U. S. ECONOMY 2 0 0 9 pot

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.. Economy Linked to the World 114 Despite political

O U T L I N E O F T H E

O U T L I N E O F T H E

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

Depart-ment of State beginning in 1981.

O u t l i n e o f t h e U S E c o n o m y

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O u t l i n e o f t h e U S E c o n o m y

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

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O u t l i n e o f t h e U S E c o n o m y

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O u t l i n e o f t h e U S E c o n o m y

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

after-effects: “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

dis-tressing 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

en-dured 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

contrac-tions, 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 Editors09-20546 OutlineEconomy_new_091210 12/28/09 11:46 AM Page v

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

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

inaugu-ration 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 ing with economic energy.

pulsat-The United States “continues to surprise…

It continues to renew itself.”

S E C R E TA R Y C O N D O L E E Z Z A R I C E

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 lead-ership in a peaceful transfer of power that demonstrated againthe strength of the country’s democratic process and the people’sconfidence in the ultimate resilience of the American economy

Since the election of Ronald Reagan as president in 1980, the UnitedStates had championed globalization of trade and finance It opened itsdoors wider to foreign products and investment than any other majoreconomy America’s entrepreneurial culture was the world’s model Thesynergy of U.S political freedoms and free markets appeared vindicated

by the Soviet Union’s collapse in 1991 At home, a bipartisan consensusemerged in favor of further economic deregulation, which, in turn,spurred a freewheeling expansion of new types of investments thathelped 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 heav-ily in the belief that the value of their investments—including, fatefullyfor 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 fragilelayer of high-risk home loans made over a decade to families that couldnot afford them, particularly if the economy weakened Some borrowershad purchased homes they could not afford, trusting that in a rising mar-ket they could always sell their properties at a profit As housing pricesfell, homeowners who no longer could keep up with their mortgage pay-ments were unable to pay their debt by selling their homes These home

loans thus were the unstable

foun-dation for a massive but largely

invisible speculation on mortgage

securities and financial contracts

sold around the world

Triggered by the housing

col-lapse, this edifice toppled in 2008

Foreclosures grew, and panic

fol-lowed 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

De-pression of the 1930s

The catastrophe revealed

weak-nesses unheeded during the boom

U.S consumption had for too long

outpaced savings Financial

regula-tors’ faith in the efficiency of

eco-nomic 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

govern-ment to respond quickly and

de-cisively 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

invest-ment arenas So eager were they

to purchase U.S Treasury

securi-ties that the return on these

in-vestments 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 ing The federal government andthe Federal Reserve central bankseized control of the two largestU.S home mortgage firms andbailed out leading banks and amajor insurance company, actionsthat would have been politicallyunthinkable before the crisis Aninitial $700 billion bank rescueplan won bipartisan support in theU.S Congress

lend-Since the start of the globalcrisis in 2008, U.S governmentagencies and the central bankhad pledged an astonishing

$12.8 trillion—equal to nearlythe entire U.S annual economicoutput—in loans, loan pur-chases, and credit guaranteesseeking to halt the financialfreefall The Federal Reserve alsopromised to buy more than $1trillion in bonds backed by deval-ued home mortgages A leadingeconomist observed that “no oneelse—not even China—had a bigenough balance sheet” to mountsuch a response

The crisis erupted in themidst of the 2008 presidentialelection and helped clinch victoryfor Senator Barack Obama, theDemocratic Party candidate.Many interpreted the electoraltriumph of the United States’first African-American president,

a man who rose rapidly fromhumble origins, as an affirmation

of the nation’s signature traits ofoptimism and faith in this coun-try As President George W Bush’ssecretary of state, CondoleezzaRice, put it, one can “go from

modest circumstances to

extraor-dinary 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

ex-traordinary economic challenges

that lie ahead

This chapter offers a brief

over-view of the U.S economy

today Chapter 2 follows the

his-torical evolution of the economy

from colonial times to the

pres-ent Chapter 3 concerns the

be-liefs, traditions, and values that

underpin the United States’

rep-resentative 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

de-scribes 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

econ-omy in a fast-changing and

less-predictable world

An Economy Driven by Competition

Many economists agree that

an understanding of the can economy begins with AdamSmith’s concept of the “invisiblehand.” Smith, considered the fa-ther of economics, wrote in his

Ameri-1776 book The Wealth of Nations

that an economy performs bestwhen buyers and sellers seek thebest outcome for themselves, as ifguided by an unseen hand Thesum of their many independenttransactions is the most efficientuse of a nation’s resources, hereasoned In freely operatingmarkets, prices are determined

by the interactions of buyers andsellers Competition results inbetter products and wider pros-perity on average than a govern-ment-run economy could deliver

—as the failure of communism inRussia so clearly attests, marketeconomists say

An American version evolvedfrom Smith’s doctrine and otherfeatures of Britain’s merchanteconomy Its centerpiece remains

a matrix of laws, institutions, andtraditions that have shaped theAmerican economy The framers

of America’s 1776 Declaration ofIndependence from Britain and

1789 U.S Constitution hadgiven the new United States

“stars to steer by,” in historianDavid McCullough’s words,meaning the basic political free-doms and restraints on govern-mental power that Americanshave prized—and debated—since the country’s founding

But even the strongest

sup-porters of market capitalism

ac-knowledge that it does not

provide all the answers “For

var-ious reasons, the invisible hand

sometimes does not work,” said

economist N Gregory Mankiw, a

former member of President

George W Bush’s Council of

Eco-nomic Advisers A manufacturer

won’t pay the environmental and

health costs of the pollution

emit-ting 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

for-mer White House adviser, Nobel

Prize winner Joseph E Stiglitz,

says, “The reason that the

invisi-ble hand often seems invisiinvisi-ble is

that it is often not there.”

