American Politics and Culture 2011.03

AMERICAN POLITICS

Causes of Rapid IndustrializationCauses of Rapid Industrialization

1. Steam Revolution of the 1830s-1850s.

2. The Railroad fueled the growing US economy: First big business in the US. A magnet for financial investment. The key to opening the West. Aided the development of other industries.

1. Steam Revolution of the 1830s-1850s.

2. The Railroad fueled the growing US economy: First big business in the US. A magnet for financial investment. The key to opening the West. Aided the development of other industries.

Thomas Alva EdisonThomas Alva Edison

The Light BulbThe Light Bulb

The Motion Picture CameraThe Motion Picture Camera

Alexander Graham BellAlexander Graham Bell

Telephone (1876)Telephone (1876)

Alternate CurrentAlternate Current

George WestinghouseGeorge Westinghouse Nikola TeslaNikola Tesla

Alternate CurrentAlternate Current

Westinghouse Lamp adWestinghouse Lamp ad

The AirplaneThe Airplane

Wilbur Wright Orville Wright Wilbur Wright Orville Wright

Kitty Hawk, NC – December 7, 1903 Kitty Hawk, NC – December 7, 1903

Model T AutomobileModel T Automobile

Henry FordI want to pay my workers so that they can afford

my product!

Henry FordI want to pay my workers so that they can afford

my product!

“Model T” Prices & Sales“Model T” Prices & Sales

U. S. Patents GrantedU. S. Patents Granted

1790s 276 patents issued. 1790s 276 patents issued.

1990s 1,119,220 patents issued. 1990s 1,119,220 patents issued.

4. Unskilled & semi-skilled labor in abundance.

5. Abundant capital.6. New, talented group of businessmen [entrepreneurs]

and advisors.7. Market growing as US population increased.8. Government willing to help at all levels to stimulate

economic growth.9. Abundant natural resources.

4. Unskilled & semi-skilled labor in abundance.

5. Abundant capital.6. New, talented group of businessmen [entrepreneurs]

and advisors.7. Market growing as US population increased.8. Government willing to help at all levels to stimulate

economic growth.9. Abundant natural resources.

Causes of Rapid IndustrializationCauses of Rapid Industrialization

New Type of Business EntitiesNew Type of Business Entities

U. S. Corporate MergersU. S. Corporate Mergers

New Financial BusinessmanNew Financial BusinessmanThe Broker:

J. Pierpont Morgan

The Broker: J. Pierpont Morgan

Wall Street – 1867 & 1900Wall Street – 1867 & 1900

The Reorganization of WorkThe Reorganization of Work

Frederick W. TaylorThe Principles of Scientific Management (1911)

Frederick W. TaylorThe Principles of Scientific Management (1911)

The Reorganization of WorkThe Reorganization of Work

The Assembly LineThe Assembly Line

% of Billionaires in 1900% of Billionaires in 1900

% of Billionaires in 1918% of Billionaires in 1918

The Protectors of Our IndustriesThe Protectors of Our Industries

The ‘Bosses’ of the SenateThe ‘Bosses’ of the Senate

The ‘Robber Barons’ of the PastThe ‘Robber Barons’ of the Past

Cornelius [“Commodore”] VanderbiltCornelius [“Commodore”] Vanderbilt

Can’t I do what I want with my money?Can’t I do what I want with my money?

William VanderbiltWilliam Vanderbilt

$ The public be damned!

$ What do I care about the law? H’aint I got the power?

$ The public be damned!

$ What do I care about the law? H’aint I got the power?

The Gospel of Wealth:Religion in the Era of Industrialization

The Gospel of Wealth:Religion in the Era of Industrialization

Russell H. ConwellRussell H. Conwell

$ Wealth no longer looked upon as bad.

$ Viewed as a sign of God’s approval.

$ Christian duty to accumulate wealth.

$ Should not help the poor.

$ Wealth no longer looked upon as bad.

$ Viewed as a sign of God’s approval.

$ Christian duty to accumulate wealth.

$ Should not help the poor.

“On Wealth”“On Wealth”

Andrew CarnegieAndrew Carnegie

$ The Anglo-Saxon race is superior.

$ “Gospel of Wealth” (1901).

$ Inequality is inevitable and good.

$ Wealthy should act as “trustees” for their “poorer brethren.”

$ The Anglo-Saxon race is superior.

