Economic Governance 101: United States of America

Foreword

This series of articles aims to provide a summary analysis of some of the key economic governance methodologies in application in the world today. Starting with the world’s largest economy the United States of America – characterised by its free-market orthodoxies. Onto Germany, the beating economic heart of the European Union. Through the hybrid phenomenon that is the contemporary Chinese economy and its direct democratic counterpart in India. The series will finish with an examination of “The Nordic Model” in Sweden and finally the enigma that is Post-USSR Russia.

The Economic Governance 101 series consists of 6 main articles:

1. Economic Governance 101: United States of America

2. Economic Governance 101: Germany

3. Economic Governance 101: China

4. Economic Governance 101: India

5. Economic Governance 101: Sweden

6. Economic Governance 101: The Russian Federation

Economic Governance 101: United States of America

Though the United States of America only achieved true global economic superpower status in the aftermath of WW2, the US has reigned as the world’s largest economy for some now 132 years, a tenure that has encompassed three centuries to date (Kuepper and Boyle, 2021). As to whether this reign will continue beyond the next 78 years is a question of some debate given the rising prominence of the world’s most populace nations India and China, and the skyrocketing population of the African continent as a whole (Kazeem, 2020), and the tectonic movement of member state alliances over time. For now, however, the US remains number one.

Figure 1: The US economy remains currently the world's largest, but for how long?

US Economic Ideology

While the US is often surmised as the ultimate bastion of free market individualism, it is much more accurate to describe the US as a “mixed” economy, one that combines elements of both capitalist and socialist-oriented economic policy. A capitalist structure places emphasis on its private sector for the provision of goods and services and the growth of the economy in general. The role of government under a capitalist system is to facilitate the functioning of the free market itself, with minimal direct government interference. Proponents argue in favour of the efficiency of such a model, while critics note the gross inequality inherent to a system that unashamedly prioritises personal gain. A socialist structure is marked in comparison by the significance of the role of government. Under a fully realised socialist system, the governing body takes responsibility for all centralised planning; which goods and services are going to be produced, where and when and at what value they will be sold and or distributed. In theory, this leads to a greater equality of income and prosperity amongst the given populace, though as history has shown, neither system is immune to abuse, or suffering.

In truth, the idea that any nation subscribes solely to one end or the other of the capitalist – socialist economic spectrum is something of a myth. It is best to consider economic governance not as an orthodox dichotomy, but as a continuum, with pure socialism on one side, and pure capitalism on the other. As an approximate summation of this principle in effect, a purely socialist economy would amount to a fully pre-planned economy with an absolutely equal distribution of assets and entitlements amongst its population. A fully capitalist society would amount to an individually focused winner takes all governing model, which if taken to its fullest extreme would effectively amount to economic anarchy. Even the most devout free market advocates such as Adam Smith and Milton Friedman recognised the essential role of government in preserving the social and political structures which enable the free market to function in the first place. Though many countries and governments have attached themselves to the label of socialism, the notion that a truly Marxian or socialist economic model has ever been employed in its ideological entirety remains fanciful.

US Economic Governance

The United States is composed of 50 sovereign states, each of which possesses its own state governing body with a significant though ultimately limited degree of autonomy. While there is some variance in how different states elect to form their governance structure, each is broadly modelled on the “bicameral legislature” system of the Federal United States Government which features both a lower House of Representatives and an upper house Senate. This system is replicated at state level through the presence of “a state executive led by the state-wide directly elected governor and a state judicial branch” (Kirkegaard, 2015).

Though State and local governments retain significant levels of self-determination with regard to economic governance, the Federal Government remains the ultimate decision maker when it comes to national policy-making. Policy areas such as printing money, conducting foreign affairs, declaring war and regulating interstate and foreign commerce remain the exclusive remit of the US federal government. State and local governments are more likely to be concerned with policy areas such as the conducting of elections, provisioning of public safety, health and welfare, and the establishing of local governments (“The Relationship Between”, 2022).

Figure 2: The US is currently in the midst of a highly publicised Trade War with the world's second largest economy China

In spite of the Federal Government retaining what effectively amounts to ultimate authority in terms of the nation’s collective governance, each state governing body remains “an independent fiscal entity with its own democratically elected institutions and direct taxing power”, the same economic power granted to the Federal Government itself. This allows for a significant degree of economic self-reliance at state and local level with State and local government accounting for around 40 percent of combined government economic activity since the 1970s onward (Kirkegaard, 2015).

Government Income and Expenditure

Though the US is in many ways most associated with the successes of its private sector – see household names such as Microsoft, Apple, Tesla and McDonald’s to name but a handful, that does not mean that government spending does not form a fundamental underpinning of US Economic Governance as a whole. From Roosevelt’s new deal that marked the beginning of the end of the Great Depression, to Obama’s post 2009 banking bail-out, and the enormous $4.57 trillion combined covid-relief stimulus recently authorised by the Trump and Biden administrations, the US is no stranger to massive-scale public spending, particularly in a time of crisis (The Federal Response to COVID-19, 2022).