Every generation of Americans

has produced critics of the

na-tion’s economic arrangements

Historian Henry Steele

Com-mager, writing in the 1950s, said

that “whatever promised to

in-crease wealth was automatically

regarded as good, and the

Amer-ican was tolerant, therefore, of

speculation, advertising,

defor-estation, and the exploitation of

natural resources, and more

pa-tient with the worst

manifesta-tions of industrialism.”

Others have pointed to

nu-merous contradictions both

seem-ing and real in the American

economic formula: a

consumer-led society long on materialism

but short on saving for the future;

a nation of abundant natural

re-sources that has at times abusedthis bounty; a political systemgrounded in civic equality but re-liant on income inequality to mo-tivate citizens to work hard andinvest in learning; a nation withastonishing wealth at the top andmore relative poverty than inmany of the world’s rich countries.But the large majority ofAmericans subscribes to the idea

of a dynamic economy that braces competition, invites striv-ing and invention, heaps rewards

em-on winners, and gives secem-ondchances to those who fail Withall its contradictions, the UnitedStates has achieved a highly flex-ible economic system that ar-guably offers more choices andopportunities than any other,and one that has displayed re-peatedly its capacity to repairmistakes and adapt to recessions,wars, and financial panics, gain-ing strength from its trials TheUnited States “continues to sur-prise,” Secretary Rice said, fol-lowing Obama’s election “Itcontinues to renew itself.”

The U.S Economy Today

Even in crisis, the America’seconomy remains the world’slargest and most diverse Thetotal output of U.S goods andservices—the gross domesticproduct—stood at $14 trillion in

2007, nearly three times the size

of Japan’s economy and five timesChina’s, based on the purchasingpower of each country’s currency.With just 5 percent of the world’spopulation, the United States is

responsible for 20 percent of total

economic output

The U.S gross domestic

prod-uct 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

know-how of the 150 million Americans

who make up the workforce

Cap-ital 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

re-mains 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

coun-tries and 85 percent higher than

that of China, according to theU.S Conference Board U.S pro-ductivity expanded by an average

2 percent a year from 2000through 2006, twice the gain inmost of Europe In one study of

16 major industrial economies,only South Korea, Sweden, andTaiwan had higher productivitygrowth than the United Statesover the same years These in-creases in productivity havehelped the United States main-tain relatively low unemploymentand inflation

The World Economic Forum,whose annual conferences are agathering of top internationalgovernment and corporate lead-ers, has regularly ranked theUnited States as the world’s mostcompetitive economy Major U.S.companies have stayed atop inter-national markets through a deter-mined focus on innovation, costreduction, and the return of prof-its to shareholders Of the 2007

Fortune magazine list of the 500

largest corporations worldwide,

162 were headquartered in the

United States Japan was second

with 67, and France third with 38

American technology

leader-ship continues to expand from

current foundations in

comput-ers, software, multimedia,

ad-vanced materials, health science,

and biotechnology into the

fron-tiers of nanotechnology and

ge-netics Although the euro is

gaining support as a currency of

choice, the American dollar mains the centerpiece of interna-tional commerce

re-When Barack Obama took fice as president in January 2009,the immediate crisis dominatedhis agenda, and beyond that laygrave, longer-range challenges.Record federal budget deficitsstemming from the governmentlending in the crisis could chal-lenge the stability of the U.S dol-lar The federal government’s

of-Above: U.S companies keep their technological edge at places such as this

nanotech-nology center at Bell Labs in New Jersey.

© AP Images

rising retirement and health care

commitments to an aging

popu-lation will test the government’s

ability to pay for itself American

businesses, shareholders, and

consumers could face heavy costs

in adapting processes and

prod-ucts to conserve natural resources

and meet the challenges of

cli-mate change Disparities in

edu-cational 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

open-ness to the world hinge critically

on a continued prosperity for thelarge majority of its citizens President Obama acknowl-edged the severity of the chal-lenge in a speech shortly beforehis inauguration But he also re-minded the nation of its heritageand of its inherent strengths “Weshould never forget that ourworkers are still more productivethan any on Earth Our universi-ties are still the envy of the world

We are still home to the most liant minds, the most creative en-trepreneurs, and the mostadvanced technology and inno-vation that history has everknown And we are still the na-tion that has overcome greatfears and improbable odds.”

bril-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

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.”