$ “Gospel of Wealth” (1901).

$ Inequality is inevitable and good.

$ Wealthy should act as “trustees” for their “poorer brethren.”

Regulating the TrustsRegulating the Trusts1877 Munn. v. IL

1886 Wabash, St. Louis & Pacific Railroad Company v. IL

1890 Sherman Antitrust Act in “restraint of trade” “rule of reason” loophole

1895 US v. E. C. Knight Co.

1877 Munn. v. IL

1886 Wabash, St. Louis & Pacific Railroad Company v. IL

1890 Sherman Antitrust Act in “restraint of trade” “rule of reason” loophole

1895 US v. E. C. Knight Co.

Relative Share of World ManufacturingRelative Share of World Manufacturing

Modern ‘Robber Barons’??Modern ‘Robber Barons’??

Introduction: A Study in Contrast(The United States)

In the midst of plenty Expanding

technologies Losing the trade war 22 + million new jobs

since 1990-91 Baby boomers better

off than previous generations

Poverty Dying industries Won the cold war Thousands of college

graduates looking for jobs in 2002 & 2003

Today’s generation is generally worse off than parents

1-3Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

The Downside of the World’s Largest Economy & One of the Highest Standards of Living The federal budget is at a record high The US trade deficit is at a record high The federal government is borrowing $2 billion

dollars a day from foreigners to finance the budget & trade deficits

Social Security & Medicare trust funds will run out of money well before most of you reach retirement age

Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved. 1-4

The Downside of the World’s Largest Economy & One of the Highest Standards of Living When you graduate, you may not be able to get a

decent job The savings rate in the United States is close to

zero The real hourly wage (adjusted for inflation) of the

average worker is lower today than it was in 1973


The American Economy in the 19th Century

Agricultural Development

The National Railroad Network

The Age of the Industrial Capitalist


Agriculture Development At the start of the American revolution, America

had an almost limitless supply of land Nine of ten Americans lived on a farm One hundred years later, fewer than one in two Today, fewer than two in one hundred

These two feed America and create a huge surplus that helps to feed the rest of the world

The abundance of land was the most influential factor in our economic development in the 19th century Brought millions of immigrants Encouraged large families Encouraged rapid technological development


Economic Conflicts Leading to the Civil War North

Benefited from high protective tariffs

Had an economy based on manufacturing

Opposed extension of slavery westward

South Had to pay higher

prices than they would have paid for British goods

Had an economy based on agriculture and slave labor

- Knew this would be politically untenable


After the Civil War

New England, the middle Atlantic states, and the mid-west were poised for major industrial expansion and experienced significant economic growth

The south remained primarily an agriculture region and experienced economic doldrums until the early 1960s


The National Railroad Network The completion of the transcontinental railroads

1850 The United States had 10,000 miles of track 1890 The United States had 164,000 miles of track

This made possible mass production, mass marketing, and mass consumption, which brought the country together into a huge social and economic unit

This made it possible to go almost anywhere in the U.S. by train except in the south (i.e., transcontinental lines by-passed the south

This severely retarded its economic development well into the 20th century


The Age of the Industrial Capitalist The last quarter of the 19th century was the age of

the industrial capitalist Carnegie (steel) Du Pont (chemicals) McCormick (farm equipment) Rockefeller (oil) Swift (meat packing)



Until the last quarter of the 19th century, American economic history was largely agricultural

The beginning of the 20th century witnessed a shift to manufacturing

By the end of WW I, agriculture played a relatively minor role in our economic development


Industrial Development By the turn of the 20th century

America was primarily an industrial economy Fewer than 4 of 10 people lived on farms The U.S. was among the world leaders in production of

steel, coal, steamships, textiles, apparel, chemicals, and agricultural machinery

America’s trade balance was positive America exported most of her agricultural

surpluses America began to export manufactured goods


Industrial Development(Continued)

America’s Population 1789 4 million people 1812 8 million people 1835 16 million people 1858 32 million people 1915 100 million 1968 200 million 2007 Estimate of 300 million


America’s large and growing population was extremely important as a market for our farmer’s and manufacturers Foreign countries also targeted the American market

Especially Japan after WW II Japan largely financed its industrial development with

American dollars




America was on the way to becoming the world’s first mass consumption society

America’s development of the automobile industry was right around the corner



America’s first plane would soon be flying at Kitty Hawk Commercial aviation was still a few decades away

