had relied on

lotteries to raise money for the

Continental Army, and today

Americans wager more than $50

billion annually in state-run lotteries whose proceeds help fund education and other programs.

Investment manias sprouted in

every generation, from colonialera land speculation, to railroads

in the 19th century, to biotech and

computersin the late 20th century.
37

In March 2000, the dot-com

bubble burst. The immediate

cause is debated, although rising

interest rates and a downturn in

technology investments by major

companies hurt the investing climate. Investor confidence was

battered by investigations showing that some prominent Wall

Street securities experts had misled the investing public about the

prospects for some of the Internet

stocks. The NASDAQ Index fell

close to 1,000 in 2002, wiping out

$5 trillion in investors’ “paper”

profits. The value of Pets.com fell

from $11 per share in February

2000 to $0.19 the day it closed its

doors at the end of that year.

The fallout claimed two of the

highest-flying companies of the

time. One was WorldCom, which

had used an aggressive acquisitions strategy funded by stock issues to claim a leading position in

telecommunications, taking over

competitors such as MCI. The

other was Enron, originally a

provider of natural gas and electricity, but later an online trader

of energy services and commodities. Government investigations

led to indictments and convictions of top executives of both

companies for defrauding investors through the release of

false financial information.

The dot-com bust was followed by another massive flood

of speculative investment into

U.S. real estate and the home

mortgage market. Two-thirds of

American families own their

homes, which are by far their

most important investment, absorbing one-third of their spending and supplying an average

$75,000 in homeowner equity, a

significant retirement cushion.

Home ownership was a crucial

part of the American dream, promoted by government leaders

across the political spectrum.

Lower interest rates early in

the 2000s decade encouraged a

surge in lending by banks and

nonbank mortgage companies

and in borrowing by home buyers. The U.S. government urged

banks to make more mortgages

available to lower-income families, increasing financial risks for

both borrowers and lenders.

Mortgages sold to these families

with lower-than-average incomes

or shaky financial histories were

called subprime mortgages (contrasted with standard, or prime,

loans to families with average or

better financial positions). In the

quarter century before 2007,

Americans’ household debt including mortgages rose from 45

percent of U.S. gross domestic

product to 98 percent.

But the federal government

took no serious actions to regulate

the surge in mortgage lending

that followed. Nor did regulators

move to restrain abusive sales tactics by lenders that left unsophisticated home buyers with home

loans they could not afford.

Home loans were sold by brokers

whose fees rose with each sale,

motivating them to push lowerincome families into home purchases that strained their finances
38

to the limit. Often, low “teaser”

interest rates were offered for the

first years of a mortgage, but the

rates would increase dramatically

in later years. Studies later

showed that many new home buyers did not understand the financial risks they were taking on.

The mortgage industry

sought to manage these risks

through a process called securitization. Riskier loans were bundled with conventional home

loans into packages and divided

into units that were sold to investors, like bonds. These mortgage-backed securities paid

higher than standard interest because they entailed more risk,

and they were eagerly snapped

up by investors in the United

States and, later, around the

world. In 2005, for example,

sales of mortgage-backed securities exceeded $1 trillion. Wall

Street financial “engineers” developed a series of increasingly

more complex and speculative

investments linked to the mortgage-backed securities. These

also sold well with investors. The

result was a sharp global expansion of speculative investments financed heavily by debt.

As long as housing values kept

growing, the process continued

apace, and housing sales flourished not only in the United

States, but also in Britain, Spain,

and other nations. But when the

overbuilt U.S. housing market

crashed in 2007, many individual

homeowners found themselves

owing more money on their mortgage than their home was worth.

As teaser-rate periods expired,

borrowers were faced with sharply

higher monthly payments, higher

in many cases than they could afford. When home prices seemed

as if they would continue to rise

without limit, borrowers willingly

assumed these debts, secure in

the belief that they could always

sell the home at a profit or refinance against the home’s increased value. Once home prices

began their decline, however,

these calculations were exposed as

gambles gone bad.

These individual mortgage

debts had been packaged into increasingly exotic securities and

sold worldwide, causing the mortgage crisis to become a global epidemic. The United States and

major European and Asian nations committed trillions of dollars to rescue impacted banks and

investment funds. As fearful, capital-short lenders stopped making

even the short-term and overnight loans woven deeply into the

everyday workings of the world

economy, government treasuries

and central banks became the

lenders of last resort on a massive

scale, pouring tax dollars into the

fractured financial sector and taking direct control or major ownership positions of banks and

funds in a stunning reversal of

decades of deregulation and reliance on markets.

To some experts, the devastating turn of events was a familiar

one in the American economic

chronicle. “Booms and busts play
a prominent role” throughout U.S.

history, the late Federal Reserve

Board member Edward M. Gramlich had observed. “In the 19th

century, the United States benefited from the canal boom, the

railroad boom, the minerals boom,

and a financial boom. The 20th

century saw another financial

boom, a stock market boom, a postwar boom, and a dot-com boom.

“The details differ, but each of

these cases feature initial discoveries of breakthroughs, widespread adoption, widespread

investment, then a collapse where

prices cannot keep up and many

investors lost a lot of money,”

Gramlich said. “When the dust

clears, there is financial carnage,

[but] the canals and railroads are

still there and functional, the

minerals are discovered and in

use, the financing innovations

stay, and we will have the Internet

and all its capabilities.”

The carnage from the 2008 financial crisis has reached staggering proportions and has

fueled widespread demands for

closer government regulation of

lending and securities markets

and far more accountable disclosure of investment risk. European

and Asian leaders have insisted

that oversight of U.S. and other

banking and financial sectors be

a global responsibility. It is impossible at this writing to determine how the United States and

other nations will resolve these issues. But American history

chronicles an ongoing debate

over regulation. Today’s Americans and tomorrow’s must determine how best to balance

dynamism and order, growth and

safety, innovation and stability.

39
40

© Bettmann/Corbis

© Corbis

© North Wind/North Wind Picture Archives © North Wind/North Wind Picture Archives
41

Above: Workers celebrate May 10, 1869, at completion in Utah of first U.S. transcontinental railroad track.

Opposite page—clockwise from top: Alexander Hamilton, pictured standing, fought for

policies aimed at strengthening manufacturing and finance, including protective tariffs

on imports and federal assumption of the states’ Revolutionary War debts; slaves pick

cotton in the deep South; slaves load cotton aboard a steamship on the Alabama River

in 1857; and colonial settlers plant crops in South Carolina.

Below: 1888 Republican Party election campaign poster advocates protective tariffs, a

divisive issue throughout U.S. history.

© AP Images

© Corbis
42

© Roger Viollet/Getty Images © National Geographic/Getty Images

© Getty Images
43

Above: Railway tunnel is under construction in Washington, D.C., circa 1904-1905.

Opposite page—clockwise from top left: Thomas Edison, circa 1883, holds incandescent

lightbulbs, one of his many inventions; in New York City, telephone inventor Alexander

Graham Bell makes the first long-distance call January 1, 1892; a jumble of electric

power lines hover over pedestrians on Broadway in New York City, circa 1900.

Below: A steam-powered tractor pulls a plow through Minnesota farmland.

© Minnesota Historical Society/Corbis

© Corbis
Above: During the Great Depression, men line up for

soup offered by a charitable organization called the

Salvation Army.

Left: Florence Thompson, destitute migrant worker

mother of seven children, comforts some of her children on a farm in California in 1936.

Below: In a wide region of the U.S. South and Midwest

called the Dust Bowl, drought and poor farming practices created dust storms such as this one in

Arkansas in 1936.

© AP Images

©

AP Images

Courtesy of Library of Congress 44
Above: Construction projects went on even

during the Depression, including work on

the RCA Building at Rockefeller Center in

New York City, where workers are shown

taking a lunch break September 29, 1932.

Left: Workers lay catwalks for construction

of the Golden Gate Bridge in San Francisco

September 19, 1935.

Below: Completion is near July 22, 1935, on

Norris Dam in Tennessee for the controversial government-owned and -operated Tennessee Valley Authority electric power utility.

© AP Images

© AP Images

©

AP Images

45
46

Above—clockwise from top left: Women at a plant in Cincinnati, Ohio, in 1942 assemble

shells in an aluminum factory converted to production of weapons for World War II; 1948

aerial image shows Levittown, New York, a prototypical mass-produced suburban development; Dr. Martin Luther King Jr., third from right, leads a 1965 civil rights march in Alabama; the search for energy goes on in 1953 at a shale oil mine.

Opposite page—clockwise from top left: Advertisement for a 1964 Ford Thunderbird represents a time of prosperity; motorists lined up for fuel in New York during the 1973-1974

gasoline shortages; President Ronald Reagan pushed for tax cuts; a nanotechnology lab

at the University of Michigan represents potential economic activity ahead; mortgage

foreclosure sign stands before a house in Shaker Heights, Ohio, in July 2008; farmer

Gary Wagner in Crookston, Minnesota, uses satellite technology to map his fields; early

Macintosh computers come down the assembly line at an Apple Computer Inc. plant in

Milpitas, California, in 1984.

Courtesy of Library of Congress

© Time & Life Pictures/Getty Images

© AP Images

© AP Images
©

APImages

©APImages

©APImages© AP Images © AP Images

©APImages

47

Courtesy of Ford Motor Company

© AP Images

The large U.S.

multinational firms have

altered their production

strategies and their roles

in response to globalization as they adapt to

increasing competition.

What the

U.S. Economy

Produces

C H A P T E R
© AP Images

50

Above: Robotic welders operate an auto van assembly line in Baltimore, Maryland.

Previous spread: Starbucks has spread far and wide to nearly 50 countries since its

first store opened in Seattle in 1971. The corporation announced plans to close 600

shops when the economic downturn struck in 2008.
51

Standing by itself, U.S. manufacturing would

be the eighth largest economy in the world.

U.S. MANUFACTURING INSTITUTE

2006

The U.S. economy is in the midst of its second

radical conversion. The first represented a shift from

agriculture to manufacturing. The past quarter-century has

witnessed a further evolution toward finance, business services,

retailing, specialized manufacturing, technology products, and

health care. The first revolution mated European capital to America’s

burgeoning 19th-century expansion, while the current transition reflects Americans’ response to unprecedented global competition in

trade and finance.

Like other economies, the U.S. economy comprises a circular flow

of goods and services between individuals and businesses. Individuals

buy goods and services produced by businesses, which employ individuals and pay them wages and benefits, providing the income that individuals use to make new purchases of goods and services and

investments, or to save.

The most common measure of the U.S. economy is the federal government’s report on the gross domestic product (GDP). GDP records the

value in dollars of all goods and services purchased in the United States

by individuals and businesses, plus investments, government spending,

and exports and importsfrom abroad. (It does not include sales by foreign

companies located in the United States or by American companies operating in foreign countries.)

GDP is made up both of goods and services for final sale in the private-sector market and nonmarket services, such as education and military defense, provided by governments. In principle, the value of

goods and services in the market reflects an exchange between willing

buyers and sellers and is not fixed by government, with some notable

exceptions such as government farm and energy subsidies.

In 2006, the $13.1 trillion U.S gross domestic product comprised approximately $9.2 trillion in personal spending by American consumers;
$2.2 trillion in private investments

for homes, business equipment,

and other purposes; and $2.5 trillion spent by governments at all

levels, minus an international deficit of $700 million—the difference

between what the United States

imported and exported and its

net financial transactions with the

rest of the world.

Looked at another way, governments collected $2.7 trillion

in taxes, roughly half of that on

personal in-come and the rest on

production and business profits.

Governments paid out $1.6 trillion in benefits, primarily to individuals, and $370 billion in

interest to holders of government

debt. (The United States places

near the bottom of major economies in its overall tax burden,

ranking 22nd out of 26 nations

surveyed in 2006 by the Organization for Economic Cooperation

and Development.)

GDP sources are broken down

into major economic sectors such

as manufacturing and retail sales.

Comparing the 2006 output of

these sectors with 1980 shows the

magnitude of the shift from goods

to services over the past quartercentury. In 2006, manufacturing

provided 12 percent of total U.S.

domestic output of goods and services. In 1980, its share was 20 percent. Finance and real estate

services overtook manufacturing,

contributing 21 percent of the U.S.

economic output in 2006 versus

16 percent in 1980. Suppliers of

professional business services, including lawyers and consultants,

contributed as much value as manufacturing—12 percent of the domestic economy. This figure was

only 7 percent in 1980. Retail and

wholesale trade, at 12 percent, was

slightly lower than in 1980. The

category of health care and private

educational services was 7 percent

in 2006, compared to 4 percent in

1980. Government at all levels accounted for 13 percent of the

country’s economic output in

2006, essentially unchanged from

1980. Oil and gas production

dropped to just over 1 percent of

the nation’s output in 2006, from

2 percent in 1980.

Excluding government’s share

of the economy, goods-producing

companies made up 20 percent

of total private-sector output in

2006, down from 34 percent in

1980. The services sector climbed

from 67 percent to 80 percent

during that period.

Manufacturing Faces Competition

Manufacturing’s share of the

U.S. economy peaked in the

1950s, when Europe and Asia

were still struggling to recover

from the devastation of World War

II. By 1980, Japan and Western

Europe were ready to challenge

U.S. industrial leadership, and in

the new century they have been

joined by China, India, and many

other nations around the globe.

American producers have responded to rising competition

and higher labor and benefits

costs by moving operations offshore, purchasing foreign parts

and components, and concen52
trating on higher-value products

where innovation offers a competitive advantage. Only 10 percent of the U.S. workforce holds

manufacturing jobs today, down

from 20 percent plus in 1980.

Even so, high U.S. worker productivity and technological leadership enabled the United States

to rank as the world’s leading

manufacturer in 2006, with $1.5

trillion in products in 2006, or

about one-quarter of total worldwide production. “Standing by itself, U.S. manufacturing would be

the eighth largest economy in the

world,” the U.S. Manufacturing

Institute has said. U.S. manufacturers employ more than 14 million workers, and another 6

million work in related industries.

According to the institute’s 2006

report, manufacturing jobs pay

about 25 percent more in wages

and benefits than nonmanufacturing jobs in the United States.

The country’s manufacturers produced more growth and more

productivity gains between 2001

and 2005 than any other sector of

the U.S. economy.

Five manufacturing groups

had more than $1 billion each in

sales in 2006: fabricated metal

parts, a key product for the construction industry; machinery;

computers and electronic equipment; motor vehicles; and food

and beverages. U.S. manufacturing output that year included

4,500 civil aircraft, 11 million cars

and light trucks, 87 million metric

tons of raw steel, 27 million computers, $127 billion worth of pharmaceutical preparations (excluding biological products), and

$120.6 billion in semiconductors

and electronic components.

Retail businesses contributed

about 6 percent to 2006 economic

output. Wholesale businesses,

which buy from producers and

then supply retailers, added another 5 percent. Together, these

sectors produced about $1.6 trillion for the U.S. economy, and

their share of the total in 2006

was slightly less than in 1980.

The retail sector’s makeup illustrates the great diversity of

stores in the American economy.

More than 95 percent of all retailers are single-store business, the

traditional “mom-and-pop” operations that populate America’s

Main Streets.

But revenuestaken in by singlestore businesses account for only

half of all retailsales.In the sprawling malls and shopping centers on

the outskirts of U.S. cities are the

“big-box” retail stores and “supercenter” warehouses that compete

for consumers’ dollars through relentless price competition. The

largest of these major retailers,

Wal-Mart, seemed to be everywhere, with 4,100 U.S. stores and

3,100 stores abroad.

Amazon.com, which ranked

No. 32 in retailing revenues in

2007, had no stores—all of its

sales are made on-line. The company is by far the most durable

survivor of the 1990s dot.com retailing boom. The shifts in rankings of leading U.S. retailers each

year show evidence of the con53 53
54

The story of Wal-Mart’s stunning rise

within a single generation from a commonplace, low-price variety store in Arkansas to

the world’s largest and most powerful retailer illustrates

many fundamental shifts taking place in the U.S. economy. Wal-Mart’s fixation on beating competitors’ prices

and squeezing its operating costs to the bone year after

year has proved to be a potent strategy. By 2006, The

Wal-Mart Effect author Charles Fishman reported,

more than half of all Americans lived within eight kilometers of a Wal-Mart store.

Although Wal-Mart typically sought out U.S. manufacturers to stock its shelves, as the company grew,

Wal-Mart management accelerated their search for lower-cost products and components in

overseas markets. Today, Wal-Mart has become the most important single conduit for foreign

retail goods entering the U.S. economy.

Wal-Mart’s spread across the American landscape has provoked intense opposition from

critics, led by labor organizations fighting what they view as the company’s anti-union policies.

Wal-Mart workers make half the wages of factory workers, or less, and have sometimes had

wages capped to hold down store costs. Personnel turnover is relatively high, but the company

reports it routinely gets 10 applications for every position when a new store opens. The company

is using its economic clout to promote energy-efficient products, solar energy installations at

its stores, and fuel conservation by its truck fleet, and has urged employees to support its

“green” strategies. Its “big box” stores, exceeding 13,000 square meters in size, have been

vilified by some for overwhelming nearby small-town merchants.