In more ordinary times, government spending is delineated along federal and state government lines. Tax revenues form the main source of income for the US government at both levels, though it is interesting to note that only a relatively small portion of said revenue is generated by corporate taxation – tax placed directly on business profits. Corporate tax on average accounts for around ten percent of total federal government revenue, or 1.5-2 percent of overall U.S. GDP, a nod to the importance, or priority even, placed upon the continued innovation, success and ultimately profitability of the US private sector. Federal income taxes by comparison have accounted for some 40 percent of all federal government revenue – approximately 7.7. percent of US GDP, since the culmination of the second world war in 1945 (Kirkegaard, 2015).

While National Defence previously served as the dominant avenue of federal expenditure – with this trend at its absolute peak during the period of the USA’s involvement in the World War II in the 1940s, the portion of federal expenditure spent on national defence has in fact fallen substantially in the time since. The most significant areas of federal government expenditure today are instead social spending in the form of "healthcare and old-age income security". Federal spending on sectors such as “agriculture, education, training and employment services and R&D remain very small components of the overall budget” indicating further the US economy’s reliance on its private sector as a driver of innovation and economic activity as a whole. The largest expenditure by state and local governments, by contrast, is in the field of education, which accounts for 28 percent of total spending at these levels. Local and State governing bodies also bear enormous responsibility for the administration of what may be broadly termed “social spending”, here to mean “combined expenses for public welfare, insurance trusts, hospitals and healthcare” (Kirkegaard, 2015).

Figure 3: The US government and Federal Reserve face a steep task in navigating the US economy successfully through the post-covid era

The US ostensibly operates through a progressive tax system - whereby the rate of tax paid by an individual rises alongside their earnings. Certainly, this is the case with regard to the US Federal income tax, the US Federal government's largest single revenue source since 1950 through to the present day (The Tax Policy Center, 2020). Upon closer inspection however the same does not hold true for other forms of taxation employed by the US government as a whole. Federal excise - often known as "sin" - taxes serve as a direct counter-example of a regressive taxation system in effect.

A progressive tax system deliberately targets higher earners with higher levels of taxation, a regressive tax system does the opposite, disproportionately charging lower income level earners more. Excise taxes are placed on certain commodities which are seen to cause harm of some description, such as gasoline, cigarettes and alcohol. Excise taxes by default then tend to disproportionately affect disadvantaged households, as a commodity tax by its nature accounts for a higher proportion of these households' earnings. US State level taxes serve as another example as such. Individual State sales tax rates tend to be quite variable, though as they are effectively a blanket commodity tax, they of course once again affect monetary poor households more. An extra 8.25% charge on a given sale item in California accounts for a much greater proportion of a minimum wage earner's budget than it does that of a successful Hollywood Producer (Roach, 2010).

Over the past several years with the Covid-19 Pandemic raging, governments all over the world have been forced to spend heavily in order to attempt to come to grips with the vast economic fall-out. To date, the US Federal government have dedicated an astonishing $4.57 trillion to Covid relief spending ("The Federal Response to", 2022). An ongoing stimulus relief package that has achieved bipartisan approval across now two very different Government Administrations and Presidents in Donald Trump and the current incumbent Joe Biden. US election campaigns are often notably mired in debate over the relevance of "the National Debt", a particularly fond trope of campaigning Republican Politicians being that thoughtless democratic spending will see the country indebted irreparably. These debates have been notably absent in recent years as the US Government has leant heavily on the Federal Reserve to effectively create money from nothing in order to fund Covid relief stimuli. A policy known as quantitative easing which was notably first employed, or certainly the phrase coined, in the aftermath of the 2009 Financial crisis, when the then-acting Obama administration funded a colossal banking bail-out (Jackson and Curry, 2022).

With rising inflation now the single biggest economic issue facing the US economy, the US government alongside the Federal Reserve is likely to be under increased scrutiny with regard to the spending they have facilitated. The simplest solution to reducing inflation - an excess of money supplied within the economy leading to a general increase in prices - is to take more money out of the economy. The Federal Reserve have been reluctant to increase interest rates to date on the basis of having promised not to do so until the US economy has fully recovered ("Why the Federal Reserve, 2022). Doing so would in theory raise the cost of borrowing, thus in turn reducing the amount of money being borrowed and by extension in circulation. The other default method is to raise taxes, which US Politicians have long been reluctant to do for fear of a loss of popularity and support. As the US cost of living continues to rise with no apparent end in sight however, this debate appears highly likely to re-emerge in the near future.