T H O M A S J E F F E R S O N

1787

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 per-son in 20 lived in an “urban” location, which then meant merely 2,500inhabitants or more The country’s largest city, New York, had a popu-lation of just 22,000 people, while London’s population exceeded onemillion But the handful of larger cities had a merchant class of trades-men, shopkeepers, importers, shippers, manufacturers, and bankerswhose interests could conflict with those of the farmers

Thomas Jefferson, a Virginia planter and principal author of ica’s Declaration of Independence, spoke for an influential group of thecountry’s Founding Fathers, including many from the South They be-lieved the country should be primarily an agrarian society, with farming

Amer-at its core and with government playing a minimal role Jefferson trusted urban classes, seeing the great cities of Europe as breeders ofpolitical corruption “Those who labor in the earth are the chosen peo-ple of God, if ever he had a chosen people,” Jefferson once declared.Opposing Jefferson and other supporters of a farm-based republicwas a second powerful political movement, the Federalists, often fa-vored by northern commercial interests Among its leaders was Alexan-der Hamilton, one of Washington’s principal military aides in theAmerican Revolutionary War (1775-1783), in which the Americancolonies had won recognition of their sovereignty from Britain Hamil-ton, a New Yorker who was the nation’s first secretary of the Treasury,believed that the young, vulnerable American republic required strongcentral leadership and federal policies that would support the spread

mis-of manufacturing

In 1801, Jefferson became the third U.S president and headed theDemocratic-Republican political party, later to be called the Democratic

Party In 1828, war hero Andrew

Jackson from Tennessee won

elec-tion as the candidate of

Jeffer-son’s wing, becoming the first

U.S president from a frontier

re-gion 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

pow-erful, the humble members of

so-ciety—the farmers, mechanics,

and laborers” who lack wealth

and influence—have the right to

protest such treatment

Hamilton argued that

Amer-ica’s unbounded economic

oppor-tunities could not be achieved

without a system that created

cap-ital and rewarded investment

Hamilton’s Federalists evolved

into the Whig Party and then the

Republican Party This major

branch of American politics

gen-erally favored policies to spur the

growth of U.S industry: internal

infrastructure improvements,

pro-tective 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

compro-mises of conflicting economic and

regional interests

“The framers of the

Constitu-tion wanted a republican

govern-ment that would represent the

people, but represent them in a

way that protected against mob

rule and maximized opportunitiesfor careful deliberation in the bestinterests of the country as awhole,” says professor Anne-Marie Slaughter of Princeton Uni-versity “They insisted on apluralist party system, a bill ofrights limiting the power of thegovernment, guarantees for freespeech and a free press, checksand balances to promote transpar-ent and accountable government,and a strong rule of law enforced

by an independent judiciary.”The lawmaking power was di-vided between two legislativehouses The Senate, whose mem-bership was fixed at two senatorsfrom each state (and until 1914,who were chosen by the state leg-islatures rather than by directelection), was assumed to reflect business and landholder inter-ests The Founders created theHouse of Representatives, withmembership apportioned amongthe states by population andelected directly by the people, toadhere more closely to the views

of the broader public

Another essential tional feature was the separation

constitu-of powers into three tal branches: legislative, executive,and judicial James Madison, aprimary author of the Constitu-tion and, beginning in 1809, thenation’s fourth president, said that

governmen-“the spirit of liberty…demandschecks” on government’s power

“If men were angels, no ment would be necessary,” hewrote, in defense of the separationprinciple But Madison also be-

govern-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

candi-dates 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

un-constitutional, but the president

retains the ability to nominate new

Supreme Court justices The

Sen-ate possesses an effective veto over

those choices, and the

Constitu-tion assigns to Congress the 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

re-public’s economy At Hamilton’s

insistence, the federal

govern-ment 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

govern-ment could regulate interstate

commerce and would have sole

power to impose import taxes on

foreign goods entering the

coun-try The federal government wasalso empowered to grant patentsand copyrights to protect thework of inventors and writers.The initial U.S protective tariffwas enacted by the first Congress

in 1789 to raise money for thefederal government and to pro-vide protection for U.S manufac-turers of glass, pottery, and otherproducts by effectively raising theprice of competing goods fromoverseas Tariffs immediately be-came one of the young nation’smost divisive regional issues.Hamilton championed thetariff as a necessary defensivebarrier against stronger Euro-pean manufacturers Hamiltonalso promoted a decisive federalhand in the nation’s finances,successfully advocating the con-troversial federal assumption andfull payment of the states’ Revo-lutionary War debts, much ofwhich had been acquired at lowprices by speculators during thewar These measures were popu-lar among American manufactur-ers and financiers in New York,Boston, and Philadelphia, whosebonds paid for the country’s in-dustrial expansion

But the protective tariff riated the predominantly agricul-tural South It raised the price ofmanufactured goods that south-erners purchased from Europe,and it encouraged European na-tions to retaliate by reducing pur-chases of the South’s agriculturalexports As historian Roger L.Ransom observes, western statescame down in the middle, object-

infu-ing to high tariffs that raised the

prices of manufactured goods but

enjoying the federal tariff

rev-enues that funded the new roads,

railroads, canals, and other

pub-lic works projects that their

com-munities needed The high 1828

barriers, dubbed the “Tariff of

Abominations” by southern

op-ponents, escalated regional anger

and contributed to sectional

ten-sions 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

dis-persed While many large

land-holdings 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

Presi-dent Jackson made the

displace-ment of Indian tribes governdisplace-ment

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

demarca-tions followed roughly the

settle-ment patterns of various ethnic

immigrant groups Settlers from

England followed the path of the

first Puritans to occupy New

Eng-land in the northeastern part of

the country Pennsylvania and

other Middle Colonies attractedDutch, German, and Scotch-Irishimmigrants There were Frenchfarmers in some of the South’stidewater settlements while Spainprovided settlers for Californiaand the Southwest But thesharpest line was drawn by theimportation of African slaves,which began in America in 1619