However, retailing in the United States has always been intensely competitive, with losing

technologies and strategies falling by the wayside. The spread of electricity in cities and the invention of the elevator in the 1880s enabled retailing magnate John Wanamaker and imitators

to create the first downtown department stores. Then Sears and other catalog stores opened a

new retailing front—shopping from home. The movement of Americans who followed the Interstate Highway System to ever more distant suburbs undermined local merchants long before

Wal-Mart reached its leviathan size. And Wal-Mart’s recent U.S. growth has slowed, as it and

other big retailers face competition from Internet shopping and specialty marketers.

The older, simpler U.S. retail model of a century ago, when community-based merchants

sold largely made-in-America products, might have provided a more stable economic base for

some communities. But this static model often failed to adapt to new conditions generated by

the nation’s dynamic economic, social, and political institutions.

Retailing’s Competitive Battlefield

Always

Low Prices

Always

Siempre precios bajos

Above: An emblem of the cost-cutting attraction of Wal-Mart.

Top left: A “greeter” awaits customers entering one of the stores of the chain Wal-Mart,

the largest private employer in the United States.

Courtesy of Wal-Mart

Courtesy of Wal-Mart
stant struggle among large stores

to win and hold the loyalty of

U.S. consumers.

The Rise of Finance

The first decade of the 21st

century marked the “ascendancy

of finance,” in the words of Joseph

E. Stiglitz, chairman of President

Bill Clinton’s Council of Economic Advisers. The finance, insurance, and real estate industry

category of gross domestic product, which includes giant securities

funds, small regional banks, and

insurance companies, contributed

$2.7 trillion to the economy in

2006, or 21 percent of the total.

Its share in 1980 was 16 percent.

Between 1998 and 2006, the revenues of U.S. finance and insurance companies shot up by 71

percent, capitalizing on the U.S.

leadership in rapidly growing

global financial markets.

The growth in international

credit markets in the 2000s

decade showed both the sophistication and dynamism of the U.S.

investment industry. The crash

that followed in 2008 revealed a

lack of restraint that led many in

the industry to assume dangerous

risk by accumulating too much

debt, much of it not clearly visible

to their shareholders.

A category of industry called

“business and professional services” added about $1.5 trillion in

output to the economy in 2006,

or 12 percent, compared to 7

percent in 1980. This encompasses the growing economic role

played by lawyers and consultants. The American Bar Association reported that more than 1.1

million lawyers were practicing in

the United States in 2008, or one

out every 300 Americans, a far

higher proportion than in any

other country.

Health care came to $900 billion, or just under 7 percent of

economic output, reflecting the

expansion of high-priced health

care technologies and the medical

needs of an aging U.S. population.

In 1980, health care accounted for

4 percent of the economy.

Americans today travel more

for business and pleasure than a

generation ago, and this has fed

the growth of the hotel and

restaurant industries, whose output totaled $350 billion in 2006,

or 2.7 percent of the gross domestic product. This is slightly

higher than in 1980.

Where Americans Work

Details about where Americans work provide another view

of the economy. On a typical

workday in 2005, just over 141

million full- and part-time employees went to work in the

United States. Not a single one of

them was truly an “average

American,” not in a nation of 300

million people with roots in virtually every nation and culture in

the world, living in huge metropolitan cities or out-of-the-way

hamlets, and in every sort of

community in between.

Just 1 percent of the workforce

was engaged in farming, forestry,

and fishing. Construction, trans55
portation, mining and utilities provided work for 10 percent. Ten

percent worked in manufacturing;

4 percent in wholesale trade; 11

percent in retail trade; 12 percent

in professional and business services; 2 percent in information,

media and software; 6 percent in finance, insurance and real estate;

13 percent in education and health

care; 9 percent in arts, entertainment, accommodations and food

services, and 5 percent in other

services. Government employed

17 percent of the workforce.

In 2005, American workers received $7 trillion in wages or

salaries, by far the largest source

of income for the nation’s 117

million households. These

households also received $1.5

trillion in dividends and interest

payments from their savings and

investments, $1.3 trillion in employer benefits, and $1.5 trillion

in government social benefits, for

which they contributed $880 billion in social insurance payments.

The United States has the

world’s most open borders based

on the volume of trade that enters

and leaves the country. In 2006,

the United States was the largest

importer and second largest exporter of merchandise goods and

led all nations in the import and

export of commercial services. In

that year, the United States exported $1.45 trillion in goods and

services, but imported $2.2 trillion, producing a record trade

deficit of $750 billion. The

United States had a surplus in the

trade of commercial services such

as airline travel and financial services, but it had a deficit of $838

billion in traded goods.

The strongest U.S. export

goods are manufactured capital goods, including motor vehicles, civil aircraft, semiconductors,

industrial machinery, and computer accessories. Pharmaceuticals, gem diamonds, household

goods, sporting goods, games,

and toys are the leading con56
sumer products exports. Chemicals and plastic products are the

largest categories of industrial

materials exports.

Manufactured goods make up

nearly two-thirds of total exports,

with agricultural products far behind, at 5 percent of all outbound

shipments. Although traditional

U.S.customers—Canada, the European Union, and Japan—are

the top recipients of American exports, China, India and developing countries receive nearly half

of U.S. shipments.

Imports have risen much

faster than exports. In 2004, for

example, more than one-third of

all manufactured products purchased by U.S. consumers were

imported. In 1972, the figure was

just 11 percent.

The value of the dollar compared to other leading world currencies has been a critical factor

in U.S. manufacturing competitiveness. In two periods—the

mid-1980s and 1997-2002—the

dollar’s value was high, making

U.S. exports relatively more expensive and imports cheaper. In

both periods, the country’s trade

deficit grew sharply. The dollar’s

decline during 2002-2008 helped

boost U.S. exports.

But apart from currency issues, a rising tide of global competition, particularly from

countries with lower labor costs,

has pushed American manufacturers to new competitive strategies. A 2005 study by the U.S.

Bureau of Economic Analysis disclosed a trend among U.S.- headquartered major multinational

corporations. U.S.-based divisions cut employment and capital

investments at home but increased jobs and investments significantly at their foreign units.

The annual output of the foreign

affiliates that year increased by

more than twice that of the parent company in the United

States. The study suggests that

U.S. multinationals were relying

increasingly on bringing in foreign-made components, including those from their overseas

affiliates, and then including

them in their final products.

57
Investing in Research and Education

American investments in research and development (R&D)

and education have been a bulwark

of U.S. trade competitiveness. The

U.S. Manufacturing Institute has

listed important new technologies

on which U.S. companies rely, including computer-aided design,

robotics, just-in-time inventory

controls, and radio frequency identification technology used in tracking the flow of goodsfrom factories

or warehouses to stores.

The institute also reports that

U.S. manufacturers are leaders in

applying the new science of nanotechnology, which harnesses the

distinctive physical properties of

individual molecules to create improved products. Nanotechnology

is producing lighter, stronger, and

more rustproof motor vehicle

components. It creates stainproof

clothing and military armor, and

it greatly extends the shelf life of

bottled products.

But U.S. industry leaders warn

that the long-standing U.S. lead

in R&D spending is shrinking.

Total R&D spending by China,

Ireland, Israel, Singapore, South

Korea, and Taiwan is expected to

exceed the U.S. total before 2010.

The United States increased R&D

investments by nearly 40 percent

between 1995 and 2005, but

China’s investments tripled during those years, albeit from a

much smaller base.

Support for Farmers

In the early 20th century, according to the U.S. Department of

Agriculture, more than half of the

U.S. workforce was employed by

58

Above: U.S. manufacturers are leaders in applying nanotechnology, as in this luggage

screening device developed by the General Electric Company.

© AP Images
the small, diversified, rural, and

family-run farms responsible for

most of the nation’s foodstuffs.

Today, U.S. agriculture is concentrated on a small number of very

large,specialized farms employing

lessthan 1 percent of U.S. workers.

The acreage of the average farm

has tripled since 1940, and half of

U.S. farm sales come from the

largest 2 percent of all farming operations. American farmers

received $285 billion for their

crops and livestock, plus $12 billion in direct government payments in 2007. Farm imports

totaled $70 billion, while exports

came to $82 billion.

Federal programs to shore up

farmers’ incomes arose in the

Great Depression of the 1930s.

The goals were to assure minimum farm prices for specific farm

commodities and to further support farm prices by paying farmers to limit production. Although

consumers bore the cost of the

resulting higher food prices,

many considered this approach

reasonable when most farms were

small and farmers’ incomes were

relatively low.

Federal policies began to

change in the 1970s as foreign

export markets grew in importance and U.S. agriculture shifted

away from predominantly small

farms to large family holdings

and corporate farming. Federal

legislation in 1996 replaced price

supports on specific commodities

with direct payments to farmers

based on historical production,

but gave farmers flexibility on

how much of their land to farm.

Until the 1980s, half of the

U.S. farm exports were major bulk

commodities such as wheat, corn,

soybeans, cotton, and tobacco.

Livestock accounted for 10 percent of exports. Horticulture products, led by fruit and vegetables,

accounted for 9 percent. Today,

livestock makes up 16 percent of

59
60

Above: Corn is a major crop for human and livestock consumption domestically and for export as well as a source of biofuel.

© Vasiliy Koval/Shutterstock
farm exports; horticulture products, 21 percent; and bulk commodities, 36 percent.

As with manufactured goods,

fluctuations in the dollar’s value

against other currencies produced shifts in agricultural trade.

But the changing tastes of American consumers played an important part, too. In the early 1980s,

an American consumed, on average, 810 kilograms of food a year,

of which 72 kilograms was imported, according to the U.S.

Agriculture Department. In 2002,

consumption had climbed to 900

kilograms and imports per person averaged 118 kilograms. As

U.S. household wealth increased

in the late 1990s and early 2000

decade, consumers spent more on

imported high-value farm products, from wine and beef to cut

flowers. American wheat, corn,

and other bulk exports remained

competitive because of the high

productivity of farmland, the expansion of large-size family and

corporate farming, and agricultural technologies. Ethanol, most

of it refined from corn, made up

nearly 3 percent of U.S. motor

fuel in 2005.

U.S. farmers have readily

adopted genetically altered crops

since their introduction in 1996.

Genetically altered soybeans and

cotton require less herbicide to

control weeds. These varieties

now make up more than 70 percent of all soybean and cotton

acreage planted in the United

States. Cotton and corn have

been engineered to resist insects

by producing their own toxins,

and these varieties are also gaining rapid acceptance in the

United States.

But genetically engineered

crops remain controversial because of critics’ concerns about

their environmental impact and

some public misgivings about the

technology generally. The ultimate response of consumers and

governments around the world to

this science will have major consequences for U.S agriculture.

61

Competition

and the

American

Culture

Competition has remained

a defining characteristic

of the U.S. economy

grounded in the

American Dream of

owning a small business.

C H A P T E R

© Gary Gladstone/Corbis
© AP Images

64

Above: Some of the wealth amassed in the economy goes to good causes. Microsoft

founder and billionaire Bill Gates, shown here with a Mozambique vaccine trial patient, has made philanthropy his new job. Previous spread: Small businesses, such

as this restaurant in Kansas, account for a vast majority of U.S. job creation.
65

“Americans...are also hustlers in the positive

sense: builders, doers, go-getters, dreamers, hard

workers, inventors, organizers, engineers, and a

people supremely generous.”

WALTER MCDOUGALL

2004

Joseph Schumpeter, an Austrian-born economist,

coined the term “creative destruction” in 1942 to describe the turbulent forces of innovation and competition

in Western economies. He called it the “essential fact about capitalism.” The “incessant gales” of markets cull out failing or underperforming companies, clearing the way for new companies,

new products, and new processes, as he put it.

Creative destruction was a philosophy that appealed to critics of the

New Deal social and economic intervention that took hold during the

Great Depression, and it maintains an influential following today. “I

read Schumpeter in my 20s and always thought he was right,” said former Federal Reserve Chairman Alan Greenspan, “and I’ve watched the

process at work through my entire career.” Today “destructive technology” is the label for change-forcing innovation and technology.

The juxtaposition of creation and destruction capturesthe ever-present

tension between gains and losses in the American market economy. The

process has never been without critics and political opponents. But because the winners have substantially outnumbered the losers, the churn

of competition remains a defining characteristic of the U.S. economy.

Outsiders often equate the U.S. economy with its largest corporations

and what they make and do. They may be surprised, then, by the vital

part that small businesses play. Napoleon is said to have dismissed England as “a nation of shopkeepers.” The phrase could also be applied in

considerable degree to the United States, whose shop owners and other

small businesses account for over half of the private-sector U.S. workforce and economic output, excluding farming. (“Small” businesses, according to an official definition, have fewer than 500 employees.)
A typical American town or

suburb of more than 10,000 people is populated with individual

business owners and small

firms—car dealers; accountants

and lawyers; physicians and therapists; shoe repairers and cleaning establishments; flower and

hardware stores; plumbers,

painters, and electricians; clothing boutiques; computer repair

shops; and restaurants of a halfdozen ethnic flavors. Many of the

small retailers compete with national chains boasting billions of

dollars in revenue and thousands

of employees.

Despite the odds against

them, small businesses account

for a vast majority of job

growth, particularly as major

manufacturing companies trim

employment in the face of stiff

global competition. In 2004, for

example, the number of jobs in

small businesses grew by 1.9

million overall from the year

before. Larger companies with

500 employees or more lost

181,000 net jobs. (Economists

point out that many small businesses provide goods and services to large companies and

thus are tied to their fortunes.)

Small Businesses

at the Economy’s Core

American entrepreneurs remain eager to risk their own savings to start small businesses

despite the potential for failure

that Schumpeter’s model predicts.

The widely published and sometimes embroidered story of American Founding Father Benjamin

Franklin was a potent symbol of

aspiration and perseverance for

generations of Americans, “defining our image of ourselves, shaping our sense of possibility,” says

author Peter Baida.

The 15th child of a Boston

soap and candle maker, Franklin

quit school after two years to

work in his brother’s printing

business. He learned the printing

trade and accounting, became

the American colonies’ most

noteworthy publisher and inventor, and then played his storied

role in the struggle for national

independence. Since Franklin’s

time, Americans have hailed

leading inventors and entrepreneurs as icons of opportunism,

from Thomas Edison to Apple’s

Steve Jobs.

Millions of entrepreneurs try

to create their own versions of

success. Government data show

that, in 2006, an estimated

650,000 new employer-owned

businesses were started up and

66
565,000 went out of business, out

of a total of around six million

such businesses nationwide. Similar ratios of births and deaths

among small businesses are repeated year after year.

One obvious reason why so

many Americans choose this path

is the relative ease of starting a

business. Professions such as law,

medicine, and accounting have

stiff licensing requirements. But

compared to other Western

economies, the United States offers an open road to a would-be

business owner. The contrast with

some Third World economies is

monumental. A study by the Peruvian economist Hernando de Soto

found that it took 289 days to

open a small garment workshop

in Lima, Peru. The absence of a vibrant small-business class is not

due to a lack of entrepreneurs, he

argued. In 1993, an estimated

150,000 vendors worked the

streets of Mexico City, to cite but

one example. But these vendors

were blocked from becoming fullfledged business owners by many

hurdles, de Soto says, including

rigid class barriers, laws that discourage property ownership, and

bureaucracies intent on preserving the status quo. In the United

States, change is a way of life.

The Chance to Start Again

If it is easy to launch a business in America, it is also relatively simple to try again after a

failed attempt. The philosopher

Erich Fromm said that the “freedom to fail” was essential to overall freedom, and the adage is

often cited as a basic tenet of

American economic life.

U.S. bankruptcy laws govern

business failures. The U.S. Congress has tried to strike a balance

that recovers as much of a failed

company’s assets as possible for

lenders and creditors, while providing financial protections that

can allow some entrepreneurs to

gain a fresh start. The bankruptcy

process may differ for individuals,

small enterprises, and large, publicly owned corporations.

A small business that cannot

pay its bills usually will go

through what is called a liquidation, selling all of its assets to pay

what it can to its creditors. Some

of the business’s debts are paid

ahead of others, and a bankruptcy court appoints a trustee to

see that the process follows the

rules. Banks and other “secured”

lenders are high on the repayment list, as are most employee

wages. But if there are public

67 67
shareholders, these owners—who

have assumed more risk in exchange for greater potential reward—are on the bottom and

often get nothing as the business

closes its doors.

Large companies that can’t

cope with their debts may choose

what is called a Chapter 11 bankruptcy process, which allows a

company to stay in business while

it tries to recover. If the company

still has valuable assets or some

cash coming in, and if its crisis

seems temporary, creditors may

choose to take less than full repayment of their claims initially

to let the business survive and

continue repaying its creditors.

In this case, too, shareholders

might be wiped out, but the business can survive.

Bankruptcy law also enables

individuals to escape unmanageable debts and start over, although they may lose their

homes. This escape route can be

crucial for people who lose their

jobs or for families facing heavy

medical bills, for example.

The bankruptcy laws are part

of the American cultural belief in

the second chance. This story is

woven deeply into the national

fabric of migration and settlement that began with the first

boatloads of European arrivals

and never stopped. French political thinker Alexis de Tocqueville

found in the 1830s an innate restlessness among Americans, who

were constantly changing course

“for fear of missing the shortest

road” to success and happiness.

The historian Frederick Jackson Turner, marking the 400th anniversary of Columbus’s 1492

landing in the New World, defined

the American frontier as an integral cultural catalyst. The steadily

changing frontier, lying ever west

of existing settlements, was a magnet for migration, pulling footloose

Americans ever westward, Turner

wrote in 1893. He attributed distinctive aspects of the predominant

American character—individualism, risk-taking, suspicion of authority, and optimism—to this

frontier experience.

