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Chapter One-- A Brief Economic History of the United States

  1. Introduction
    1. America-- A Study in Contrasts: the pluses
      1. Thriving industries: computer and medical technologies
      2. It is the only remaining superpower in the world
      3. Still has one of the highest standards of living in the world
      4. Has created more than 15 million new jobs in the 1990s
      5. The baby-boom generation has earned higher incomes than anyone in history.


    2. America-- A Study in Contrasts: the minuses
      1. Poverty in the midst of plenty
      2. Dying industries: steel, coal, manufacturing
      3. Permanent underclass (underprivileged, disadvantaged)
      4. Rampant crime
      5. Half of those new jobs (McJobs) created in this decade pay less than $12,000 a year with no benefits.


  2. The American Economy 1800 to 1899
    1. An Agrarian Society
      1. In 1800, 9 out of every 10 Americans lived on a farm
      2. By 1900, about 5 out of 10 lived on a farm
      3. Today, about 2 out of 100 live on a farm.
        1. But those 2% not only feed America, but produce a huge surplus that is sold abroad.
      4. The great abundance of land was the most important factor to our economic development in the 19th century.
        1. Attracted millions of immigrants
        2. Led to the occurrence of early marriages and large families
          1. more workers for the farm!
      5. At the beginning of the 19th century, America's population was about 5 million.
      6. By the time of the Civil War, the population was over 30 million.
      7. It reached 100 million in 1915, 200 million in 1968, and is now about 270 million.
      8. Following the Civil War, the Northeast began gearing-up for major industrial expansion.
        1. Iron & Steel and textiles
      9. The South remained an agricultural economy.
        1. Cotton, tobacco, rice, and sugar.
        2. What industrialization it had was largely destroyed during the war.
      10. Times were bad for agriculture in the latter half of the 1800s.
        1. Cheap land plus increased mechanism greatly expanded output.
        2. Supply of agricultural products far exceeded demand.


        3. These huge surpluses resulted in low prices for farmers.
      11. Large population provided a market for consumer goods.
      12. Railroads crossing the country enabled goods to reach consumers.
      13. The transcontinental railroad bypassed the South, stifling its economic development for many years to come.
        1. The availability of a mass-market meant that mass-production would be profitable.
        2. Furthermore, mass-production was made possible by technological advances in industrial and farm machinery.
        3. Such a market drew vast amounts of capital investment in means of production.
        4. Output exploded and many Americans' standard of living soared.


INVE$TMENT--->MACHINERY--->MASS PRODUCTION--->CHEAP GOODS--->DEMAND (loop)

  1. The American Economy-- 1900 to 1920
    1. Emphasis shifted to manufacturing as the American Industrial Revolution was in full swing.
    2. Fewer than 4 out of 10 people lived on farms.
    3. Trade balance was always positive every year.
      1. We exported more than we imported.
    4. It was the dawn of the Automobile Age with Henry Ford leading the way in automobile production with his assembly line.
    5. Orville and Wilbur Wright took us into the skies.
    6. Radio and telephone transmissions crisscrossed the country
    7. The United States had emerged as the leading industrial power as well as the pioneer of technological advancement.
    8. One fact of economic life: wars energize an economy.
      1. More food, supplies, and machinery are needed, putting virtually everyone to work. They are a huge government spending program.
    9. After WWI, the country endured a mild recession as the war production ground to a halt.
    10. But, the Doughboys demanded housing, automobiles, clothing, etc. which launched a post-war boom, a ten year party called The Roaring Twenties.


  2. The American Economy Between the World Wars-- the Roaring Twenties
    1. Demand for electrical service doubled in the 1920s
    2. The radio, the telephone, the toaster, the refrigerator, and other conveniences became commonplace during this decade.
    3. National output rose by 50%.
    4. Americans thought prosperity would last forever.
    5. The stock market was soaring and instant millionaires were created daily.
      1. At least, on paper.
    6. What goes up must come down-- and down it came in October 1929.
  3. The Great Depression
    1. By the summer of 1929, sales of cars and appliances were flat.
      1. Oversupply; saturation
    2. The textile industry, too, had huge inventories and huge factories ready to produce even more, but couldn't sell it all.
    3. Banks made bad investments with their depositors' funds, losing much of them.
    4. Many banks were thus forced to close, wiping out depositors' life savings.
    5. To add injury to insult, the 1930 drought in the Midwest destroyed many family farms, forcing families to move to California in search of a better life.
    6. The official unemployment rate was about 25%.
    7. The year 1933 and a new president bring some relief.


