Economy & Business

Recovering the American Tradition of Economic Policy

In the 29 years that towboat captain Joe Gray has worked the flotillas of barges that carry coal and other cargo up and down the Ohio River he has witnessed the decline at the heart of industrial America’s Rust Belt. Here’s a look at images of the towboat crews that work the Ohio River and life in the cities and towns along the way. Pictured, barges on the Ohio River near Stratton, Ohio. (All photos: Brian Snyder/Reuters)
The nation’s greatest achievements resulted from public and private cooperation.

In unwitting homage to Congressman Barney Frank’s line that “government is simply the name we give to the things we choose to do together,” Senator Pat Toomey recently defined “the market” as “just the name that we assign to the sum total of all the voluntary exchanges that occur every day.” These equal and opposite platitudes share more than a formulation and a woeful inadequacy. Each represents, for the ideologues who adopt it, a comfortably absolute view of the world that either validates or invalidates whatever policymakers might attempt. If government is nothing more than voluntary collaboration, who could object? If the market is nothing more than the sum of voluntary exchanges, why should the government ever get involved?

Toomey’s market reductivism is widely embraced on the right-of-center, imposing blinders that limit the economic-policy menu to the task of avoiding interference — so, tax cuts, perhaps served with a side of “occupational licensing reform.” This abdication scorns the American tradition. It lacks support in economic theory. And it deprives policymakers of the tools for sustaining a well-functioning market economy and widespread prosperity.

Earlier generations understood this. In 1832, Henry Clay rose on the Senate floor to defend the bold national economic agenda he called “a genuine American System”: the Second Bank of the United States, protective tariffs for burgeoning industries, and public infrastructure investment to connect commercial centers to the expansive frontier. This “long established system,” he argued, “patiently and carefully built up, and sanctioned . . . by the nation and its highest and most revered authorities,” was delivering “unparalleled prosperity.” To his opponents, he was unsparing:

When gentlemen have succeeded in their design of an immediate or gradual destruction of the American System, what is their substitute? Free trade! Free trade! The call for free trade, is as unavailing as the cry of a spoiled child. . . . It never has existed; it never will exist.

Clay was not the first great American statesman to champion a robust role for public policy in shaping the national economy, nor would he be the last. The efforts of that coalition, from Hamilton to Lincoln to Eisenhower, kept alive the tradition of the American System from the nation’s founding to the middle of the 20th century, delivering the unparalleled prosperity of which Clay once spoke.

President Abraham Lincoln, for instance, proclaimed, “I have always been an old-line Henry Clay Whig” and pursued an aggressive expansion of the American System even as the Civil War raged. He raised tariffs twice. He signed the Homestead Act, offering settlers 160 acres of public land to encourage westward migration, and the Morrill Land-Grant Act, which funded the creation of more than 60 colleges, including Cornell University and the Massachusetts Institute of Technology.

Over the next century, the federal government insulated domestic industries from foreign competition and pursued an aggressive sectoral strategy to support agriculture. It created antitrust law, a collective-bargaining system, and a social safety net; funded ambitious research and development projects through dedicated agencies; and both fostered and regulated a burgeoning financial system. It made unprecedented investments in the “internal improvements” of each era, building postal, telegraph, radio, electricity, and highway networks that enabled the spread of the population and its economic dynamism across the continent.

And then it stopped. Modernizing the air-traffic-control system now rests beyond the outer reaches of ambition. The Cold War established a stark dichotomy between the West’s free-market capitalism and Communism’s economic “planning.” By the time the Berlin Wall fell, the anti-planning orthodoxy had hardened into rejection of not only Soviet-style efforts to ration resources and micromanage firms by centralized diktat, but also the traditional efforts of liberal democracies to ensure investment in long-term economic and social priorities — that is, to pursue economic policy at all. “As we are dealing with changes in our economy,” says former ambassador Nikki Haley, “tax cuts are always a good idea.” Efforts to influence the economy’s trajectory, by contrast, represent “a watered-down or hyphenated capitalism, which is the slow path to socialism.”

