Economic Prosperity in the United States: 1919-1929 (Classroom Activity)

Economic Prosperity in the United States: 1919-1929 (Classroom Activity)

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The United States entered the 1920's in a strong economic position. The economies of her European rivals had been severely disrupted by the First World War and the United States had been able to capture markets which had previously been supplied by countries like Britain, France and Germany.

Companies in the United States also made full use of the system called "mass production". Between 1919 and 1929 output per worker increased by 43%. This increase enabled America to produce items that were cheaper than those manufactured by her European competitors. This enabled employers to pay higher wages. By 1926 the average daily wage of a Ford worker was $10 and the Model T sold for only $350.

The United States also pioneered techniques in persuading people to buy the latest products. The development of commercial radio meant that companies could communicate information about their goods to a mass audience. In order to encourage people to purchase expensive goods like motor cars, refrigerators and washing machines, the system of hire-purchase was introduced which allowed customers to pay for these goods by installments.

The American economy appeared to be in such a healthy state that during the 1928 Presidential Election. Herbert Hoover easily defeated Al Smith, the Democratic Party candidate (21,427,123 votes to 15,015,464) in the election. An editorial in the New York Times in January, 1929, quoted President Hoover as saying: "It has been twelve months of unprecedented advance, of wonderful prosperity. If there is any way of judging the future by the past, this New Year will be one of felicitation and hopefulness."

I think our people have long realized the advantages of large business operations in improving and cheapening the cost of manufacture and distribution…. The more goods produced, the more share there is to distribute.

The average industrial wage rose from 1919's $1,158 to $1,304 in 1927, a solid if unspectacular gain, during a period of mainly stable prices... The twenties brought an average increase in income of about 35%. But the biggest gain went to the people earning more than $3,000 a year.... The number of millionaires had risen from 7,000 in 1914 to about 35,000 in 1928.

In America the daily life of the majority is conceived on a scale that is reserved for the privileged classes anywhere else... The use of the telephone, for instance, is very widespread. In 1925 there were 15 subscribers for every 100 inhabitants as compared with 2 in Europe, and some 49,000,000 conversations per day.... Wireless is rapidly winning a similar position for itself, for even in 1924 the farmers alone possessed over 550,000 radios.... Statistics for 1925 show that... the United States owned 81 per cent of all the automobiles in existence, or one for every 5.6 people, as compared with one for every 49 and 54 in Great Britain and France.

We in America are nearer to the financial triumph over poverty than ever before in the history of our land. The poor house is vanishing from among us. Under these impulses, and the Republican protective system our industrial output has increased as never before and our wages have grown steadily in buying power. Our workers, with their average weekly wages, can today buy two and even three times more bread and butter than any other earner in Europe.

In the wake of the five-dollar day - which overnight more than doubled Ford worker's pay - scores of newspaper and magazine writers swarmed to Highland Park (the new Ford Factory).... Gaping at the smooth-flowing assembly lines, the writers used such adjectives as "miraculous", "phenomenal", "revolutionary", and "world-shaking" in attempting to describe the process. Syndicated stories on how "Ford cars grow up by magic methods" appeared in hundreds of newspapers throughout the nation.

Questions for Students

Question 1: How far does the information supplied in sources 3 and 5 support the claims made by Herbert Hoover in source 2.

Question 2: Henry Ford described the process of mass production as "the operation sub-divided so that each man and each machine do only one thing. The thing is to keep everything in motion and take the work to the man and not the man to the work." How does this description help to explain the phrase in source 8 that "Ford cars grow up by magic methods?"

Question 3: What methods does source 4 use to persuade people to buy Ford cars?

Question 4: Why did some people believe that the economic advantage which the United States had over Europe (source 5), was likely to be "short-lived"?

5. Select one of these sources which may be identified as a primary source of history and one which may be identified as a secondary source. Give reasons for your decisions.

Answer Commentary

A commentary on these questions can be found here.

Economics (ECON)

An introduction to the United States' economic system and institutions through the examination of current economic problems. Not applicable for a major or minor in economics. Credit will not be given for 1501 if a student has already received credit for ECON 2610 or its equivalent.
Gen Ed: Social Science.

ECON 1502 Panic and Prosperity, United States Economic Policy Since the Great Depression 3 s.h.

Examines the crises and successes of the American economy since 1929, and how the economic policies of different presidential administrations affected the lives of U.S. citizens. Not applicable towards a major or minor in economics.
Gen Ed: Social Science.

ECON 1503 Rich and Poor: Diversity and Disparity in the United States Workplace 3 s.h.

Examines how labor markets determine the distribution of income and the dramatic changes in the composition of the American labor force. Explores such issues as the widening gap between low and upper income groups, the characteristics of the poor, affirmative action, the glass ceiling, the mommy track, and family-friendly working environments. Not applicable towards a major or minor in economics.
Gen Ed: Domestic Diversity, Social Science, Social and Personal Awareness.

ECON 1504 Economics of Aging 3 s.h.

An introduction to the economic consequences of an aging population and the economic status of the aged. Topics include income adequacy in old age, retirement decisions, retirement income planning, social security income, employer-sponsored pensions, and financing health care. Not applicable toward a major or minor in economics.
Prereq.: ECON 1501 or GERO 1501.

ECON 1505 Introduction to Personal Financial Literacy 3 s.h.

An introduction to personal financial planning. Topics covered include budgeting, the use of credit, taxes, savings accounts, investment strategies, insurance, buying a home, career planning, and retirement planning. Students will gain the knowledge and resources to be better prepared for their financial future.
Gen Ed: Well Being, Social and Personal Awareness.

ECON 2610 Principles 1: Microeconomics 3 s.h.

Introduction to the theory of markets, including the behavior of consumers and the conduct of private and public business enterprise. Effects of monopoly and competition on private and social welfare. The role of government in promoting the economic welfare of consumers, workers, and minorities.
Prereq.: Level 20 or higher on the math placement exam.
Gen Ed: Social Science.

ECON 2630 Principles 2: Macroeconomics 3 s.h.

Studies of growth, inflation, and unemployment at the national level and the performance of the U.S. economy in the global setting. The impacts of national economic policies on individual and social welfare. An extensive discussion and evaluation of the U.S. banking system and its effects on individuals and businesses.
Prereq.: ECON 2610.
Gen Ed: Social Science.

ECON 2631 Introductory Macroeconomics for Education Majors 3 s.h.

Measurement of the national economy's performance (growth, inflation, and unemployment), the banking system, the impact of government on macroeconomic performance, and international macroeconomics. Principles of personal finance, including budgeting, the use of credit, and financial planning are also discussed. Open only to education majors. Credit will not be given for both ECON 2630 and ECON 2631.
Prereq.: FOUN 1501 and ECON 2610.

ECON 3701 Money and Banking 3 s.h.

Organization and operation of commercial banking in the United States central banking under the Federal Reserve System basic theory. Monetary policy as a determinant of national income.
Prereq.: ECON 2630.

ECON 3702 Public Finance 3 s.h.

The development and present status of public finance federal, state and local expenditures and taxation theories of tax incidence, axioms of taxation, theories in justification and government spending tax reform. Study of the techniques of fiscal policy with emphasis on its role as a determinant of the level of national income.
Prereq.: ECON 2610.

ECON 3703 Behavioral Economics 3 s.h.

Uses insights from economics and psychology to explain why normally rational people make poor choices in their lives, be it in terms of money, health, education or long-term happiness. This introductory course explores the sources of poor economic choices and examines ways to improve them.
Prereq.: ECON 2610 or PSYC 1560.

ECON 3704 Emerging Economies in Asia 3 s.h.

Introduction to emerging economies in Asia, mainly in East Asia and India where the economies in recent decades have generally performed well compared with the rest of the world. Focus is on the development strategies and policies of the region’s major economies with an aim in contrasting their experience with the industrialized nations in the West.
Prereq.: ECON 1501, ECON 2610, or ASST 1550.

ECON 3705 Environmental and Resource Economics 3 s.h.

Application of economic theory to environmental problems, analysis of policy alternatives for pollution abatement, and the conservation of exhaustible resources. Determination of efficient management of local and national pollution levels, including air, water, and toxic substances. Possible economic consequences associated with global warming.
Prereq.: ECON 1501 or ECON 2610.

ECON 3710 Intermediate Microeconomic Theory 3 s.h.

A systematic analysis of the theory of demand and the theory of the firm: production input and output choices, and some basic concepts of linear programming. An intensive analysis of the theory of the firm: competitive pricing, monopoly pricing, pricing in imperfect competition and the theory of rent, profits, interest and wages.
Prereq.: ECON 2610, and either MATH 1552, MATH 1570, or MATH 1571 For Actuarial Science minors, the prerequisite is either MATH 1571 or MATH 1572.

ECON 3712 Intermediate Macroeconomic Theory 3 s.h.

The construction of national income and production accounts and the basic determinant of income, output, and employment. Determination of the level of employment, interest, and money through the classical versus Keynesian aggregate economics.
Prereq.: ECON 2630 and either MATH 1552, MATH 1570, or MATH 1571 For Actuarial Science minors, the prerequisite is either MATH 1571 or MATH 1572.

ECON 3720 Comparative Economic Systems 3 s.h.

An examination of the recent world-wide trend toward free market economy, giving particular attention to basic processes such as resource allocation and product distribution. Frequent references are made to the failure of Socialism in the USSR and the new approach in Russia, Eastern Europe and China toward market economies.
Prereq.: ECON 1501 or ECON 2630.

ECON 3724 Public Budgeting 3 s.h.

Study of the politics, theories, and techniques of public budgeting. Includes the process of budget preparation, adoption and execution. Topics include debt management and capital budgets. (This course is cross-listed with POL 3724.).
Prereq.: POL 3720.

ECON 3788 Statistics for Business and Economics 1 3 s.h.

Introduction to statistical methods in data analysis and forecasting. Topics include descriptive statistics, probability, sampling and sampling distributions, and hypothesis testing. Practical application of statistical procedures is incorporated into regularly scheduled computer workshops. Credit will not be given for ECON 3788 if a student has already received credit for ECON 3790 or its equivalent.
Prereq.: MATH 1510.

ECON 3789 Statistics for Business and Economics 2 3 s.h.

This course builds on concepts introduced in ECON 3788. Specific topics include hypothesis testing, regression analysis, ANOVA and time series analysis. Practical application of statistical procedures is incorporated into regularly scheduled computer workshops. Credit will not be given for ECON 3789 if a student has already received credit for ECON 3790 or its equivalent. 3 s.h.
Prereq.: ECON 3788.

ECON 4810 Managerial Economics 3 s.h.

An application of economic analysis to business problems. Emphasis upon executive decisions for the allocation of resources.
Prereq.: ECON 2610.

ECON 4855 Health Economics 3 s.h.

Application of basic principles to the study of the health care industry. Topics include the supply and demand of medical care, the effects of private and public insurance on the health care industry, trends in health care costs, public policies to equalize access to medical care and the dilemma caused by the improvement in life-sustaining technology.
Prereq.: ECON 2610.

ECON 4860 Selected Topics in Economics 3 s.h.