American technological progress made possible the era of mass consumption and higher living standards


By the End of WWI the U.S. Emerged As the Worlds Leading Industrial Power

The technological talent A large agricultural

surplus The world’s first universal

public education system The available

entrepreneurial abilities The fact that the U.S. was

kept out of harm’s way during World War I


Due to:


The Roaring Twenties

The Great Depression

The New Deal


The Roaring Twenties Actually began and ended with depressions

Early in 1920 the country had a brief depression Between 1921 and 1929 national output rose by

50 percent and most Americans thought prosperity would last forever

However the stock market crashed in1929 The “Great Depression” had arrived


The Great Depression Started with the August 1929 recession

Had the stock market not crashed and had the federal government acted more quickly, this could have been a fairly short recession

The economy hit bottom in March, 1933 National output was one third what it was in 1929 Official unemployment was 25 percent 16 million Americans were out of work

The population was less than ½ its present size


The Recession of 1937-38 An expansion began in March 1933 and lasted

until May 1937 Output however did not reach 1929 levels Seven million people were still unemployed in

1937 A system similar to today’s workfare (work for

your welfare check) was put in place About 6 million people were put to work on public

works type projects


The Recession of 1937-38(Continued)

A lot of credit goes to Franklin D. Roosevelt’s “New Deal” administration for the 1933 – 1937 expansion Banks were reopened The Government confiscated America’s gold The Securities and Exchange Commission (SEC) came into

being The Federal Deposit Insurance Commission (FDIC) was set

up An unemployment insurance benefit program was

started The Social Security System was started

This was the most significant reform


What Went Wrong?

The Federal Reserve greatly tightened credit This reduced the money supply

The Roosevelt administration suddenly got the urge to balance the budget This would have made sense during an economic boom

but not when the unemployment rate was 12% This caused

Industrial production to fall by 30% Five million more people to be put out of work


What Went Wrong?(Continued) In April, 1938 the Federal Reserve and the

Roosevelt Administration reversed course War broke out in Europe America mobilized in 1940 – 41 and then entered

the war on December 7, 1941 America was back on the road to recovery


What Finally Brought the United States Out of the Great Depression?

The massive federal government spending that was needed to prepare for and fight World War II? This was deficit spending (borrowed money) In other words the federal budget ran a deficit


The End World War II The country that emerged from WW II was very

different from what it had been four years earlier Prosperity had replaced depression Inflation was now the number one economic

problem The U.S. accounted for ½ of the world’s

manufacturing output With just 7 percent of the world’s population

The U.S. and the Soviet Union were the only superpowers left standing


The End of World War II(Continued) The U. S. spent tens of billions of dollars to

prop up the economies of Western Europe and Japan It spent hundreds of billions more for their

defense Since WW II

The U.S. has expended 6 percent of national output on defense

The Soviet Union expended at least 18 percent of national output on defense which contributed to its collapse in 1990


The 1940s: World War II and Peacetime Prosperity

WW II required a total national effort It consumed nearly half of the nation’s output It mobilized 12 million men and women

The Unemployment rate fell below 2 percent 1939 – 1944

Output of goods and services doubled Government spending rose more than 400 percent

Mainly for defense The economy grew 10 – 11 percent a year The government instituted wage and price controls and issued

ration coupons for meat, butter, gasoline, and other staples Business and workers strived to produce goods of the highest

quality possible, believing it a prerequisite to win the war



The Suburbanization of America After WW II Twelve million men and several hundred

thousand women returned to civilian lives There was a tremendous shortage of housing The V.A. offered affordable mortgages

One percent interest and nothing down The FHA supplemented this need

The only place to build was outside cities This required roads and cars The Federal Government subsidized an interstate highway

network along with state freeways, state highways, roads, and local streets


1940s and 1950s

One big construction boom The automobile industry prospered

Supplied America’s pent up demand and became the world’s leading exporter of cars

Birth rates shot up Congress passed the G.I. Bill of Rights (1944)

Provided loans for home mortgages, business, and education


The 1950s: The Eisenhower Years The advent of television and the Korean War

stimulated the economy The Eisenhower administration

Ended the Korean War and inflation Made no attempt to undo the legacies of the New

Deal The role of the federal government as a major

economic player became a permanent one


The Soaring Sixties: The Years of Kennedy and Johnson

The country was in recession when Kennedy was elected He was assassinated and replaced by Johnson in 1963

