Vittorio Valli The American Economy from Roosevelt to Trump Vittorio Valli Department of Economics and Statistics “Cognetti De Martiis”, University of Torino, Torino, Italy ISBN 978-3-319-96952-7 e-ISBN 978-3-319-96953-4 https://doi.org/10.1007/978-3-319-96953-4 Library of Congress Control Number: 2018954741 © The Editor(s) (if applicable) and The Author(s) 2018 This work is subject to copyright All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed The use of general descriptive names, registered names, trademarks, service marks, etc in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use The publisher, the authors and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication Neither the publisher nor the authors or the editors give a warranty, express or implied, with respect to the material contained herein or for any errors or omissions that may have been made The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations Cover illustration: Jupiterimages / Getty This Palgrave Macmillan imprint is published by the registered company Springer Nature Switzerland AG The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland Preface In 1978, I published a book on the US economic system After more than 30 years, I returned to write about the largest and most powerful economy in the world and on its economic and political relations in a very different, but equally important, historical phase The first edition of this book was published by Carocci in 2010 It was written in Italian and had a considerable success in the relatively restricted Italian market This English edition of the volume is not only a fully revised and updated version of the book but a new edition It adds two important chapters Chapter 5 is devoted to technical progress and to the strong accumulation of physical capital and knowledge , which have been a distinctive feature of American economic success for over a century The other new chapter is dedicated to the economic consequences of Donald Trump in the first 18 months of his presidency Also Obama’s presidency and the critical matter of the decline of the American economy have been more fully analyzed A remark must be made: the Roosevelt in the title is not Franklin Delano, but Theodore Roosevelt, since my book takes essentially the move from the beginning of the twentieth century I have not written a thorough and detailed economic history, but I have tried to give an interpretation of the main long-term economic trends in the country from 1870 up to now I did not do so as an economic historian, but as a macroeconomist, focusing only on the main changes and some crucial turning points of the economy of the US The interpretative line, the red thread of the book, is the following In the period 1870–1913, the US had an impressive economic development and a much faster rate of growth than most other countries, becoming the major economy in the world This had been largely due to the great advantage of the frontier , that is, the possibility to move west using untapped natural resources, new lands to cultivate, new pastures, new mines, and so on This favored large immigration inflows and both extensive and intensive investment , technological progress, and economies of scale, facilitating the rapid growth of the economy In the early twentieth century, these benefits gradually weakened The US, however, could successfully continue its rapid economic ascent because, since 1908, it had gradually replaced those benefits with the ones derived by the Fordist model of development Despite the great depression undergone by the US economy after the Wall Street crash of 1929 and throughout the lost decade 1929–1939—when the Fordist model worked backwards—the Fordist model could be partially reactivated after the conclusion of the Second World War Since the 1950s, the dominating US economy had been slowly losing ground because of the outbreak of some creeping, deep weaknesses in the American development mechanism and in the Fordist model itself The US had gradually become a large net importer of energy and was growing at a slower pace than several Western and Eastern European economies, the Soviet Union, Japan , and the four Asian tigers This led the US to try another solution, namely, the attempt at gradually building up a global economic empire Since Bretton Woods , the US had strongly pushed towards the establishment of the dollar as the key currency of the international monetary system; it had made a huge mass of foreign direct investment; it had favored a gradual process of liberalization of the international movements of goods and capitals, sustaining from the early 1970s a growing economic and financial globalization; it had taken part in major wars in Korea, Vietnam, and the Middle East The dominance in finance, technology, and the internet economy, accompanied by an extensive political and military power, could temporarily relieve the US fears that globalization could, in the long run, destabilize the very sources of its economic hegemony The crisis of the Soviet Union and