How Government and Markets Built America Together

This post was originally published as part of a series on The Regulatory Review. Reprinted with permission.

Government has always been an essential part of American history, and this remains true today. Yet, as President Trump prepares, once again, to do his best to dismantle the administrative state, American history reveals why these efforts will ultimately fail. To appreciate that history, and what it means as the country moves into the Trump administration, we summarize key findings of our book.

The first is the most significant. The country has always been driven by a mix of government and markets.  In fact, considering the small size of the country and its market system at the founding, the country started out with “big” government.

Markets and social life were heavily regulated in the colonies, and that regulation continued after the formation of the new country. The Jeffersonians and Federalists fought about the size and reach of the new federal government, but neither faction advocated market dominance and social deregulation in the states. As Lawrence Freedman has indicated, “A century before Adam Smith, the proprietors, squires and magistrates of America certainly did not assume that government was best that governed the least.”

Second, while the commitment to government and markets has ebbed and flowed, substantial government has never been absent from our political economy. In eras during which the country preferred markets, government was still there undertaking its basic functions of investing in market infrastructure, policing market behavior, and maintaining an economic safety net. Those functions date to the beginning of the country at least in an elementary form. As the economy has grown and changed, the country has added new or revised programs to those three fundamental functions, sometimes incrementally and sometimes significantly by expanding government, as in the New Deal and the Great Society eras.

Third, as our book demonstrates, it takes both political figures and ordinary citizens to change the mix. There was President Franklin Roosevelt, leading the country into vast changes in government, and President Ronald Reagan, who moved the country in other direction, but there were also Ida Tarbell, Rachel Carson, and John Lewis and his fellow civil rights advocates, among many others.

These first three themes are descriptive of the country’s economic history. Our last theme is normative as it links our history to the democratic values that we hold dear. This theme answers the question about the proper, healthy mix of government and markets.

The reason for this constant mix is that both government and markets have been necessary to align the country with its fundamental political values of liberty, equality, fairness, and the common good. Markets cannot achieve those values alone, nor can government. The mix evolves and it changes in response to political recognition that the country is out of sync with one value or another.

Significant changes can take years to occur as the overthrowing of the Jim Crow era, let alone the system of slavery, indicates. But change does occur as the country refines our fundamental values and acts to achieve new understandings.

In other words, the mix between government and markets is healthy when our values are advanced. Gross economic or political inequalities require a rebalancing of the mix, and most cases often require government intervention into market excesses.

Taking these lessons into account, the book offers a perspective on the country’s current situation. For nearly five decades, the country has put its faith in markets and adopted only incremental increases in government. This period of neoliberalism was initiated by a decline in the economic fortunes of many people due to the extraordinary inflation that followed the decision in the Johnson administration not to raise taxes to pay for both the Great Society and the cost of the Vietnam War. That policy mistake was followed by the deindustrialization related to globalization and additional policy choices that the book discusses.

The result is clear. The neoliberal agenda has not worked for the many as it has made billionaires of the few. As the PEW Foundation documents, “income inequality in the U.S. has increased since 1980 and is greater than in peer countries.”

It was Abraham Lincoln who said, “The legitimate object of government, is to do for a community of people, whatever they need to have done, but can not do, at all, or can not, so well do, for themselves—in their separate, and individual capacities.” The “object of government,” he noted, was “to elevate the condition of men—to lift artificial weights from all shoulders; to clear the paths of laudable pursuit for all; to afford all, an unfettered start, and a fair chance, in the race of life.”

The Biden administration tried to live up to Lincoln’s admonitions: A large portion of the jobs and projects funded by the Inflation Reduction Act have gone to places that back President Donald J. Trump because that was where the investment was needed. But enamored by President Trump’s promises to turn things around, voters narrowly elected him for a second term.  Notably, working class voters provided much of the margin he needed.

History tells this about President Trump’s intentions: His political appointments of people with little relevant experience,  selection of Elon Musk to head an agency to slash a trillion dollars from the federal budget, his promise to fire thousands of the most experienced civil servants, his intention to pass multiple tax cuts, his proposed cuts to Medicaid and other assistance to those in need to pay for the tax cuts, and so on, will do little to help the millions of Americans who have been left been behind as the country and a small percentage of its citizens have become wealthier.

Neoliberalism and reliance on markets has failed to establish a fair chance in the race of life. Over time the determined efforts of political leaders and ordinary citizens will realign the country with its political values by once again turning to government to do for its citizens what they cannot do for themselves through no fault of their own.

That is the final lesson of history we document in How Government Built America.