Advanced study of selected topics in economic analysis and issues in economic policy. May be repeated once with different topic.
Prereq.: ECON 2610 and ECON 2630.

ECON 4860D ST Game Theory 3 s.h.

Advanced study of selected topics in economic analysis and issues in economic policy. May be repeated once with different topic.
Prereq.: ECON 2610 and ECON 2630.

ECON 4860E Selected Topics in Economics Sports Economics 3 s.h.

Advanced study of selected topics in economic analysis and issues in economic policy. May be repeated once with different topic.
Prereq.: ECON 2610 and ECON 2630.

ECON 4870 Economics Internship 3 s.h.

The practical application of economic knowledge and statistical skills in the workplace. Students assist professionals in various kinds of industrial, financial, and public service organizations.
Prereq.: By permit only, minimum GPA 2.5.

ECON 4880 Analysis of Economic Problems 3 s.h.

The application and extension of the student's skills in economic analysis and statistical techniques to economic issues. The course covers sources of data, exploratory data techniques, matching of data and statistical tests, interpretation and presentation of the results. Students demonstrate their command of research techniques by the completion of a research paper and oral presentation. Topics to be determined.
Prereq.: ECON 3710, ECON 3712, and ECON 3790 or ECON 3788 and ECON 3789 or ECON 3788 and BUS 3700.
Gen Ed: Capstone.

ECON 4898 Graduate Study in Selected Economic Topics 3 s.h.

For undergraduates taking courses in the MA in Economics program for credit towards an undergraduate degree. Credit earned cannot be later applied to a graduate degree. The student must meet the criteria for undergraduate students taking graduate coursework listed in the Graduate Bulletin. May be repeated with different graduate courses.
Prereq.: A minimum of 20 hours of coursework in economics at the 2600 level and above, permission of the chair, junior standing.

ECON 4899 Individual Study in Economics 1-4 s.h.

Individual study of a topic, area, or problem requiring in-depth reading, and a written project. May be repeated once with a different topic, area, or problem.
Prereq.: Junior or senior standing, by permit only.

ECON 5801 Economics of Industrial Organization 3 s.h.

A systematic analysis of the structure, conduct, and performance of American industry. A quantitative analysis plus a comprehensive review of theoretical models of the market, firm behavior, and performance.
Prereq.: ECON 2610.

ECON 5806 History of Economic Thought 3 s.h.

Designed to provide students with an understanding of the development of economic ideas to include: Mercantilism, Physiocrats, the English Classical School, Utilitarianism, early Social Thought, Karl Marx, the German Historical School, Institutionalists and the Keynesian School.
Prereq.: ECON 2630.

ECON 5809 Current Problems in Money, Banking, and Financial Markets 3 s.h.

The financial market system, including money and capital markets. Current problems associated with trends in theory and practice. Theories of the interest rate and monetarism.
Prereq.: ECON 3701 or consent of instructor.

ECON 5811 International Trade 3 s.h.

Theories of international trade and specialization free trade vs. protectionism tariff and non-tariff barriers to international trade international balance of payments and its components the role of multinational enterprises in contemporary trade pattern regional economic integrations and world trade U.S. commercial policies.
Prereq.: ECON 2630.

ECON 5812 International Finance 3 s.h.

Theories of foreign exchange and capital movements, international payments, analysis of spot and forward foreign exchange markets, foreign exchange market arbitrage, speculation, and risk hedging. The Bretton Woods agreement and the contemporary international monetary system. The rise of international organizations and multinational enterprises in the international economy.
Prereq.: ECON 2630.

ECON 5822 Urban and Regional Economics 3 s.h.

Economic analysis of the problems of urbanized areas and the causes of the growth or decline in economic activity in small-area economics. Topics include benefit-cost analysis, economic base analysis, input-output applications, and the theory of location and agglomeration.
Prereq.: ECON 2610.

ECON 5824 Applied Time Series Analysis of Economic and Business Data 3 s.h.

An in-depth analysis of time series models and their applications to problems in economics and business. Emphasis on forecasting. Extensive use of standard computer programs.
Prereq.: ECON 2610 and STAT 4817 or ECON 3790 or (ECON 3788 and ECON 3789) or (ECON 3788 and BUS 3700).

ECON 5831 Labor Markets and the Economics of Unions 3 s.h.

Economic theory and analysis of labor as an input in the resource market principles, labor problems, public policy theories of the development of the labor movement economic objectives of trade unions problems in public control.
Prereq.: ECON 2610.

ECON 5843 Economics of Poverty, Transfers and Discrimination 3 s.h.

Examines the measurement and causes of poverty, trends in the distribution of income, and antipoverty programs and their effectiveness. Discussions of theories of discrimination, difficulties in measuring the impact of discrimination, and policies designed to reduce discrimination.
Prereq.: ECON 2610.

ECON 5850 Introduction to Game Theory 3 s.h.

Topics include (not limited to) Nash equilibrium, pure/mixed strategy, static/dynamic games, repeated games and coordination, perfect/incomplete information, etc.
Prereq.: ECON 2610.

ECON 5853 Applied Econometrics 3 s.h.

The practice of econometrics with emphasis on model construction, estimation, and interpretation of results. Applications in the private and public sectors involve the use of computers and economic software.
Prereq.: ECON 2630 and ECON 3788.

ECON 5856 Topics in Quantitative Economics 3 s.h.

Application of different tools of mathematical economics, computational economics, and econometrics in conjunction with economic theory to model economic problems of firms, consumers, financial institutions, and public sectors. Specific content of the course will vary with the instructor. May be repeated once with a different topic.
Prereq.: ECON 3788.

ECON 5861 SAS Programming for Data Analysis 3 s.h.

An introduction to SAS programming for data analytics. Topics include using SAS for data processing, manipulation, visualization, reporting, and statistical analysis. The objective is for students to develop statistical computing skills for problem solving and decision making.
Prereq.: STAT 2601 or STAT 3717 or STAT 3743 or ECON 3790, or ECON 3788 and ECON 3789, or ECON 3788 and BUS 3700.
Cross-listed: STAT 5811.

ECON 6900 Statistical Problems 3 s.h.

A survey of the fundamental statistical techniques used in business with special emphasis on interpreting the results generated by statistical software. Techniques covered: hypothesis tests of means and proportions, estimation, chi-square tests, analysis of variance, correlation, and regression. Not applicable toward the M.A. in economics.

ECON 6904 Quantitative Methods for Economics 3 s.h.

A course designed to provide graduate students in economics with an opportunity to acquire the necessary skills in using the quantitative methods that are required to complete graduate-level economic theory and econometrics courses successfully. The course introduces the basic concepts and procedures of differential and integral calculus that are used in economic analysis, as well as the fundamental probability and statistics which are needed in the study of econometrics.

ECON 6912 Microeconomic Theory 3 s.h.

Study of demand and supply, consumer theory, the theory of the firm, various market structures, and Pareto efficiency.

ECON 6915 Health Policy 3 s.h.

A theoretical and empirical analysis of the health care sector. Topics include the demand for health care and health insurance, the perverse incentives of health insurance, moral hazard, physician and hospital behavior, and the role of competitive markets in the delivery of health care. Special emphasis is placed on the analysis of public policy, including financing and regulating the health care industry.
Prereq.: admission into the MA in Economics or MA in Financial Economics programs or permission of instructor.

ECON 6921 Economic Analysis of Markets and Industries 3 s.h.

Participants will learn to analyze and understand the impact economic factors (e.g., information, consumer behavior, supply and demand) have on shaping markets and industries. Using this knowledge, participants will be capable of assessing the different types of economic strategies (e.g., product differentiation, pricing, advertising and signaling) an organization can employ to gain market power to realize economic profits.
Prereq.: Graduate standing.

ECON 6922 Macroeconomic Theory 3 s.h.

Examines models used to determine the value of various aggregate economic variables, such as the price level, national income, employment, interest rates, and wage rates.

ECON 6939 The Economics of Financial Markets and Institutions 3 s.h.

Study of the institutions, instruments, and markets that facilitate the distribution of financial resources throughout the economy. The course discusses the money, capital, and commodity markets. Also, the topics of accessing default risk and hedging against market risk are discussed.
Prereq.: admission into the MA in Economics or MA in Financial Economics programs or permission of instructor.

ECON 6940 Financial Economics 3 s.h.

Study of various topics, including risk and the selection of the optimal monetary control tool, politics and monetary control, the financial firm as an optimizing institution, and portfolio theory.
Prereq.: ECON 6939 or permission of the instructor.

ECON 6941 Monetary Economics 3 s.h.

Study of the empirical analysis using multivariate time series methods, including the topics of distributed lag models, selection of the appropriate lag structures, causation versus correlation, and cointegration.
Prereq.: ECON 6922 or permission of the instructor.

ECON 6945 Public Finance 3 s.h.

Study of the role of the government in the economy. The topics covered will include expenditure analysis, theories of taxation, provision of public goods, fiscal federalism, and public choice theory.
Prereq.: ECON 6912.

ECON 6946 State and Local Public Finance 3 s.h.

Study of the special problems of financing subnational governments. Topics include the optimal level of local government spending, public choice through voting, public choice through migration, the combination of taxes used by state and local governments, the theory of tax incidence, the effect of intergovernmental grants, and expenditure patterns of local governments. Special attention will be given to local governmental grants and expenditure patterns of local governments, as well as local governments' role in financing education and transfer payments.
Prereq.: admission into the MA in Economics or MA in Financial Economics programs or permission of instructor.

ECON 6952 Transfer Programs and Poverty 3 s.h.

A study of poverty and the effectiveness of antipoverty programs. Topics include defining and measuring poverty, trends in the rate of poverty and the distribution of income, causes of poverty, models of discrimination, effectiveness of government training programs, transfer programs and their effect on labor supply, and the financial stability of the Social Security retirement program.
Prereq.: admission into the MA in Economics or MA in Financial Economics programs or permission of instructor.

ECON 6955 Antitrust and Market Structure 3 s.h.

Study of the pivotal court decisions that have determined the direction of antitrust law. Concentration is on the economic analysis of court decisions and the impact of the courts' decision on market structure. Topics covered include price fixing, mergers, monopolization, and exclusion practices.
Prereq.: admission into the MA in Economics or MA in Financial Economics programs or permission of instructor.

ECON 6970 Economics Internship 3 s.h.

The practical application of economic knowledge and statistical skills in the workplace. Students assist participating professionals in various kinds of industrial, financial, and public service organizations. By permit only.
Prereq.: ECON 6912 and ECON 6922.

ECON 6976 Econometrics 3 s.h.

Study of the fundamentals of econometric techniques that are useful for estimating causal economic relationships. The objectives include (1) analysis of the effects of exogenous factors on the variable whose behavior we seek to explain, (2) testing of hypotheses about new and existing economic theories, and (3) forecasting estimated economic relationships beyond the sample period for the purpose of planning and control. The course will focus on the practice of econometrics with extensive applications to a variety of real-world problems in many areas of economics.
Prereq.: ECON 6904.

ECON 6980 Applied Time Series Analysis and Forecasting 3 s.h.