Creative Destruction

at the Top of the Economy

Creative destruction is evident

at the top of the economy in the

rise and decline of the largest,

most powerful U.S. corporations.

One measure is the survey of

the 50 largest industrial companies published annually by Fortune magazine. In 1990, the

top-50 list featured companies

with household names and an international reach, many dating

back to the early 20th century, including General Motors, Ford

Motor Company, DuPont, Eastman Kodak, and the predecessors of Exxon Mobil. These

businesses similarly reflected the

heyday of U.S. manufacturing:

Manufacturers held 31 of the 50

places, followed by 12 energy

companies and seven consumer

products suppliers.

The 2007 rankings document

the consequences of globalization, the decline of goods pro68
duction in favor of services, and

the rise of health care as a major

need for an aging population.

On the 2007 Fortune list, the

largest U.S. non-financial company was Wal-Mart Stores. Its

$351 billion in revenue narrowly

exceeded revenues of energy

giant Exxon Mobil. The number

of manufacturers among the 50

largest industrial firms was down

to 20. Mergers had reduced the

energy companies to eight in all.

Taking the place of the displaced manufacturing and energy

firms were 10 retailers, including

Wal-Mart, its rival Target, and

Home Depot and Lowes, the leading home improvement and construction materials retailers. Also

in the top 50 were six health industry companies and three companies focused on moving a

steadily growing volume of food,

goods, and documents around the

country—United Parcel Service,

FedEx, and Sysco, the largest distributor of food products. Kodak,

Xerox, International Paper,

Goodyear Tire & Rubber, and

Bristol-Myers Squibb had fallen

far out of the top 50 in 2007.

The global economic expansion has profoundly altered U.S.

business. But so have domestic

forces of change. At the beginning

of the 20th century,some of America’s dominant businesses were

called to account by reformers crusading for better working conditions and pure food. The

movement was revived in the

1960s through a one-man attack

on the safety of American-built automobiles by Ralph Nader, an attorney and activist. Nader’s 1965

book, Unsafe at Any Speed, singled

out the small General Motors Corvair sedan. GM retaliated by investigating Nader’s private life in an

apparent effort to discredit him.

GM’s chairman called Nader “one

of the bitter gypsies of dissent who

plague America.” But Nader’s

campaign against the nation’s No.

1 automaker registered with the

69

Above: Author Ralph Nader shakes the hand of President Lyndon Johnson at the 1966

signing of auto safety legislation boosted by Nader’s book.

© AP Images
American mood. Congress passed

the National Traffic and Motor Vehicle Safety Act of 1966 to set automobile safety standards.

Corporations Push Back

“Ambition must counter ambition,” James Madison wrote in

1788 in Federalist 51, an effort to

defend the proposed U.S. Constitution he had done so much to

shape. American businesses and

their opponents actively play the

role Madison anticipated, presenting and defending their interests

in Washington and state capitals.

The word “lobbying” as a

name for these campaigns dates

back at least to 18th-century

Britain. In the Gilded Age of

rapid U.S. economic expansion

after the Civil War, lobbying by

railroad promoters took the

form of outright bribes “where it

will do most good,” as one railroad trustee put it, spent on congressmen who could determine

railroad routes. Today, lobbyists

who contact members of Congress for their clients must register and publicly disclose their

activities. Their direct contributions of money to members of

Congress are limited and must

be revealed.

Critics of lobbying say it represents a corruption of the democratic process, giving large

contributors the strongest voice.

Defenders reply that the lobbyist

is exercising a constitutionally

guaranteed right to petition the

government and that lawmakers

cannot properly perform their

duties without understanding

the various sides of controversial

issues—details that lobbyists are

eager to provide.

In any event, lobbying is a

growth industry. In 1975, lobbyists reported spending $100 million to make their cases in

Washington. In 2005, the U.S.

Capitol had 17,000 registered

lobbyists (200 of them former

members of Congress), and their

spending totaled $2.5 billion.

There is hardly a cause of any

size that is not part of this campaign, but business groups lead

the list of registered lobbyists.

Between 1998 and 2006, five

U.S. industries reported spending a total of $1 billion or more

on lobbying.

A profound internal challenge

to America’s business establishment in the past quarter-century

came not from regulators or “gypsies of dissent,” but from investors. In the 1980s, an industry

sprang up centered on Wall Street

and focused on taking over underperforming publicly owned

corporations. In 1981, DuPont, a

diversified manufacturer of chemical-based products, made a bid to

purchase the oil giant Conoco. A

bidding frenzy followed as

Canada’s Seagram liquor distiller

and Conoco rivals Texaco and

Mobil sought to beat DuPont’s

price. Conoco’s $7.8 billion

merger with DuPont equated to a

purchase price of $98 for each

share of Conoco stock, twice the

share price before DuPont made

its move. The largest corporate

70
merger to that time, it created

stunning financial gains not only

for Conoco stockholders, but also

for speculators who purchased

the oil company’s shares and for

the Wall Street investment

bankers and lawyers who worked

on the deal.

The acquisition of Conoco

opened a wild new chapter in

U.S. business history. Bidding

wars broke out to seize control of

companies whose low stock prices

left them vulnerable. New tactics

appeared, such as “greenmail” by

investors and speculators who

bought significant shares of a

company and then threatened a

takeover unless the company repurchased their shares at a

higher price. Corporate “raiders”

such as T. Boone Pickens, Carl

Icahn, and Sir James Goldsmith

became celebrities. Corporate

leaders accused them of financial

piracy. The raiders countered

that by purchasing shares of “mismanaged” companies, they made

rightful claims on behalf of all

shareholders to the companies’

true value.

Junk Bonds and Takeovers

Adding to the turmoil was an

explosive increase in leveraged

buyouts, or LBOs. The targets of

this strategy were companies

whose stock prices appeared depressed because of poor management or because of Wall Street’s

misreading of the companies’

potential. Outside investors or a

company’s top managers would

seek to buy a company from public shareholders by offering an

above-market price. The leverage in this case was debt. The

typical LBO was financed primarily by loans that would be issued

by the company once the new

owners had succeeded in taking

it over. Interest payments on

these loans were tax deductible,

lessening both the cost and financial risk of the LBO and encouraging LBO organizers to

offer their bonds at relatively

high yields to investors.

Traditionally, high-yielding but

riskier debt securities were offered

by companies in trouble and so

were known as “junk bonds,” but

LBO promoters argued that these

bonds were not as risky as many

investors had assumed. A 1978

change in federal rules permitted

regulated corporate pension

funds to invest in LBO debt,

opening a vital source of financing

to the LBO movement. Insurance

companies, mutual funds, and

savings and loan banks were other

major buyers of junk bonds.

In the first half of the 1980s,

LBO transactions increased sixfold. In 1988, an estimated $200

billion in junk bonds had been issued, a boom in Wall Street dealmaking not seen since J.P.

Morgan’s day, said Business Week

magazine. Shareholders benefited from the premium prices on

LBO offers. Wall Street investment and law firms collected

handsome fees, and LBO owners

stood to profit enormously if the

plans succeeded. It was the

“great, infallible money-making

71
machine” of the decade, said finance professor Roy C. Smith.

The downside was the destructive half of Schumpeter’s

creative destruction model. To

meet debt payments, new owners

often had to sell off poor-performing divisions or shrink payrolls, and then employees lost

jobs. Companies that had been

fixtures of communities for years

were sold or dismantled. A top

executive of a leading U.S. automobile tire company said that the

LBO was “created in hell by the

devil himself.”

The LBO process depended

on a healthy economy with buyers eager to purchase the unwanted parts of LBO companies,

on investors’ confidence in junk

bonds, and on a permissive regulatory climate. But the economy

slowed at the end of the 1980s,

and investor confidence was

jarred by scandal. The billiondollar deals tempted some of

Wall Street’s best-known bankers

and lawyers to cheat, violating

federal securities laws by tipping

off one another on upcoming but

unannounced deals, manipulating stock prices, and issuing

fraudulently false financial statements. The Wall Street firm

Drexel Burnham Lambert, the

leading junk bond financier, admitted felony securities violations

in 1988, paid a record $650 million fine, and wound up in bankruptcy court.

The corporate raiding frenzy

subsided in the 1990s after

Drexel’s demise was followed by

heavy losses for junk bond investors generally. The 1990s

boom in technology stocks absorbed larger and larger amounts

of investors’ money until that

speculative stock surge collapsed

in 2000. After a few years, however, a new wave of corporate acquisitions swelled up. It was led

by private investment funds

whose clients pooled their capital

and borrowed additional funds to

purchase companies whose profits and stock market prices had

slumped, creating possible bargains for the investors.

Unlike some takeovers by

1980s raiders, investment funds

such as the Blackstone Group

and the Carlyle Group aimed not

just to cut costs, but to improve

the company’s results. The private managers sought to take a

company public, selling shares on

U.S. stock markets. If the company was performing better than

during its last public incarnation,

the share prices would be correspondingly higher and the private investors would reap

extraordinary gains. The list of

companies acquired by such private equity funds included the

Hertz Corporation car rental

company, Metro-Goldwyn Mayer

movie studios, Burger King,

Chrysler, and TXU, the largest

electric utility in Texas.

In 1992, private equity investments totaled just $21 billion. In

2006, private equity firms bought

control of 654 U.S. companies for

a total of $375 billion, evidence

of the constant turnover in Amer72
ican business that Schumpeter

would have instantly recognized.

Competition and

the American Culture

How did competition and disruptive change become accepted

as part of the American economic culture?

The first European settlers in

the New World braved the perilous Atlantic crossing for varied

reasons. Some sought a new land

where their religious beliefs

would escape persecution. Others

sought gold or the fountain of

youth or the passage to India.

Many simply dreamed of a new

chance in life. But most shared

the reality that they would have

to build their new world from the

bottom up.

From the first fragile settlements, Americans pushed westward, inventing and reinventing

their society in the face of constantly changing opportunities

and hazards. Historian Walter A.

McDougall has called the United

States “the most dynamic civilization in history,” adding, “nowhere

else has more change occurred in

so short a span. America was not

just born of revolution, it is one.”

Many Americans believed that

God, the Creator, the Almighty—

whom they saw in many different

ways—blessed their struggle to

create a new nation. In 1630,

John Winthrop, the governor of

the Massachusetts Bay Colony,

had called his settlement a “city

on a hill. The eyes of people are

upon us.” President Woodrow

Wilson, in 1915, told a group of

new American citizens, “you have

taken an oath of allegiance to a

great ideal, to a great body of

principles, to a great hope of the

human race.” And Winthrop’s

metaphor became a favorite of

President Ronald Reagan, as the

20th century neared its close.

This sense of mission fortified

the willingness of many Americans to seize the land and build a

new country and a strong economy. And it helped instill in the

American people a lasting streak

of optimism.

“With optimism went a sense

of power and of vast resources of

energy,” said the historian

Henry Steele Commager. “The

American had spacious ideas, his

imagination roamed a continent,

and he was impatient with petty

transactions, hesitation, and

timidities. To carve out a farm of

a square mile or a ranch of a

hundred square miles, to educate millions of children, to feed

the Western world with his wheat

and his corn, did not appear to

him remarkable.”

Idealism and self-interest prevailed alongside one another. McDougall argues that stripped to

essentials, America was, and remains, a nation of hustlers. In

Freedom Just Around the Corner, McDougall described his dilemma:

“Shall I portray Americans as individualists or community

builders, pragmatists or dreamers, materialists or idealists, bigots

or champions of tolerance, lovers

of liberty and justice for all, or his73
tory’s most brazen hypocrites?” In

fact, all of these traits have been

obvious throughout the American

experience, he said.

The common denominator

McDougall saw was a scrappy

drive to hustle, to get ahead and

improve one’s circumstances.

“Americans take it for granted

that ‘everyone’s got an angle,’ except maybe themselves,” he wrote.

“Politicians, lawyers, bankers, merchants, and salesmen are considered guilty until proven innocent.”

Americans were “hustlers in the

sense of self-promoters, scofflaws,

occasional frauds, and peripatetic

self-reinventors,” he said. But he

added, “They are also hustlers

in the positive sense: builders,

doers, go-getters, dreamers, hard

workers, inventors, organizers,

engineers, and a people supremely generous.”

The first American settlers

brought with them the principles

of Britain’s complex, diverse, and

opportunistic market economy,

and applied them on the new

soil. But the British model was

changed by the ideals of liberty

and democracy that promised

opportunity. As Princeton University’s Anne-Marie Slaughter

put it, “From nothing to something is what we mean by the

American Dream—from rags to

riches, from a log cabin to the

White House, from a Kansas farm

to a Hollywood studio. It is a

story of making and remaking

ourselves as far as luck and hard

work will carry us.”

Praising Work

The original contours of the

American economy were defined

by a culture that elevated conscientious work into a national

value. “In the beginning America

was the land and the land was

America,” wrote anthropologist

and businessman Herbert Applebaum. Unlike Britain, the New

World offered the promise of

landownership to the typical settler, at least once the Native

American peoples had been

driven off. But the land was useless without an investment in

“backbreaking and continuous

work,” Applebaum added. The

farmer had to master a dozen

tradesman’s skills. The tradesman had to farm. Necessity bred

a deep strain of individualism

within the communal settlements

that spread across the land.

As the American colonies

prospered and then combined in

their unlikely Revolutionary War

victory, Americans increasingly

viewed work not merely as a requisite of survival but as the path

to success.

“Significant numbers of

Americans believe that anyone,

high or low, can move up the economic ladder as long as they are

talented, hardworking, entrepreneurial, and not too unlucky,”

wrote Yale University law professor Amy Chau. This belief helps

explain the relative weakness of

class-based political movements

in the United States and the acceptance—however grudgingly—

74
by most Americans of greater disparities in wealth than are found

in other developed nations, Chau

and other commentators say.

The sociologist and political

economist Max Weber, writing a

century ago in his influential The

Protestant Ethic and the Spirit of

Capitalism, argued that Protestant

religions helped build capitalism’s foundation by endorsing

hard work, honesty, and frugality.

That spirit survives, but in changing forms, says the urban studies

theorist Richard Florida.

In his 2005 book, The Flight of

the Creative Class, Florida argues

that the protest movements of

the 1960s and 1970s eventually

sparked new perceptions of work.

Increasingly not just hard work,

but fulfilling, interesting, fun

work became the goal of the

baby-boom generation that dominated the U.S. economy in the

last third of the 20th century.

But even this cultural turn reflected traditional American

traits. A streak of pragmatism,

skepticism, and contrariness runs

deep in the American character,

historians say. “The American’s

attitude toward authority, rules,

and regulations was the despair

of bureaucrats and disciplinarians,” writes Commager.

American history suggests that

whatever future form it takes, the

individualism and contrariness

that seem wired into the national

culture will continue to fuel Americans’ hustling, striving nature.

75

Courtesy of Library of Congress

Geography

and

Infrastructure

Education and

transportation help

hold together

widely separated

and distinct regions.

C H A P T E R
78

Above: Pittsburgh, Pennsylvania, became a steelmaking center at the confluence

of rivers, coal beds, and rail. Previous spread: The Jones & Laughlin Steel Company plant along the Ohio River in Aliquippa, Pennsylvania, in 1938, operated near

Pittsburgh.

© Gianna Stadelmyer / Shutterstock
79

“It is one of the happy incidents of the federal system

that a single courageous state may... serve as

a laboratory and try novel social and economic

experiments...”

JUSTICE LOUIS BRANDEIS

U.S. Supreme Court

1932

As a continental nation spanning much of the

territory between two great oceans, the United States

is blessed with tremendous natural resources: a treasure of

forests, seacoasts, arable land, rivers, lakes, and minerals. School

atlases of North America once located important economic resources with simple icons placed on a map: office skyscrapers

marking the Eastern Seaboard’s metropolitan centers; factories

flanking the Great Lakes industrial belt; stacks of wheat and

grazing livestock on the Great Plains; cotton in the Old South and

eastern Texas; coal in the Appalachian Mountains of the East and

on the eastern slopes of the Rocky Mountains; iron ore in Minnesota’s Mesabi Range; oil wells in the Southwest, California, and

Alaska; timber and hydropower in the Southeast and Northwest.

Of course these resources were found in many places. The area

around Pittsburgh, Pennsylvania, became a center of steelmaking because of the nearby coal deposits and its rail and river connections to

the rest of the country. Gary, Indiana, and Birmingham, Alabama, were

big steel cities, too. John D. Rockefeller’s oil fortunes were made in Pennsylvania, but Texas’s plains, the coastal states along the Gulf of Mexico,

southern California, and Alaska also sheltered large oil preserves. Even

so, those old schoolbook maps correctly pinpointed the different centers

of America’s resource wealth from which the economy grew.

A similar 21st-century economic map would look very different. Old

manufacturing cities around the Great Lakes have lost hundreds of thousands of production jobs over the past two decades. Other metropolitan
areas have grown on the strength

of their technology and finance

sectors. Even so, the American

economy retains its strongly regional character.

A Nation of Regions

Distinct regions emerged in

America’s first century as immigrants from different lands moved

to parts of the country where their

skills might best be suited and

their families welcomed. Scandinavian farmers landed in Minnesota; Jewish immigrant

tradesmen from Europe’s cities

settled in New York and other

major northern cities; Mexican

farm workers beat a path to California’s orchards and fields.

