Why is American capitalism unsustainable

USA - history, economy, society

Stormy-Annika Mildner

Miss Dr. Stormy-Annika Mildner was a member of the institute management of the Science and Politics Foundation (SWP) in Berlin until the end of 2013. Since January 2014 she has been Head of Foreign Trade at the Federation of German Industries (BDI). Her work focuses on fundamental questions of global economic development as well as international trade and investment policy, the US economy and transatlantic relations.

Julia Howald

Julia Howald, MPP, was research assistant in the institute management of the Science and Politics Foundation (SWP) in Berlin until the end of 2013. Since January 2014 she has been a consultant at the Federation of German Industries (BDI). Her main areas of work are US economic policy and the Transatlantic Trade and Investment Partnership.

The US embodies the free market model like no other country. But it was not just the economic and financial crisis that began in 2008/09 that showed that it would not work without government intervention. Despite emerging competitors like China, the US is still the largest economic power.

Even if it is ailing, the USA is the leading economy. At the pulse of the US economy: the New York Stock Exchange on Wall Street (& copy Stan Honda / AFP / Getty Images)

Share of global GDP, world trade and foreign direct investment (FDI) (& copy IMF, Direction of Trade Statistics, via elibrary-data.imf.org (accessed on August 5, 2013) / UNCTAD, UNCTADstat, via unctadstat.unctad.org ( viewed on August 5, 2013))
"Are the best days in America behind us?" Asked Time Magazine in the spring of 2011. In the recent financial and economic crisis, the number of voices predicting the decline of the United States of America increased. However, the US share of the world economy has not only declined since the crisis. According to figures from the International Monetary Fund (IMF), the country's contribution to global gross domestic product (GDP) fell from 26 to 21.9 percent between 1980 and 2012. In 1980 the USA accounted for 16.4 percent of global goods exports, but in 2012 this figure was only 10.9 percent. According to the United Nations Conference on Trade and Development (UNCTAD), the share of global stocks of foreign direct investment (FDI) was 39.2 percent in 1980; in 2012, the United States only had 22 percent. This development is not only due to the economic rise of the emerging countries, especially China. The US is grappling with major deficits in the country's infrastructure and education. And the government's mountain of debt has now risen to over 100 percent of GDP.

The challenges are enormous. Despite all the calls for cash, the American decline is far from certain. After the economic performance due to the financial and economic crisis, according to the U.S. Bureau of Economic Analysis (BEA) had shrunk by 0.3 and 2.8 percent respectively in 2008 and 2009, it has been growing again since 2010 - more than that of the European Union. In 2012 the GDP was $ 16.24 trillion. This makes the USA still the largest economy in the world.

Real GDP growth (& copy US Bureau of Economic Analysis (BEA), National Income and Product Accounts Tables, Table 1.1.1. Percent Change From Preceding Period in real Gross Domestic Product, via www.bea.gov/iTable/index_nipac.cfm (accessed on 08/20/2013))
The third largest country in the world after Russia and Canada (9 826 675 square kilometers) had a population of around 314 million in 2012. This means that the USA not only has a huge domestic market, but also an enormous workforce. They are the country with the largest influx of immigrants: in 2012, net migration was five million people, according to the World Bank. The fertility rate has been around two children per woman for years (2009: 2.0; 2010: 1.9; 2011: 1.9), which means that the population level in the United States remains stable even without immigration. For the next few years, a strong growth in the number of workers is forecast: In 2010, according to the U.S. Bureau of Labor Statistics (BLS) around 154 million people; by 2020 an increase to 164 million people is expected.

The US territory is well developed and rich in resources. Many of the world's most innovative companies have their origins here. In general, the United States is the most productive country in the world according to the "Key Labor Market Indicators" of the International Labor Organization (ILO): In 2010 it had added value per employee of 68,126 US dollars (expressed in 1990 prices; by some distance followed by Hong Kong with US $ 61,382, Ireland with US $ 57,473 and France with US $ 55,033). In the same year, Germany achieved an average added value per employee of 43,050 US dollars.

The state in the economy

The US government played a central role in the wake of the financial and economic crisis. It has supported the economy with extensive aid packages and stimulus measures, as well as enacting extensive regulations for the financial sector. Nevertheless, the economic and financial system in the USA is fundamentally aligned with the concept of the free market economy - as in hardly any other European country.
An indicator of the reluctance of the state is the comparatively low government ratio: According to Statista, the share of government spending in GDP in the USA was 36.7 percent in 2007 - shortly before the start of the crisis. The tax rate was also low by international standards: According to the OECD, the share of taxes and social security contributions in US economic output was 28.3 percent in 2007. In the course of the crisis, the government quota rose to 44.2 percent in 2009, but according to Statista it is now falling again (2012: 40.7 percent).