In the South, slave labor derpinned a class of wealthyplanters whose crops—first to-bacco, then cotton, sugar, wool,and hemp—were the nation’sprincipal exports Small farmholders were the backbone ofmany new settlements and townsand were elevated by Jeffersonand many others as symbols of

un-an “Americun-an character” bodying independence, hardwork, and frugality

em-Some of the Founding Fathersfeared the direction in which theunschooled majority of Ameri-cans, a “rabble in arms” in oneauthor’s famous description,might take their new country But the image that prevailed wasthat of the farmer-patriot, oncecaptured by the 19th-centuryphilosopher Ralph Waldo Emer-son’s depiction of the “embattledfarmers” who had defied Britishsoldiers, fired “the shot heardround the world,” and sparkedthe American Revolution.President Jefferson’s purchase

of the Louisiana territory in 1803from France doubled the nation’ssize and opened a vast new fron-tier that called out to settlers andadventurers

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-cen-tury preceding the Civil War

(1861-1865) were increasingly

dominated by the South’s

tena-cious defense of its “peculiar

insti-tution” and growing northern

demands for slavery’s abolition In

1860, in the 11 southern states

that would secede from the

Union, create their own

Confed-eracy, 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

sen-ator and defender of slavery, in

1858 Cotton was the nation’s most

important export, vital to the

economies of North and South

The low cost of slave-produced

cot-ton benefited U.S and British

tex-tile 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 stimulatedthe great manufacturing andcommercial expansion of thedecades that followed More re-cent research asserts that the U.S.economy would have expandedgreatly with or without the war.The victorious North, in any case,moved to new heights, stumbledduring a series of financial pan-ics, but recovered and continued

to advance

The South mostly adopted asystem of tenant farming that ef-fectively broke up the plantationsystem on which the region’seconomy had previously de-pended While the Reconstruc-tion years immediately followingthe Civil War saw real efforts toimprove the lot of former slaves,the political will to see throughthese reforms ebbed, especiallyafter 1877 The promised politi-cal and economic freedoms thuswere not delivered Instead therepressive system of “Jim Crow”segregation took hold throughoutthe South By the end of the 19thcentury, poverty was widespreadamong blacks, as it was amongmany rural whites

The Civil War marked thegreatest threat to the Union’s sur-vival, but it was also an opportu-nity for the war-time Congress—inthe absence of representativesfrom the rebellious southernstates—to expand the power of thenational government The firstsystem of national taxation waspassed; a national paper currencywas issued; public land-grant uni-versities were funded; and con-

struction of the first

transcontinen-tal railroad was begun

A Spirit of Invention

Across the country, a flow of

inventions sparked dramatic

in-creases in farm output Jefferson

himself had experimented with

new designs for plow blades that

would cut the earth more

effi-ciently, and the drive to improve

farming equipment never

slack-ened 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

pur-chase John Deere’s steel plows

and Cyrus McCormick’s reapers,

which cut, separated, and

col-lected farmers’ grain

mechani-cally 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

pro-duce 100 bushels of wheat had

dropped to just 50 hours In

1930, a farmer with a

tractor-pulled 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,

in-troduced in 1793, revolutionized

cotton production by

mechaniz-ing the separation of cotton

fibers from sticky short-grain

seeds Cotton demand soared,

but the cotton gin also multiplied

the demand for slave labor ney, a Massachusetts craftsmanand entrepreneur, fought a long,frustrating battle to secure patentrights and revenue from southernplanters who had copied his in-vention, one of the earliest legalstruggles over the protection ofinventors’ discoveries

Whit-Whitney did succeed on other front, demonstrating howmanufacturing could be dramat-ically accelerated through the use

an-of interchangeable parts Seeking

a federal contract to manufacturemuskets, Whitney, as the storywas told, amazed Washington of-ficials in 1801 by pulling parts atrandom from a box to assemblethe weapon He illustrated thatthe work of highly trained crafts-men, turning out an entire prod-uct one at a time, could bereplaced with standardizedprocesses involving simple stepsand precision-made parts—tasksthat journeymen could handle.His insights were the foundationfor the emergence of a machinetool industry and mass produc-tion processes that made U.S.manufacturing flourish, eventu-ally producing “a sewing machineand a pocket watch in everyhome, a harvester on every farm,

a typewriter in every office,” nalist Harold Evans notes.The 19th century deliveredother startling inventions and ad-vances in manufacturing andtechnology, including SamuelMorse’s telegraph, which linkedall parts of the United States andthen crossed the Atlantic, and