Johnson enacted a tax cut planned by Kennedy The tax cut and the spending on the Vietnam war ended

the recession The federal budget deficit and the money supply

grew Inflation began and lasted until the mid-80s


The Soaring Sixties: The Years of Kennedy and Johnson(Continued)

Johnson enacted three spending programs in 1965 that would have profound long-term effects on the economy

Medicare Medicaid Food stamps


The Sagging Seventies: The Stagflation Decade (Stagnation + Inflation = Stagflation)

Nixon became President in 1968 The decade began with the problems

of inflation and ending the Vietnam war Wage and price controls were initiated Ford became President when Nixon

resigned


The Sagging Seventies: The Stagflation Decade(Continued)

1973 Economic disaster began OPEC quadrupled oil prices The U.S. was hit by the worst recession since the

1930s The U.S. faced double digit inflation

The U.S. experienced stagflation Economic stagnation + inflation


The Sagging Seventies: The Stagflation Decade(Continued) Jimmy Carter was President in 1976

He presided over mounting budget deficits The money supply grew rapidly Inflation rose almost to double digit levels He faced the Iranian revolution in 1979

Gasoline prices went through the ceiling In October, 1979 the Fed stopped the growth of the money

supply By January, 1980 the country was in recession

The inflation rate was 18 percent The nation’s productivity growth was at one percent, one third

the postwar rate1-38Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

The1980s: The Age of Reagan Supply-Side vs. Keynesian economics

The objective of both is to stimulate output Keynesian economics

The government should spend more money This would give business the incentive to produce

more Supply-Side economics

The government should cut tax rates Consumers would then have

More incentive to work More of their own money to spend and business

would produce more1-39Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

The1980s: The Age of Reagan(Continued) The country was in a severe recession 1981

It was the worst since WW II Unemployment reached nearly 11 percent in 1982 Inflation had been brought under control Unemployment rates began falling

They seemed to stick around 6 percent Deficits were a problem: $79 billion in 1981 and $290

billion in 1992 Personal income taxes were cut Business taxes were cut


George Bush

“Read my lips: no new taxes” Bush won the election of 1988 Two years later, he agreed to a major tax increase

Supposedly to reduce the deficit But, the deficit continued to rise

A recession began in early 1992 and ended late in 1992

Bush failed in his bid for reelection


The State of American Agriculture The story is one of vastly expanding

productivity 1850 to 1900 output doubled 1900 to 1947 output doubled 1947 to 1960 output doubled

In 1800, it took 370 hours to produce 100 bushels of wheat.

In 1960, it took just 15 hours to produce 100 bushels of wheat.

In 1820, one farmer fed 4.5 people. Today one farmer feeds 100 people.


The State of American Agriculture(Continued)

Agriculture is one of the most productive sectors of our economy Yet, only 4.5 million people live on farms today

and less than half farm full time The U.S. exports more than one-third of its crops 35 million Americans make use of food pantries

and other food distribution programs In the Great Depression, Americans resorted to soup

kitchens


The State of American Agriculture(Continued)

Despite hundreds of billions of dollars in government aid (subsidy payments) since WW II Family farms are disappearing

7 out of 10 are now gone The average farm has gone from 139 acres to 435 acres

Family farms are being squeezed out by huge agriculture combines Today you have to become big to survive!

The Farm Act of 1996 was supposed to reduce subsidy payments and eventually phase them out Nevertheless, as crop prices sank to 10 and 20 year lows in

1999, subsidy payments to farmers were a record $23 billion


Subsidy Payments

In 2002 President Bush signed a 10 year $190 billion farm bill that provides the nation’s largest farmers with subsidies of $19 billion. Defenders point out that the European union gives its

farmers $60 billion in annual subsidies To compete in world markets so do we.