Settlers followed kinsmen,

creating clusters of common customs that took root in each region. Journalist Dan Morgan has

observed that orderly New England “Yankees” moving from

their homes in the northeastern

United States to Ohio laid out

plans for future towns with

schools and courthouses “before

the first harvest was in.” German

immigrants erected sturdy dairy

barns in Pennsylvania, built to

last, and they did, as one generation followed another. Farmers

and townspeople in the East

sought land or fortune on western frontiers, braving life-threatening challenges. Those who

made it implanted a strong individualistic strain that still characterizes the western outlook.

This clustering of people,skills,

and resources fostered the emergence of distinct regional identities

and personalities. Journalist Joel

Garreau, in his book The Nine Nations of North America, suggests that

the United States, Canada, Mexico, and the Caribbean contain

separate North American regions

with different, defining characteristics. The U.S. regions are New

England; the old industrial states

around the Great Lakes; the South

with its historical legacies and new

economic dynamism; the breadbasket of farmlands from the Midwest to the Great Plains; the thinly

settled wilderness and desert

regions along the Rocky Mountains; the center of Latino presence in Texas and the Southwest;

the nucleus of environmental

activism along the Pacific Coast;

and the tip of Florida with its ties

to the Caribbean.

“Some are close to being raw

frontiers; others have four centuries of history. Each has a peculiar economy; each commands

a certain emotional allegiance

from its citizens. These nations

look different, feel different, and

sound different from each other,”

Garreau wrote. “Some are clearly divided topographically by

mountains, deserts, and rivers.

Others are separated by architecture, music, language, and

ways of making a living. Most

importantly, each nation has a

distinct prism through which it

views the world.”

Differences in character affected how each region developed. An example is water. The

first settlers reaching America

80
from Britain brought with them

the traditions of English common

law. Owners of “riparian” property—on the banks of lakes and

rivers—had the right to claim use

of the “natural flow” of water past

their lands. But this principle was

tested by economic competition.

Mill owners, key players in the

northern colonies’ economy,

could claim competing rights to

the same river.

To settle these disputes, American courts created the doctrine of

“reasonable use.” It is, in effect, a

requirement that users fairly share

water resources. What was reasonable in these disputes varied from

state to state and region to region,

but it often meant that a bigger

mill or factory could make a

greater claim on a river’s flow

than a smaller one. The factory

cities that sprung up along the

rivers of the northeastern United

States owed their existence to

shared water supplies.

The California gold rush of

1848 led to an entirely different

doctrine, one that met the miners’ needs and would shape the

uses of water throughout the

West. A miner finding a gold

seam would claim the land and

water from the nearest creek to

wash dirt away from the precious

nuggets. The miner’s claim established a “first-in-time, first-in-use”

priority allowing him to take as

much water as he required.

After the gold rush ended, the

miners’ approach to water rights

became an established custom.

Unlike the principle of shared resources in the East, the miners’

“prior appropriation” doctrine,

as it became called in the West,

allowed pioneering developers to

claim vast amounts of water to

support the expansion of cities in

arid Southern California and

other southwestern states and to

help western farmers grow crops

on dry land by tapping immense

underground water aquifers without limitations. Los Angeles and

Las Vegas exist as metropolitan

cities today because of the western

water rights doctrine.

The example of water rights illustrates the variety of regional

policies, laws, and practices that

emerged within a diverse Union.

U.S. Supreme Court Justice Louis

D. Brandeis framed the case for

the diversity of state policies in a

widely noted dissenting opinion

on a 1932 case before the court:

“It is one of the happy incidents

of the federal system that a single

courageous state may, if its citizens choose, serve as a laboratory,

and try novel social and economic

experiments without risk to the

rest of the country.” States remain

laboratories of policy innovation

in education, energy supply, and

public transportation.

Unifying Forces

The landscape of U.S. history

is covered with travelers’ paths.

The economic blight throughout

the South after the U.S. Civil War

sent thousands of Scotch-Irish immigrants and their children drifting westward to find open farms

in Texas and native American

81
Indian territory. “When conditions became intolerable, they exercised their ultimate right as

Americans—the right to move

on,” Dan Morgan wrote. They

chalked “GTT” on abandoned

front doors and departed. Their

neighbors knew the initials meant

“Gone to Texas.”

The Great Depression and

dust storms of the 1930s forced

the greatest migration in the nation’s history, as 300,000 people

from Oklahoma, Texas, Missouri,

and Arkansas headed for California’s fertile central valley. Fearful

California authorities raised a

sign in Tulsa, Oklahoma, warning, “No Jobs in California. If you

are out of work keep out!” But

the Okies, as they were called,

went anyway.

The movement of people was

triggered by both opportunity

and necessity. A long-running migration of African Americans out

of the South continued throughout the 20th century as farm

mechanization displaced hand

labor. The greatest transition

began during World War II, when

northern steel and auto factories

offered jobs to African Americans

to fill wartime vacancies. Economic necessity prevailed over

traditions of racial bias.

New England’s textile industry over the past century gradually moved to the South, where

land was cheaper and labor

unions weaker. In recent decades,

foreign auto and truck companies have set up factories across

the South, welcomed by growth82

Above: The 1930s Great Depression and dust storms led 300,000 people from the plains

states to migrate to California looking for work on farms.

Courtesy of Library of Congress
minded business and civic leaders. Today, once-empty towns in

Wyoming are filling up with newcomers taking jobs in the state’s

expanding coal industry.

The mobility of American

workers is well documented. One

study in the past decade reported

that, on average, U.S. college

graduates would work for 11 employers before retirement. The

U.S. Bureau of Labor Statistics

calculated that college graduates

would hold 13 different job positions, counting promotions and

changes of employers, before

reaching 38 years of age.

The willingness of Americans

to “get up and go” is recorded by

the national census taken every

10 years. The 1990 U.S. census

found that just 60 percent of the

country’s people were living in

the same state where they were

born. And that average concealed

considerable variations among

the states. Eighty percent of

Pennsylvanians surveyed in that

census, and more than 70 percent of residents of other states,

including Iowa, Louisiana, Michigan, Minnesota, and Mississippi,

were living in their birth state.

But only 30 percent of Florida’s

residents could say the same.

Migration continued in the

beginning of the 21st century.

From 2000 to 2004, the northeastern United States lost a net

average of 246,000 residents a

year, and the Midwest’s population declined by an average

161,000 people a year. But the

South gained 352,000 people a

year on average. In the West, Pacific Coast states lost an average

75,500 residents a year, but the

Rocky Mountain states gained an

average 130,000.

Unifying Forces and Infrastructure

Even as immigration, resources, and culture helped define regional differences, other

economic and cultural forces

worked to break down regional

barriers and integrate more

closely the nation’s regional

economies. These included a

common currency, a legal system

that recognized the rights of

property ownership, and federal

laws creating uniform policies for

commerce among the states.

A crucial linkage was the development of the country’s transportation infrastructure, which

smoothed the flow of goods

among all the regions.

The need for transportation

networks was clear from the

start. It was George Washington’s dream to connect Virginia

and other eastern states to the

Ohio Valley—then the nation’s

frontier—through a canal from

Washington, D.C., across the

Appalachian Mountains to

Ohio. But money was scarce,

and construction did not begin

until 1828. Before the canal’s

completion in 1850, hundreds

of steamboats were working the

Mississippi River and regional

railroads crisscrossed the populated eastern states. Rail and

steam had made the canal obsolete before its completion.

83
Samuel F.B. Morse’s development of the telegraph received

crucial funding from the federal

government: a $30,000 grant enabled him to run a telegraph line

from Baltimore, Maryland, to

Washington, D.C., in 1844. The

determined inventor triumphed

when the line instantly and magically transmitted to Washington

the results of the presidential

nominating conventions held in

Baltimore, using the dot-and-dash

letter code Morse had created.

Morse’s telegraph was an

early demonstration of the key

role that the U.S. government

would play in promoting science

and commerce, a role that has

continued to the present through

the funding of the U.S. space

program, cancer research, and

advanced energy systems. Morse

believed that the government,

having bankrolled the project,

should build and run a nationwide telegraph network, just as it

delivered the mails. But Washington officials were not interested,

and Morse and his partners

formed a private company to run

telegraph wires between Washington and New York. Five years

later, 19,000 kilometers of lines

had been strung. That number

was doubled by armies during the

Civil War. Before Morse’s death

in 1872, telegraph lines extended

400,000 kilometers, opening a

coast-to-coast communications

capability that was indispensable

to the economy’s growth.

The federal government

alone had the authority and capital to launch the 19th century’s

greatest infrastructure project—

the transcontinental railroad.

President Abraham Lincoln

signed the legislation creating a

nationally chartered corporation

to undertake the immense project. Two companies got the task

of building the lines, one starting

in Omaha, Nebraska, the other

in Sacramento, California. The

hazardous project, which had to

cross deserts and overcome western mountain ranges, employed

10,000 workers, including European settlers, freed slaves, and

Chinese immigrants.

The railroad united the nation

from coast to coast. Grain, coal to

make steel and illuminating gas,

copper, iron ore, petroleum, timber, clothing to supply new city

department stores and consumer

catalog businesses, foodstuffs—

even fruit in newly created refrigerator cars—all could cross the

country in search of markets. A

trip from New York to China,

which had taken 100 days around

South America’s forbidding Cape

Horn, now could be completed in

30 days thanks to the continentspanning railroad.

In 1912, the automobile was

still a toy of the wealthy. But industrialist Carl G. Fisher, whose

company made automobile headlights, saw the possibilities of a

coast-to-coast highway and organized a campaign to create it with

public contributions. The 5,456-

kilometer route was called the

Lincoln Highway, and by 1925 it

ran from New York to San Fran84
cisco. At the project’s start, improved highways covered less than

half of the route. Sections of the

route followed historic pathways

blazed by Native Americans, colonial settlers, Civil War armies, and

the Pony Express mail service.

Called “America’s Main Street,” it

forged the first connection between commerce and the automobile and inspired the construction

of the Interstate Highway System

beginning in the 1950s.

President Dwight D. Eisenhower had made the arduous

cross-country trip by truck as a

young Army officer in 1919 and

conceived of a modern limitedaccess highway system that would

buttress America’s internal defenses. Strongly promoted by the

influential automobile and oil industries, the government-funded

highway network was under construction by 1956. Its initial route

plan was completed in 1992 at a

cost of $114 billion—10 times the

projected budget—and paid for

almost entirely by taxes on gasoline sales and other user fees.

By 2004, the road network covered 75,408 kilometers. It accelerated the movement of city dwellers

to suburbs, encouraged the spread

of industry from older commercial

centers in the North into the

85

Above: The Interstate Highway System of limited-access roads like these in Los Angeles bolstered

suburbs, drove shifts of manufacturing to different states, and promoted the trucking industry for

shipping goods.

© iofoto / Shutterstock
South and West, and established

the trucking industry as a rival for

railroads in shipping freight. It

also put more Americans on the

road, and the resulting increasesin

their already-expanding demands

for oil-based motor fuels would

dominate the country’s energy

policy debates.

Creating a National Audience

The United States is often

considered a comparatively decentralized country, one with a

federal government, and yet one

in which individual citizens identify strongly with their regions,

states, and municipalities. To

some extent this was a function

of the country’s great size, and of

technological limits. Nineteenthcentury advances such as the

telegraph and the transcontinental railroad helped to bridge

this distance.

But it was broadcasting—

radio, then television—that

helped to create truly nationwide

audiences, a more common culture, and a truly national economic market. Americans living

thousands of miles apart could

experience domestic and global

events simultaneously. Radio

news broadcasts from the 1920s

on delivered momentous news

happenings, President Franklin

D. Roosevelt’s “fireside chats,”

and popular sporting events.

Broadcasting in America

mostly has evolved along a privately owned, publicly regulated

model. While radio and television stations are licensed by the

federal government and are required to serve the public interest, most also are run to generate

profits for their private-sector

owners, who achieve this by selling advertising time. These product pitches prime the pump of

consumer spending. The country’s top advertisers spent $150

billion promoting their wares in

2006, with 44 percent of that

going to television, 40 percent to

newspapers and magazine, 7 percent to radio, and nearly 7 percent more to fast-growing

Internet advertising.

Advertising is the information

source that underpins competition and promotes the consumer

choice essential for a mass-market economy. Critics also charge

that advertising promotes excessive materialism and unwise

spending impulses.

The Power of Education

Benjamin Rush, a Philadelphia physician and signer of the

Declaration of Independence,

told all who would listen that

winning the war of independence from England had been

hard enough. Still harder would

be the challenge of making

democracy work. To fulfill that

task, the new self-governing nation had to create a broad system

of free public education.

“The form of government we

have assumed has created a new

class of duties to every American,” Rush said in 1783. Believing that humankind was

“improvable,” Rush and other

86
founders wanted education to be

useful. But it also had a central

political purpose: Education was

essential to equip citizens to use

the power of the ballot wisely.

The question was how, and at

first also who. In the nation’s early

decades, states followed many

paths in expanding public education, at least to the sons of white

Americans. Native Americans

were excluded. African-American

children in the North had separate schools; the children of

slaves received no schooling.

Young girls were typically taught

homemaking skills.

The reforms that would make

American education a model for

the world got their strongest initial push from Horace Mann,

who served as secretary of the

Massachusetts State Board of Education beginning in 1837. He

grew up in poor circumstances

and could attend school only part

time, but, with help from tutors,

he attended college and then

spent the rest of his life promoting a then-revolutionary educational philosophy.

Mann campaigned for free,

taxpayer-supported public

schools that both rich and poor

children would attend together.

While these public schools would

be managed locally, Mann advocated an encompassing system of

educational improvement to

apply best-teaching methods and

to assess schools’ performance.

Mann’s preferred curriculum

would seek to instill general

Protestant moral, as opposed to

religious, precepts, and it would

aim to foster a nonpartisan patriotism. Beyond that, Mann argued

that schools must strive for the

highest scholarship, teaching students to educate themselves for

roles in the economy and society.

States across the country gradually adopted Mann’s ideas, thus

raising the quality of broadly

available public education.

Schools in poor areas and the

racially segregated parts of the

South received substantially fewer

resources than other school systems, a gap that has narrowed

but not been fully eliminated

since the start of federal antipoverty and educational programs in the 1960s.

While debates about education methods have persisted at

least since Horace Mann’s day,

one precept widely shared by

most Americans is that a nation’s

wealth includes not just its citizens’ private property, but also

those citizens’ capacity to better

themselves, says historian

Lawrence A. Cremin. “Granting

its flaws, its imperfections, and

even its several tragic shortcomings,” Cremin says, the U.S. education system stands “among the

two or three most significant contributions the United States has

made to the advancement of

world civilization.”

By the end of the 19th century, a wide range of colleges and

universities had been opened.

They included elite private universities, a group of colleges

opened for African Americans,

87
and a system of land-grant universities established by Congress

to provide education in “agriculture and mechanical arts.” The

land-grant schools have evolved

today into state universities with

tens of thousands of students.

Education was a cornerstone

of U.S. economic success. The

1940 federal census reported that

one-quarter of Americans over

the age of 25 had attended high

school and 4.6 percent had graduated from college. A 2007 census survey found 44 percent of

Americans over age 25 had graduated from high school, 17 percent had attended college but not

earned a degree, and 27 percent

were college graduates.

At the end of World War II,

Congress funded scholarships to

help veterans attend college, and

the percentage of men attending

colleges climbed rapidly. The

percentage of women over age 25

who had attended college did not

increase significantly until after

1980. But by 2005, the percentage of women over 25 with some

college education exceeded the

percentage for men, reflecting

the impact of the women’s movement and the desire of, or need

for, women to join the workforce.

As international competition

and foreign trade became larger

factors in the U.S. economy during the first decade of the 21st

century, a shift of jobs away from

the older centers of factory production accelerated. The regions

gaining jobs have been regional

centers where technology and finance are strongest, as shown by

government data on job gains

and losses for major U.S. cities

from 2000 to 2007.

While job growth throughout

the United States averaged less

than 1 percent a year during

those seven years, Huntsville, Alabama, a center of U.S. space

technology, had a 42 percent increase in “professional, scientific, and technical” jobs. Austin,

Texas, where semiconductor

production has a strong footing,

had a 22 percent gain in the

same category of technology

jobs. In Northern Virginia,

whose economy is built on the

presence of major contractors

who work on the federal government’s technology missions, jobs

in the professional and scientific

category expanded by 31 percent from 2000 to 2007, and

computer system design jobs

grew by the same percentage.

In contrast, Chicago, America’s “second city” and the centerpiece of the old manufacturing

Midwest, lost 19 percent of its

goods-producing jobs over those

seven years. South Bend, Indiana, another old factory city, lost

18 percent of its goods-producing jobs. Detroit, Michigan,

home of the U.S. car industry,

suffered a 35 percent drop in

goods-producing jobs.

Well before the start of the

21st century, many had concluded that America’s economy

could no longer prosper simply

by employing Yankee ingenuity

to convert its wealth of natural re88
sources into products for sale at

home and abroad. Nor could it

rely on older industries that had

been centerpieces of state and regional economies to hold their

places in competitive markets.