of the Soviet bloc in the late 1980s and the beginning of the 1990s seemed to promise the full achievement of the American aims and to mark the end of history , with the final prevalence of western liberal democracy But history teaches us that history never ends: it has always trends and cycles, reversals of fortune, sudden upheavals, gradual ascents or decline Unregulated globalization and technological changes finally led to a great backlash The rapid industrialization and technological catching up of Japan , South Korea, and then China and other emerging countries contributed to accelerate the US deindustrialization and indirectly increase US economic inequalities We have, moreover, witnessed the passage of part of Eastern Europe to the EU after the dissolution of the Soviet Union; the booming expansion of the Chinese economy and, since 1992, that of India ; the growing tensions in the Middle East; the attack on the twin towers on September 11, 2001; the wars in Afghanistan, Iraq, Syria , and Libya ; the advent and semi-defeat of ISIS; the desire for resurgence of Russia and of emerging powers; the great recession; the drama of migrants and refugees from Latin America, Middle East, and Africa; the Brexit , and so on The reaction to a part of these events has been the brutal recourse to arms and wars of the two Bush administrations, the more nuanced, but undecided, Obama’s international policy and the rough avowal of America first and of protectionist measures of Trump’s populist policy All this is leading towards an imperfect multipolar world , much more difficult and complex than the asymmetric bi-polarism prevailing in the 1946–1989 years, frozen by the hard equilibrium of cold war and nuclear terror A phase of gradual decline of the American economic power had taken its first steps In economic matters, the great recession of the 2007–2010 years has proved the inner fragility of an economy dominated by banks and multinationals and in which the political decisions are heavily influenced by the interests of the big finance, the big e-corporations, the multinationals, and the super-rich In the US, President Obama saved the majority of financial institutions and some big industrial corporations and helped the recovery of the country by stimulus packages He tried also to put some timid limits to the unruly action of major financial groups and to extend the health coverage to the majority of the population Finally, he tried to take some steps toward a “green” policy, but at the same time, he favored the expansion of fracking techniques in the extraction of oil and gas, which reduced the US energy dependence but caused severe environmental damage in vast zones of the territory Obama’s major domestic failure is due to his timid reformist and gradualist approach, which could attenuate, but not arrest, the continuing rise of the great fractures in the US economy and society: the rapidly increasing divide between the rich, the poor, and the declining middle class, between races and religions, between immigrants and natives These fractures have indeed been the culture medium of Donald Trump’s populist appeal President Trump has announced and then tried to cancel, or reduce, the effects of Obama’s policies on health and on green policies He also proceeded to extend anti-migration walls, to repudiate some multilateral trade agreements and to raise some tariffs, to try reducing offshoring and attract foreign investment He finally cut taxation, in particular to corporations and to rich people as himself His populist policy has helped him to gain the presidential election, but his controversial personality, full of haughtiness and of racist and sexist elements, and his intricate links with the interests of the arm industry, the oil and coal corporations, the construction industry, and big finance, can prelude to even greater social fractures, to trade wars, and to a dangerous scenery in international relations and in the social and environmental arenas Vittorio Valli Torino, Italy Acknowledgments During many years of work on the American Economy and on comparative economic development, I have accumulated many intellectual debts The first one is toward Harvey Leibenstein , Hollis B Chenery , Gregory Grossman, and Carlo Maria Cipolla I originally met them in Berkeley in 1966–1967 and then on several other occasions The first three scholars gave me a taste for the analysis of the problems of economic development and of comparative studies; the fourth, a great economic historian, the pleasure of combining economics and history Another important debt is toward Angus Maddison and several Italian economists, in particular Paolo Sylos Labini Of Angus Maddison , I appreciated not only the impressive work of reconstruction and analysis of macro-economic data, widely used in this book, but also the vast knowledge, clarity, and concision in writing Of Sylos Labini, I greatly appreciated his exceptional capacity of skillfully combining economic theory with social facts and his relevant policy insight and generous