Covers essential tools for time series analysis and forecasting with emphasis on how to apply those tools to analyze and forecast economic and business data. Topics include ARMA models, Time Series Decomposition, Exponential Smoothing, GARCH, VAR models, and Cointegration.
Prereq.: ECON 2610 and ECON 3789 or ECON 3790 or ECON 6976 or STAT 5817.

ECON 6981 International Finance 3 s.h.

Study of the foreign exchange market the business and economic consequences of changes in domestic and foreign banking central banking and financial market policies. The development of various exchange rate standards, foreign currency markets, and the Eurocurrency and Eurobond markets.
Prereq.: admission into the MA in Economics or MA in Financial Economics programs or permission of instructor.

ECON 6985 International Trade and Development 3 s.h.

Study of the determination of a country's exports and imports, the social welfare consequence of trade, free trade versus restricted trade, preferential trading agreements, and the current composition and direction of U.S. trade.
Prereq.: admission into the MA in Economics or MA in Financial Economics programs or permission of instructor.

ECON 6988 Modeling in Financial Economics 3 s.h.

A study of modeling and evaluation of derivatives and bonds and risk management using derivatives. Topics cover various models in asset evaluation, such as bond price models, the Black-Sholes model, diffusion processes, and risk management. Also listed as STAT 6988.
Prereq.: STAT 4843 or STAT 6943 or ECON 6976.

ECON 6990 Special Topics in Economics 1-3 s.h.

Special interest topics selected by the staff in the following areas: economic education, economic theory, and applied economics analysis. May be repeated for a maximum of six hours toward a graduate degree.

ECON 6992 Data Analytics - Advanced SAS Programming 3 s.h.

This coures is designed to provide students training of advanced SAS programming for data analysis. Main topics include SQL, Macro language, Econometrics-related procedures, working with large data set, etc. Crosslisted with STAT 6912.
Prereq.: ECON 6976 or equivalent and either ECON 5861 or STAT 5811.

ECON 6998 Research Seminar 3 s.h.

Applied quantitative research techniques will be discussed. Students are required to undertake an original quantitative research project in a field of economics and write a paper summarizing their results. Course may be taken concurrently with ECON 6976.Prereq.: ECON 6912 and ECON 6922.

ECON 6999 Master's Thesis 3 s.h.

A research project under the supervision of a member of the department on the graduate faculty. The project typically extends the student's research in ECON 6998.
Prereq.: a grade of "A" or "B" in ECON 6998 and a thesis proposal accepted by departmental committee.

Race and Opportunity

Despite their rising numbers, free African Americans in the North faced discrimination and limited opportunity.

Learning Objectives

Discuss the political and economic position of African Americans in the early nineteenth-century North

Key Takeaways

Key Points

  • The power of slaveholders in the South and racial discrimination in the North limited the economic opportunities of African Americans who had won their freedom.
  • While virtually all African Americans in the North were free by 1840, they were subject to racial segregation and discrimination, including the institutionalized racism that characterized the majority of the nineteenth and twentieth centuries.
  • Though most free African Americans in the North lived in poverty, some businessmen and professionals overcame the obstacles of discrimination and established the foundation of the African American middle class.
  • In 1857, the Supreme Court’s decision Dred Scottv. Sandford ruled that African Americans were not, and never could be, American citizens.

Key Terms

  • Dred Scott v. Sandford: A ruling by the U.S. Supreme Court that people of African descent brought into the United States and held as slaves (or their descendants, whether or not they were slaves) were not protected by the Constitution and were not U.S. citizens.


During the Market Revolution, slaveholders and the commodity crops of the South had a strong influence on U.S. politics and the country’s economy for example, New York City’s economy was closely tied to the South through shipping and manufacturing. Though this period saw a rising number of slaves freed in the North and to a much lesser extent the South, African Americans experienced barriers that prevented their full participation in the economy.


As the United States grew, the institution of slavery became more entrenched in the Southern states, even as Northern states began to abolish it. Vermont was the first state to outlaw slavery in its constitution of 1777, and other Northern states followed suit. Either through the language of their state constitutions, court decisions, or gradual emancipation acts, all states north of the Ohio River and the Mason-Dixon Line had outlawed slavery by 1804.

By 1810, 75 percent of African Americans in the North and 13.5 percent of all African Americans in the United States were free. Following this period, fewer slaves were freed as a result of the development of cotton plantations in the Deep South. The invention of the cotton gin in 1793 triggered a huge demand for slave labor to develop new cotton plantations. During a 20-year period, there was a 70 percent increase in the number of slaves in the United States, mostly concentrated in the Deep South. The abolition of the international slave trade in 1808 also increased the demand for domestic slaves.

By 1819, there were exactly 11 free and 11 slave states, which increased sectionalism in the United States. Fears of an imbalance in Congress led to the 1820 Missouri Compromise that divided the Territories along the 36°30′ parallel. Territories seeking statehood above the line would become free states, and those below the line would become slave states. Many politicians believed that this would provide a permanent solution to the vexing question of slavery in the expanding American nation.

African Americans in the North

By 1830, there were 319,000 free African Americans in the United States, 150,000 of whom lived in the Northern states. While virtually all African Americans in the North were free by 1840, they were subject to racial segregation and discrimination, including the institutionalized racism that characterized the majority of the nineteenth and twentieth centuries.

The system of white supremacy that provided cultural justification of slavery also affected the status of free African Americans, who were perceived as members of an inferior race. Free African Americans could not enter many professional occupations, such as medicine and law, because they were barred from the necessary education. This was also true of occupations that required firearm possession, elective office, or a liquor license. Many of these careers required large capital investments that most free African Americans could not afford. The 1830s saw a significant effort by white communities to oppose black education, coinciding with the emergence of public schooling in northern American society. Public schooling and citizenship were linked together, and because of the ambiguity that surrounded African American citizenship status, African Americans were effectively excluded from public access to universal education.

Free African American males enjoyed wider employment opportunities than free African American females, who were largely confined to domestic occupations. While free African American boys could become apprentices to carpenters, coopers, barbers, and blacksmiths, girls’—whose options were much more limited—were confined to domestic work such as being cooks, cleaning women, seamstresses, and caregivers.

African Americans attempted to combat discrimination and strengthen their communities by forming organizations such as the American Society of Free People of Color. Other active abolitionist bodies advocating reforms in the North were the Pennsylvania Abolition Society, formed in 1775, and the New York Manumission Society, formed in 1785. These organizations provided social aid to African Americans in poverty and organized responses to political issues. The African American community also established schools for African American children, who were often barred from entering public schools.

While the majority of free African Americans lived in poverty, some were able to establish successful businesses that catered to the African American community. Doctors, lawyers, and other businessmen were the foundation of the early African American middle class.

Dred Scott v. Sandford

In 1857, the Supreme Court ruled in the case of Dred Scott v. Sandford. Dred Scott, born a slave in Virginia in 1795, had been one of the thousands forced to relocate as a result of the massive internal slave trade and taken to the slave state of Missouri. In 1820, Scott’s owner took him first to Illinois and then to the Wisconsin territory. However, both of those regions were part of the Northwest Territory, where the 1787 Northwest Ordinance had prohibited slavery. When Scott returned to Missouri, he attempted to buy his freedom. After his owner refused, he sought relief in the state courts, arguing that by virtue of having lived in areas where slavery was banned, he should be free.

In a complicated set of legal decisions, a jury found that Scott, along with his wife and two children, were free. However, on appeal from Scott’s owner, the state Superior Court reversed the decision, and the Scotts remained slaves. Scott then became the property of John Sanford, who lived in New York. He continued his legal battle, and the case was brought to the federal court in 1854 (where Scott lost) and the Supreme Court in 1857.

The Supreme Court—led by Chief Justice Roger Taney—decided Scott remained a slave. The court then went beyond the specific issue of Scott’s freedom to make a sweeping and momentous judgment about the status of African Americans, both free and slave. Per the court, African Americans could never be citizens of the United States. Further, the court ruled that Congress had no authority to stop or limit the spread of slavery into American territories. This proslavery ruling struck a major blow to the African American community and would not be reversed until the Civil Rights Act of 1865.

Dred Scott portrait by Louis Schultze: Dred Scott (1795–1858), plaintiff in the infamous Dred Scott v. Sanford (1857) case at the Supreme Court of the United States.

The 1960s' Effect on the Economy

President John F. Kennedy (1961-1963) ushered in a more activist approach to governing. During his 1960 presidential campaign, Kennedy said he would ask Americans to meet the challenges of the "New Frontier." As president, he sought to accelerate economic growth by increasing government spending and cutting taxes, and he pressed for medical help for the elderly, aid for inner cities, and increased funds for education.

Many of these proposals were not enacted, although Kennedy's vision of sending Americans abroad to help developing nations did materialize with the creation of the Peace Corps. Kennedy also stepped up American space exploration. After his death, the American space program surpassed Soviet achievements and culminated in the landing of American astronauts on the moon in July 1969.

President Kennedy's assassination in 1963 spurred Congress to enact much of his legislative agenda. His successor, Lyndon Johnson (1963-1969), sought to build a "Great Society" by spreading benefits of America's thriving economy to more citizens. Federal spending increased dramatically, as the government launched such new programs as Medicare (health care for the elderly), Food Stamps (food assistance for the poor), and numerous education initiatives (assistance to students as well as grants to schools and colleges).

Military spending also increased as American's presence in Vietnam grew. What had started as a small military action under Kennedy mushroomed into a significant military initiative during Johnson's presidency. Ironically, spending on both wars -- the war on poverty and fighting the war in Vietnam -- contributed to prosperity in the short term. But by the end of the 1960s, the government's failure to raise taxes to pay for these efforts led to accelerating inflation, which eroded this prosperity.

Economic Prosperity in the United States: 1919-1929 (Classroom Activity) - History

The Legatum Institute is a London-based think-tank with a global vision: to see all people lifted out of poverty.

Our mission is to create the pathways from poverty to prosperity, by fostering Open Economies, Inclusive Societies and Empowered People.

The Legatum Institute is a London-based think-tank with a global vision: to see all people lifted out of poverty. Our mission is to create the pathways from poverty to prosperity, by fostering Open Economies, Inclusive Societies and Empowered People.

Our Centre for Metrics which create indexes and datasets to measure and explain how poverty and prosperfty are changing.

Our Research Programmes which analyse the many complex drivers of poverty and prosperity at the local, national and global level.
Our Practical Programmes which identify the actions required to enable transformational change.

IV. Conclusions

This promising state of affairs did not just happen, and there is no guarantee that it will endure. The contemporary era was forged by steadfast American leadership over the last half century--through efforts such as the Marshall Plan, NATO, the United Nations and the World Bank. The clear dangers of the past made the need for national security commitments and expenditures obvious to the American people. Today, the task of mobilizing public support for national security priorities is more complicated. The complex array of unique dangers, opportunities and responsibilities outlined in this strategy are not always readily apparent as we go about our daily lives, focused on immediate concerns. Yet, in a more integrated and interdependent world, we must remain actively engaged in world affairs to successfully advance our diplomatic, military and economic interests. To be secure and prosperous, America must continue to lead.