Since the 1980s, many local

officials have tried to stimulate

their economies by investing in

their region’s education and

technology resources. Some governors have created technology

“greenhouses”—giving space in

research facilities to help entrepreneurs develop new products

and processes. Universities have

developed courses to equip scientists and engineers with specific

skills needed by local companies.

Such regional strategies lost

momentum in the 2000s decade

as the economy grew and unemployment shrank. But the steep

recession that began in 2008 was

expected to renew interest in

these policies.

89

Government

and the

Economy

Much of America’s

history has focused

on the debate over

the government’s role

in the economy.

C H A P T E R

© Lance Nelson/Corbis
92

© Underwood & Underwood/Corbis

Above: Rachel Carson, a government scientist, raised concerns about pesticide use

that led to government environmental regulation. Previous spread: In 2009 the Federal Reserve was poised to gain even more power for regulating financial institutions.
93

The United States was established on the mutually reinforcing principles of individual enterprise and

limited governmental influence. The rage of the American

colonists over a range of taxes imposed by the British Crown

helped trigger the Revolutionary War in 1775. “Taxation Without

Representation” was a battle cry. The new republic’s first secretary

of the Treasury, Alexander Hamilton, succeeded in establishing

a national bank but lost his campaign for a federal industrial

policy in which government would promote strategically important industries to strengthen the nation’s economy and its

military defense.

But this predisposition toward free enterprise was not absolute. From

the beginning, the country’s governments—federal, state, and local—

have protected, regulated, and channeled the economy. Governments

have intervened to aid the interests of regions, individuals, and particular industries. Just how far the government should go in doing this

always has been a central political issue.

The legal justification for economic regulation rests on a few sections

of Article I of the U.S. Constitution. These give Congress authority to

collect taxes and duties, borrow on the credit of the nation, pay the federal government’s debts, create and regulate the value of U.S. currency,

and establish national laws governing bankruptcies and the naturalization of immigrants. States were barred from taxing trade with other

states. The Constitution’s authors recognized that the young country

had far to go to match European scientific and industrial leadership;

“Then a strange blight crept over the area and everything began to

change....There was a strange stillness....The few birds seen anywhere were moribund; they trembled violently and could not fly.

It was a spring without voices. On the mornings that had once

throbbed with the dawn chorus of scores of bird voices there was now

no sound; only silence lay over the fields and woods and marsh.”

RACHEL CARSON

Silent Spring

1962
in part for this reason, they empowered Congress to give authors and inventors exclusive

rights to profit from their creations for a limited period.

The most general—and controversial—constitutional language on the economy lies in the

16 words of Article I, Section 8,

which authorize Congress to “regulate commerce” with foreign nations, with the native American

Indian tribes, and among the

states. This application of the

commerce clause to the states has

been used during the past century

to justify far-reaching government programs on issues the

Founding Fathers could never

have imagined.

Interpretation of the commerce clause divides Americans

who want an activist federal government from those who advocate

a more limited central authority.

The U.S. Supreme Court has often

been called on to resolve disputes

over the reach of the commerce

clause. Some of the important

19th-century decisionsinterpreted

the clause narrowly, finding that,

while shipments of goods along

rivers that passed several states

were covered by the commerce

clause, manufacturing was a local

activity and not covered.

But the court’s decisions grew

more expansive in the 20th century, upholding important New

Deal programs affecting employment and agriculture. In the

1960s, the judiciary broadly interpreted the term “interstate commerce,” as it held that Congress

did possess the power to pass the

landmark civil rights laws that forbade private businesses from engaging in racial discrimination. In

these cases the courts carefully

scrutinized the evidentiary record

for ties to interstate commerce, in

one instance finding it in the

wheat used in the hot dog rolls

served by a “private” club that

practiced discrimination in membership. Beginning in the 1990s, a

number of Supreme Court rulings

sought to narrow those earlier decisions by focusing the commerce

clause on controversies directly

centered on economic activities.

Although economic regulation has diminished since the

1970s, its protections still play an

essential role, affecting the health

of workers; the safety of medicines and consumer products;

protection of motorists and airline passengers, bank depositors

and securities investors; and the

impact of business operations on

the environment.

The Reach of Economic Regulation

In the life cycle of an American

business, the first step is the least

regulated of all. An entrepreneur

seeking to form a new business

need only register the company

and record it with state tax authorities. Those entering specific occupations may require licenses or

certifications, but no permission is

required to create a company.

Another set of laws and rules

govern the balance of the rights of

employees to keep their jobs and

the rights of employers to fire

94
workers who aren’t performing acceptably. The rules favor the employer. In most U.S. states, people

are considered “at will” employees, meaning they can be discharged whenever the employer

chooses, except under some specific situations where the workers’

rights are protected. People may

not be fired because of their race,

religion, gender, age, or sexual

preference, although terminated

employees will need to show that

they were wrongfully discharged if

they want to recover their jobs.

The federal Equal Employment

Opportunity Commission, created

in 1961, can sue employers to defend workers against unjust firing.

A federal whistle-blower law

protects employees who disclose

their employers’ illegal activities.

If an employer has cheated the

federal government, a whistle

blower may receive between 15

and 30 percent of the money recovered by the government because of the company’s wrongful

conduct. In one exceptional case,

a former sales manager of a leading U.S. drug company received

$45 million in 2008 as his share

of the payment by the company

that settled a federal investigation into alleged improper marketing of drugs widely used in the

government’s Medicaid program

for low-income patients.

For more than a century,

Americans have debated how far

the federal government should go

to prevent dominant companies

from undermining economic

competition. Regulation of businesses has usually been of one or

two types. Economic regulations

have tried to combat abuses by

monopolies and, at times, establish “fair” prices for specific commodities. Social regulations aim to

protect the public from unsafe

food or drugs, for example, or to

improve the safety of motorists in

their cars.

Federal regulation arrived with

the railroad age in the 19th century. The power of railroad owners to set interstate shipping rates

to their advantage led to widespread complaints and protests

about discriminatory treatment

that favored some customers and

penalized others. In response, the

Interstate Commerce Commission, the United States’ first economic regulatory agency, was

created in 1887. Congress gave it

the authority to determine “reasonable” maximum rates and require that rates be published to

prevent secret rate agreements.

The ICC set a pattern that

would be followed by other federal

regulatory agencies. Its commissioners were full-time regulators,

expected to make independent,

fact-based decisions, and it played

an influential role for nearly a century before its powers were reduced in the movement toward

government deregulation. The

agency was abolished in 1995.

Another early regulatory agency

was the Federal Trade Commission, established in 1914. It

shared antitrust responsibility

with the U.S. Justice Department

for preventing abuses by power95
96

When President Woodrow Wilson traveled to the 1919 Paris Peace

Conference at the end of World War I, the U.S. delegation he assembled included

Samuel Gompers, the slight, 69-year-old son of poor Jewish immigrants from

Holland by way of Britain. Gompers had risen from an apprentice cigar maker in New York

City to become president of the American Federation of Labor, the country’s largest union organization.

Gompers’s leadership of the AFL during the turbulent birth of the union movement defined

the unique role of labor organizations in the United States. For most of the century that followed,

despite periods of violent conflicts with company managements, U.S. labor leadership never

frontally attacked the capitalist market structure of the nation’s economy. Its goal was a greater

portion of the economy’s fruits for its members. “We shall never cease to demand more until we

have received the results of our labor,” Gompers often said. But he also held that “the worst

crime against working people is a company which fails to operate at a profit.”

Although these goals sound today to be within the boundaries of mainstream political debate, labor’s efforts to organize railroad, mine, and factory workers a century ago produced

constant confrontations, many of them violent and some deadly. The strike by steelworkers at

Andrew Carnegie’s Homestead, Pennsylvania, plant in 1892 caused a bloody fight pitting workers and their families and friends against company-hired guards, and ultimately state militia.

The core of the dispute was a power struggle between workers and management over work rules

governing the plant’s operations. Although Carnegie said he favored unions, he backed the goal

of his deputy, Henry Clay Frick, of regaining unchallenged control over the plant. After a series

of assaults, gunfights, and an attempted assassination of Frick, the strike was broken. Gompers’s

AFL would not take the strikers’ side, and the plant remained non-union for 40 years.

But over the following decades, labor’s demand for a larger share of the economic pie and

relief from often brutal working conditions were adopted increasingly by political reformers

and then national political candidates. Even in the darkest years of the Great Depression, when

a quarter of the nation’s workforce was unemployed, American labor unions mostly concentrated

on securing higher wages and better working conditions and not on assuming traditional management prerogatives to make fundamental business decisions. Nor did U.S. labor unions follow

the example of European unions by embracing radical politics or forming their own political

party. American labor instead typically used its financial and organizational clout, greatest in

the industrial states of the Northeast and the Midwest, to back pro-labor political candidates.

The legitimacy of organized labor was guaranteed by the National Labor Relations Act of

1935, commonly known as the Wagner Act. Part of President Franklin D. Roosevelt’s New

Deal, the law established the rules under which workers could form unions and employers would

be required to bargain with them, and also established a National Labor Relations Board to

enforce those rules.

During the prosperous years following World War II, U.S. labor unions enjoyed their greatest success. Automobile manufacturers, to cite one example, found it preferable to negotiate

generous wages and benefits, passing through the costs to American consumers.

But global and domestic developments gradually changed the economic climate in ways

unfavorable to industrial unions. Many U.S. manufacturers expanded or shifted operations to

southern states, where labor unions were less prevalent. Beginning in the 1980s, manufacturers

turned increasingly to foreign sources of products and components. When steel and other manufacturing plants closed down across the northeastern and midwestern states, people started

calling the region the Rust Bowl, an echo of the devastating 1930s’ Dust Bowl erosion of midThe Changing Union Movement
97

western farmland. In the southern Sun Belt, much domestic industrial job growth focused on

new, nonunion factories established by foreign manufacturers, Japanese and German carmakers

prominent among them.

One symbolic moment in the relative decline of organized labor occurred early in the first

administration of President Ronald Reagan (1981–1989). Ironically, Reagan came from a union

background; a successful actor, he rose to head the Screen Actors Guild, where he led a campaign to block communist efforts to infiltrate the union. In 1981, Reagan confronted a strike

by the Professional Air Traffic Controllers Organization. The strike was illegal, as federal employees were by law permitted in many cases to unionize but prohibited from striking “against

the public interest,” as the commonly used phrase went. Reagan gave the controllers 48 hours

to return to their jobs, then fired the 11,000-plus who refused to return, replacing them with

new workers and breaking the union.

The outcome reflected the American public’s lack of sympathy for public employee strikes,

and it also reflected waning union membership. At the end of World War II, one-third of the

workforce belonged to unions. By 1983, it was 20 percent, and by 2007, the figure had dropped

to 12 percent

One bright spot for organized labor was growth in the services sector, particularly among

public service employees such as teachers, police officers, and firefighters, whose jobs could

not easily be outsourced. This trend is illustrated by the growth of the Service Employees International Union, whose ranks nearly doubled between 1995 and 2005 to reach 1.9 million

members at a time when industrial union rolls were shrinking. The SEIU represents workers at

the bottom of the income scale, including janitors, nurses, custodial workers, and home-care

providers. Many of their jobs lack health insurance and other benefits that come with high-paid

work. Another major union, the National Education Association, represents more than 3 million

public school teachers and employees.

Labor organizations such as the AFL-CIO (an umbrella organization of many unions),

SEIU, and NEA assisted President Barack Obama’s successful 2008 election, helping staff his

voter registration and turnout drives. The unions hoped that the incoming Obama administration

would advance new legislation strengthening their efforts to organize workplaces.

Above: Organizers for the Office Workers Union stage a rally on Wall Street in New York City in 1936.

© Time & Life Pictures/Getty Images
ful companies that could dominate their industries either singly

or acting with other companies.

By the end of the 19th century,

the concerns about economic

power had focused on a series of

dominant monopolies that controlled commerce in industries as

diverse as oil, steel, and tobacco,

and whose operations were often

cloaked in secrecy because of

hidden ownership interests. The

monopolies typically took the

form of “trusts,” with shareholders giving control of their companies to a board of trustees in

return for a share of the profits

in the form of dividends.

More than 2,000 mergers

were made between 1897 and

1901, when Theodore Roosevelt

became president and began his

campaign of trust-busting against

the “malefactors of great wealth,”

as he called the business tycoons

he targeted. Under Roosevelt

and his successor, President

William Howard Taft, the federal

government won antitrust lawsuits against most of the major

monopolies, breaking up more

than 100, including John D.

Rockefeller’s Standard Oil trust;

J.P. Morgan’s Northern Securities

Company, which dominated the

railroad business in the Northwest; and James B. Duke’s American Tobacco trust.

Congress in 1898 gave workers

the right to organize labor unions

and authorized government mediation of conflicts between labor

and management. During the

New Deal, Congress enacted the

National Labor Relations Act of

1935 (usually called the Wagner

Act after one of its sponsors),

which legalized the rights of most

private-sector workers to form

labor unions, to bargain with

management over wages and

working conditions, and to strike

to obtain their demands. A federal agency, the National Labor

Relations Board, was established

to oversee union elections and address unfair labor complaints.

The Fair Labor Standards Act was

passed in 1938, establishing a national minimum wage, forbidding

“oppressive” child labor, and providing for overtime pay in designated occupations. It declared the

goal of assuring “a minimum

standard of living necessary for

the health, efficiency, and general

well-being of workers.” But it also

allowed employers to replace

striking workers.

In the 1930s and the decades

that followed, Congress created a

host of specialized regulatory

agencies. The Federal Power

Commission (later renamed the

Federal Energy Regulatory Commission) was created in 1930 as an

independent regulatory agency

which would oversee wholesale

electricity sales. The Federal

Communications Commission

was established in 1934 to regulate the telephone and broadcast

industries. The Securities and Exchange Commission in 1934 was

given responsibility for overseeing securities markets. These were

followed by the National Labor

Relations Board in 1935, the Civil

98
Aeronautics Board in 1940, and

the Consumer Product Safety

Commission in 1975. Commissioners of these agencies were appointed by the president. They

had to come from both major political parties and had staggered

terms that began in different

years, limiting the executive

branch’s ability to replace all the

commissioners at once and hence

its influence over the regulators.

The Antitrust Laws

The government’s antitrust authority came from two laws, the

Sherman Antitrust Act of 1890

and the Clayton Act of 1914.

These laws, based on common law

sanctions against monopolies dating from Roman times, had different goals. The Sherman Act

attacked conspiracies among companies to fix prices and restrain

trade, and it empowered the federal government to break up monopolies into smaller companies.

The Clayton Act was directed

against specific anticompetitive

actions, and it gave the government the right to review large

mergers of companies that could

undermine competition.

Although antitrust prosecutions are rare, anticompetitive

schemes have not disappeared, as

economist Joseph Stiglitz says. He

cites efforts by the Archer Daniels

Midland company in the 1990s in

cooperation with several Asian

partners to monopolize the sale

of several feed products and additives. ADM, one of the largest

agribusiness firms in the world,

was fined $100 million, and several executives went to prison.

But the use of antitrust laws

outside the criminal realm has

been anything but simple. How

far should government go to

protect competition, and what

does competition really mean?

Thinkers of different ideological

temperaments have contested

this, with courts, particularly the

Supreme Court, playing the pivotal role. From the start, there

was clear focus on the conduct of

dominant firms, not their size

and power alone; Theodore Roosevelt famously observed that

there were both “good trusts”

and “bad trusts.”

In 1911, the Supreme Court

set down its “rule of reason” in

antitrust disputes, holding that

only unreasonable restraints of

trade—those that had no clear

economic purpose—were illegal

under the Sherman Act. A company that gained a monopoly by

producing better products or following a better strategy would

not be vulnerable to antitrust action. But the use of antitrust law

to deal with dominant companies

remained an unsettled issue. Federal judges hearing cases over the

decades have tended to respect

long-standing legal precedents, a

principle known by its Latin

name, stare decisis.

Court rulings at times have reflected changes in philosophy or

doctrine as new judges were appointed by new presidents to replace retiring or deceased judges.

And the judiciary tends also to re99
flect the temperament of its times.

In 1936, during the New Deal era,

Congress passed a new antitrust

law, the Robinson-Patman Act, “to

protect the independent merchant and the manufacturer from

whom he buys,” according to Representative Wright Patman, who

co-authored the bill. In this view,

the goal of antitrust law was to

maintain a balance between large

national manufacturing and retailing companies on one side,

and the small businesses that then

formed the economic center of

most communities on the other.

This idea—that the law

should preserve a competitive

balance in the nation’s commerce

by restraining dominant firms regardless of their conduct—was reinforced by court decisions into

the 1970s. At the peak of this

trend, the U.S. government was

pursuing antitrust cases against

IBM Corporation, the largest

computer manufacturer, and

AT&T Corporation, the national

telephone monopoly.

Protecting Competition,

Not Competitors

In the 1980s, the Reagan administration adopted a different

philosophy, one advocated by academics at the University of

Chicago. The “Chicago school”

economists argued that antitrust

law should, above all, protect

competition by putting consumers’ interests first: A single

powerful firm that lowers product

prices may hurt competitors, but

it benefits consumers and therefore should not run afoul of the

antitrust law.

Robert H. Bork, an antitrust

authority and federal appeals

court judge, argued that “it would

be hard to demonstrate that the

independent druggist or the grocery man is any more solid and

virtuous a citizen than the local

manager of a chain operation.”