Critics contend that subsidies provide farmers with essentially a guaranteed income so they keep producing more than the market wants This keeps prices low and the farmers have to continually ask the

government for more subsidies


The “New Economy” of the Nineties It was a decade of major technological change

Marked by low inflation, low unemployment, and rapidly growing productivity

The 1920s and the 1960s could be similarly described

One of the most prosperous decades ever The stock market soared

The length of the economic expansion ended in March, 2001 (a period of 120 months) an all-time record


The “New Economy” of the Nineties(Continued)

The last two decades our economy has become increasingly integrated with the global economy

This has resulted in An exodus of jobs making shoes, electronics, toys and clothing to

developing countries Service work like writing software code and processing credit card

receipts shifted to low-wage countries White collar jobs now moving offshore Routine service and engineering tasks are now going to India, China,

and Russia Educated workers are paid a fraction of what their American counterparts

earn


The “American Economy” in the New Millennium 2001 was not a good year for America

March, 2001 the 10 year economic expansion ended (a recession started)

The stock market started down Unemployment began to creep up 9/11 occurred Unbridled optimism gave way to uncertainty

2003 the war with Iraq began


Current IssueAmerica’s Place in History In the early years of the 20th Century the United

States Emerged as the world’s leading industrial power Had the largest economy and the largest consumer

market Emerged as the world’s greatest military power


Tomorrow’s Concerns

Rising budget deficits Trade deficits Concern about

Social Security being there when you retire Medicare being there when you need it Will we be able to live as well as our parents?


Tomorrow’s Concerns In the nineteenth century, the sun never set on the

British empire The drain of two world wars compelled the British to give up

their empires By the mid 20th century to the present, American military

bases do the globe We have become the world’s policeman, perhaps self-anointed, We are currently involved in Iraq, Afghanistan, A World war on

terror that has come to our shores, and huge problems with securing our on borders

Many believe we are overextended and stretched too thin both militarily and economically

This would mean we will have to cut back both militarily and economically

The big question is will you be able to live as well as your parents?


“We’ve never been better off, but can America keep the party going?”

Jonathan Alter, Newsweek, February 7, 2000


Apparently NOT!

Benjamin Franklin said “A question is halfway to wisdom.”

Hopefully your generation can up with better answers than

that of your parents.


What is a Corporation?

A corporation is a legal entity created to run a business.

There are a number of advantages of a business being a corporation:

Limited liability – the assets of the owners of a corporation (stockholders, if publicly traded) are protected

Longevity – the company can survive past the death of its owner

Tax impacts

Tax Advantages of Corporations: Corporate income is not subject to Social

Security, Workers Compensation and Medicare taxes; and self-employment taxes

Tax disadvantages Corporate earnings are taxed and then taxed

again as capital gains when paid out as dividends.

The institution most often referenced by the word "corporation" is a public or publicly traded corporation, the shares of which are traded on a public stock exchange (e.g., the New York Stock Exchange or NASDAQ in the United States) where shares of stock of corporations are bought and sold by and to the general public.

Most of the largest businesses in the world are publicly traded corporations. However, the majority of corporations are said to be closely held, privately held or close corporations, meaning that no ready market exists for the trading of shares.

Many such corporations are owned and managed by a small group of businesspeople or companies.

A Corporation as a “Person” A corporation is allowed to own property and

enter contracts. It can also be sued and held liable under both civil and criminal law. Among the most frequently discussed and controversial consequences of corporate personhood in the United States is the extension of a limited subset of the same constitutional rights.

Corporations were recognized as ‘people’ for purposes of the 14th Amendment in an 1886 Supreme Court Case, Santa Clara County v. Southern Pacific Railroad, 118 U.S. 394.

Disadvantages of Corporations

As Adam Smith pointed out in the Wealth of Nations, when ownership is separated from management (i.e. the actual production process required to obtain the capital), the management will inevitably begin to neglect the interests of the ownership, creating dysfunction within the company. Some maintain that recent events in corporate America may serve to reinforce Smith's warnings about the dangers of legally-protected collectivist hierarchies.

PROSPERITY AND AMERICAN BUSINESSIncreased production, new management methods, and a booming economy elevated the public image of big business in the minds of many Americans in the 1920s.

The Deification of business

The United States emerged from World War I as a creditor nation and bounded into a period of record-breaking prosperity.

During the 1920s, Americans turned successful business leaders into heroes.

• As profits, salaries, dividends, and industrial wages rose, the gospel of big business became a national creed.

Productivity and technology

• Between 1922 and 1928, new technology and techniques–particularly use of the assembly line–increased industrial productivity.

• When American business boomed, companies needed bigger and better offices. A growing urban population required new apartment buildings, and a spreading suburban population demanded new roads and houses.

Why is productivity important?