Our international leadership focuses on six strategic priorities. Taken together, these priorities form the roadmap to security, peace and prosperity into the next century:

How Broken Families Rob Children of Their Chances for Future Prosperity

Simply put, whether or not a child's parents are married and stay married has a massive affect on his or her future prosperity and that of the next generation. Unfortunately, the growth in the number of children born into broken families in America--from 12 for every 100 born in 1950 to 58 for every 100 born in 1992 2 --has become a seemingly unbreakable cycle that the federal government not only continues to ignore, but even promotes through some of its policies.

Numerous academic and social science researchers have demonstrated how the path to achieving a decent and stable income is still the traditional one: complete school, get a job, get married, then have children, in that order. Obviously, the journey toward a secure income can be derailed by choices growing children make, such as dropping out of school or getting pregnant before marriage. But generally, children who grow up in a stable, two-parent Family have the best prospects for achieving income security as adults.

Because of recent advances in the methods social scientists and economists use to collect data, researchers are taking a broader intergenerational view of America's poor. From this vantage point, it has become clear that federal policies over the past three decades have promoted Welfare dependency and single-parent families over married parents while frittering away the benefits of a vigorous free market and strong economy. Today, the economic and social future of children in the poor and the middle class is being undermined by a culture that promotes teenage sex, divorce, cohabitation, and out-of-wedlock birth.

Fortunately, the federal government and states and local communities can play important roles in changing this culture to ensure that all children reach their full income potential and do not languish in the poverty trap.


To understand the importance of marriage to prosperity, and what the determinants of a stable marriage are, it is important to look first at the evidence surrounding the effects of its alternatives--divorce, cohabitation, and out-of-wedlock births--on children and on income.

Sadly, almost half of American families experience poverty following a divorce, 3 and 75 percent of all women who apply for Welfare benefits do so because of a disrupted marriage or a disrupted relationship in which they live with a male outside of marriage. 4

Divorce has many harmful effects on the income of families and future generations. Its immediate effects can be seen in data reported in 1994 by Mary Corcoran, a professor of political science at the University of Michigan: "During the years children lived with two parents, their Family incomes averaged $43,600, and when these same children lived with one parent, their Family incomes averaged $25,300." 5 In other words, the household income of a child's Family dropped on average about 42 percent following divorce. 6 By 1997, 8.15 million children were living with a divorced single parent. As Chart 4 illustrates, there has been an increase of 354 percent since 1950. 7

As substantial as this income reduction is, little public attention is paid to the relationship between the breakdown of marriage and poverty. Consider, by comparison, the reaction to a comparable decrease in the national economy. When America's economic productivity fell by 2.1 percent from 1981 to 1982, it was called a recession. And when the economy contracted by 30.5 percent from $203 million to $141 million (in constant 1958 dollars) from 1929 to 1933, 8 it was called the Great Depression. Yet each and every year for the past 27 years, over one million children have experienced divorce in their families with an associated reduction in Family income that ranged from 28 percent to 42 percent. It is no wonder that three-fourths of all women applying for Welfare benefits do so because of a disruption of marriage. 9

Understandably, mothers who are employed at the time of divorce are much less likely to become Welfare recipients than are mothers who do not work. And mothers who are not employed in the workforce at the time of divorce are as close to going on Welfare as are single mothers who lose their jobs. 10 Divorce is the main factor in determining the length of "poverty spells," 11 particularly for women whose pre-divorce Family income was in the bottom half of the income distribution. 12 Divorce, then, poses the greatest threat to women in low-income families. Moreover, almost 50 percent of households with children move into poverty following divorce. 13 Simply put, divorce has become too prevalent and affects an ever-increasing number of children. (See Chart 4.)

In the 1950s, the rate of divorce was lower among high-income groups by 1960, there was a convergence of rates among all socioeconomic groups. 14 By 1975, for the first time, more marriages ended in divorce than in death. 15 Since 1960, there has been a significant shift in the ratio of children deprived of married parents by death compared with those so deprived by divorce. Compared with the number of children who lost a parent through death, 75 percent, 150 percent, and 580 percent as many, respectively, lost a parent through divorce in 1960, in 1986, 16 and in 1995. 17

Divorce is linked to a number of serious problems beyond the immediate economic problem of lost income. For instance, the children of divorced parents are more likely to get pregnant and give birth outside of marriage, especially if the divorce occurred during their mid-teenage years, 18 and twice as likely to cohabit than are children of married parents. 19 Moreover, divorce appears to result in a reduction of the educational accomplishments of the affected children, weakens their psychological and physical health, and predisposes them to rapid initiation of sexual relationships and higher levels of marital instability. 20 It also raises the probability that they will never marry, 21 especially for boys. 22

For a mother with children, divorce increases her financial responsibility and, typically, her hours of laboroutside the home. Divorce and additional work hours also disrupt her network of support for parenting her children. 23 These additional stresses take their toll: Single mothers experience increased levels of physical and mental illness, addictions, and even suicide following divorce. 24 All of these outcomes have an effect on Family income.

Moreover, the consequences of divorce flow from generation to generation, since the children of divorce are more likely to experience the same problems and pass them on to their own children. 25 Significantly, these effects are markedly different from the effect that the death of a married parent has on children in fact, such children are less likely than the average to divorce when they grow up. 26

Divorce and Asset Formation. Little research has been done on the effect of divorce on the assets accumulated over time by a household, but a RAND Corporation study indicates that the effect may be dramatic: Family structure is strongly tied to wealth by the time one reaches the sixth decade of life. The assets of married couples in their fifties (who are approaching retirement) are four times greater than those of their divorced peers. (See Chart 5.) Even when the two divorced households' assets on average are combined, the RAND study shows that their asset base is half that of married couples. 27

Upon reflection, this makes sense. After a divorce, the largest asset--the Family home--frequently is sold and the proceeds used to finance the divorce and start new homes. In addition, the evidence indicates that the income of divorced households with children drops significantly, thereby lessening the likelihood of asset formation.

Cohabitation and Divorce

Our understanding of cohabitation's effect on income derives, to date, mainly from its significant relationship to divorce. People who live together before marrying divorce at about twice the rate of couples who do not cohabit before marriage, and four times the rate if they marry someone other than their present partner. 28 Furthermore, many of these young adults express uncertainty about their future together. 29 It is both a direct and an indirect factor in reducing average Family income.

Today, more Americans than ever before are living together before marriage--an average of 1.5 years. 30 Men and women in their twenties and thirties are living together at much the same rate as before, but with a significant difference: Many more now cohabit rather than marry.

The proportion of marriages preceded by a period of cohabitation increased from 8 percent
in the late 1960s to 49 percent in 1985. 31 Over half of Americans in their thirties today live in a cohabiting relationship, and more than half of recent marriages were preceded by cohabitation. 32 Larry Bumpass, a University of Wisconsin-Madison professor in the Center for Demography and Ecology, noted in an address to the Population Association of America that "Sex, living arrangements and parenting depend less on marriage." 33

One reason for this change in American values lies with parents who divorce: Their children are more likely to cohabit before marriage as young adults. In 1990, 29 percent of those who had continually married parents had cohabited before their own marriage, but between 54 percent and 62 percent of children from divorced families cohabited before marriage. 34

Cohabitation doubles the rate of divorce, and the rates double again for those who cohabit before marriage with someone other than a future spouse. 35 Forty percent of cohabiting couples have children in the home, and 12 percent of all cohabiting couples have had a biological child during cohabitation. 36 More than half of adults (56 percent) who live together outside of marriage and beget children and then marry will divorce. About 80 percent of children who have lived in a household with cohabiting parents will spend some of their childhood in a single-parent home. 37

Given this high level of disruption, cohabitation can be a good marker of future weakness in household income and the economic and social situation of children in these unions. The problem is further aggravated by the growing cultural acceptance of what used to be described as "illicit" relationships. Larry Bumpass found that by the early 1990s, only 20 percent of young adults disapproved of premarital sex, even for 18-year-olds, and that only one-sixth explicitly disapproved of cohabitation under any circumstances. 38

The Risks and Rates of Divorce

The risk of divorce is tied directly to factors in one's Family background and such other factors as the divorce or cohabitation of one's parents a and being born to a very young mother. b

The research also shows that divorce is linked to level of education. In general, the more educated a person, the less likely he or she will be to divorce. Divorce rates are one-third lower among women who have completed high school, and 80 percent lower among women who have completed college, than among those who have not completed high school .a,f Divorce also is linkedto lower intelligence scores. c

The risk of divorce is greater among marriages of mixed faiths 1 and among those who do not attend religious worship regularly. d

The risk doubles for those who live together before marriage, and doubles yet again if the person cohabits with someone other than the current spouse. e

Other risks for divorce include a prior divorce f marrying into a step Family g getting married as a teen (divorce rates are two-thirds lower among women married after age 25 than among those married as teenagers) a and, especially, getting married as a pregnant teenager. h

In general, the greater a man's income relative to his spouse's, the higher the marriage rate and the lower the divorce rate. For women, marriage rates are highest in local areas that offer the fewest economic alternatives to marriage. i The more women earn, the less attractive marriage appears to be in general. j As University of Wisconsin professor Larry Bumpass said in his 1990 presidential address to the Population Association of America, "If marriage assures neither a two parent Family for the child nor lifetime economic security for the woman, the importance of marrying to 'legitimate' a birth is much less compelling." e This seems to apply to marriages in general, not just to "shotgun" marriages.