The Federal Reserve

The third key party in any discussion of US Economic Governance is the US Central Bank, known as the Federal Reserve. Since its formal inception in 1913, the Federal Reserve has remained a hugely influential force in US Economic Governance. Though a federal level government institution, the Federal Reserve enjoys a significant level of independence with regard to economic policy making. As Milton Friedman would argue, this has not always gone well, with the Federal Reserve’s failure to intervene in the early stages of the Great Depression serving as perhaps the ultimate policy failure example on their part. In more recent times, the Fed's handling of the 2009 financial crisis has received mixed reviews, while it is currently under increased scrutiny with regard to its handling of the US' post-covid economy ("Why the Federal," 2022).

The simplest interpretation of the complex dynamic between the Federal Reserve and the government and population it serves is that the Fed is responsible for monetary policy – how much money is made available in the economy, while the government is responsible for fiscal policy – government spending and taxation levels. Of course, there must be a degree of co-operation in place in order for these policy objectives to successfully meet, and neither party is by any means infallible (Blystone, Boyle & Kvilhaug, 2022).

Red or Blue

The US as a nation is often framed along political lines, with the common refrain of states and individuals identifying as either “red”, meaning Republican Party oriented, or “blue”, meaning that they are more likely to vote for Democratic Party candidates. In theory, the difference between both parties as governing bodies should be vast, with Republican candidates generally falling along right-leaning conservative lines, and Democratic candidates perceived as being more left-leaning or “socialist” oriented. In practical terms this translates to less public spending and lower taxation rates from Republican administrations, while Democratic candidates generally advocate for greater public spending, and higher levels of taxation in order to fund it. The reality of US economic governance however is commonly far more mundane and less polarised than media characterisations would have people believe.

Figure 4: The US Political and Economic base is traditionally drawn upon Red and Blue lines

The recent transition from the Republican Trump administration – widely held as right-wing, to the supposed left-wing orthodoxy of current US President Joe Biden’s government provides a rather neat encapsulation of this principle. Though there are of course some notable policy differences between both administrations, one may be surprised by just how much they have in common. Both presidents expressed support for a US infrastructural development plan and both implemented large scale covid-relief economic stimulus packages. Having made clear the adversarial nature of his approach to Chinese relations throughout the duration of his tenure, Trump followed up on this promise by instigating a “trade war” with China. This conflict has been characterised by the widespread implementation of tariffs (import taxes) on both sides (A quick guide to the US-China trade war, 2020). A stance which the freshly incumbent Biden administration has hardly softened on (Liu, 2022).

Though the current government have rolled back some of the tax cuts controversially implemented by the Trump Administration, these changes have been relatively minor, and certainly nothing like the radical taxation overhauls proposed by other democratic presidential candidates such as Elizabeth Warren and Bernie Sanders (Nitti, 2020). Though the Trump government was almost universally regarded as the more confrontational and aggressive force, Defence spending has in fact increased under the Biden administration (Greve, 2022). This is perhaps unsurprising in light of increasingly tense relations with the world’s second largest economy in China, along with a host of other global geo-political security issues, not least Russia’s ongoing invasion of Ukraine.

Climate

Perhaps the largest and most significant policy change between both administrations is in their approach to climate change. Branded a “hoax” by the previous President Trump, who in turn elected to withdraw the United States from the Paris Climate Change Agreement (Worland, 2019). The Biden Administration has sought to reverse this trajectory, re-joining the Paris accord at the soonest available opportunity and expressing their commitment to reaching a net-zero carbon emissions status by 2050 (McGrath, 2021). In the time since however, Biden’s administration have faced a series of difficulties in implementing prior campaign promises and have been accused of having “Over-Promised and Under-Delivered” with regard to Climate Change action (Friedman, 2022).

Figure 5: After the Trump Administrations' backwards step, the US government is attempting to get back on track re: Climate Change

While Republican Administrations tend to rightfully take the most heat for their dismissive approach to climate change, viewing matters along such orthodox party lines does not necessarily lend to the most accurate reading of events. Economic governance is best judged by tangible policy actions rather than words, or for that matter feelings. Despite being branded the “greatest threat to future generations” by former two term Democratic President Barack Obama (United Nations, 2015) himself a popular and engaging climate change activist, the Obama Administration went on to fund a massive $34 billion worth of fossil fuel projects around the world (Prasad, Burke, Slezak & Milman, 2016).

As the world’s largest economy and second largest carbon emitter (Tiseo, 2021), many perceive the US as having a key role in managing the global transition toward clean energy. The Trump administration’s backward step in addressing these issues was a source of enormous lament for climate change advocates everywhere and the vast majority of the scientific community as a whole. The difficulties of achieving a bi-partisan consensus on what is very clearly a universal issue is highlighted by the current failings of the Biden Administration to deliver meaningful change in this area quickly.

This brings into sharp focus the greatest simultaneous strength and weakness of US economic governance. The presence of a two-party dominated representative democracy ensures that while everyone can – in theory at least – have their say, putting meaningful policy action into effect is a far more challenging obstacle. The US as a nation has achieved extraordinary things under its system of economic governance, its leadership of the supposed “free world” however, remains oftentimes questionable at best.

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