More goods can be made per worker per hour lowers prices = increases demand = increased

profits = more jobs = higher wages Standard of living goes up throughout society

Technology

The rapid economic growth was aided by new industries–production of light metals such as aluminum, a brand-new synthetics industry, motion picture production, radio manufacturing and, above all else, the production of automobiles

As roads and automobiles remade the horizontal landscape, skyscrapers revolutionized the vertical landscape

The corporate revolution

Many family-run firms could not raise the capital to compete with the corporations that came to dominate business in the 1920s.

The merger movement reduced the number of firms operating in the United States. Under pressure from Republican Presidents, the Federal Trade Commission–created to protect small businesses from takeovers–began to encourage trade associations and mergers

Business gets bigger

• Some companies so dominated an industry that they created oligopolies. As a result, a smaller and smaller number of businesses began to wield unmatched economic power.

• Small firms went out of business, while chain stores and other large companies thrived.

• These chain stores could offer lower prices and better selection because they bought in bulk from suppliers and could afford more advertising

The Management Class

• As businesses became more complicated, new college-trained business managers began to replace the company-trained general managers of the past.

• Increased layers of management removed the heads of companies from contact with employees, who often did not even know the names of the people who controlled their working lives.

The bureaucrat

Division of labor – experts are coordinated to perform complex tasks

Allocation of functions – no one makes a whole product – each task is assigned

Supervision – some workers are assigned the function of watching over other workers – communications between workers or between levels move in a prescribed fashion (chain of command)

Identification of career within the organization – workers come to identify with the organization as a way of life – seniority, pension, and promotions are geared to this relationship

Labor

After the Red Scare, which dealt a serious blow to unions, corporations kept labor submissive with an effective combination of reward and punishment.

• The American Plan–a variety of activities used after the war to demoralize and destroy unions–was the punishment. Activities included open-shop associations that allowed employers to blacklist union members, use of labor spies, “yellow-dog” contracts, and application of court rulings that favored management.

Welfare capitalism

Welfare capitalism–the combination of programs that employers used to reduce the appeal of unions–was the reward. Employers hired company doctors and nurses, organized activities such as company glee clubs, and offered benefits such as dental care, group insurance, or stock options.

• Some companies also instituted “industrial democracy,” a policy in which workers could elect representatives to speak to management.

Corporations improve their image

As employee well-being increased efficiency and profits, welfare capitalism paid off for big business. Corporations also used welfare capitalism to restore their public image after the muckraking scandals of the Progressive Era.

The idea of public service became an ideal of big business in the 1920s, with business leaders joining service groups such as the Rotary Club.

U.S. GOVT REGULATION: An Overview

Cycles of regulation periods of heavy regulation followed by periods of deregulation

Economic and political influences Federal regulatory agencies and

commissions

HISTORY: GOVT REGULATION OF BUSINESS IN THE US

Justification for Government Regulation --the use of private property can be regulated to serve the public interest

Prior to the 1880s most regulation of business took place at the state and local level

Congress established the first modern regulatory agency in 1887

HISTORY OF GOVERNMENT REGULATION

- Interstate Commerce Commission ** initially set railroad rates ICC was the first significant reaction to concerns

regarding the detrimental effects of the concentration of ownership with higher prices and reduced output

ICC in line with the constitution --right of federal government to regulate trade among the states

HISTORY OF GOVERNMENT REGULATION

Level of federal regulation remained low until the Great Depression in the 1930s

The Depression (stock market “crash” and collapse of the banking industry) represented to many:

-- “the failure of the free enterprise system”

-- the problems with concentration of economic resources

HISTORY OF GOVT REGULATION

THE NEW DEAL (FDR): Vast System of Federal Economic Regulation attempted to alleviate detrimental effects of concentrated ownership and private market through: Price control Control over the entry of firms Vested federal government with unprecedented

authority to intervene in business affairs

HISTORY OF REGULATON

By the 1960s government regulation of prices and entry was commonplace in the transportation (railroads, trucking, airlines), communications (telephone services, radio, television), and “natural” utility (electricity, natural gas) industries

SOCIAL REGULATION

* Increased significantly starting late 1960s and continuing in the 1970s-- in the wake of Vietnam protests and emergence of environmental and consumer movements

Scale & scope of regulatory activity expanded Fed govt imposed new controls on

environmental pollution, the safety of the workplace & consumer products

DEREGULATIONThen came the late 1970s--Great Stagflation

(double digit inflation and unemployment during the Carter administration)