The divorce rate doubles for young married couples if the husband is unemployed at any time during the first year of marriage, and is 50 percent higher again if both are unemployed. a If the unemployment is due to continuing education, however, there is no increased risk to the marriage. a Data from the 1980 census showed that one of every four wives earned more or only slightly less income than their husbands earned. Forty percent of wives who had five or more years of college education earned more or slightly less than their husbands did. f

The rate of wives' participation in the marketplace has accompanied a rise in the divorce rate: The number of wives participating in the marketplace jumped from 18 percent in 1950 to 64 percent in 1992. k During the same period, the divorce ratio jumped from one in every four marriages to one in every two. l

In 1989, Sara McLanahan, professor of sociology at Princeton University, reported that women in troubled marriages were more than twice as likely as men to report that they wanted a separation. e Wives working full-time are twice as likely to report having trouble in their marriage if they regard the division of laborin the household unfair. e

a Larry L. Bumpass, Teresa Castro Martin, and James A. Sweet, "The Impact of Family Background and Early Marital Factors on Marital Disruption," Journal of Family Issues, Vol. 12, No. 1 (March 1991), pp. 22-42.

b Tom Luster and Harriette Pipes McAdoo, "Factors Related to the Achievement and Adjustment of Young African American Children," Child Development, Vol. 65, No. 4 (April 1994), pp. 1080-1094.

c Charles Murray, Income Inequality and IQ (Washington, D.C.: American Enterprise Institute, 1998).

d Darwin L. Thomas and Gwendolyn C. Henry, "The Religion and Family Connection: Increasing Dialogue in the Social Sciences," Journal of marriage and the Family, Vol. 47 (May 1985), pp. 369-370.

e Larry L. Bumpass, "What's Happening to the Family? Interactions Between Demographic and Institutional Change," Presidential Address to the Population Assocation of America, Demography, Vol. 27, No. 4 (November 1990), pp. 483-498.

f Paul C. Glick, "Fifty Years of Family Demography: A Record of Social Change,"J. of marriage and Family, Vol. 50 (1988), pp. 861-873.

g Larry L. Bumpass, James Sweet, and Andrew Cherlin, "The Role of Cohabitation in Declining Rates of marriage," Journal of marriage and the Family, Vol. 93 (1995), pp. 913-927.

h F. Furstenburg, J. Brooks-Gunn, and P. Morgan, Adolescent Mothers in Later Life (Cambridge, U.K.: Cambridge University Press, 1987), and "Adolescent Mothers and Their Children in Later Life," Family Planning Perspectives, Vol. 19, No. 4 (July/August 1987).

i Daniel T. Lichter, Felicia B. LeClere, and Diane K. McLaughlin, "Local marriage Markets and the Marital Behavior of Black and White Women," American Journal of Sociology, Vol. 96, No. 4 (January 1991), pp. 843-867.

j Steven L. Nock, "Commitment and Dependency in marriage," Journal of marriage and the Family, Vol 57 (1995), pp. 503-514.

k June O'Neill, "Can Work and Training Programs Reform Welfare?" J. of laborResearch, Vol. 14, No. 3 (1993), pp. 265-281.

l Bureau of the Census, Statistical Abstract of the United States, 1996, Table No. 90.

The Likelihood of marriage

Children raised in their original Family with two parents are more likely to marry as adults, and children of early-marrying parents tend to marry early as adults. a Children of low-income married families tend to marry much earlier than children of high-income married families, while those who were raised from early childhood in an intact marriage tend to delay the onset of marriage. b

Those who experience the disruption of their parents' marriage tend to marry or cohabit at earlier ages. c Grown children whose parents are divorced experience a 3 percent to 6 percent reduction in the likelihood of marriage at any particular age. a

Young single mothers are more likely to marry their way out of poverty than are older women, d a trend supported by the findings of studies that show that poor single-parent mothers hold mainstream values about marriage. e For older mothers, education provides a more likely way out of poverty. d

June O'Neill, professor of economics and finance at Baruch College of the City University of New York and former director of the Congressional Budget Office, estimates that about 50 percent to 60 percent of single mothers who go on Welfare leave the program within two years most leave because they marry, while others leave because their income has increased. f According to a 1994 report in American Economic Review, those who leave Welfare because of marriage are the least likely to return. g

However, as the evidence shows, early marriage is not the key to achieving stable Family income: Couples who marry young or who are expecting a child when they marry have substantially higher levels of separation and divorce than those who marry later or who first marry and then conceive. a For example, a study of Baltimore adolescent mothers showed that only 16 percent remained married 18 years later to the father of a child conceived during a teen pregnancy. h

Once a person is married, a number of factors inoculate that person against divorce: sharing a religious faith, particularly when accompanied by regular worship i getting married over the age of 25 j and completing more education. k All of these factors lead to greater economic prosperity.

a Arland Thornton, "Influence of the Marital History of Parents on the Marital and Cohabitational Experiences of Children," American Journal of Sociology, Vol. 96, No. 4 (1991), pp. 868-894.

b France E. Kobrin and Linda J. Waite, "Effects of Childhood Family Structure on the Transition to marriage," Journal of marriage and the Family, Vol. 46 (1984), pp. 807-816.

c Paul Amato, "Explaining the Intergenerational Transmission of Divorce," Journal of marriage and Family, Vol. 58 (1996) p. 629.

d Julia Heath, "Determinants of Spells of poverty Following Divorce," Review of Social economy, Vol. 49 (1992), pp. 305-315.

e Robin L. Jarrett, "Living Poor: Family Life Among Single Parent, African-American Women," Social Problems, Vol. 41, No. 1 (1994), pp. 29-49.

f June O'Neill, "Can Work and Training Programs Reform Welfare?" J. of laborResearch, Vol. 14, No. 3 , (1993), pp. 265-281.

g Rebecca M. Blank and Patricia Ruggles, "Short-Term Recidivism Among Public-Assistance Recipients," American Economic Review, Vol. 84, No. 2 (May 1994), pp. 49-53.

h F. Furstenburg, J. Brooks-Gunn, and P. Morgan, Adol. Mothers in Later Life (Cambridge, U.K.: Cambridge University Press, 1987).

i David B. Larson, Susan S. Larson, and John Gartner, "Families, Relationships and Health," in Danny Wedding, ed., Behavior and Medicine (Baltimore, Md.: Mosby Year Book Inc., 1990), pp. 135-147.

j Larry L. Bumpass, Teresa Castro Martin, and James A. Sweet, "The Impact of Family Background and Early Marital Factors on Marital Disruption," Journal of Family Issues, Vol. 12, No. 1 (March 1991), pp. 22-42.

k Paul C. Glick, "Fifty Years of Family Demography: A Record of Social Change," Journal of marriage and the Family, Vol. 50 (November 1988), pp. 861-873.


Today, social science research broadly characterizes the children who are most likely to attain a good income as adults: They have parents who are married they finish school, get a job, abstain from intercourse until marriage, and marry before having children of their own. But Family structure plays an even larger role in children's future prosperity than those who have formulated public policy over the past 30 years have been willing to admit.

Having a baby out of wedlock usually derails progress toward achieving a stable Family structure and income. Teenage out-of-wedlock births rose from 15 percent of all teen births in 1960 to 76 percent in 1994. 39 Fewer than one-third of those who have a baby before reaching age 18 complete high school, compared with the 50 percent completion rate for teens of similar backgrounds who avoid pregnancy. 40

It is not that the number of babies born to teens has changed it is that marriage within this group has vanished. In addition, almost half of the mothers of out-of-wedlock children will go on to have another child out of wedlock. 41

The vast majority of out-of-wedlock births occur to mature adults age 20 and older, and more out-of-wedlock births occur to women over 30 than to teens below age 18 42 the number is eight times higher for second out-of-wedlock births. (See Charts 6 and 7.) The increase in these births among older women accompanies a decline in teenage out-of-wedlock births and abortions.

Two very different changes in American society may explain this decline: the rise in teenage virginity 43 and an increase in the use of contraceptives. The editor of Teen People magazine recently reported very high interest among teenagers in the subject of virginity. 44 Access to the specific implant contraceptives Depro-Provera and Norplant also has been associated (but not documented as yet) with the reduction in the number of out-of-wedlock teen births. 45 Aside from the avoidance of pregnancy, the decision not to abstain from sex is linked to habits of risk-taking related to alcohol and drug abuse, school dropout rates, and crime. 46

More than any other group, teenage mothers who give birth outside of marriage spend more of their lives as single parents. 47 Not surprisingly, their children spend more time in poverty than do the children of any other Family structure. 48

A single-parent Family background and the poverty that usually accompanies it render children twice as likely to drop out of high school, 2.5 times as likely to become out-of-wedlock teen parents, and 1.4 times as likely to be unemployed. 49 These teens miss more days of school, have lower educational aspirations, receive lower grades, and eventually divorce more often as adults. 50 They are almost twice as likely to exhibit antisocial behavior as adults 25 percent to 50 percent more likely to manifest such behavioral problems as anxiety, depression, hyperactivity, or dependence two to three times more likely to need psychiatric care and much more likely to commit suicide as teenagers. 51

Mark Testa, a professor in the University of Chicago's School of Social Service Administration, conducted studies that show the linkage between Family background, education, and work habits and out-of-wedlock pregnancy. According to Testa, "premarital pregnancy risks are significantly higher among single women who are not in school or [are] out of work and who have dropped out of high school. Being raised in a Family that received Welfare also appears to raise the risk of premarital pregnancy." 52

The research of Yuko Matsuhashi of the University of California at San Diego and his colleagues shows that few mothers (14 percent) were living with both parents at the time of their first out-of-wedlock baby's conception, and fewer still (2 percent) were living with both parents at the time of their second baby's conception. 53 In other words, single-parent households become much more entrenched with the second baby, and fewer of these mothers stay in school, thereby lessening their chances of attaining a good income in the future. 54

Nearly 80 percent of men do not marry the teenage mothers of their children. 55 Nonetheless, cohabitation and cooperation in some form generally does occur between biological parents. About 40 percent of mothers plan to care for their first baby with the father of the baby, but not to marry him. 56 Many more mothers of second out-of-wedlock babies plan to take care of their babies alone than do the mothers of first out-of-wedlock babies, and fewer of them live with their own parents. The downward economic spiral accelerates.

Typically, the household income of those who have out-of-wedlock children in their teens is low. Over 75 percent will be on Welfare within five years. 57 These women comprise more than half of all mothers on welfare. 58 The average Family income for children who lived with their never-married mothers was only about 40 percent of the Family income for children who lived with either a divorced or a widowed mother. 59 The Family background of most teenage out-of-wedlock mothers includes such factors as early age at marriage (or cohabitation) for the teen mother's own parents and lower educational levels for both the teen mother's parents and the teen mother herself. 60


As Chart 8 shows, the relationship between poverty and the absence of intact marriages is indeed very strong. The continuous cooperation and lifelong commitment involved in marriage have much to do with significant income differences in households with children. For example:

The vast majority of children who live with a single parent are in households in the bottom 20 percent of earnings. Specifically, about 74 percent of families with children in the lowest income quintile are headed by single parents. 61 Conversely, 95 percent of families with children in the highest quintile of income are headed by married parents. 62 (See Chart 9.)

The research discussed above clearly indicates that Family structure has much to do with income levels and asset building, both of which lead to economic prosperity. This section will explain why this occurs.

A family's income is used to finance immediate needs and, if it is sufficient, may allow the Family to save for future needs. There are two elements in the amount of income received: the dollar value of hours worked and the number of hours worked. These in turn are affected by, among other things, the parents' education level (see Chart 12) and work habits that typically are formed in the early years.

The marriage of the parents has much to do with a child's educational attainment and work ethic. The relationship can be expressed as an equation: Income = (education attained) x (work ethic) x (unity of Family structure).

Marriage, education, and Income

Of course, one does not obtain an adequate and steady income just by marrying. Increasing the number of hours worked at a job valued by the marketplace will provide more income. The number of hours worked is linked directly to educational achievement and Family structure. (See Charts 13 and 14.) Families whose members have lower levels of education normally will have to work longer to reach a modest level of financial security than do those whose members achieve higher levels of education.