There are two basic American values ​​behind this pronounced economic liberalism: individual freedom and equality. It is not the state that is responsible for the success or failure of its citizens - the realization of the American Dream - but their own actions. The roots of this conviction lie in the colonial era: When North America was settled in the 17th and 18th centuries, economic liberalism began to displace mercantilism and state dirigism in Europe - especially in England. Accordingly, the new colonies were given more economic freedom. The willingness to take risks, the creativity, but also the pragmatism of society that can be observed in the USA can also be traced back to the pioneering experience during the westward migration and settlement: It was risky and labor-intensive, but also promised the chance for success and prosperity while in the event of a fall If there was a failure, there was always the possibility of a fresh start. Americans also believe in the functioning of markets while suspicious of government intervention.

The most important task of the state, according to the US Constitution of 1787, is not to direct the economy. Rather, it should protect the citizens in their rights and their economic development. The federal government is therefore only responsible for tax and budget matters, money and credit and trade between the individual states and with foreign countries. All rights that the constitution does not expressly transfer to the federal government remain with the individual states, the municipalities or the citizens themselves.

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Who decides what?

The President proposes, Congress disposes - the President proposes, the Congress orders. In almost all economic policy questions, the president first has to convince either Congress - with regard to fiscal policy, monetary and credit systems, and trade - or the Federal Reserve - with regard to monetary policy - of his goals. This means that the President has far fewer powers in economic policy than, for example, in foreign and security policy.

The main actors in economic policy on the executive side are the presidential bureaucracy (White House Office), the ministries (above all the Department of the Treasury, the Department of Commerce and the Department of Agriculture) and the independent government agencies. The President appoints the heads of these institutions as well as the constitutional and federal judges (Supreme Court). However, these appointments must be confirmed by the Senate. The White House Office includes the Office of Management and Budget (OMB), the United States Trade Representative (USTR) and the Council of Economic Advisers (CEA). The OMB is responsible for budget planning for the President. The CEA advises the President on economic issues. The Council publishes the "Economic Report of the President" once a year, which describes the economic situation in the country. The Trade Representative's Office advises the President on trade issues and acts as a negotiator in the conclusion of international trade agreements.

The House of Representatives and the Senate have divided their economic competences into numerous standing committees: the Agriculture Committees (the Committee on Agriculture of the House of Representatives and the Committee of Agriculture, Nutrition, and Forestry of the Senate), the Committees on Appropriations, the Budget Committees ( Committees on Budget), the Finance Committees (the Committee of Ways and Means of the House of Representatives and the Finance Committee of the Senate), the Banking Committees (the Committee on Financial Services of the House of Representatives and the Committee on Banking, Housing, and Urban Affairs of the Senate), and the Energy committees (the House Committee on Energy and Commerce and the Senate Committee on Energy and Natural Resources).

In addition, numerous independent government agencies have an influence on economic policy. Probably the most powerful authority is the Federal Reserve System, the central bank of the USA. The Fed consists of a network of twelve formally independent but mutually corresponding central banks (Federal Reserve Banks, FRBs). While the European Central Bank sets unilateral priorities in favor of price stability, the Fed pursues a "multi-goal orientation": It is equally committed to price stability and employment. It formulates and implements monetary policy. It "guards" the currency primarily through interest rate and money supply control in order to ensure price stability and sustainable economic growth. And as the "bank of the banks", it ensures the stability of the national banking system.

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The economy on the long leash of the government?

Nonetheless, it is wrong to assume that the government does not regulate and steer the US economy. As early as the second half of the 19th century, it became clear that a legal framework is important so that markets can function efficiently. After the end of the civil war (1861-1865), industrialization had picked up speed. The transition from an agrarian-small-business to an urban-industrial society was accompanied by many grievances: monopolies and cartels exploited their price-setting power, corruption was widespread in politics, and working conditions in the young industries were inhumane. As a reaction, the reform movement of progressivism formed in the late 19th and early 20th centuries: The reformers fought against the power of cartels, for stricter state regulation of corporations and better consumer protection. The most prominent progressive presidents of the period were Theodore Roosevelt (1901-1909) and Woodrow Wilson (1913-1921). Progressivism was not a turning away from the market, but was directed against the prevailing laissez-faire politics and gave the state a greater role.

In 1887 the federal government passed the Interstate Commerce Act to curb the ruinous and discriminatory pricing policies of the railroad companies. The Interstate Commerce Commission, created by law, was the first federal regulator in the United States. The desire to secure freedom of competition, but also to limit the political influence of large corporations, led to the first federal antitrust law, the Sherman Antitrust Act, in 1890. All other laws on competition policy are based on it, including in particular the Clayton Antitrust Act (1914) and the Federal Trade Commission Act (1914). They prohibit the formation of monopolies, cartels and restrictions on competition and are intended to protect consumers from being overcharged.

1913 and 1914 were years of great reforms. In addition to the antitrust laws, in response to the financial crises and bank failures of the late 19th and early 20th centuries, Congress passed the Federal Reserve Act (1913), creating the Federal Reserve (Fed). In addition, the federal income tax was introduced (16th amendment to the Constitution of 1913) - a prerequisite for tax and budget policy to become important control instruments of the government. In 1921, with the establishment of the Bureau of the Budget (today Office of Management and Budget, OMB), the institutional basis for budget planning was laid.
The Great Depression of the 1930s triggered the second major wave of reforms in the USA: In order to alleviate mass unemployment and poverty - almost a quarter of the US population was unemployed in 1933 - President Roosevelt first introduced the Social Security Act (1935) a nationwide unemployment and pension insurance. Other elements of his economic and social program New Deal were employment, social welfare and infrastructure measures as well as state support for agriculture. The Glass-Steagall Act of 1933 was intended to provide more stability in the banking system by separating commercial and investment banks.