This undermined public confidence in the prevailing system of regulation

From the late 1970s through the Reagan/Bush administrations there was a move to Deregulation and greater reliance on market forces

ECONOMIC DEREGULATION

Emanated from: -- the perceived failure of government regulation -- the value placed on the efficacy of free markets

by Reagan/Bush administrations Removal of many price and entry restrictions in

regulated industries

DEREGULATION OF THE 1980s: Started with Carter accelerated with Reagan

-Airline Industry & Trucking deregulation was supported by some, but not all, firms in the effected industries

- particularly supportive were new and small firms who could now compete more effectively

- however, many incumbent firms lost market share & profits

- also, wages of unionized workers (e.g., Teamsters in trucking) in “protected” industries declined

DEREGULATION OF THE 1980s

* While economic regulation declined, social regulations (e.g., environmental, product safety, workplace) remained

-- Interest groups and general public support remained high for social regulation

US GOVERNMENT REGULATIONIN SUMMARY

* U.S. Government Regulation has been characterized as a “middle way” of relating government to industry -- somewhere between government control and more complete reliance on private markets

* Cycles of Regulation and Deregulation affected by economic conditions, public interest and politics

CURRENT REGULATORY ENVIRONMENT

Clinton administration “middle ground” Support for social (e.g., equal employment

opportunity, increased min. wage) and environmental regulation

Economic deregulation of: (1) Telecommunications (2) Electrical Utilities (3) Banking/Financial Services

Regulatory institutional arenas

Most U.S. Government Regulations are implemented through independent commissions and agencies of the federal executive branch and state government

Regulatory statutes and practices can be appealed to the courts to test their constitutionality and to ensure that agencies satisfy due process in their decision making

FEDERAL REGULATORY AGENCIES

--There are 60 autonomous federal agencies, some (e.g.,EPA) report directly to the President, bypassing cabinet secretaries

-- There are also 20 independent regulatory commissions which do not report to the President (e.g., Fed Reserve System, FCC, CPSC)

FEDERAL REGULATORY AGENCIES

Independent Regulatory Commissions (IRCs)-- Commission members appointed by President

and approved by Senate, terms are not coterminous with President (e.g, FEC)

-- Lack continuing supervision of any of the formal branches of government

-- Represent the “fourth branch of government”

LISTING OF SOME FEDERAL AGENCIES AND IRCs

“many familiar names” INTERSTATE COMMERCE COMMISSION, (1887) IRC FED RESERVE SYSTEM, (1913) IRC FED TRADE COMMISION, (1914) IRC FOOD AND DRUG ADM, (1931) AGENCY UNDER HHS

EXAMPLES OF FEDERAL AGENCIES & IRCs

SECURITIES AND EXCHANGE COMMISSION, (1934) IRC

FEDERAL COMMUNICATIONS COMMISSION, (1934) IRC

FEDERAL AVIATION AGENCY, (1948) agency under DOT

EQUAL EMPLOYMENT OPPORTUNITY COMMISSION, (1965) IRC

ENVIRONMENTAL PROTECTION AGENCY, (1970) IND. AGENCY

ANTI-TRUST POLICY

HISTORY JUSTIFICATIONS INSTITUTIONAL ARENAS EXEMPTIONS DIFFERENT APPROACHES: TRADITIONAL, “CHICAGO

SCHOOL”, CURRENT POLICY MICROSOFT CASE (ROLE PLAYS)

ANTI-TRUST POLICYHISTORY Anti-trust became an issue at the turn of the

20th century Concern about control of industry by single firm,

“unnatural” monopoly & loss of economic efficiency -- resulting in reduction of output and rise in prices which worked against interests of consumers and detrimental to US economy

ANTI-TRUST POLICY

Monopoly as market failure justifying government intervention:-- price above MC-- output below efficient level-- loss of consumer surplus-- transfer of surplus to producers-- loss of efficiency in economy, as ** max (PS+CS) is not achieved

ANTI-TRUST POLICY To promote economic efficiency govt. anti-trust

policy attempts to ensure entry and fair competition in industries with barriers to entry and anti-competitive practices

Anti-trust policies (as with all govt regs) change over time and are strongly influenced by economics and politics

The awarding of triple damages in anti-trust cases provides significant incentive for private firms to initiate cases

Anti-Trust institutional arenas

Anti-Trust laws are established by the U.S. Congress. However, laws are enforced mostly through the courts by private litigation & law suits-- in contrast with most govt regs where main I.A.s are agencies, commissions & legislatures