However, people who are not married and have less education work the fewest hours per year. In general, married couples have higher levels of education and work longer (see Charts 15 and 16), and make sure that their children achieve higher levels of education. 65

Although the income of a Family household depends on the educational level of parents, it is the parents' income rather than their level of education that predicts more accurately the level of education their children will achieve. 66 In general, children with high-income parents receive more education than do children of lower-income parents. 67 But higher income is less likely without marriage (see Chart 8), and poverty is much more likely without it.

education gives the child from a high-income Family a great advantage. The federal government's Panel Study of Income Dynamics showed the large economic gains that can be realized by completing high school, both in the level of wages earned and in the longer hours per week that a person will work. 68 But Family background accounts for at least half the variance in educational attainment. 69 Students from intact families score more positively on all measures than do those from both step and single-parent families. 70 Adolescents who do not live with both natural parents are at significantly greater risk of leaving high school before graduating. 71 And the number of years of education received translates into a better first job and better jobs later at higher salaries. 72

Why Measuring the Risk of "poverty" Is Really Measuring "Family"

Many Family conditions are seen as factors that increase the likelihood of poverty. Regarding risk factors, Tom Luster and Harriett McAdoo of Michigan State University summed up the findings of 17 eminent researchers in the field in 1994 by noting: "Over the past 15 years, research on diverse samples of children has shown that children who are exposed to several risk factors simultaneously tend to experience learning or behavioral problems." a Poor families are more likely to have multiple risk factors.

Jean Brooks-Gunn of Teachers College at Columbia University and her colleagues estimated that in 1995, only 2 percent of poor families had no risk factors, while 35 percent experienced six or more. By contrast, among families that were not poor, 19 percent experienced no risk factors and 5 percent experienced six or more risk factors. b Many of these risks are measures of conditions linked to broken families.

The instrument used most widely in social science research to assess risk factors is the "HOME" measurement, used in the National Longitudinal Survey of Youth (NLSY). The factors in the HOME scale below can be shown to be associated with the presence or absence of marriage and with Family structure, as noted within the parentheses. References cited in the footnotes for each factor are studies that illustrate the correlation between the risk and Family structure.

The HOME assessment factors are:

Low birth weight (most prevalent in out-of-wedlock births). c

Low neonatal health index score (most prevalent in out-of-wedlock births). c

Unemployment of the household head (least likely in a two-parent Family). d

Mother has less than a high school education (less likely if parents are married). e

Mother has a verbal comprehension score below the 25th percentile (associated strongly with educational level, which is linked extensively to her parent's Family structure). f

High maternal depression score (less likely if married). g

More than three stressful life events (less likely if married). h

Teenagers at time of child's birth (most unlikely to marry). f

Low social support network (less likely if married and have married parents). i

Father absent at time of interview.

Child-to-adult ratio is greater than 2:1 (50 percent less likely if married, since marriage doubles the number of adults).

Simplistic categorical view of child development.

Of ethnic minority b (two married parents are less likely in African-American and Hispanic households). j

Rather than being immutable conditions, many of these risk factors are the result of individual choices, particularly regarding marriage. Restoring marriage among the poor would create home environments that are more likely to reduce these factors significantly. But this will require a coordinated effort by the public, private, and parochial sectors of society.

a Tom Luster and Harriette Pipes McAdoo, "Factors Related to the Achievement and Adjustment of Young African American Children," Child Development, Vol. 65, No. 4 (April 1994), pp. 1080-1094.

b Jean Brooks-Gunn, Pamel Kato Klevbanov, and Fron-ruey Liaw, "Learning, Physical and Emotional Environment of the Home in the Context of poverty: The Infant Health and Development Program," Children& Youth Services Review, Vol.17, (1995), pp. 251-276.

c Nicholas Eberstadt, The Tyranny of Numbers (Washington, D.C.: American Enterprise Institute, 1995), pp. 58-59.

d Hiromi Ono, "Husbands' and Wives' Resources and Marital Dissolution," J. of marriage and the Family, Vol. 60 (1998), p. 678.

e Janet B. Hardy et al., "Self-Sufficiency at Ages 27-33 Years: Factors Present Between Birth and 18 Years That Predict Educational Attainment Among Children Born to Inner-City Families," Pediatrics, Vol. 99 (1997), pp. 80-87.

f Patrick F. Fagan, "Rising Illegitimacy: America's Social Catastrophe," Heritage Foundation F.Y.I. No. 19/94, June 29, 1994.

g Allan V. Horowitz, Helene Raskin White, and Sandra Howell-White, "Becoming Married and Mental Health: A Longitudinal Study of a Cohort of Young Adults," Journal of marriage and the Family, Vol. 58 (1996), pp. 900-901.

h Susan Kennedy et al., "Immunological Consequences of Acute and Chronic Stressors: Mediating Role of Interpersonal Relationships," British Journal of Medical Psychology, Vol. 61 (1988), pp.77-85, and Robin W. Simon, "Parental Role Strains, Salience of Parental Identity and Gender Differences in Psychological Distress," J. of Health and Social Behavior, Vol. 33 (1992), pp. 25-35.

i Jan E. Stets, "Cohabiting and Aggression: The Role of Social Isolation," Journal of marriage and Family, Vol. 53 (August 1991), pp. 669-680, and Sylvie Drapeau and Camil Bouchard, "Support Networks and Adjustment Among 6 to 16-Year-Olds from Maritally Disrupted and Intact Families," Journal of Divorce and Remarriage, Vol. 19 (1993), pp. 75-94.

j U.S. Bureau of the Census, Current Population Report, No. P20-514, March 1998, Table 2.

Marriage, Work Ethic, and Income

A significant portion of two-parent families have moved out of the poverty range because both parents work, 73 which also increases--and in many cases doubles--the total number of hours worked within the household. Among America's poor, there has been a significant shift in the number of hours worked per household, which indicates that much of the disparity in young men's economic status is concentrated in the number of hours worked. 74

In 1960, nearly two-thirds of households in the bottom quintile of income were headed by individuals who worked--primarily married fathers. By 1991, this figure had fallen to around one-third, and only 11 percent of these households were headed by someone who worked full-time throughout the year. 75

The total number of hours worked in married households has increased significantly over the past 40 years. According to former Congressional Budget Office Director June O'Neill, in 1950 only 18 percent of married mothers with children under 18 worked outside the home. By 1975, 41 percent of married mothers worked and that proportion reached 64 percent in 1992. Yet mothers on Welfare appear to work little--only 7 percent report any employment. 76 (These data were collected before the enforcement of the Welfare Reform Act (1996.)

Not only are those in the lowest quintile generally working fewer hours than their counterparts were in the 1950s and 1960s, but they are doing so despite a national Family trend in the rising number of hours worked.

A reverse trend accompanies the disappearance of marriage: The number of hours worked in the Family household declines. Present-day single heads of households are working fewer hours than the married heads of poor households in the 1950s (typically, married men). At the same time, married couples are increasing the total number of hours worked, and although there are some unwelcome consequences from this increase in working hours in married households, there is no doubt that it has increased the number of families exiting a life of poverty.

Welfare's Impact on the Number of Hours Worked.
Welfare payments have had a predictable if pernicious effect on the overall response of recipients to marriage as well as work. 77 Consider data from the past decade. Again, according to former CBO Director June O'Neill:

Findings from the Seattle-Denver Income Maintenance Experiment (U.S. Office of Income Security Policy, 1983) show that female heads of families responded to income guarantees by significantly reducing their work effort. Other studies have found that women are less likely to work in states with high levels of AFDC benefits. 78

Historically, O'Neill found, higher Welfare benefit levels have had dramatic negative effects on the behavior of young men, especially young African-American males, by reducing their participation in the workforce and increasing the likelihood that they will father a child or children out of wedlock. 79 Sheldon Danziger, professor at the School of Social Policy at the University of Michigan, concluded in 1986 that because only one-third of the poor were expected to work, most poor households would not benefit from an improved economy. 80 Thus, even when the national economy improved, Welfare families who were disconnected from a market-based economy remained stuck in poverty because their income was not connected to the number of hours worked or to a rise in the hourly value of their laborthat is commonly connected with a more robust economy.

The Value of Effort.
If the level of education and the number of hours worked are important to a child's future income, the acquisition of a positive work ethic is vital. If a child's parents already espouse a belief in effort, the child has a much better chance of believing in the positive results of effort.

For some time, social scientists have presented "personal effort believers" as typically successful, competent, and emotionally stable people. Their opposites are "external pressure believers," who tend not to make long-term plans or to think of ways to control or change their circumstances since they do not believe their efforts will really matter. The latter group generally is far less successful. 81

Martin Seligman, professor of Psychology at the University of Pennsylvania and president of the American Psychological Association, is world-renowned for his work on changing external pressure believers into personal effort believers and on learned optimism and learned helplessness. His work on "Learned Efficacy/Learned Optimism" shows that the coaching children receive from their parents and teachers as they tackle the early and tougher tasks of life has everything to do with deep-seated beliefs they acquire regarding effort (beyond their own awareness). 82

Learned helplessness also can be acquired in the early years, 83 with such beliefs frequently having taken hold by age six. 84 Many of the children who are external pressure believers jeopardize their economic future in adolescence by dropping out of school or getting pregnant before marriage. 85

The presence or absence of a belief in effort, then, has much to do with poverty or attaining a desired income level. Middle-class children are more likely to pick up belief in effort from their parents and teachers. Children raised on Welfare, in many cases, have the opposite experience. 86 The longer a person is on Welfare, the greater the erosion of the belief in effort. 87 Some Welfare recipients report that they are aware of the bad effects Welfare has on attitudes within their families, but having a low belief in their own abilities, they see few viable alternatives. 88 In other words, they lose confidence.

As the research cited above shows, parents' achievement in the marketplace leads to achievement by their children in the schoolroom. The earlier the parents pass on a belief in effort, the longer and deeper the educational and economic benefits to the child will be.


The overwhelming evidence of recent social science research clearly demonstrates that the pathway to a stable, secure income and Family life for children starts with married parents. But the child must get a good education, develop sound work ethics, and abstain from sexual relationships before marrying and having children. Each departure from these traditional norms decreases a child's chance of achieving a decent and secure income. Yet another factor that is associated with staying married is regular worship by both married parents. 89

In the past, many poverty experts neglected and even denigrated these influences. They argued that providing money and a "helping hand" would be more than enough to overcome the effects of broken families on children.

In reality, however, strong cultural norms are needed to reinforce behaviors that make a positive difference for the poor. For instance, the incidence of cohabitation, which has deleterious effects for the Family and community life of America's poor children, cannot be changed if America's professionals and role models continue to accept it as normal. The sins of the social and economic elite are visited most dramatically on the poor.

The old liberal nostrum that poverty in one generation is caused by poverty in the previous generation is both simplistic and largely wrong. poverty is the result of many factors, but most have to do with marriage, sex before marriage, living together outside of marriage, and divorce after marriage. It is no coincidence that marriage has all but disappeared among America's very poor (see Chart 9) and has been replaced with serial cohabitation. This breakdown in stable families burdens women and children first, but it also burdens the larger community. 90 Such Family structure chaos effectively robs children of future economic independence.