The critics of planning so broadly defined do not understand their own critique. The theoretical basis for their objections is Friedrich Hayek’s “knowledge problem,” but that problem is not generically applicable to all forms of economic policy. The essence of Hayek’s argument is that no central planner could possibly aggregate, process, or act upon information as efficiently as decentralized participants respond to the information and incentives conveyed by the price system. The fact that government planners are not omniscient is obvious, but it does not automatically follow that planning is always ineffective. Perfect information is not a precondition of successful planning in either the private or the public sector.

If anything, government intervention — and thus planning — becomes more necessary when less market and industry knowledge is available. If a project’s commercial prospects are easily known, then risk is low and investor capital is cheaper and easier to raise. But if a project’s commercial prospects are only dimly perceivable, then it may be impossible to raise capital from economically motivated investors, no matter how important the effort. Thus governments typically must take a leading role in critical areas such as basic research and the development of infant industries, among many others.

Likewise, planning plays a vital role when knowledge, even if available, is of no interest to the private sector. Nations have a wide range of goals beyond the maximization of profit that the most perfectly free and efficient market will make no effort to achieve. In such situations, it is absurd to reject the policymaker’s imperfect efforts for lack of knowledge and opt instead to rely upon private actors behaving like perfect imbeciles.

Hayek’s notion of knowledge discovery and market competition fundamentally confuses rationing and investing. Price competition often works well, and the knowledge problem is most acute, when it comes to rationing — deciding who gets what in the present, which need not require a view of the future. The same is not true of investing capital, which simply cannot be prudently allocated by price signals alone. Hayek’s spontaneous order, in more than one sense, has no future.

A richer conception of the market’s functioning, and the role for public policy, begins with the recognition that voluntary exchanges are contingent on the conditions in which they occur. Each exchange occurs against the substantive backdrop of law, institutions, accumulated capital, culture, and technology. Each exchange may be freely chosen, but none is inevitable, because under different conditions the parties might choose differently — or be different parties entirely. No true result exists against which all others can be measured for distortion, because no one set of “free market” conditions exists to provide a baseline. This expands dramatically the scope for economic policy and renders arbitrary an unwavering preference for non-intervention.

Policymakers most directly write the law, but their decisions also shape institutions, alter the flow of investments in both physical and human capital, and influence the directions in which culture and technology evolve. In all these ways, they affect the market’s exchanges and thus its outcomes and its benefits to the nation. Committing such acts of economic policy is not a crime against capitalism. It was a prerequisite to the emergence of capitalist systems; it is unavoidable to the task of governing them; and it will be vital to their continued success.

Conservatives must remove the blinders that prevent their attention from wandering beyond tax cuts. The future of American economic policy lies in the creation of a modern American System, establishing the market conditions for an economy that supports our shared national goals. That system will require economic policy operating through four channels:

(1) Shaping the institutions, from public education to organized labor, the military to the safety net, that provide a foundation atop which the market’s individual transactions occur;

(2) Facilitating investments through direct spending in areas such as infrastructure, public health, and basic research, and through partnerships with and incentives for the private sector;

(3) Establishing the rules within which market transactions occur, on issues ranging from intellectual property and monopoly to trade and immigration to employment and the environment; and

(4) Using public finance for countercyclical stimulus and to allocate equitably the burden of raising revenue.

As the old joke goes, ask a roomful of modern economists how to expand access to books, and they will develop all manner of means-tested book-buying subsidies. None would suggest a public library. Just as Grover Norquist’s infamous “Taxpayer Protection Pledge” asks candidates to promise they will oppose all efforts to raise taxes, perhaps the first step toward effective economic policy should be a new, simpler pledge: “I will not talk about taxes until 2030.”

What would we talk about, if forced to think about the levers of public power available to shape economic outcomes? Once upon a time, American statesmen had those conversations, as well as the confidence to set national goals, make demands of the nation’s economy, and establish public policies that led to their fulfillment. The American System and its progeny were the happy result. If we allow ourselves to set goals, and to orient our institutions, investments, and rules toward meeting them, we can carry the tradition forward.

Wells King is the research director of American Compass. Julius Krein is the editor of American Affairs. Oren Cass is the executive director of American Compass. This article is adapted from “Rebooting the American System,” a series of essays published by American Compass.


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