  4. FDR and The New Deal
    1. Relief
      1. Similar to our present day welfare, except recipients worked for their checks.
        1. painting, raking leaves, community projects, and anything that needed done.
    2. Reform
      1. SEC was set up to regulate the stock market and avoid a repetition of the speculative excesses which contributed to the crash.
        1. Securities and Exchange Commission
      2. FDIC was established and banks were required to insure deposits up to $100,000
        1. Federal Deposit Insurance Corporation
      3. FUTA to provide temporary unemployment benefits.
      4. Social Security (Medicare was created in the 1960s)
        1. has provided tens of millions of retirees a small income that at least has prevented them from being destitute.


    3. Massive government spending on work-relief programs put vast amounts of money back into the economy.


    4. John Maynard Keynes (kanes), renowned English economist whose ideas shaped much of 20th century economic thought, maintained that it didn't matter what the money was spent on (even digging holes and filling them back up!), just as long as the government spent it on projects which would provide economic benefit for its citizens.


    5. The Federal Government ran budget deficits (spent more than they took in) which stimulated the economy.


    6. The good times were cut short in 1937 when a changing political climate in Washington led to cutting of these New Deal programs to balance the budget.


    1. And, The Federal Reserve decided to tighten credit to prevent inflation.
      1. Central bank of the United States set up to control monetary growth, established in 1913.


    2. America slid back into the depression during the years 1937 and 1938.


    3. Roosevelt and the Fed both reversed course during 1938, and America was at least up to pre-depression production levels again.


    4. But what really brought America past the depression into a robust economy began with a fateful event on December 7, 1941.


  1. From WWII to Vietnam
    1. WWII required total national effort.
      1. More than 12 million men and women were mobilized.
      2. Unemployment fell below 2%!
      3. Women replaced the men in the workplace.
      4. To hold inflation in check, the government imposed price and wage freezes.
      5. Rationing of meat, butter, sugar, and other staples-- as well as gasoline.


    2. The country that emerged from WWII was very different from the one going in.
      1. Prosperity replaced depression.
      2. Inflation was the number one economic worry.
      3. The U.S. and U.S.S.R. were the only remaining superpowers standing in 1945.
      4. We spent billions propping up the economies of Western Europe and Japan.
      5. From here on we would spend about 6% of our national wealth on defending those countries and ourselves.
      6. The Soviets spent much more of their resources on defense than we did.
        1. Instead of building their own economy, they spent it on bombs. This action probably led to the demise of the U.S.S.R.


    3. The Federal Government kept the economy going strong after the war by instituting the GI Bill of Rights.
      1. Veterans would be given attractive low-interest VA home loans.
      2. And they were offered educational benefits, where they could earn a degree at government expense.
      3. The money pot for housing spurred construction of new homes, especially in Levittown, Long Island, New York.
      4. The education the GIs got qualified them for better jobs, which also helped the economy.
      5. Moreover, the U.S. began building a vast network of Interstate Highways.
        1. Which facilitated the distribution of goods nationwide, thus providing larger markets for businesses.
      6. The government knew that "you have to spend money to make money."


    4. The 1960s
      1. In 1965, President Lyndon Johnson's War on Poverty introduced three major spending programs.
        1. Medicare, Medicaid, and Food Stamps.
      2. While people have always debated the merits of these programs, there is no doubt that they have strong effects on the economy.


    5. The 1970's
      1. OPEC Oil Embargo
        1. In 1973, we were hit by the worst recession in nearly 40 years.
        2. OPEC quadrupled oil prices overnight.
          1. think of all the businesses and products that rely heavily on petroleum products!
          2. not to mention the consumers, themselves!
      2. With the resulting double-digit inflation (18%!) that resulted, the Fed hiked interest rates to stop the growth of the money supply.