For far too long, the federal government effectively supported Family instability. The 104th Congress changed some of that by reforming Welfare to workfare and devolving much of the Welfare program back to the states. The results from the states thus far have been impressive. For example, Wisconsin, which has had its Welfare reforms in place the longest, has achieved a 90 percent reduction in its Welfare rolls. 91

Today, Americans understand that the best federal remedies are not bigger handouts, but support for the family--one of the foundations of society--and the philosophy that income should be tied to effort. Congress, the states, and local communities can play important roles in rebuilding the Family to ensure that America's children escape the poverty trap and reach their full potential. Specifically, Congress should:

Eliminate the marriage penalty in the Earned Income Tax Credit (EITC) program and all other poverty programs.
Serious anti-poverty policy must include as a goal the restoration of marriage. Yet one of the heaviest penalties against marriage is the EITC, which is targeted specifically to those income groups in which marriage is most absent.

Require all Welfare recipients to work in return for benefits.
Every person who seeks public assistance, other than the totally disabled and possibly mothers with very young infants, should be required to work in exchange for that assistance. Welfare without work distorts the work ethic by giving something for nothing, and these families transmit this distortion to their children. Instead of a five-year limit on Welfare, Congress should require work by all recipients immediately. Welfare thus would become the first rung on the ladder of full-time work.

Demand that the National Center for Health Statistics (NCHS) ensure that the federal statistics delivery system includes accurate data on marriage and divorce.
At present, divorce data--especially data on the number of children affected by divorce each year--are not available from the federal statistical system generally or the NCHS and Bureau of the Census specifically. What is available has come from the Federal Reserve Board, an unlikely but welcome source. Although this information is probably the most powerful for explaining many of the outcomes of federal programs that are being measured, such departments as Health and Human Services, education, and Justice fail to gather Family structure data. A thorough review of all federal social surveys should be undertaken.

Direct more federal dollars to researching the effects of marriage on children and income.
For over 30 years, Congress poured hundreds of millions of tax dollars into "Family research," yet very little has been directed toward understanding the benefits of or strengthening marriage. Given the decline of marriage among the urban poor and the increase in violence, addiction, school dropouts, and out-of-wedlock births, as well as the growing divorce rate among the middle and upper classes, a study of marital stability and its relationship to these societal problems should become a federal social policy priority. Congress, for example, could mandate in the budget that a serious portion of the funds of the National Institute of Child Health and Development and the National Institute of Mental Health be directed toward studying marriage. Congress could instruct the National Science Foundation to request that the next round of research in the Panel Study of Income Dynamics at the University of Michigan be devoted to gathering detailed marital History on all respondents, and that funding be directed to that end, so that the impact of Family structure on income can studied by the social science community in depth.

Consider funding demonstration grants to facilitate current efforts that yield progress in reducing divorce, such as the marriage Covenant efforts of the marriage Savers, a group in Potomac, Maryland. 92

Explore using "Learned Efficacy/Learned Optimism" principles as a component of welfare-to-work job training and education enhancement.
The belief that one's efforts are linked to the results desired is especially important in building a commitment to work and marriage. Although much is already known from research in this field, policymakers should enhance its application to those who need it most by holding exploratory hearings that lead to demonstration grants on learning work habits.

Examine the relative contribution to tax revenues and the relative drawdown from the Treasury of households with different Family structures: always single parent, always married parents, step parents, divorced parents, and cohabiting adults.

Require the GAO to report on the differential costs of abstinence education and contraceptive training for teenagers.
Recent research indicates that these very different strategies for reducing teen pregnancy have contributed to recent reductions in the number of out-of-wedlock births among teenagers. 93 But these two options also lead to different sets of social behavior and foster different Family structures. They should be studied in depth to confirm their different outcomes. Future policy decisions then will be based on considerations of the different health and lifestyle consequences of these strategies.

Change the requirements for obtaining a divorce.
State legislatures should require parents to prove that a divorce is necessary for the well-being of their children. Social scientists now recognize how "no fault" divorces harm children. Research also demonstrates that the costs to society are too great for the states to ignore. Certain legal, social, and cultural constraints should make divorce less appealing and less easy to obtain, especially when children are involved.

Enforce child support.
Children living with a single mother are six times more likely to live in poverty than are children whose parents are married. To discourage this, states should ensure that 100 percent of out-of-wedlock or divorced fathers pay full child support. Local governments, as key players in the enforcement of child support laws, should have access to the tools that state governments already have available to trace absentee fathers.

Examine school curricula to ensure that the benefits of marriage and costs of divorce are covered fairly.
It is clear from the work of Professor Norval Glenn of the University of Texas at Austin 94 that many textbook publishing companies not only neglect marriage, but also distort the research on the benefits of marriage and the harmful effects of divorce and out-of-wedlock parenting on children. This lack of support for the married Family structure threatens society. States should examine their course curricula and promote resources that support marriage as a viable and desirable structure within which to raise healthy children.

Church leaders and nonprofit organizations should:

Work to restore marriage among the poor whom they serve.
The restoration of marriage among the poor ought to be one of the most important goals of faith communities that are concerned about the plight of the poor and the future of children. Both social science data and common sense indicate this will not happen without restoring regular religious worship for both men and women.


Marital and Family stability is undeniably linked to economic prosperity for American families. Even though America has achieved a level of prosperity unrivaled in History, too many families still do not share in these benefits. The effects of marital breakdown on national prosperity and the well-being of individual children are like the action of termites on the beams in a home's foundation: They are weakening, quietly but seriously, the structural underpinnings of society.

The contradiction between Washington's concern for economic prosperity and its disregard for stable marriage and Family life must be resolved. The longer reform is delayed, the more children will be doomed to living in poverty with its life-changing effects. Congress, state legislators, community leaders, and church officials can and must take clear steps to restore the primacy of marriage--the backbone of the Family and society in America.

Patrick F. Fagan is William H. G. FitzGerald Senior Fellow in Family and Cultural Issues at The Heritage Foundation.

1. The author is deeply indebted to Kirk Johnson, Ph.D., of the Center for Data Analysis at The Heritage Foundation for his contributions on the Survey of Consumer Finance data and to former Domestic Policy intern Melanie Malluk for her invaluable research efforts.

2. The federal statistics system since 1992 has been unable to provide accurate data on the number of children who move into broken families. Complete data on divorce are no longer collected by the National Center for Health Statistics and the Bureau of the Census.

3. Julia Heath, "Determinants of Spells of Poverty Following Divorce," Review of Social Economy, Vol. 49 (1992), pp. 305-315.

4. Organization for Economic Cooperation and Development (OECD), Factors Affecting the Labor Force Participation of Lone Mothers in the United States, prepared by the Panel on Evaluation Factors Affecting the Labor Force Participation of Lone Mothers, Paris, 1989.

5. Mary E. Corcoran and Ajay Chaudry, "The Dynamics of Childhood Poverty," Future of Children, Vol. 7, No. 2 (1997), pp. 40-54, quoting from G. J. Duncan et al., "Lone-Parent Families in the United States: Dynamics, Economic Status, and Developmental Consequences," unpublished research paper, Survey Research Center, University of Michigan, Ann Arbor, May 1994.

6. Peggy O. Corcoran, unpublished paper, Survey Research Center, University of Michigan, Ann Arbor, May 1994.

7. U.S. Department of Health and Human Services, Monthly Vital Statistics Reports.

8. U.S. Department of Commerce, Bureau of the Census, Historical Statistics of the United States, Bicenntennial Edition Colonial Times to 1970, Part 1, p. 228.

9. OECD, Factors Affecting the Labor Force Participation of Lone Mothers in the United States.

10. Philip K. Robins, "Child Support, Welfare Dependency, and Poverty," American Economic Review, Vol. 76, No. 4 (September 1986), pp. 768-786.

11. Heath, "Determinants of Spells of Poverty Following Divorce."

12. Greg J. Duncan, Martha S. Hill, and Saul D. Hoffman, "Welfare Dependence Within and Across Generations," Science, Vol. 239, No. 4839 (January 1988), pp. 467-471.

13. Heath, "Determinants of Spells of Poverty Following Divorce."

14. Paul C. Glick, "Fifty Years of Family Demography: A Record of Social Change," Journal of Marriage and the Family, Vol. 50 (November 1988), pp. 861-873.

17. See Chart 6 data from the Federal Reserve Board's 1995 Survey of Consumer Finance.

18. Sara S. McLanahan, "Family Structure and Dependency: Early Transitions to Female Household Headship," Demography, Vol. 25, No. 1 (February 1988), pp. 1-16.

19. Arland Thornton, "Influence of the Marital History of Parents on the Marital and Cohabitational Experiences of Children," American Journal of Sociology, Vol. 96, No. 4 (1991), pp. 868-894.

21. France E. Kobrin and Linda J. Waite, "Effects of Childhood Family Structure on the Transition to Marriage," Journal of Marriage and the Family, Vol. 46 (1984), pp. 807-816.

22. Larry L. Bumpass, Teresa Castro Martin, and James A. Sweet, "The Impact of Family Background and Early Marital Factors on Marital Disruption," Journal of Family Issues, Vol. 12, No. 1 (March 1991), pp. 22-42.

23. Thornton, "Influence of the Marital History of Parents."

25. Kobrin and Waite, "Effects of Childhood Family Structure on the Transition to Marriage."

26. Bumpass et al., "The Impact of Family Background."

27. James P. Smith, "Marriage, Assets, and Savings," RAND Issue Paper DRU-1055-NIA, 1995.

28. Bumpass et al., "The Impact of Family Background."

29. Larry L. Bumpass, "What's Happening to the Family? Interactions Between Demographic and Institutional Change," Presidential Address to the Population Assocation of America, Demography, Vol. 27, No. 4 (November 1990), pp. 483-498.

The Free Market is Dead: What Will Replace It?

B ig meetings in the Oval Office in the time of Covid-19 are rare, but two weeks into his presidency, President Joe Biden decided to make an exception. It was only a few days after the nation&rsquos coronavirus case count peaked in late January, and Biden sat on a stately beige chair, double masked and flanked by Vice President Kamala Harris and newly confirmed Treasury Secretary, Janet Yellen.

The leaders of some of the nation&rsquos largest businesses like Wal-Mart and J.P. Morgan Chase had come to the White House that day to talk economic stimulus. But the real surprise attendee was the head of America&rsquos largest business advocacy group, the Chamber of Commerce, Tom Donohue. Under Donohue&rsquos leadership over the past two decades, the Chamber had effectively become an organ of the Republican party, handsomely rewarding conservatives who worked to dismantle public programs and the regulatory state with campaign donations and support.

Donohue said little, but he didn&rsquot have to. His presence was enough to rock the political landscape. &ldquoWashington&rsquos most powerful trade group is having a political identity crisis,&rdquo wrote Politico. Two weeks later, a group of 150 CEOs, unaffiliated with the Chamber, followed suit, throwing their weight behind Biden&rsquos COVID relief bill, which sailed through Congress. They have been similarly supportive of the additional $2 trillion the administration has now proposed for infrastructure spending &ndash but they unsurprisingly don&rsquot want corporate tax rates to be the means for paying for it.

But corporate America&rsquos newfound support for more public investment is not a temporary phenomenon. We are witnessing the most profound realignment in American political economy in nearly forty years. President Ronald Reagan summed up the conventional wisdom that reigned from the mid-1970s onward in the United States: “Government is not the solution to our problem, government is the problem.” Economists, policymakers, and everyday Americans alike generally accepted that markets, unfettered and free, are the best way to create economic growth.