civil commitment A debt is also due to friends and colleagues who read or reviewed the Italian or the English editions of the book and gave me helpful comments and suggestions, and in particular, Nicola Acocella, Giovanni Balcet , Gian Carlo Bisacchi, Terenzio Cozzi, Silvana Dalmazzone, Enrico Filippi, Dino Martellato , Ferdinando Fasce, Angus Maddison , Ignazio Musu, Giuliano Petrovich, Sanjay Reddy, Salvatore Rossi, Marcello Signorelli, Renata Targetti Lenti, Pierangelo Maria Toninelli, Gianni Toniolo, and Maurizio Vaudagna Particular thanks are due to Luigi Oddo, who has skillfully provided the updating of most figures and tables for the English edition of the volume I finally thank the editors of the publisher Carocci for their important contribution to the Italian edition of the book and Laura Pacey and Clara Heathcock of Palgrave Macmillan for their very kind and competent supervision of the new English edition of the book Any errors or omissions are, of course, my complete responsibility Contents 1 The Birth of a Great Economic Power 1.1 The Economic Ascent of the US 1.2 The Economic Consequences of the Frontier References 2 The Fordist Model of Economic Development 2.1 The Concept of Fordism 2.2 The Fordist Model of Economic Development References 3 The Great Depression and the New Deal 3.1 The Wall Street Crash 3.2 The Great Depression 3.3 The New Deal 3.4 The Debate on the Great Depression and the New Deal References 4 Return and Crisis of the Fordist Model of Development 4.1 The War and Its Consequences 4.2 The Return to the Fordist Model: 1946–1969 4.3 The Crisis of the Second Wave of the Fordist Model References 5 Capital Accumulation, Technological Progress, and Knowledge 5.1 The Main Determinants of Economic Development 5.2 Capital Accumulation 5.3 The Role of Technological Progress 5.4 The Importance of Knowledge 5.5 Structural Changes in the US Economy 5.6 Robots and the E-Economy 5.7 Summing Up References 6 The Global Power of the US 6.1 After Teheran and Yalta 6.2 The Main Points of Strength of the US Economy 6.3 The Economic Consequences of the Wars 6.4 Economic, Military, and Political Powers 6.5 The US and the Turin Index of Economic Power References 7 Main Weaknesses in the American Economic Power 7.1 The Dependence on Foreign Oil and Other Raw Materials 7.2 The Environmental Problem in the US 7.3 Phases of Ascent and Decline of the US Economy 7.4 From Surplus to Structural Deficit in the US Balance of Current Accounts 7.5 The Weakening of the Dollar 7.6 Rising Inequalities in Wages, Income, and Wealth 7.7 Terrorism and Organized Crime 7.8 The Withering of the American Dream 7.9 The Erosion of Democracy References 8 Toward a Global Economic Empire 8.1 The Instruments 8.2 Post-war Aids and the Marshall Plan 8.3 The Path toward Trade Liberalization 8.4 Foreign Direct Investment and the Growth of the US Presence in the World 8.5 The US and the Third Wave of Economic and Financial Globalization 8.6 The Financial Supremacy 8.7 Ideology and the American Lifestyle 8.8 The Influence of Media and Internet 8.9 The Power of Arms and Diplomacy References 9 The Great Recession 9.1 Why the Great Financial Crises? 9.2 The US Sub-prime Financial Crisis 9.3 The Great Recession 9.4 The Inadequacy of Controls 9.5 Possible Remedies 9.6 A Comparison with the Great Depression References 10 Obanomics 10.1 Obama’s Ideas on Economics 10.2 Obama’s Response to the Great Recession 10.3 The Industrial and Innovation Policy 10.4 Obama and the Environment 10.5 Obamacare 10.6 Inequality, Taxation, and the Middle-Class Crunch References 11 The Economic Consequences of Donald Trump 11.1 Populism and Trumpism 11.2 Donald Trump’s Victory in the 2016 Presidential Election 11.3 The Relations with Economic and Financial Power 11.4 America First 11.5 The Neo-Protectionist Policy 11.6 The Reform Tax Bill 11.7 Trump’s Policy on Health Care and Environment References 12 America’s Decline? Toward an Imperfect Multipolar World 12.1 America’s Decline? 12.2 China: The Other Economic Giant 12.3 The Role of the European Union 12.4 Russia, Japan, India, and Other Emerging Powers 12.5 The Nongovernmental Powers 12.6 The Fragility of International Organizations 12.7 Conclusions References Statistical Appendix Index ... Department of Economics and Statistics “Cognetti De Martiis”, University of Torino, Torino, Italy Vittorio Valli Keywords The American economy – The economy of the US in the 1870–1908 period – The frontier in the US economy – The economic ascent of the American economy. .. The chain of productive interdependencies was crucial to the generalization of the model to other sectors The car is produced with raw materials and components of the steel industry and of many other sectors, which in turn get their supplies from firms in other sectors... See, on the relations between capital accumulation, technical progress, and knowledge, Chap © The Author(s) 2018 Vittorio Valli, The American Economy from Roosevelt to Trump https://doi.org/10.1007/978-3-319-96953-4_3 The Great Depression and the New Deal Vittorio Valli1