jour-Alexander Graham Bell’s

tele-phone, which put people in direct

contact across great distances In

1882, Thomas A Edison and his

eclectic team of inventors

intro-duced the first standard for

gen-erating 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

revolu-tion was launched with the

completion of the first

transcon-tinental railroad, when

converg-ing 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

con-struction 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

Eu-rope and Asia and greatly

ex-panding 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

move-ments began and vied for power,

with immigrants helping to adapt

European protest ideologies into

American forms

By the 1880s, manufacturingand commerce surpassed farmoutput in value New industriesand railroad lines proliferatedwith vital backing from Europeanfinanciers Major U.S cities shot

up in size, attracting immigrantfamilies and migration from thefarms A devastating depressionshook the country in the first half

of the 1890s, forcing some16,000 businesses to fail in 1893alone The following year, asmany as 750,000 workers were onstrike, and the unemploymentrate reached 20 percent

Farmers from the South andWest, battered by tight credit andfalling commodity prices, formed

a third national political zation, the Populist Party, whoseanger focused on the nation’sbankers, financiers, and railroadmagnates The Populist platformdemanded easier credit and cur-rency policies to help farmers Inthe 1894 congressional elections,Populists took 11 percent of allvotes cast

organi-But American politics cally has coalesced around twolarge parties—the Republicanand Democratic parties havefilled this role since the mid-1800s Smaller groupings servedmostly to inject their issues intoeither or both of the main con-tenders This would be the fate ofthe 1890s Populists By 1896, thenew party had fused with the De-mocrats But significant parts ofthe Populist agenda subsequentlyfound their way into law by way ofthe trans-party Progressive move-

histori-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 tors of the American economy By the end of the 19th cen- tury, oil had its John D Rockefeller, finance its J Pierpont Morgan and Jay Gould, and tobacco its James B Duke and

sec-R J Reynolds Alongside them were many others, some born into wealthy families, and some who personified the self- made 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 portunities 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

op-as op-assistant to Thomop-as 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 rail- road leaders in the country, his valued protégé Carnegie advanced too, sharing lucrative fi- nancial 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 dards for quality, research, innovation, and efficiency Carnegie also availed himself of se- cret alliances and advance knowledge of business decisions, practices forbidden by today’s securities laws as “insider” transactions but legal in Carnegie’s era.

stan-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 so- ciety’s benefit He financed nearly 1,700 public libraries, purchased church organs for thou- sands 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.

ment of the 20th century’s first

two decades Among the

innova-tions were direct popular election

of senators and a progressive

na-tional income tax

American Progressivism

re-flected a growing sense among

many Americans that, in the words

of historian Carl Degler, “the

com-munity and its inhabitants no

longer controlled their own fate.”

Progressives relied on trained

ex-perts in the social sciences and

other fields to devise policies and

regulations to reign in perceived

excesses of powerful trusts and

other business interests 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

in-dividual, but on behalf of equality

and the average man.”

The influence of Progressive

thought grew rapidly after the

as-sassination of President William

McKinley in 1901 thrust Vice

President Theodore Roosevelt

into the White House

Adven-turer, naturalist, and scion of

wealth, “Teddy” Roosevelt

be-lieved the most powerful

corpo-rate titans were strangling

competition Businesses’ worst

excesses must be restrained lest

the public turn against the

Amer-ican capitalist system, Roosevelt

and his allies argued

The New York World

newspa-per, owned by the influential

pub-lisher Joseph Pulitzer, ized that “the United States wasprobably never nearer to a socialrevolution than when TheodoreRoosevelt became president.”Roosevelt responded with regula-tions and federal antitrust lawsuits

editorial-to break up the greatest trations of industrial power Hisadministration’s antitrust suitagainst the nation’s largest rail-road monopoly, Northern Securi-ties Company, was a direct attack

concen-on the naticoncen-on’s foremost cier, J.P Morgan “If we havedone anything wrong,” Morgantold Roosevelt, “send your man to

finan-my man and they can fix it up.”Roosevelt responded, “That can’t

be done.” The Supreme Court’sultimate decision against North-ern Securities was a beachhead inthe government’s campaign to re-strict the largest businesses’ powerover the economy

A Modern Economy Emerges

Electric power surgedthroughout the U.S economy inthe first decades of the 20th cen-tury, steadily replacing steam andwater power in industrial plants

It lit offices and households, minated department stores andmovie theaters It reshaped cities,lifting elevators in new skyscrap-ers and powering street cars andsubways that enabled people towork farther from home By

illu-1939, electricity provided 85 cent of the primary power forU.S manufacturing The ability

per-to transfer power easily over thinelectric wires spurred totally new

manufacturing processes

favor-ing automation, the use of

spe-cialized parts, and the rise of

skilled labor

But the Great Depression of the

1930s brought economic

expan-sion to a devastating halt Its causes

were complex After a decade of

in-creasingly reckless stock

specula-tion, the stock market crash of 1929

wiped out millions of investors and

crippled confidence among

busi-ness executives and consumers

The United States and other

economic powers waged a

destruc-tive battle over trade, raising tariff

barriers against each other’s

im-ports and pushing their currency

values down in an unsuccessful

ef-fort to make their exports more

competitive Prices collapsed,

im-poverishing businesses and

fami-lies 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

bank-ing crisis shut down 40 percent of

the banks doing business at the

Depression’s beginning The

na-tional unemployment rate

ex-ceeded 20 percent

Some desperate and

disillu-sioned Americans looked to

com-munism 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

Her-bert Hoover (1929–1933) to meet

demands for economic relief setthe stage for the 1932 election ofDemocrat Frank-lin D Roosevelt