The argument that small businesses deserved special protection

from chain stores “is an ugly demand for class privileges.”

This shift in policy was reflected in a climactic antitrust case

against the Microsoft Corporation. President Bill Clinton’s Justice Department filed an antitrust

suit in 1998 against Microsoft,

which controlled 90 percent of

the market for personal computer

operating systems software. Microsoft allegedly had used its market power to dominate a crucial

new application for computers—

the browser software that links

users to the Internet.

A federal judge ruled against

Microsoft, but his decision was

overruled by a higher appeals

court judge. A key factor in the

latter decision was that Microsoft

offered its browser software for

free. While that hurt its much

smaller competitors, consumers

benefited, and maximizing consumer interests served the larger

interests of the economy, the

court ruled. Competition and innovation would keep competition healthy, according to this

theory. President George W.

Bush decided not to continue

100
the Justice Department’s case

against Microsoft.

The Birth of Environmental Regulation

Widespread social regulation

began with the New Deal employment and labor laws but expanded

in the 1960s and 1970s. Both

Democratic and Republican presidents joined with Congress to act

on a wide range ofsocial concerns.

Perhaps the most striking example of how public opinion affects U.S. government processes

was the sudden growth of the environmental movement as a powerful political force in that

period. Conservation of natural

resources had motivated political

activists since the late 19th century, when California preservationist John Muir led campaigns

to protect wilderness areas and

founded the Sierra Club as a

grassroots lobbying organization

for his cause.

The movement surged in new

directions in the 1960s following

publication of a best-selling book,

Silent Spring, written by government biologist Rachel Carson.

She warned that the growing use

of chemical pesticides was causing far-reaching damage to birds,

other species, and the natural environment. They could threaten

human health as well, she said.

The chemical industry attacked

Carson as an alarmist and disputed her claims. But her warnings, amplified by media

coverage, won powerful support

from citizens and the U.S. government. The movement led to a

ban on the widely used pesticide

DDT and the formation of the

U.S. Environmental Protection

Agency in 1970 to enforce federal

environmental regulation.

Unlike the independent agencies created in the 1930s, the EPA

was made a part of the executive

branch, subject to the president’s

direction. This approach was followed later with other new agencies, such as the Occupational

Safety and Health Administration (OSHA) in 1970 to prevent

workplace accidents and illnesses,

and the Consumer Product Safety

Commission in 1972 to regulate

unsafe products. Because of the

increased presidential control,

these agencies’ regulatory policies often change with the arrival

of a new president.

Federal regulations have had

profound impacts in reducing

health risks facing industrial and

shipyard workers; improving the

safety of medicines, children’s

toys, and motor vehicles; and improving the cleanliness and quality of lakes, rivers, and the air.

OSHA, for example, requires employers to create a workplace that

is “free from recognized hazards”

that cause or could cause death or

serious harm. The OSHA legislation has been used by the government, often following demands

by labor unions, to control workers’ exposure to a range of industrial chemicals that cause or may

cause cancer.

Debate about such regulation

has often centered on whether

there is adequate scientific evi101
dence to justify government action and whether compliance

costs paid by businesses and their

consumers are worth the environmental gain. Academic and business critics of Rachel Carson, for

example, argued that eliminating

DDT removed the most effective

pesticide in the fight against mosquitoes that spread malaria. In

her time, Carson—who urged

that DDT be controlled, not eliminated—tipped the public debate

in favor of precautionary government regulation that could address serious threats, even though

some scientific or economic issues

were still being debated. The current debate over climate change

has reached a similar point.

As historians have observed,

U.S. government priorities on

economic and social issues have

seldom taken a straight, unbroken path, but instead have followed the swings of public

opinion between a desire for

more regulation and one for unfettered economic growth. In the

1960s, a period when Americans

challenged the status quo on a

number of fronts, many were willing to discount the industry viewpoint in the debate over pesticide

regulation and to support federal

intervention to protect the environment. In the 1980s, opinion

reversed direction again.

The Tide Turns Against Regulation

Historian Daniel Yergin sees a

turning point in public support

for regulation in America’s economic stagnation of the 1970s,

when oil prices and inflation

soared, and employment and

stock markets slumped. Critics of

regulatory activism had long

charged that regulation stifled

economic growth, and they challenged government economic interventions as unwise and unfair.

With the economic malaise of

the 1970s and early 1980s, more

Americans and their political representatives were willing to give

business a freer hand in order to

enhance economic growth. “With

time,” wrote Yergin and Joseph

Stanislaw in The Commanding

Heights, “competition increasingly

came to be seen as preferable to

regulation.” Stephen Breyer, an

important U.S. Senate staff member in the 1970s, put it simply:

“Why regulate something if it can

be done better by the market?”

Breyer, later a U.S. Supreme

Court justice, was targeting the

regulation of commercial airline

service by the federal Civil Aeronautics Board. The CAB set

prices for air travel on all domestic routes and decided which airlines would serve the cities

around the country. It was a regulatory tradeoff: In return for

providing unprofitable air service to smaller cities, airlines were

rewarded with high prices and

profits on busy routes between

large cities. By the 1970s, this

seemed like an inefficient, costly

approach. Competition could do

better, Congress concluded, and

in 1978, airline deregulation was

enacted. The CAB was closed

down in 1985.

102
Although the costs and benefits of airline deregulation continue to be argued, competition

dramatically changed the industry. Prices did fall on heavily traveled air routes. New airlines

sprang up to challenge the industry leaders. The new airlines paid

lower wages to pilots, mechanics,

and flight attendants and could

charge less money for tickets. The

older airlines lost ground, falling

into damaging quarrels with their

unionized pilots and other employees. Many failed. Others

merged together to try to stay

competitive. The number of people flying on domestic U.S. flights

soared from 240 million in 1977

to 665 million in 2000. On the

other hand, flights became more

crowded, delays and lost luggage

problems grew, and more questions surfaced about the airlines’

safety and maintenance practices.

But the restructuring of the airline

industry marked a clear turning

point toward a reliance on markets, not government, to make the

economy work for the public.

The Regulation of Banking

Since the first years of the

American republic, federal and

state lawmakers and government

officials have struggled to determine the right level of regulation

and government control over the

banking system. When banks can

respond to market forces, innovation and competitive services

multiply. But competition’s downside has been a succession of

banking crises and financial panics. Overly aggressive lending and

speculative risk-taking that led to

these crises have, in turn, led to

political demands for tighter controls over interest rates and banking practices. A new chapter in

this debate began in response to

the 2008 financial crisis.

The U.S. banking and finance

industries have been remade over

the past quarter-century by globalization, deregulation, and technology. Consumers can draw cash

from automated teller machines,

pay bills and switch funds between checking and savings accounts over the Internet, and

shop online for home loans. As

services have expanded, the number of banks has contracted dramatically. Between 1984 and

2003, the number of independent

banks and savings associations

shrunk by half, according to one

study. In 1984, a relative handful

of large banks, with assets of $10

billion or more, held 42 percent

of all U.S. banking assets. By

2003, that figure was 73 percent.

New computer systems to

manage banking operations gave

an advantage to large banks that

could afford them. The dramatic

expansion of world trade and

cross-border financial transactions led the largest banks to seek

a global presence. New markets

arose in Asia and other regions as

banking and investment transactions flowed instantly across

oceans. These trends called for

and were fueled by a steady

deregulation of U.S. banking and

finance rules.

103
Historically, the banking industry has been split between smaller,

state-chartered banks that claimed

close tiesto their communities, and

larger national banks whose leaders sought to expand by opening

multistate branch offices, saying

their size made them more secure

and efficient. This split echoes in

some waysthe debatesin America’s

early days between Alexander

Hamilton and Thomas Jefferson

over urban and rural interests.

Community banks prevailed

early in the 20th century, but

were devastated by the 1930s

banking crisis; their limited assets left them particularly vulnerable. The country’s urbanization

after World War II reduced the

political power of rural legislators, undermining their ability to

defend smaller banks, and in

1980 banking deregulation got

under way.

Until the 1980s, U.S. commercial banks faced limits on the levels of interest rates they could

charge borrowers or pay to customers who deposited money.

They could not take part in the securities or insurance businesses.

And their size was restricted as

well. All states protected banks

within their borders by forbidding

entry by banks headquartered in

other states. Many states also protected small community banks

with rules restricting the number

of branch offices that big banks

could open inside the state. Almost all of these regulations were

removed after 1980, leaving a

banking industry that was more

competitive, more concentrated,

more freewheeling and more

risk-taking—and more vulnerable to catastrophic failures.

As banks expanded geographically, they sought also to enter

new financial arenas, including

ones forbidden to them by New

Deal-era legislation that separated parts of the commercial

banking and securities industries.

Banks were permitted to reenter

the securities business in 1999,

and many major banks subsequently created unregulated divisions, called special investment

vehicles, in order to invest in

speculative mortgage-backed securities and other housing-related investments.

Congressional advocates of a

looser regulatory regime argued

that greater bank freedom would

produce more modern, efficient,

and innovative markets. For a

time, it arguably did. The U.S. financial sector led the way during

a period of unprecedented international expansion of banking

and securities transactions.

A McKinsey Global Institute

study reported that from 2000 to

2008, the sum of all financial assets—bank deposits, stocks, and

private and government bonds—

soared from $92 trillion to $167

trillion, an average annual gain of

9 percent and one that far exceeded the growth in world economic output. Alan Greenspan,

chairman of the Federal Reserve

Board during most of that period,

said that global financial markets

had grown too large and complex

104
105

for regulators adequately to oversee them. It was for Congress, he

argued, to pass new laws should it

wish closer oversight. But as economist Mark Zandi, author of Financial Shock, a book about the

2008 crash, says, “Legislators and

the White House were looking for

less oversight, not more.”

At this writing, the 2008 financial crisis appears to have reversed the philosophical trend

toward greater reliance on markets and the assumptions about

financial deregulation that had

increasingly held sway in the

United States since the end of the

1970s. A public backlash against

multi-million dollar bonuses and

lavish lifestyles enjoyed by leaders of failed Wall Street firms fed

demands for tighter regulation.

Greenspan himself, who retired

in 2006, told a congressional

committee two years later that

“those of us who have looked to

the self-interest of lending institutions to protect shareholders’

equity, myself especially, are in a

state of shocked disbelief.”
© AP Images

© AP Images

© AP Images © AP Images

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107

Above: Workers assemble a Boeing 787 Dreamliner at the company’s Everett, Washington, plant

in January 2009.

Opposite page—clockwise from top: Hills of corn in Kansas are reminders that agriculture remains an important part of the U.S. economy; Federal Express, which delivers goods here

in San Francisco and a lot of other places around the world, started out as a small business;

workers at a New Balance factory in Skowhegan, Maine, survive the brutal competition of the

footwear industry; construction workers such as this one in New York prospered during the real

estate boom early in the 21st century and suffered during the following bust.

Below: Chassis for Ford Motor Company autos roll down the assembly line at the company’s

Chicago assembly plant in June 2007, before the U.S. auto industry suffered its great contraction.

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Above: Mario Escobar processes orders at this small draperies business in Calabasas, California.

Opposite page—clockwise from top: A Shell Oil Company refinery in Deer Park, Texas, produces

some of the tens of millions of barrels of oil consumed in the United States every day; President

Obama aims to encourage alternative energy sources, such as this wind power utility near Palm

Springs, California; the 2008 global recession slowed down shipping at U.S. ports such as this

one in Elizabeth, New Jersey.

Below: Coal mines, such as this one in Coulterville, Illinois, might supply even a bigger share of

U.S. energy needs if clean-coal technology can be made to work efficiently.

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Above: Entertainers Amy Adams, left, Meryl Streep, center,

and Viola Davis represent an important U.S. services industry that accounts for a significant share of U.S. exports.

Left: Barbie, who reached age 50 in 2009, has become

one of toy manufacturing’s all-time hits.

Below: Tourists, such as these at the South Rim of the

Grand Canyon in Arizona, contribute a significant share

of the U.S. economy.

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© Jean-Pierre Lescourret/Corbis
Above: Andronico’s Market in San Francisco

represents retail sales, one of the service industries that account for the largest share of

economic output.

Right: The New York Stock Exchange represents financial services, a sector of the service economy that was reeling in the global

financial crisis that emerged in 2008.

Below: Another representative of retail is

Lowe’s, which sells hardware to builders and

the millions of Americans who perform little

jobs around the house.

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Above: Health care represents a growing share of U.S. economic output and a growing cost burden for American government and business.

Opposite page—from top: Holiday shopping at the end of the year can mean success or failure

for retailers; U.S. exports to China include McDonalds restaurants.

Below: Education is viewed as one way to reverse a trend of income disparity in the United States.

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A U.S.

Economy

Linked

to the World

Despite political divisions,

the United States shows no

sign of retreat

from global engagement

in trade and investment.

C H A P T E R

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Above: Rising imports from Asia such as these cargo containers unloaded in

Tacoma, Washington, created political tension in the United States. Previous

spread: The foreign exchange value of the U.S. dollar alternatively plunged and

soared in the global financial crisis that began in 2008.
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Trade ties the United States’ economy inextricably to the markets and economies of the rest of the

world. In 2007, the U.S. gross domestic product—the output of U.S.-based workers and property—totaled nearly $14 trillion. One out of every eight dollars, or $1.6 trillion, came from

exports to foreign destinations. Imports into the United States

were significantly higher, totaling $2.3 trillion.

In addition to traded goods and services, huge tides of financial

transactions flow across global borders. U.S. companies and individuals

directly invest more than $2 trillion abroad annually, making the United

States the world’s largest direct investor in foreign economies. It also receives more investment from outside its borders than any other nation.

As a world financial capital, New York is the center of an international

hedge fund industry of private investors that amassed nearly $1.5 trillion

in assets at the end of 2006.

While U.S. exports add to the nation’s gross domestic product, the

larger volume of imports reduces it. The trade imbalance over the past

decade has created a politically sensitive tradeoff: The surplus of imports tended to lower prices paid by American consumers, but it also

depressed wages for some workers in industries facing foreign competition. The U.S. trade deficits have also undermined the value of the

U.S. dollar compared to other major currencies, increasing concerns

about the stability of the world’s financial markets, as described in

chapter 8.

What does the United States export? The largest single category

in 2006 was motor vehicles and their parts and engines, totaling $107

billion. Semiconductors ($52 billion), civilian aircraft ($41 billion),

computer accessories ($36 billion), pharmaceuticals ($31 billion),

Open trade “dovetailed with peace; high tariffs,

trade barriers, and unfair economic competition, with war....”

Secretary Cordell Hull

U.S. Department of State

1948
telecommunications equipment

($28 billion), chemicals ($27 billion), plastic materials ($25 billion), and medicinal equipment

($22 billion) followed on the list of

major export industry categories.

U.S. oil and gas imports totaled $330 billion in 2006. Americans imported $257 billion

worth of motor vehicles, engines,

and parts that year, along with

$100 billion in computers and

computer accessories, $91 billion

in various kinds of apparel and

textiles, $64 billion in pharmaceuticals, $36 billion in televisions and VCRs, and $29 billion

worth of toys and games. The variety of traded items spans virtually everything Americans make,

wear, use, or consume.

The United States is the

world’s largest agricultural exporter, with one out of every

three acres planted for export,

according to U.S. government

surveys. The value of U.S. exports of farm products, animal

feeds, and beverages came to $66

billion in 2006. Imports were

higher, at $74 billion. The total

volume of U.S. farm exports rose

by 17 percent between 1997 and

2007, and in that period American farmers exported 45 percent

of their wheat, 33 percent of their

soybean production, and 60 percent of their sunflower oil crops.

As economist Paul M. Romer

has observed, imports rose from

12 percent of the U.S. gross domestic product in 1995 to about

17 percent a decade later. Foreign

money provides about one-third

of U.S. domestic investment, up

from 7 percent in 1995. In other

words, Romer says, “The U.S. is

more open to the global economy

than ever before, and the links

run in both directions.”

A commitment to expand

global trade has been a cornerstone of U.S. policy since the final

years of World War II, when the

United States and other victorious nations adopted a series of international compacts to promote

economic stability and growth.

Trade restrictions and currency

devaluations were widely considered to have worsened the 1930s

Great Depression by stifling international commerce.

Through the formation of the

United Nations and the agreements on international economic

policies reached at the 1944 Bretton Woods Conference in the

United States, the allied powers

hoped to replace the militant nationalism that led to the war with

cooperative economic policies.

During the Cold War between the

Soviet bloc and the West, trade

liberalization with Europe and

Asia became an instrument of

U.S. foreign policy and a way to

promote market capitalism in

emerging nation economies.

Open Trade and Foreign Policy

U.S. Secretary of State Cordell

Hull said in 1948 that open trade

“dovetailed with peace; high tariffs, trade barriers, and unfair

economic competition, with war....

If we could get a freer flow of

trade...freer in the sense of fewer

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discriminations and obstructions...so that one country would

not be deadly jealous of another

and the living standards of all

countries might rise, thereby

eliminating the economic dissatisfaction that breeds war, we

might have a reasonable chance

of lasting peace.”