    6. The 1980's
      1. While government spending on programs (Keynesian approach) had always seemed to work in the past to cure the country's economic ills, the Conservative Republicans led by Ronald Reagan had another approach.
        1. Supply-Side
          1. cutting taxes would give Americans more disposable income which, when spent, would pump up the economy.
        2. It had no immediate results-- we were in another bad recession in 1982, with 11% unemployment.
      2. While the government was running huge deficits, little wound up back in the economy.
        1. Instead, these huge deficits built weapons that were obsolete and full of defects even before they were finished.
      3. Moreover, we began to buy more than ever from overseas, and sell less and less to them.
        1. Resulting in foreign trade deficits-- importing more than you export.


    7. The 1990's
      1. Since 1992, we have enjoyed the longest economic expansion period to date.
      2. Unemployment is under 5% and inflation is less than 3%, thanks to the vigilance of the Federal Reserve.
      3. Budget deficits have disappeared as of 1998.
      4. The stock market has thrived, and despite the nervousness of some analysts, there seems to be no end in sight to the bull market.


    8. Today and beyond
      1. The story of American Agriculture
        1. 1820-- 1 farmer could feed 4.5 people
        2. Today-- 1 farmer can feed 100 people
      2. To save the family farm, our government pays many farmers not to produce!
        1. This prevents oversupply, and as a result falling prices.
      3. The trend is toward large, corporate-owned farms.
      4. While we pay farmers not to produce, 30 million Americans go hungry!
      5. Americans are more concerned with economic security than "national security."
      6. Are we optimistic? Or, are we pessimistic? (Ask)
      7. While most Americans are making more money than ever, that money buys less than it used to.
        1. In real dollars, we are worse off than we were 30 years ago.
        2. Family incomes rose 111% between 1947 and 1973.
        3. They have risen only 10% between 1973 and the present.
          1. largely due to increasing numbers of women in the workforce.
      8. Why are we making less than we used to?
        1. Plant closings and corporate downsizing have forced many well paid workers to accept lower paying jobs.
        2. Weakening of labor unions.
        3. Companies can operate overseas and get cheaper labor.
        4. Replacing many full-time jobs with part-time ones.
          1. half of the jobs our economy has generated in the 1990's have been part-time or temporary.
          2. Who's the largest employer in the United States?
            1. Answer: Manpower, Inc.!
          3. The big advantage to companies is that they don't have to pay any benefits, like medical insurance.
      9. The Problem of Poverty
        1. 36 million Americans below the poverty line.
          1. about $19,000 year for a family of five.
        2. There are about 2 million homeless people in the U.S.
      10. Other issues troubling us (get examples from class)
        1. Crime, drugs, disposal of nuclear waste, the spread of AIDS, decaying cities.
        2. A nation of consumption-junkies who have run up public and private debt of over $17 Trillion!!!
          1. at a rate more than double our annual national output.
        3. 15 years ago, were the world's largest creditor; now we're the world's largest debtor.
        4. Wall Street gets rich-- Main Street gets poor.
          1. we have steadily been bled of manufacturing jobs, all going south of the border and overseas.
          2. Corporations and consumers are the big winners as cheap labor turns into high profits AND low cost goods.
        5. Our educational system cranks out 1 million functional illiterates each year.
        6. One out of every 10 Americans is on public assistance.
        7. Growing permanent underclass
          1. fourth and fifth generation welfare families are common.
        8. We have over 1.6 million people in prison, yet our streets are still unsafe.
      11. Not all the news is bad
        1. We're currently in our 7th year of uninterrupted economic expansion.
      12. We can say that economics is all about how "the pie gets divided"-- who gets what?
      13. President Reagan said, "don't fight about how the pie gets divided. Just make a bigger pie!"
      14. Economics deals with how big the pie is (production), and how the pie gets divided (distribution).
      15. Our "economic pie" is made from these ingredients:
        1. Land
        2. Labor
        3. Capital
        4. Entrepreneurial ability.
      16. More on these, next.