The myth that the American economy’s traditional and natural state is laissez-faire and government-free predominates over the conventional understanding of American history. To some, a free market unencumbered by government meddling has forever been sacrosanct to the American project. A lightly regulated economy is part and parcel of American freedom, it’s thought.
It turns out that this view deeply misunderstands our history, both far and recent. Academics are challenging the conventional wisdom, showing that government action has been an integral part of the American economy throughout our history. Jacob Hacker and Paul Pierson recently demonstrated in their book American Amnesia how government made the crucial public investments necessary to lay the foundation for broad-based rapid economic growth in the twentieth century. The economy works best when the government works in tandem.
But the history of federal intervention into the market economy stretches back far earlier, dating from the earliest days of the republic. In The Case for Big Government, Jeff Madrick lays out exactly that: a case for robust programmatic regulation and government action in the twenty-first century. Like Hacker and Pierson, Madrick sees government action as an essential ingredient to a healthy and fair modern economy.
One particularly valuable section of Madrick’s case traces the history of federal intervention into the economy from the nation’s founding to the 1950s. As Washington’s secretary of treasury, Alexander Hamilton favored a strong and active federal government that imposed excise taxes and tariffs on imports. He endorsed public investments in infrastructure; fought for the establishment of a central bank; and promoted subsidies to get new industry off the ground. He also injected the federal government into state economies to assume the war-time debts of the states.
Thomas Jefferson too came to promote an active government in the economy. As a Virginia legislator, he proposed giving land grants to all citizens without property. As president, he set aside federal land for schools and embraced federal financing of roads. And of course, he greatly expanded the geographic sphere of the United States by stretching the bounds of his perceived constitutional authority to sign off on the Louisiana Purchase.
James Madison adjusted government’s role as the United States began to shift from an agricultural economy. He believed wage labor would displace land ownership as the core of the economy, so he enacted a new tariff to protect domestic manufacturing. He also supported a second national bank.
Notably, Madison would not support federally-funded internal improvements and transportation. Both he and Jefferson thought that this required a constitutional amendment. John Quincy Adams abandoned this reticence and made massive investments in roads and canals, setting the precedent for a federal role in developing the nation’s physical infrastructure.
Following this long early period of consistent federal intervention to provide the foundation and investment to develop a growing economy, the presidency of Andrew Jackson momentarily halted the pro-federal intervention consensus. Under Jackson’s rugged individualist ethos, the federal government pivoted back toward laissez faire, devolving economic intervention to state and local government. In the meantime, states took on important public transportation projects, like the Erie Canal in New York. States financed more than two-thirds of the cost of new canals, and also provided generous land grants and subsidies to railroads. These public investments were essential in developing the nation’s transportation network.
During the Reconstruction era after the Civil War, the federal government provided generous federal land grants to subsidize the development of transnational railroads. These were expenditures akin to tax exemptions or tax credits today: revenue uncollected or resources un-monetized by the government to encourage certain private activity. Even earlier, the government made generous land grants to colleges under the Morrill Act, and expanded the postal system.
Beginning in the late 1890s, the Progressive era saw government intervention into the economy accelerate. At the federal level, government sought to break up industrial consolidation through anti-trust actions. State and local governments increasingly invested in health programs, city services, education, and public goods like parks.
These investments saw huge gains, including a five-fold increase in the number of Americans completing high school between 1910 and 1930. It also ushered in a shining new “age of sanitation” from public health investments to fight disease and invest in sewage systems.
During this time, states also began regulating the workplace to protect employees, imposing minimum wages, maximum hours for women, child labor laws, and widows’ pensions. They undertook important regulations to protect retirees and consumers. And they helped spread the reach of energy by establishing and regulating electric and gas utilities.
And of course, activist government came to a crescendo under Franklin Roosevelt’s New Deal. On the heels of the Great Depression, Roosevelt created a flurry of new government programs to spark the economy and protect Americans’ livelihoods. The FDIC came into being to insure bank deposits. The SEC was created to patrol Wall Street. Glass-Steagall was enacted to separate investment banks from plain vanilla commercial banks. A national minimum wage guaranteed basic pay for all working Americans for the first time. Robust public works and infrastructure investment put people back to work during the Depression while improving the nation’s physical stock. The G.I. Bill made it easier for a generation of returning soldiers to pay for school and housing, and facilitated the modern middle-class life. Social Security eliminated the elder poverty produced by laissez-faire capitalism and promised retirees a decent living. And income taxes were cranked up to pay for the war effort and welfare state expansion. Top marginal rates crept above 90 percent, creating a de facto maximum wage.
After the Roosevelt and Truman generation of welfare state dominance, President Eisenhower too took up moderate efforts to keep government involved in the economy. He expanded Social Security to reach an additional ten million workers. And he created the national highway system—yet another mass transportation project to facilitate economic activity and travel.
And so on. The story of American economic triumph is one featuring a large and active role for government throughout. As Madrick explains, government interventions in the economy have several benefits. First, government can step in to provide public goods that would be under-provided by the market’s profit motive. Second, government can be the focal point for necessary and useful coordination to create economies of scale, such as railroads, water systems, and highways. Third, government can stimulate the economy by boosting the economic standing of workers, whether through a minimum wage, labor protections, or union rights. And fourth, government intervention can provide macroeconomic stability through Keynesian demand management when the private sector turns sluggish.
All of which adds up to an economy that’s stronger, fairer, and more resilient. As Madrick and others have shown, whether judged through the lens of historical experience or economic empirics, there has long been a compelling case for big government in the United States.