In 1948, the United States and

22 other nations signed the General Agreement on Tariffs and

Trade, a set of international rules

that significantly reduced tariffs

and other barriers to the international flow of goods. Seven other

rounds of trade negotiations followed as the GATT membership

expanded, leading in 1995 to the

creation of the World Trade Organization in Geneva, Switzerland, with the authority to oversee

member nations’ compliance with

trade agreements. The GATT

process has successfully lowered

tariffs on most manufactured

items, stimulating a vast increase

in world commerce far beyond

the vision of the Bretton Woods

organizers. The exception has

been agricultural tariffs, which

have remained relatively high because of the political strength of

the farming sector in both

wealthy and developing nations

and the desire to safeguard essential food production.

Government subsidies and tariffs on farm products have long

been politically controversial.

American farmers received $16

billion in various federal subsidies

in 2004. U.S. agricultural tariff

rates average 12 percent, raising

the price of foreign farm products

by that amount overall.In the U.S.

Congress, representatives from urban areas tend to criticize the tariffs as an unjust tax on consumers

that isn’t necessary to support

American farmers. Representatives from farm states counter that

U.S. tariffs are far lower than average farm tariffs in Europe (30

percent), Japan (50 percent), and

India (114 percent).

Subsidies affect farmers’ decisions about which crops to plant.

U.S. wheat production has fallen,

for example, as many farmers

have switched production to corn

used in the manufacture of

ethanol as a motor fuel. The U.S.

government provides a cash subsidy to ethanol blenders, which, in

turn, increases the price farmers

receive for supplying corn. Farm

subsidies are a confrontational

issue with developing nations,

which have resisted pressures to

open their markets further until

the United States agrees to lower

its support for its farmers.

The theoretical argument for

free trade, made more than two

centuries ago by Scottish economist Adam Smith in The Wealth of

Nations, holds that all nations

prosper if each concentrates on

manufacturing and trading goods

where it has a particular advantage: France its wine, Britain its

woolens. On the flip side, for

Britain to put a high tariff on

French wines raises the price of all

wines for British consumers.

But theory and politics began

to collide in the 1960s and early

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1970s when the rising manufacturing prowess of Japan and Germany began seriously to erode

U.S. production in many industries, including steel, automobiles, shoes, and textiles. The

advantages of expanded trade

would be enjoyed across the entire population, as foreign products afford consumers new

choices and, often, lower prices.

The costs of trade hit much more

narrowly on particular industries

and their employees whose businesses slumped or failed.

The AFL-CIO, America’s

largest and most influential labor

organization, had initially supported the postwar consensus on

trade expansion. But it changed

direction in 1970. The threat to

its union members from the

spread of technology, the escalating flow of U.S. investments into

foreign businesses, and unfair

trade practices by foreign governments could no longer be ignored, said its chief lobbyist,

Andrew Biemiller.

The greatest challenge to the

United States in trade in the

1980s and early 1990s came from

Japan. As the Japanese rebuilt

from World War II, they steadily

created an array of export-focused

industries with world-class technologies and efficiencies. In steel,

automobiles, consumer electronics, and semiconductors, Japan’s

successes were built on a cohesive

cultural commitment to quality.

But Japan’s critics argued that its

growing trade advantage also

rested on unfair trade practices

that restricted competing imports

from the United States and other

rivals, giving Japanese firms a safe

haven in which to grow.

Responses to Foreign Competition

Competition from Japanese

automakers, whose costs were

lower and automation more advanced, pushed the American

carmaker Chrysler Corporation

to the edge of bankruptcy in

1979. Chrysler was the third

largest U.S. auto manufacturer. Its

collapse would have cost hundreds of thousands of jobs at its

plants and those of its suppliers.

It was saved by a $3.5 billion

“bailout” by the U.S. government,

a flood of orders from the U.S.

military, and the exuberant salesmanship of its chief executive,

Lee A. Iacocca. Two decades later,

Chrysler was purchased by Germany’s Daimler-Benz and then

sold to a private-equity company.

In 2009, Chrysler went through a

bankruptcy reorganization, supported by federal financial assistance, and sold its assets to a new

ownership group including the

United Auto Workers retiree

healthcare trust and Italy’s Fiat

automaker. The U.S. government

had a temporary minority share.

Chrysler’s 1979 crisis opened

a long debate over how the

United States should advance its

global trading interests. During

the administrations of Presidents

Ronald Reagan and George H. W.

Bush, politicians, economists,

business leaders, and labor leaders advanced different strategies

120
for strengthening America’s international competitiveness. Some

urged new initiatives, such as government-business partnerships to

target research efforts at technological breakthroughs in leadingedge industries such as semiconductors. Others demanded

stronger defenses against trading

practices by Japan and other nations that U.S. businesses and

labor unions attacked as unfair.

The policy arguments often broke

down on ideological lines, with

liberal Democratic legislators calling for more intervention and Republicans protesting that the

government would fail if it tried

to pick winners among industries

and interests.

In some sectors, notably steel

production, U.S. firms faced foreign competitors that were

owned or controlled by their governments. These foreign firms

were expected to keep expanding

steel production in order to build

economic capacity and provide

jobs—regardless of whether the

steel industry’s customers needed

more output.

As a signatory to the WTO

agreement, the United States

seeks to re-solve such trade disputes through that organization’s

multilateral process.

But U.S. law permits unilateral

actions against countries that are

found to violate U.S. trade law—

although such actions could expose the United States to

retaliation by these countries. The

1974 Trade Act authorizes the

U.S. trade representative—a presidentially appointed official—to

investigate complaints of unfair

trade practices and to impose

penalties or sanctions against foreign companies that violate

American law. In 1984, the act

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122

The U.S. steel industry has faced

a series of crises since the mid-1970s,

when steel producers engaged in a

global battle for market share, profitability, and

survival. The industry’s struggles graphically illustrate the impact—both positive and negative—of

creative destruction on American manufacturing.

Benefits have accrued to the nation as a

whole. The U.S. steel industry and its workers are

three times more productive today than in the 1970s. American steel companies have invested

in advanced processes that have dramatically boosted energy efficiency while reducing pollution

and health threats to steelworkers. The sharp rise in coal and other energy prices since 2000

has helped U.S. steel producers that own their own raw materials.

On the ledger’s other side, steel industry employment plunged from 531,000 in 1970 to

150,000 in 2008. Steelmaking cities in the American industrial heartland were battered over

these decades. In a 2006 interview, Nobel Prize-winning economist Joseph Stiglitz recounted

the impact of the industry’s fall on his hometown of Gary, Indiana, a city founded by U.S. Steel

Corporation a century ago. The city “reflects the history of industrial America. It rose with the

U.S. steel industry, reached a peak in the mid-’50s when I was growing up, and then declined

very rapidly, and today is but a shell of what it was.”

In Europe and Asia, governments have directly intervened for more than a quarter-century to

help fund a massive expansion of steelmaking capacity. They have supported both official and

unofficial import barriers and turned a blind eye on secret market-sharing agreements, according to evidence before the U.S. International Trade Commission and the European Union’s competition authorities.

While the United States has sporadically restricted imports, it has never developed a longterm policy to bolster the American steel industry’s competitiveness.

International trade rules permit countries to defend domestic industries against the “dumping” of imports in their home markets at “less than normal” prices. When recessions and financial crises left world markets filled with surplus steel, the U.S. industry sought dumping

penalties to combat low-priced imports. In response, U.S. presidents tended to impose temporary limits on imported steel, or arrange voluntary restraints, to ease the damage to American

steel firms. But the U.S. steel industry rarely got the sustained protection it sought. For a range

of political and economic reasons, U.S. policy has tended to resist tough trade sanctions.

Cheaper steel imports benefited the auto industry and other steel users and helped restrain inflation. And Washington has been sensitive to the outcry from foreign governments against proposed U.S. trade penalties.

The result is a U.S. steel market that is more open to foreign ownership and imports than

are any of its major rivals. In 2007, more than 30 percent of U.S. steel consumption was imported, a far higher import share than one finds in the markets of major U.S. steel competitors

Japan, Russia, China, and Brazil.

U.S. Steel Corporation, the company that J.P. Morgan founded in 1901, remains the country’s largest steel manufacturer and is ranked 10th in the world based on 2007 output. Nucor,

the upstart U.S. producer that challenged “Big Steel” by fabricating new steel from scrap

melted in high-efficiency furnaces, is third in the United States and 12th in the world.

A Lesson in Creative Destruction

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The other major U.S. steel concern is a collection of commonly owned historic companies

headed by the former Bethlehem Steel, a major producer that sank into bankruptcy in the late

1990s. They were bought at severely discounted prices by an American investor, Wilbur L. Ross,

a specialist in distressed asset acquisitions. Ross says his approach to buying failing companies

and reclaiming the salvageable parts is “a Darwinian thing.” He told Fortune magazine in

2003, “The weaker parts get eliminated, and the stronger ones come out stronger. Our trick is

to figure out which is which, try to climb on to the ones that can be made into the stronger

ones, and then try to facilitate the demise of the weaker ones.”

In 2004, Ross sold the U.S. plants to India’s Lakshmi Mittal and his Mittal Steel company,

which then became part of the world’s largest steel producer in 2006 when Mittal merged with

Europe’s leading steelmaker, Arcelor. Today, U.S. Steel, Arcelor Mittal, and Nucor control

more than half of U.S. production. Ten percent is owned by Russian steel interests, another beneficiary of the relatively open U.S. steel market.

Following the late 1990s’ financial crises, when low-cost foreign steel flooded the U.S.

market, more than 40 steelmakers, distributors, and fabricators filed for bankruptcy. At that

time, the U.S. steel industry owed more than $11 billion in “unfunded” pension obligations to

a growing population of retirees, debts that it could not pay. Bankruptcy was a way out.

U.S. bankruptcy law allows companies to revoke certain contracts, including pension commitments, which can then be passed on to the Pension Benefit Guaranty Corporation, a federal

agency that insures certain pension plans and pays promised benefits upon a company’s failure.

Steelworkers retired from the insolvent companies held on to most of their pension benefits

thanks to the PBGC, but they lost the retiree health insurance coverage also promised by their

former employees.

Trade restrictions imposed by former President George W. Bush, coupled with relief from

some industry retiree health care commitments, helped the U.S. steel industry recover during

the economic boom of the early 2000s. But the recession that began in 2008 has revived fears

of steel surpluses, particularly with the growth of state-supported steelworks in Brazil, India,

and China. Steelmaking capacity in those three countries now equals one-third of the world’s

total, and the debate over fair trade in steel is back on the world’s agenda.

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Above: In February 2008 thousands of steelworkers rallied near the White House demanding protective tariffs

and other measures to help their newly again troubled industry.

Opposite top left: The U.S. steel industry survives in a reduced size, continuing research and development as

at this facility in Monroeville, Pennsylvania.
was amended to define failure to

protect intellectual property as an

unfair trade practice.

Threatened U.S. industries

have lobbied Congress for protective quotas and tariffs and for

relief from what they saw as unfair trade practices.

U.S. companies also bring

complaints to the U.S. International Trade Commission, an independent U.S. government

agency authorized to impose

trade restrictions on foreign

suppliers that violate fair trade

laws. U.S. textile, shoe, specialty

steel, consumer electronics, and

color television manufacturers

all demanded protection from

import competition.

But U.S. foreign policy priorities often entered the picture.

Rather than jeopardize relations

with its allies, the United States

under several presidential administrations sought voluntary

agreements to limit imports of

steel, for example, rather than

unilaterally imposing sanctions.

A Boost for Trade Expansion

The case for trade expansion

received a major, if unexpected,

boost in the 1990s from the administration of President Bill

Clinton. Clinton’s predecessor,

George H.W. Bush, had made a

North American Free Trade

Agreement a centerpiece of his

economic program, and it

awaited congressional action as

the 1992 presidential campaign

arrived. Some of Clinton’s advisers urged him to back NAFTA to

demonstrate his credentials as a

“new Democrat” —one who embraced trade and technology and

was not beholden to the labor

leaders who adamantly opposed

the agreement. Others warned

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Clinton that supporting NAFTA

could cost him precious electoral

votes in a campaign that featured

the independent candidacy of

software billionaire H. Ross Perot,

who predicted that NAFTA

would send jobs flying to Mexico

with a “giant sucking sound.”

Stanley Greenberg, Clinton’s

pollster, argued that backing

NAFTA might afford important

political gains. Even though

many voters were uneasy about

the Mexican trade issue, they

were not against trade itself,

Greenberg said. Voters in “new

economy” states such as California, he asserted, wanted an internationalist president. Clinton

agreed, declaring he would seek

to improve the agreement and

then support its passage. He went

on to defeat Bush in the 1992

election. Perot received 19 percent of the popular vote, a highwater mark for no-compromise

opponents of trade expansion in

a national election.

After becoming president,

Clinton made congressional approval of the NAFTA agreement

one of his administration’s top

priorities, gathering a coalition of

Republicans and pro-trade Democrats in both the House of Representatives and the Senate to

support it. An intense nationwide

debate followed, with American

labor unions warning that U.S.

workers would lose jobs to Mexico,

and with U.S. business leaders

urging approval of the trade pact

as a way of stimulating exports.

To win support from more Democrats, Clinton’s negotiators

pushed Mexico and Canada to accept two additions to the agreement designed to improve

workers’ rights and environmental

protection in Mexico. These, it was

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Opposite left, Above: Democratic presidential candidates Hillary Clinton, left, and Barack

Obama, right, both campaigned in 2008 to make trade agreements fairer for U.S. workers

but not to repeal any agreements.

© AP Images
thought, would help protect American labor by preventing Mexican

producers from cutting their costs

at the expense of labor and environmentalstandards. Congress approved the pact in 1993.

The debate about NAFTA’s

economic impact continues. During the 2008 Democratic presidential primary campaign in

Ohio—a state that has lost

400,000 manufacturing jobs this

decade—leading contenders

Barack Obama and Hillary Clinton each said they favored

amending NAFTA to make it

fairer to workers. But they did not

call for its repeal.

Following NAFTA’s approval,

the United States sought regional

trade agreements with Central

American nations and negotiated

bilateral agreements with Israel,

Jordan, Chile, and Singapore.

But opposition grew in the House

of Representatives as imports cut

more deeply into U.S. manufacturing employment. Earlier trade

agreements had succeeded in

Congress largely because they

could be handled under special

fast-track parliamentary rules

that specified firm deadlines and

forbade amendments. U.S. officials said the rules preventing

major congressional amendments were essential since they

locked in the terms reached by

negotiators at the bargaining

table. Congress could approve or

reject the pacts, but not change

them. However, a renewal of the

fast-track authority in 2002

passed by just three votes in the

House, and the authority was not

renewed when it expired in 2007.

When President George W.

Bush in 2008 sought congressional approval of a pending trade

agreement with Colombia, House

Speaker Nancy Pelosi, a Democrat, blocked it, asserting the

House would first have to consider measures to deal with the

U.S. economy’s slowdown and to

“address the economic insecurity

of America’s working families.”

Patents, Copyright, Trademarks

The innovation- and technology-driven information age has

pushed the question of intellectual property to the top of the

world’s trade agenda. It is an

issue with a long pedigree. Strict

laws protected the trade secrets of

medieval crafts guilds but facilitated knowledge sharing among

guild members. By the 15th century, European rulers were granting patents to inventors and to

foreigners willing to introduce

new technologies.

Since those early times, the

lines of debate have been clearly

drawn: Invention of products is

bolstered when inventors have a

legal right to exploit their discoveries by gaining a monopoly on

their use. But if the protection extends too long, competition suffers and improvements are held

back. The question is how to

strike the balance. The inventor

can seek protection by securing a

patent from the federal government, but he or she is required to

describe the invention in detail.

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The patent holder must be prepared to enforce it, in court if necessary, by compelling those who

use the invention either to cease

or else pay for their use. In some

cases, inventors prefer to keep a

process or formula secret and not

disclose it by seeking a patent.

Perhaps the most famous example is the formula for the ingredients of Coca-Cola, which has

remained a business secret and is

kept in the vault of an Atlanta,

Georgia, bank.

Recognizing the importance

of protecting inventions and encouraging innovation, the authors of the U.S. Constitution

granted Congress sole authority

to create patent and trademark

laws. As President George Washington’s first secretary of state,

Thomas Jefferson, who had experimented with new designs for

plows, reviewed the country’s first

patents until his diplomatic duties became too great. U.S. patent

and trademark policies have

evolved steadily since then.

To receive a patent, an inventor must satisfy basic requirements: The invention must be of

a kind that can be patented, such

as a machine or a manufacturing

process; it must have a useful

purpose, and it must mark a significant advance over earlier

products or processes. The maximum length of patent protection

is 20 years from the date of filing.

Half of all U.S. patents are issued

to foreign inventors. The United

States appears by far more open

to foreign inventions than its

major trading partners: The

Japanese Patent Office issued 90

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Above: Celebrity Paula Abdul, center, Javier Benito, Coca-Cola chief marketing officer,

left, and Don Knauss, president, Coca-Cola North America, introduce Coco-Cola C2 on

May 24, 2004, in Los Angeles. According to Coca-Cola, it has half the carbohydrates,

calories and sugar of the regular patented cola whose formula is a highly guarded secret.

© AP Images
percent of patents to Japanese inventors in 2002, for example.

The earliest intellectual property rights agreements were the

1883 Paris Convention on

Patents and the 1886 Berne Convention, which covered artistic

and written works. The Patent

Cooperation Treaty of 1970,

amended several times since

then, creates a standard process

for patent applications among

more than 100 countries.