as president and the enactmentthe following year of the first ofhis “New Deal” economic pro-grams The president, known byhis initials, FDR, was a wealthy pa-trician from New York State with

a gift for communicating his sage to Americans in those hardtimes He used the new medium

mes-of radio to do so directly In his augural speech upon assumingthe presidency, Roosevelt assuredthe country, “The only thing wehave to fear is fear itself.”

in-Roosevelt then launched atide of new laws and programs tohalt the paralyzing banking crisisand create jobs New agenciessuch as the Civilian ConservationCorps, the Works Progress Ad-ministration, and the PublicWorks Administration put mil-lions of unemployed Americans

to work on government projects.The Agricultural Adjustment Ad-ministration worked to supportfarm prices by reducing output,fining farmers in some cases forexcess production Overall, theprograms marked “the return ofhope,” said long-time Demo-cratic congressman EmanuelCeller of New York

FDR was far more an viser than an ideologue, histori-ans agree His budget policieswere inconsistent: Spending cuts

impro-in the middle of his presidencyprobably extended the Depres-sion Some New Deal measuresproved contradictory or hugely

Above: The Social Security retirement pension system was part of President Franklin

Roosevelt’s New Deal.

controversial The National

Re-covery Administration negotiated

a series of industry-wide codes

es-tablishing minimum prices,

wages, and other particulars

Many small businesses

com-plained 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

Amer-ica’s traditionally looser, more

free-wheeling economic

arrange-ments The Supreme Court agreed,

declaring the law establishing the

NRA unconstitutional, an

exer-cise 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

insur-ance 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

fed-eral social safety net that has

helped Americans through

hard-ships, but whose costs today pose

huge future financial challenges

for the government

Before Franklin Roosevelt’s

administration, the federal

gov-ernment had taken a

predomi-nantly hands-off attitude toward

business, except for its regulation

of banking and the railroads,

and the campaigns against the

monopolistic trusts FDR tookthe country far in the other di-rection, injecting the federal gov-ernment into economic activitiespreviously deemed the domain

of the private sector One notableexample was his creation in 1933

of the Tennessee Valley ity, a federally chartered corpo-ration formed to controlflooding and generate electricpower in an impoverished region

To its opponents, the TVA wassocialism, violating the basic prin-ciples of free enterprise Roo-sevelt’s Republican predecessor,Herbert Hoover, had opposedearlier proposals for governmentpower projects and economic de-velopment programs in the Ten-nessee Valley, saying it would

“break down the initiative and terprise of the American peo-ple.… It is the negation of theideals upon which our civilizationhas been based.”

en-Americans differed as well

over more practical questions:

How could any private power

company compete with the

virtu-ally 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

peo-ple from their farms Although

the TVA complex of dams was

built and the TVA remains the

largest U.S public power

pro-ducer, 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

com-passes, a tableware company

turned out automatic rifles, and a

typewriter company delivered

machine guns, author Rick

Atkson notes The weight of U.S

in-dustrial might was irresistible

American factories supplied

armed forces in both the

Euro-pean and Pacific theaters, with

more to spare for the British, the

Soviets, and other Allied armies

At the war’s end, much of rope and Asia were in ruins, andAmerica stood alone as theworld’s economic superpower

Eu-Organized Labor:

Prosperity and Conflict

The end of wartime economiccontrols unlocked pent-up de-mands by American workers forbetter wages, leading to a series

of major labor strikes that ized American attitudes towardunions, as in the 1890s In 1935,the Democratic-controlled Con-gress had enacted the NationalLabor Relations Act of 1935 es-tablishing the right of most pri-vate-sector workers to formunions, to bargain with manage-ment over wages and workingconditions, and to strike to obtaintheir demands A federal agency,the National Labor RelationsBoard, was established to overseeunion elections and address un-fair labor complaints The FairLabor Standards Act of 1938 es-tablished a national minimumwage, forbade “oppressive” childlabor, and provided for overtimepay in designated occupations Itdeclared the goal of assuring “aminimum standard of living nec-essary for the health, efficiency,and general well-being of work-ers.” But it also allowed employ-ers to replace striking workers.After World War II, a Repub-lican-controlled Congress passedthe Taft-Hartley Act of 1947, whichreduced union power in organiz-ing disputes, strengthened therights of employees who didn’t

polar-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

endan-ger 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

over-ridden by the required two-thirds

congressional majorities

Together, the Fair Labor

Stan-dards Act and the Taft-Hartley

Act established the broad legal

parameters within which

organ-ized labor contended with business

leadership and union opponents

for economic and political

influ-ence 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

em-ployer’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

in-dustry became less willing or able

to pass through such labor costs

These issues played out in the

political realm as well As a

gen-eralization, labor unions mostly

supported Democratic

candi-dates with money and manpower,

while businesses backed

Republi-cans Each side hoped that toral victories would secure morefavorable treatment But globaleconomic developments inter-vened With the recovery of in-dustry in other nations, U.S.industrial unions generally de-clined in membership At the end

elec-of World War II, one-third elec-of theworkforce belonged to unions In

1983, it was 20 percent By 2007,the figure had dropped to 12percent, with union membershiptotaling 15.7 million