Broad language of anti-trust acts leaves considerable room for interpretation for courts/judges/juries

INSTITUTIONAL ARENAS

Apart from the courts the enforcement of Anti-Trust is the responsibility of the DOJ Anti-Trust Div., FTC, the DOT (with airlines) and state attorney generals

FTC has enforcement, investigation and regulatory role (e.g., Staples-Office Depot proposed merger)

DOJ’s role in enforcement is through law suits brought to Federal Courts as in the Microsoft case

Key Issues to consider in Anti-Trust - what is the relevant market?- market share of competitors?- prices, are they fair?- barriers to entry (capital costs, distribution chains,

software platforms)?- is there international competition?- cost structure of industry (is it subject to increasing

returns to scale?)- incentives to innovate ?- the effect of tech change on relevant market?

Types of Anti-Competitive Behavior

(1) Horizontal Restraint of Trade-- a division of market, which reduces competition

and creates monopoly -- a single company dominates a market and/or

industry

Types of Anti-Competitive Behavior

(2) Vertical Restraint of Tradeexamples:--resale price maintenance (manufacturer tries to

control the retail price)-- exclusive dealing (e.g., Anheuser Bush)-- a single firm controls supply chain

Types of Anti-Competitive Practices

(3) Predatory Pricing-- firms price below marginal cost until other firms

get driven out of business and then they price and profit as a monopolist

-- most relevant in industries with high barriers to entry (e.g., airlines)

MICROSOFT & ANTI-COMPETITIVE PRACTICES

Microsoft has been accused of Horizontal and Vertical Monopoly practices

-- MS dominates operating system (OS) market with MS DOS

-- accused of unfairly using position in supply chain in browser competition with Netscape/American Online

SOME EXEMPTIONS TO ANTI-TRUST

-- Regulated Industries (e.g.., natural monopolies)-- Agricultural Cooperatives-- State Economic Activity (e.g., NH liquor monopoly)-- Major League Baseball (“it is a game”)-- Competitors working together to lobby the govt--

First Amendment right-- Unions (first thought to be unlawful combinations

not serving the public good)

SCHOOLS OF “THOUGHT” ON ANTI-TRUST

(1) TRADITIONAL/STRUCTURALIST the dominant school until 1970s, emanated from

populist tradition- social, political & econ justifications for breaking

up large companies- concern with economic power leading to political

power- concern with fairness and protection of consumer

& small businesses


(1) Traditional/Structuralist (continued)

- “Per Se” rule -- few competitors reduced supply, increased price

- most concerned with industry structure, i.e., the number of firms and market share

SCHOOLS OF “THOUGHT” ON ANTI-TRUST(2) CHICAGO SCHOOL Started to dominate in late 70s, in Reagan and

Bush administrations- Economic objectives emphasized

- market efficiency is objective i.e., P=MC & max(PS+CS)- not concerned with distribution of income or equity- “Rule of Reason” Test-- does market operate as if competition was possible?


(2) CHICAGO SCHOOL(continued)- barriers to entry, substitutes and international

competition are considered- not concerned with social and political

implications of concentration of economic resources

GOVERNMENTAL POLICIES-- suggested by the different schools of thought

(1) STRUCTURALISTS- active government role- promote an increased number of firms in

industries- focus removing barriers to entry- break-up “per se” monopolies- restrict mergers that will result in market power

(e.g., Staples-Office Depot, Microsoft and Intuit)

SUGGESTED GOVERNMENTAL POLICIES

(2) CHICAGO SCHOOL- minimal government anti-trust effort- government intervention often makes markets less

competitive and less efficient- government can inhibit entry, e.g., govt regulation

of trucking till the 1980s- private firm control of regulatory agencies can lead

to “capture”- large firms and limited competition could be most

efficient, particularly in capital intensive industries with increasing returns

CURRENT ANTI-TRUST POLICIES

Microsoft is the leading example Also in the news

Airline industry (American Airlines, Continental-Northwest)

Visa/MasterCard Auction Houses

Mix of traditional & Chicago views used, reflective of economic as leading, but not only concern

Also the internationalization of anti-trust reg., e.g., EU vs. Boeing, Lonza vs. US

MICROSOFT CASE ACCUSATIONS AGAINST MICROSOFT

MICROSOFT --IT’S DEFENSE

RULING