The most important recent

agreement is the 1994 Trade Related Aspects of Intellectual Property Rights, or TRIPS, which sets

out a minimum list of protections

that signatories must provide and

requires that whenever a signatory nation grants its own citizens

any intellectual rights, it must extend the same rights to inventors

from other signatory nations.

“The problem of international

[copyright] piracy has become

more acute in the digital age,”

public policy scholar Suzanne

Scotchmer says. Modern copyright piracy involves software,

music, movies, even textbooks.

The theft of trademarks, the

illegal copying of products, and

the piracy of books, software, and

recorded entertainment remain

a serious and provocative issue

for the United States, particularly in its trade relations with

China. Nine of every 10 U.S.-

content DVDs sold in China are

pirated, the Motion Picture Association of America complained to

Congress in 2007. Companies in

China allegedly produce counterfeit auto parts and other products that are sold abroad under

the name of well-known U.S.

manufacturers, according to the

U.S. Motor Equipment and

Manufacturers Association. Similar protests have been made

by U.S. pharmaceutical companies, who warn that counterfeit

Chinese medicines pose potential serious health threats to unsuspecting purchasers.

Dan Glickman, a former U.S.

congressman who heads the Motion Picture Association of America, told Congress that, at the

national level, Chinese officials express concern and will take limited

actions, but these actions don’t extend to effective controls within

China’s provinces. Overall, trade

violation enforcement is “selective, it’s arbitrary, it’s intentionally

vague in some cases. And in some

cases, it’s just not very well developed,” Glickman testified to a

congressional committee.

When the United States supported China’s membership in

the WTO, the expectation was

that the latter’s trade policies

would converge with international rules. From a U.S. perspective, the need to make the

expectation a reality remains a

major trade issue.

The economic interdependence of China and the United

States symbolizes the sweeping

growth of trade and cross-border

financial flows as the new century

began. Historian Niall Ferguson

describes a symbiotic relationship

between the two states he whim128
sically combined as “Chimerica.”

Inexpensive Chinese imports

helped keep inflation low in the

United States and helped put

downward pressure on U.S.

wages. China reinvested dollars

received for its goods in the

United States to fund U.S.

deficits, helping keep U.S. interest rates low. “As a result, it was

remarkably cheap to borrow

money and remarkably profitable

to run a corporation...The more

China was willing to lend to the

United States, the more Americans were willing to borrow.”

Then the debt bubble burst in

2008, creating a financial crisis

that is stirring the debate among

Americans about the benefits of

globalization and trade. A consensus favoring open trade has

prevailed in the United States for

more than half a century, buttressed by the belief that America’s creative, entrepreneurial

economy has much more to gain

than lose through economic engagement with the world.

But these values are hardest to

preserve during economic hard

times, when foreign competitors

become natural targetsfor the frustrations of a country’s unemployed

and foreign practices that appear

unfair feed protectionist feelings.

America’s continued political

support for a free flow of trade

and finance and its openness to

the world may depend on a continued prosperity for the large

majority of its citizens, many experts say. Federal Reserve Chairman Ben Bernanke said in 2007,

“if we did not place some limits

on the downside risks to individuals affected by economic

change, the public at large might

become less willing to accept the

dynamism that is so essential to

economic progress.” But America

could not turn its back on the rest

of the world’s economy, even if it

somehow chose to, and as the

control of the U.S. government

changed hands in 2009, there

was no sign of a retreat from

global engagement.

129

A New

Chapter

in America’s

Economic

Story

The United States,

in its democratic way,

faces up to immense

economic challenges.

C H A P T E R

© AP Images
© AP Images

132

Above: President Barack Obama, shown with former Federal Reserve Chairman Paul

Volcker, faces the greatest economic challenges in a generation while working with a

Congress that is sharply divided politically. Previous spread: The numbers for the

U.S. economy started turning down even before the 2008 global crisis.
133

At this writing (March 2009), the United States

and much of the world were enmeshed in a financial

crisis and economic downturn considered by many to be the

worst since the Great Depression of the 1930s. The need

for an immediate response has ushered in a burst of government

intervention, most strikingly in the United States but also

throughout the industrialized world. By spring 2009, it appeared that the gravest fears of a complete financial meltdown

had been averted and world stock markets recovered part of

their devastating losses over the previous half year. But the

United States and other industrial nations still faced rising unemployment and a vulnerable economic future.

Several conclusions seemed inescapable. Economic globalization,

which has linked banking and trade on every continent, enabled the financial market contagion to spread worldwide. Leaders of the United

States and other major economies agreed that a new system of financial

market supervision and regulation would have to be created to restore

investors’ battered confidence in markets and revive investment. The

reforms should seek to set new banking and investment standards for

all advanced economies, and the United States would have to play a

leading role in their creation by reforming its own complex system of

banking and securities regulation.

Former Federal Reserve Chairman Paul Volcker introduced a blueprint for such reforms early in 2009 on behalf of a group of prominent

international financial officials and academics called The Group of 30.

The organization’s report sought to “restore strong, competitive, inno-

“Starting today,...we must pick ourselves up,

dust ourselves off, and begin again the work of

remaking America.”

PRESIDENT BARACK OBAMA

United States of America

2009
vative financial markets to support global economic growth

without once again risking a

breakdown in market functioning

so severe as to put the world

economy at risk,” said Volcker,

who also led President Barack

Obama’s Economic Advisory

Board, as the new administration

took office.

The group called for tighter

restrictions on banks to prevent

reckless lending by them; more

effective accounting standards

that could help identify potentially dangerous investing trends;

rules compelling the largest private hedge funds and other

pools of private investment capital to disclose results and levels of

borrowing, and regulation of

over-the-counter derivatives such

as the complex, credit default insurance investments that became

an unseen virus in the global

banking system collapse.

An effective worldwide consensus on a new financial regime

was a daunting goal, given the

spectrum of economies and political systems among the major nations. But the challenge was no

less formidable in the United

States itself.

As other chapters have described, economic governance in

America has evolved unevenly,

responding to the major currents

of change in the economy itself.

From the writing of the Constitution onward, Americans have debated government’s proper role

in the economy: Did society’s

needs require a strong government hand, or would government stifle innovation and enterprise that drives economic

advancement? How should government authority be divided

among the federal government

and the states?

The U.S. financial regulatory

system, thus, is a patchwork of

many state and federal agencies

with overlapping missions, and

some major gaps in oversight

lying in between. Some reformers

have said the financial crisis calls

for creation of a single, powerful

financial market oversight agency.

The Federal Reserve was seen as

the most likely candidate for that

role in the United States. But such

a role would stir concerns among

many Americans about centralizing too much power in a single

government agency—an issue

that separated the followers of

Jefferson and Hamilton at the

country’s birth and remains very

much alive today.

Soaring Deficit

One consequence of the

emergency measures taken to

stimulate the economy and shore

up threatened financial institutions is a drastic increase in the

federal budget deficit. That figure, which represents the difference between federal spending

and revenue, was headed over $1

trillion in 2009, nearly three

times the previous year’s figure.

President Obama’s 2009 stimulus

package of new government

spending and tax cuts would

bring the deficit, as measured in

134
proportion to the entire economy, to a level not seen since the

end of World War II.

While Americans differed

over the details of the stimulus

plan, a broad consensus emerged

that swift action was necessary.

Most economists agreed that a

rapid and massive fiscal stimulus

of federal spending was essential

to spur job creation and reverse

the economic contraction. They

also agreed that once the economy had stabilized, the United

States would have to turn to the

much harder task of deficit reduction by better aligning the

government’s spending commitments with its revenues.

The U.S. government was

able to react on a massive scale as

the crisis erupted late in 2008.

The financial strength of the Federal Reserve and the ability of the

U.S. government to borrow

abroad helped Washington pour

unprecedented amounts of

money into the banking system

and new spending programs in

the months that followed. As

World Bank President Robert

Zoellick told the New York Times

late in 2008, America’s “ability to

turn around problems is really

unmatched historically.” Economist Brad Setser noted that in

2008 the United States sold a

stunning $1.7 trillion in Treasury

securities without triggering a

jump in market interest rates.

The second challenge—confronting the growing federal

budget deficit—would likely be

much harder. As President

Obama and other political leaders observed, the American public

and their political representatives could not postpone indefinitely hard decisions about the

scope and breadth of government’s role in the U.S. economy

and the best means of funding

those commitments. Foreigners

ask, Zoellick said, “will the

United States get at some of the

root causes that could determine

135
its real strength over the next 10

or 20 or 30 years?”

The government’s longstanding commitments to America’s

elderly were a big part of the

challenge. Current projections

suggest that, without fundamental

reform, Social Security (retirement income), Medicare (medical care for the elderly) and

Medicaid (medical care for lowincome families) programs will

swamp all other claims on the

federal budget within a few

decades. They take 44 percent of

all current federal spending, excluding interest paid on the U.S.

national debt.

In 2011, the first of the 78

million-strong baby-boom generation will become eligible for

Social Security and Medicare

benefits. The U.S. Treasury estimates that by 2030, the three

major “entitlement” programs

will absorb two-thirds of the federal budget, assuming that federal taxes continue at current

levels. If no changes are made in

spending or tax law, government

revenues in that year would cover

only half of the expected expenditures, according to the 2008

Financial Report of the United States.

Because the government must

borrow to pay for expenditures

that exceed revenues (the federal

deficit), the unchecked rise of entitlement spending would also

swell the U.S. national debt (the

amount borrowed by the government from lenders in America

and abroad). If current spending

and taxing trends continue, the

U.S. debt in 2032 would equal

the nation’s annual economic

output of goods and services.

The trends are unsustainable,

the Treasury says, and would

steadily undermine confidence in

America’s economy and in the

dollar. Former Federal Reserve

Chairman Alan Greenspan has

called the outlook a “pending

tsunami.” As Obama said shortly

after his election in 2008, if the

financial challenges are hard,

“the politics are even harder.”

Older people may have to postpone retirement. Health care and

Social Security benefits may have

to be limited for the wealthiest

Americans, or taxes on working

American may have to rise—

choices that will test society’s cohesiveness. “You have to have a

president who is willing to spend

some political capital on this,”

Obama said, “and I intend to

spend some.”

Income Disparity

A growing disparity in the distribution of the economy’s rewards raised even higher the

political hurdles to achieving

both domestic economic reform

and international economic cooperation. Scholars have identified a number of possible factors

that, taken together, have increasingly concentrated income and

wealth gains among a small minority of the U.S. population.

Among them: the decline in

higher-paid manufacturing jobs

and a shift toward lower-scale

service employment, the growing

136
employment disadvantages of

less-educated workers in a highly

technical economy, and the burden of rising medical care costs

for America’s lower- and middleincome families. Because of these

and other factors, the average

wage of U.S. non-farm workers

has not increased appreciably

since 1980, after taking inflation

into account.

Harvard University economist

Benjamin M. Friedman observed,

“The central question for the

United States at the outset of the

21st century is whether the nation

in the generation ahead will again

achieve increasing prosperity, as

in the decades immediately following World War II, or lapse

back into the stagnation of living

standards for the majority of our

citizens that persisted from the

early 1970s until the early 1990s.”

The government’s long-term

fiscal plight also carries international political complications. As

the 2000s decade proceeded, foreign investors financed an increasing share of U.S.

government debt. In mid-2000,

this debt totaled $1 trillion. Eight

years later, the total was $2.7 trillion, with government-owned

banks or “sovereign” investment

funds holding the fastest-growing

share. They used the U.S. dollars

flowing overseas that bought

manufactured goods and oil to

purchase U.S. Treasury securities

and other U.S. government debt.

America, in essence, was borrowing from the future to finance

current consumption.

A 2008 report by the Council

on Foreign Relations emphasized

the political ramifications of this

financial dependence: “Without

financing from China, Russia,

and the Gulf states, the dollar

would fall sharply, U.S. interest

rates would rise, and the U.S government would find it far more

difficult to sustain its global role

at an acceptable domestic cost.”

As noted in chapter 1, the foreign response to the global financial crisis was a rush to

purchase U.S. Treasury securities

because America’s economic size

and political stability made the

dollar the safest refuge. But a

growing U.S. indebtedness could

press foreign investors to substitute a basket of currencies including the euro and the Chinese

yuan for the dollar in international transactions and to reduce

the amount of dollars held in

government accounts.

137
“The next crisis will be related

to our own federal government’s

daunting fiscal challenges,” wrote

economist Mark Zandi in 2008.

“Global investors are already growing disaffected with U.S. debt, and

even the Treasury will have a difficult time finding buyers for all the

bonds it will be trying to sell if

nothing changes soon.”

In the aftermath of the global

financial crisis, the United States

also will be challenged to repair

the credibility of its financial sector. The Obama administration

has pledged to support international efforts to strengthen banking reserves and investment

regulation and place limits on

market risk-taking without stifling

the flow of capital to fund growth.

Obama’s Plan

Immediately following his

election to the presidency, Obama

began to shape a large-scale federal response to the emergency.

The massive economic stimulus

plan passed by the U.S. Congress

early in his administration distributed federal funding, loans, and

tax cuts throughout the faltering

economy. It also sought to use

federal dollars to fuel a rapid expansion of new, technology-advanced energy and environmental

initiatives. These developments, it

was hoped, would create new

markets at home and overseas for

American companies and millions of jobs for workers across a

wide range of skill levels.

Many of the energy and environmental opportunities presented a commonsense appeal.Investments in new energy controls

and weatherization could help

homes and businesses better conserve energy used for heating,

cooling, and lighting. A faster transition to hybrid gas-electric vehicles, or eventually “plug-in” electric

cars, could cut America’s dependence on foreign oilshipmentsfrom

politically volatile regions.

Expansion of the nation’s

electric power transmission grid

could allow more renewable energy from wind and solar power

to move from the Sun Belt in the

South and the Midwest’s windy

Great Plains to the nation’s urban

centers. Perhaps in a decade,

electric cars could be plugged

into the grid when not on the

road, recharging themselves at

night when electricity is cheapest.

Federal initiatives could seed

new, globally competitive industries and secure U.S. leadership in worldwide efforts to

restrain carbon-based climate

change. For example, the use of

wind or nuclear power to make

electricity, and of biofuels to

drive cars, could reduce greenhouse gas emissions. One day,

the carbon emissions from coalfired power plants could be

confined and stored permanently underground.

Some Americans posed philosophical and political challenges

to this vision. Longstanding

quarrels over the desirability of

“big” government continued. So

did clashes of regional interests.

Lawmakers from states where

138
wind energy is generated sought

to strengthen the nationwide

transmission system, but their

counterparts in states with strong

coal industries resisted mandates

to use more wind power. Sectorleading utility and energy companies perceived threats to their

established business models, particularly in the proposals to cap

carbon emissions from coal and

oil operations and for expanded

use of solar power in homes and

offices. And regardless of the preferred strategy, the financial crisis

had undermined the capacity of

American industry and investment firms to fund such an energy transformation.

More optimistic observers

noted that America still could

bring important resources to bear

on the challenge of devising new

energy strategies, among them its

entrepreneurial culture, the

depth and breadth of its educational system, and the freedom it

afforded capital to seek the highest returns. Singapore’s minister

of education, Tharman Shanmugaratnam, commented in 2006

about an essential aspect of U.S.

education. “We know how to train

people to take exams. You know

how to use people’s talents to the

fullest. Both are important, but

there are some parts of the intellect that we are not able to test

well—like creativity, curiosity, a

sense of adventure, ambition.

Most of all, America has a culture

of learning that challenges conventional wisdom, even if it

means challenging authority.”

Applying these real strengths

to the nation’s equally real challenges will be a great test for the

current generation of Americans. As Kent H. Hughes of the

Woodrow Wilson International

Center for Scholars writes, “It is

hard to see how the United

States will win the contest of

ideas in the 21st century without

continued economic growth,

technological innovation, im139
proved education, and broadbased equality of opportunity.”

In 2009, the United States is

struggling to recover from a harsh

recession that has challenged the

public’s faith in national economic policies, open trade, financial markets, and business

governance. Hughes adds that

“the country will need to take

steps to restore national trust in

key institutions, rediscover a sense

of national purpose, restore its

commitment to shared gains and

shared sacrifices, and renew its

sense of American identity.” But

it also is true that Americans have

faced and surmounted such challenges in the past, and few doubt

but that they will do so again.

Barack Obama’s candidacy

for president was historically

unique in many ways, but his

economic platform was rooted

deeply in America’s political history. Many observers saw in his

victory a swing of the political

pendulum from Reagan-era limited government and light regulation of markets back toward

Franklin D. Roosevelt’s New Deal

era of greater government economic intervention.

How much of a shift occurs remains to be seen. But in the 2008

election the American people

opted for activism, and in his inaugural address President

Obama sought to respond.

“Starting today,” he said, “we

must pick ourselves up, dust ourselves off, and begin again the

work of remaking America.”

Even with the Democratic Party

majorities in the House and Senate, finding solutions to intractable economic and energy

problems would require effective

collaboration between the president and members of both parties at a time when political

divisions are sharp. But that has

been the situation throughout

America’s history, with few exceptions. In other times of crisis, the

country found a way forward despite the fractious aspects of

democracy. The start of Obama’s

presidency marked the opportunity to write a new chapter of the

nation’s economic story, with

much at stake.

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143
U.S. DEPARTMENT OF STATE

BUREAU OF INTERNATIONAL INFORMATION PROGRAMS

http://www.america.gov/publications/books.html#outline_economy