An important lesson from the Great Depression was that the restrictive monetary and fiscal policies of the early 1930s had been the wrong answer to the crisis and had actually exacerbated it. Far too late, the government had turned to growth-enhancing investments. In the 1960s, the Democratic presidents John F. Kennedy and Lyndon B. Johnson tried to influence private-sector activity through state demand policies. In addition, a number of new social policy programs were introduced as part of President Johnson's War on Poverty: With amendments to the Social Security Act of 1965, health insurance was created for pensioners ("Medicare") and the socially disadvantaged ("Medicaid").

When Ronald Reagan took office, however, there was another paradigm shift. The president's advisers criticized the demand-oriented economic policy of their predecessors: Excessive taxes and a corset of rigid regulations would have stunted economic growth, excessive wage demands by the unions led to inflation and ever higher unemployment figures, and the chronic budget deficits together with the state's debt to rising interest rates. Her recipe against the stagflation of the 1970s: the state should withdraw from economic activity, state requirements for individual sectors should be dismantled (deregulation) and social benefits should be drastically cut. These measures should be accompanied by a restrictive monetary policy in order to bring inflation back to a reasonable level, which the Reagan administration succeeded in doing. As a result, the USA recorded moderate economic growth again when the Western European countries were still deep in the crisis. In contrast, the Reagan administration failed to reduce the mountain of debt; on the contrary, it continued to rise.

During the eight-year term in office of President Bill Clinton (1992-2000), many economic policy decisions by Reagan and his successor George Bush were continued. As a Democratic candidate, Clinton started his campaign with the slogan "It's the economy, stupid!" disputed. However, he not only wanted to give the economy new impetus, but also to cushion the social hardships of supply-side economic policy. The state should play a more active role again and invest more in business-related areas such as research and development; the infrastructure (transport, communication) and the education system should be modernized and expanded. This should be financed through budget shifts, savings elsewhere and tax increases for top earners. In addition, budget consolidation was a high priority for the Clinton administration - and it actually managed to turn the budget deficit into a surplus. At the same time, Clinton continued the deregulation policy of his predecessors in the financial sector, for example by repealing the segregated banking system (Gramm-Leach-Bliley Act, 1999). The deregulation of the financial markets was seen as strengthening the US financial industry in international competition; the financial sector was praised as a growth industry - a fatal misjudgment, as the end of the 2000s would show.

President George W.Bush and his economic policy advisors, in turn, continued the tradition of the Reagan years. The state should once again be limited to its core regulatory tasks: ensuring internal and external security and creating a favorable climate for private-sector initiatives. But the financial and economic crisis that began at the end of 2007 required extensive state intervention. In order to avoid major unrest in the financial markets, the government took over provisional control of the ailing mortgage banks Fannie Mae and Freddie Mac in early September 2008. In 2008, Congress also launched a $ 700 billion rescue package for troubled banks, the Troubled Asset Relief Program (TARP).

People with health insurance in the USA (& copy picture-alliance, picture-alliance / dpa-infografik 17 024 source: National center of Health Statistics)
When Barack Obama moved into the White House as the 44th President of the United States in January 2009, many hoped for a fundamental change in economic policy and comprehensive reforms in the tradition of the progressivists. He proposed a tax program that focused on easing the middle class and increasing the burden on high incomes. Obama believed just as little in the "trickle-down" theory, according to which relief for companies and upper income groups ultimately also benefits the poor, as he did in self-regulation and the self-healing powers of the markets. In contrast to his predecessors, he showed a greater willingness to intervene by the state in order to achieve socio-political goals. He wanted to put an end to the deregulation of the financial markets, which was largely to blame for the crisis, and to create a more transparent and, above all, seamless supervisory system. A "green turnaround" (Green New Deal) should also curb climate change, at the same time create jobs and make the USA more competitive in the long term.

Despite all the reforms, it was ultimately the economic and financial crisis that set the political agenda and priorities. The aim was to stop the economic downturn with comprehensive and unusual monetary and fiscal policy measures. In 2009, Congress passed the $ 787 billion American Recovery and Reinvestment Act (ARRA) and launched a second major stimulus package in late 2010. Far more important, however, was the Dodd Frank Act passed in the summer of 2010 - arguably the largest reform of financial regulation in the United States since the 1930s. It gave regulators more power and supplemented financial supervision with monitoring systemic risks and consumer protection.

The Obama administration was able to record yet another success for itself: Also in 2010 the House of Representatives approved the Patient Protection and Affordable Care Act, the health care reform of the president (also known as "Obamacare"), which had already been passed by the Senate. Other reform projects, however, fell by the wayside, including the turnaround in energy and climate policy, tax reforms and educational reforms.