Union growth today is mostly

in arenas less susceptible to eign competition: the services sec-tor, particularly among publicservices employees such as teach-ers, police officers, and firefight-ers In 2007, just over one-third ofpublic-services workers belonged

for-to unions, only 7.5 percent of vate-sector workers were inunions, and union membershipamong workers under 24 years ofage was less than 5 percent.One symbol of organizedlabor’s relative decline came in

pri-1981, when President RonaldReagan fired striking air trafficcontrollers Public employeessuch as the controllers typicallyenjoyed great job security but, inturn, were prohibited from strik-ing “against the public.” This isnot to say that public employeesnever struck: Sometimes theydid, and usually the illegality ofthe strike was forgiven as part ofthe settlement Not this time.Reagan ordered the controllersback to work, citing the federallaw against government em-

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

cur-rents 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

fa-cilities, and public transportation,

separating blacks and whites, as

well as restrictions on

African-Americans’ voting rights After a

strife-filled decade, the

non-vio-lent campaign for racial justice

led by the late Dr Martin Luther

King Jr led to passage of federal

laws to combat racial

discrimina-tion and poverty A wide-ranging

series of laws that Democratic

President Lyndon Johnson called

his Great Society program

fol-lowed Education and

employ-ment opportunities for minorities

expanded While Americans have

debated the fairness of

“affirma-tive action” preferences for

mi-norities in hiring and college

admissions, the 1960s’ laws

opened increasing workplace

op-portunities for minorities

The 1960s civil rights

move-ment 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 fivewomen were in the workforce Fe-male chief executive officers haveled such major corporations astechnology giant Hewlett-Packard and the Ogilvy & Matheradvertising firm Other womenhave built careers in virtuallyevery arena, from academia, pol-itics, and medicine to manufac-turing, the construction trades,and the military A wage gap be-tween men and women is shrink-ing, but still remains In 2000women working full time earned

77 cents for every dollar paid tomen throughout the workforce,while 20 years earlier womenearned just two-thirds of whatmen received

Another major impact was thearrival of the “baby-boom” gener-ation in the workforce Betweenthe end of World War II and 1964,

76 million Americans were born,

an unprecedented surge that mayhave reflected the nation’s post-war optimism This populationbulge, in the midst of a long up-ward economic trend, triggered asustained boom in housing con-struction and the expansion of aconsumer-focused economy

The Political Pendulum Swings

The 1960s Great Society lation, comprising 84 differentnew laws, was the crest of a wave ofpolitical action begun by FranklinRoosevelt to use government’spower to set economic and socialagendas Voting rights for minori-ties, employment opportunity,public education, the safety of con-

legis-sumers and motorists,

environ-mental protection, and health

in-surance 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

de-cisive majorities his Democratic

Party achieved in Congress that

year But Johnson’s policies

ener-gized opposition from

conserva-tives 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

meas-ures Johnson championed

embit-tered many southern whites,

whose allegiance shifted to the

Republican Party

The 1970s was a trying decade

for the U.S economy In the

mid-dle of his first term in office,

Pres-ident 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

admin-istrations 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

ef-fort to halt an inflationary cycle in

which rising wages led

corpora-tions to increase prices, and

higher prices then led to new

de-mands for higher pay by workers

“Now, I am a Keynesian,” Nixonsaid in 1971, putting himself inthe camp of British economistJohn Maynard Keynes, who hadadvocated deficit spending duringtimes of slow economic growth.Nixon’s wage-and-price con-trol program failed To cite justone example, the price of cottonwas not controlled because of thepolitical influence of cotton farm-ers But the price of plain cottonfabric was regulated, and whenfabric manufacturers’ profits weresqueezed, they cut back on pro-duction, causing shortages, ac-cording to former Federal ReserveChairman Alan Greenspan.The lesson from Nixon’s ex-periment was a lasting one: TheU.S economy was far too com-plex, chaotic, and fast moving to

be managed in any detail by ernment officials A new consen-sus formed that controls couldnot overcome inflationary forces,but instead stifled innovation,risk taking, and competition.Two oil price shocks that fol-lowed the Arab-Israeli War of

gov-1973 and the Islamic Revolution

in Iran in 1979 battered U.S nomic performance Oil pricestripled Long lines formed atgasoline stations At the end of thedecade, inflation was higher than

eco-at any time since World War I, andunemployment had jumped tomore than 9 percent The impacthit hardest during the administra-tion of President Jimmy Carter, aDemocrat elected in 1976 TheU.S economy was gripped in a

“malaise,” as Carter’s advisers put

it, and nothing government did

seemed an answer to high

unem-ployment, high prices, and

stag-nant stock markets

During economic travails,

American voters have often

pun-ished 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

presi-dential 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

presi-dency 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

re-verse 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

ad-ministration 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 choicescollectively would generate moreeconomic growth than would gov-ernment spending This theory,called supply-side economics, heldthat the resulting economic growthalso would generate more revenuethan would be lost through thelower tax rates, and that the fed-eral budget could be balanced inthis manner

The Reagan tax cuts did helplift the U.S economy, but contrary

to the supply-siders’ predictions,federal budget deficits persistedand grew Nevertheless, the “Rea-gan revolution” was a politicalturning point toward smaller gov-ernment and individualism, andReagan left office as one of themost popular U.S presidents

Deregulating Business

The 1980s tax cuts were onlyone part of a broad movement toreduce government’s economicrole Another was deregulation.During the 1970s, a number

of thinkers attributed some of thenation’s economic sluggishness tothe web of laws and regulationsthat businesses were obliged toobserve These regulations hadbeen put in place for sound rea-sons: to prevent abuse of the freemarket and, more generally, toachieve greater social equity andimprove the nation’s overall qual-ity of life But, critics argued, reg-ulation came at a price, onemeasured by fewer competitors in

a given industry, by higher prices,and by lower economic growth

During the economically

try-ing 1970s and early 1980s, many

Americans grew less willing to

pay that price President Gerald

R Ford, a Republican who

suc-ceeded 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

deregula-tion of the transportaderegula-tion

indus-tries 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

govern-ment’s influence gained

momen-tum in Great Britain, Eastern

Europe, and parts of South

Amer-ica 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

Ameri-can Telephone and Telegraph

Company, the nationwide

tele-phone monopoly Prior to the

government’s action, AT&T

dom-inated all phone service, both

local and long-distance, and it

ar-gued that admitting new service

providers would threaten networkreliability AT&T obliged Ameri-cans to rent their telephones fromits Western Electric subsidiary, amonopoly that stifled the devel-opment of innovative types andstyles of phones A far smallerrival, MCI Communications, con-tended that technology advanceswould enable competition toflourish, benefiting consumers.The federal government took

up MCI’s cause, filing an antitrustsuit asking a federal judge to endAT&T’s monopoly AT&T capitu-lated, agreeing to split off its localtelephone service into seven newregional phone companies Thisbegan an era of intense competi-tion and innovation around theconvergence of phones, comput-ers, the Internet, and wirelesscommunications (AT&T main-tained its long-distance network,but in 2005 the company was pur-chased by one of its former localphone subsidiaries.) While manyAmerican consumers found thechanges in phone service confus-ing, they eagerly snapped up aspeedy parade of new communi-cations products

The loosening of regulations

on electric power service in the1990s has been far more contro-versial, and its benefits disputed.For a century following ThomasEdison’s time, most Americanspurchased electricity from com-panies that operated legal mo-nopolies in their regions Statecommissions regulated these util-ities’ local rates, while federal reg-ulators oversaw wholesale sales

across state lines Prices were

gen-erally based on the costs of

mak-ing 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

polit-ical backlash against electricity

deregulation ensued, worsened by

a scandal surrounding the failure

of Enron Corporation, a

Texas-based energy company that had

been a key promoter of

competi-tive electricity markets

The deregulation movement

stopped in midstream after 2000,

leaving an electricity industry

par-tially regulated and parpar-tially

deregulated, and divided by

diver-gent regional agendas Some areas

of the country rely on coal to

gen-erate 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

re-gional interests slowed movement

toward a national response to

cli-mate change issues, including such

possible measures as the

develop-ment of renewable electricity

gen-eration and an expanded power

transmission grid Instead, state

governments have been the

prin-cipal policy innovators

Technology’s Upheaval

Technology is changing the

fundamentals of economic

com-petition, and often faster thangovernment, political leaders,and the public can keep pace.The computer age grew out of aconfluence of discoveries onmany fronts, including the firstcomputer microprocessor, cre-ated in 1971 This breakthroughcombined key functions of com-puter processing that had beenseparate operations—the move-ment of data and instructions inand out, the processing of data,and the electronic storage of results—onto a single siliconchip no bigger than a thumb-nail It was the product of scien-tists at Intel Corporation, athree-year-old start-up technol-ogy company that had attractedthe support of wealthy venturecapitalists willing to bet large in-vestments on new, unproven en-trepreneurs The raw material

Above: The microprocessor combines

movement of data, processing of data, and storage of results on a single chip.

© AP Images

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

sil-icon computer chip, computers

were massive devices serving

government agencies and large

businesses, and operated by

spe-cialists But in 1976, two

second-ary 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 idly became an indispensablecommunications, entertainment,and knowledge tool for homesand offices IBM, the computergiant that had dominated main-frame computers since the 1950s,produced a personal computer inthe 1980s that quickly overtookApple’s lead But IBM, in turn,was driven from PC manufactur-ing by competitors in the UnitedStates and Asia who outsourcedcomponent fabrication to lowest-cost manufacturers and mini-mized production costs of anincreasingly low-margin item.The biggest winner in thiscompetition was Microsoft, a Red-mond, Washington-based start-up

rap-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 com-

petition for a while.