That ideology began to crack after the Great Recession, and in the wake of the coronavirus pandemic, it has collapsed. The rise of ethno-nationalism on the right and democratic socialism on the left testify to the growing disillusionment with the conventional wisdom of how government and economics are supposed to work.

It&rsquos not just the fringes questioning free market orthodoxy in a time of disease. Cross-partisan supermajorities of Americans want some of the biggest companies of America to be broken up, significantly higher minimum wages, a wealth tax on billionaires, and believe significantly more public investment is required to create economic growth.

We have had regulations, public investment, and macroeconomic management to varying degrees throughout American history. What makes this moment different is that Americans across parties, class, and educational background are using a new framework to think about how we create prosperity.

The new managed market paradigm is bigger than Bidenomics or any particular economic agenda&mdashit is a story about how the economy works.

We went from living in a country where markets couldn&rsquot be touched to one where Americans believe the state has an important role in managing them to create prosperity. What killed off free market mythology, and what will come next?

A crisis in confidence in government triggered the last paradigm shift, making way for the rise of free market thinking. In the 1970s, the Vietnam War and Watergate challenged America&rsquos faith in their leaders at the start of the decade. Meanwhile, the gains of the Civil Rights Movement and the introduction of affirmative action profoundly threatened the American racial order of the time, facilitating a narrative that government was putting its thumb on the scale for &ldquoundeserving&rdquo Black and poor folks.

Geopolitical tensions in the Middle East flared, causing oil prices to spike and creating long gas lines. Inflation was out of control, reaching as high as 20% on an annualized basis in 1978. Americans stopped spending, and inflation and unemployment kept rising. Presidents Gerald Ford and Jimmy Carter, Congress, the Federal Reserve all failed to develop any coherent program to help.

Far-right economists and policymakers were waiting in the wings with an explanation for the social and economic instability and a way out: government created our problems, and markets will solve them.

These free market advocates had been preparing for decades. Since the early 1950s, a group of intellectuals including Milton Friedman, James Buchanan and Aaron Director had been building a framework of free market orthodoxy grounded in the idea that markets exist independent of the state. They cherry-picked aspects of the Adam Smith idea of &ldquolaissez-faire&rdquo and put them on steroids, explaining that self-interested individuals use perfect information to make entirely rational short- and long-term decisions. They used graphs and complex mathematics to suggest theirs was an empirical science.

In reality, they made a normative argument that the best society is one where individuals are unleashed to be rational, selfish, and competitive, fueling aggregate economic growth. Government bureaucracy, they argued, disrupts markets and disincentives work and competition.

Inside the academy, they aimed to demolish the intellectual paradigm that predated free market orthodoxy, the Keynesian consensus. Before the 1970s, most economists and lawyers believed that we needed robust government action&mdashcountercyclical fiscal spending, management of the currency, tactical protectionism&mdashto create long-term prosperity. The free market apostles wanted to erase the role of the state.

Their ideas rapidly caught on more broadly, in large part because of a shift in the country&rsquos racial politics. Their supposedly &ldquovalues neutral&rdquo economic framework justified an end to race conscious policymaking.

Until the 1960s, numerous government policies were explicitly racist. Black Americans were unable to take advantage of the Homestead Act or the GI Bill, and they were effectively barred from purchasing homes, limiting their ability to build household wealth. But the 1960s saw a historic shift with government moving to support racial equality, through the Civil Rights Acts, Voting Rights Act, and integrated schools.

Free market orthodoxy made an intellectual case that government should stop pursuing policies that might disproportionately help Black Americans, like investments in public housing or affordable health care. Any state program&mdasheven those focused on reducing poverty, providing healthcare access, or banning discrimination in the workplace&mdashwas an &ldquointervention&rdquo in the natural economy, no matter how virtuous the intent. Political leaders cast the logic in unthreatening language, arguing that hard working Americans, whatever their race, should simply work their way to the top. But limiting government&rsquos role in public investment and regulation only entrenched and deepened the racial inequities in the American economy.

Reagan and George H.W. Bush used the same rhetoric of the free market to demolish programs that reined in private corporations and supported the middle class and poor. Their successors, Democrats and Republicans alike, continued to cut spending, pursue deregulation, and privatize swaths of the government.

But in the fall of 2008, the stock market collapsed. The first cracks in the widespread faith in free market orthodoxy began to appear soon after Lehman Brothers filed for bankruptcy and global markets panicked. Over the course of the following six months, the stock market continued to fall, eventually losing about 50% of its value from its 2007 peak. Unemployment in the United States reached a high of 10% a year later, and American households lost over $10 trillion of wealth. Ten million Americans lost their homes.

The crisis was largely the result of reforms that the free market orthodoxy had favored. A decade prior, the Clinton administration had repealed historic bank regulation laws like Glass-Steagall, making it easier for bankers to use the deposits of Americans to pursue risky investment decisions. They chose to put some of that risk into the predatory subprime lending market which steered borrowers&mdashdisproportionately people of color&mdashto buy or refinance their loans, often at higher rates than they qualified for.

Free market orthodoxy said that the mountains of risk would never grow too large because savvy investors would identify the problem and bet against them. The naïveté of that belief became clear to all when the house of cards began to fall.

After Lehman&rsquos collapse, political leaders stepped in. The Federal Reserve provided $9 trillion of emergency loans to banks, and nationalized the nation&rsquos largest insurance company, AIG. The U.S. government directly purchased the most toxic assets from the banks and then nationalized the auto industry to prevent it from going bankrupt. At the start of 2009, the government spent $800 billion in stimulus funds to prop up the economy.

The free market, it turned out, was prone to collapse, revealing to everyone how dependent it had been on the state all along. When bankers took the riskiest of bets, they knew that if systemic failure threatened the system, government would step in to save the economy.

In the years after the crisis, scholars and policymakers came to realize that free markets had failed empirically to live up to their promise.

Reduced taxes on capital and fewer regulations were supposed to create more growth by making it easier for investors to invest and entrepreneurs to hire, the orthodoxy said. Yet the economy grew by 3.9 percent on average between 1950 and 1980, the era before free market orthodoxy took hold, and only at 2.6 percent on average in the 40 years since.

Similarly, aggregate growth, fueled by deregulation and free trade, should have boosted incomes for American workers if free market orthodoxy was to be believed. The rich would do well with lower taxes, they promised, but so too would the middle class and poor because of all the additional economic activity. In reality, wages have not meaningfully increased over the past 40 years after accounting for inflation, while income inequality has soared.

This list goes on. Relaxed antitrust enforcement was supposed to enable monolith companies to benefit from economies of scale, reducing costs for Americans. But the cost of living in America has skyrocketed, with housing, healthcare, and education eating up a greater proportion of Americans&rsquo budgets than ever before. Expected investments in productivity-enhancing technologies by such large companies have not materialized.

We were told that policies developed to combat inequality like progressive taxation or public investment were supposed to constrict growth. Studies now show the opposite is true. The work of economists like Raj Chetty and Janet Currie has shown that poorer children lack access to good nutrition, stable neighborhoods, and quality schools and are not able to climb a meritocratic ladder. That hurts them individually and starves the economy of skilled workers that boost growth. The lack of public investment in public programs like affordable childcare means parents are more likely to drop out of the labor force, depriving the economy of workers and growth, as Heather Boushey has shown. And because the wealthy save for more than the poor, growing wealth inequality has muted the largest driver of economic growth, consumer spending, as documented by the economist Karen Dynan.

But American voters did not need research reports and economic professors to prove to them that they were getting the short end of the stick. As wages stagnated and the cost of living soared, the promise of the free market was starting to look suspicious. Then, Donald Trump entered the void.

Trump&rsquos campaigns and presidency were built on rage. China, Washington, immigrants, cancel culture&mdashhe insisted they were all responsible for the disappearance of a great America. This was not a populist campaign of ideas or a concerted effort to replace free market orthodoxy, but largely an appeal to restore status and privilege to those who would vote for him.

Trump rhetorically attacked the free market system as one built by global elites to serve their own interests, but then went on as president to implement free market reforms. His signature legislative accomplishment lowered taxes on corporations and the wealthy, and his government pursued a privatization agenda wherever possible, particularly in healthcare services and education. His notable departures from the free market framework&mdasha tariff war with China and a renegotiated NAFTA&mdash were more about burnishing America&rsquos status in the world than offering any new economic framework.

Trump&rsquos election was not a break from the free market orthodoxy, but it did scramble the conventional wisdom of political economy. Now all orthodoxies, including the free market one, were suddenly up for debate.

Then, the COVID-19 pandemic struck, bringing world markets to a standstill. Governments around the world froze as much in-person economic activity as possible and opened their wallets to spend unprecedented sums of money to replace lost income. In the United States, Republicans and Democrats agreed to invest record sums, nearly 20% of GDP. For the second time in 12 years, free markets had broken down, and government stepped up.

If the message wasn&rsquot clear before, it&rsquos now become impossible to miss: Government steps in when the going gets rough, ensuring that wealthy risk takers will be bailed out in the worst of times. Markets don&rsquot exist before the state, and the state doesn&rsquot intervene in their natural work. The state makes markets possible.

We are on the cusp of a new era of broad-based prosperity in which our leaders are poised to more actively manage the American market.

There are three key pillars to a new, managed market approach: effective regulation, sizable public investment, and careful macroeconomic supervision. A managed market requires centralized, accountable institutions embracing their power to create stable and competitive markets where innovation can flourish and labor shares in the wealth.

To help think about this new big picture, it helps to think small and look back to our history.

The oldest continuously operating farmers market in the United States, the Lancaster Central Market, is in the heart of Pennsylvania Dutch Country. Local farmers started hauling their crops there in 1730, and today, it still occupies the beautiful red brick building citizens built over a century ago in the center of the charming downtown of Lancaster.

But the Lancaster Central market hasn&rsquot survived through the centuries by luck or good fortune. The leaders of the market and local government have tended to the market to help it flourish and grow. They have been guided by the same principles that can create broad-based American prosperity.

The market is carefully regulated today and has been through its history. Back in the eighteenth century, the state designated the market site, and participants selected a market clerk to help with the day-to-day administration. &ldquoHe settled disputes between buyers and sellers and enforced the official rules of the market, including compliance with standard weights and measures,&rdquo writes Phyllis Good in a history of the market in a local cookbook. &ldquoHe was to examine all butter and lard and measure all firewood for sale, making allowances for crooked or uneven sticks.&rdquo

Zoom forward a couple hundred years, and the market continues to function similarly today. A market association agrees on rules to facilitate commerce, like the particular days and times it&rsquos open. They create basic standards to ensure cleanliness, quality, and that the goods are from small-scale sellers. The market makers ensure that there&rsquos a good mix of vendors and that the sellers and buyers act ethically and legally&mdashno stealing, cheating, or misrepresenting the quality or provenance of goods.

The Lancaster market is not an exception&mdasheverything from commercial malls to the S&P 500 rely on regulations to help create fairness and prosperity. When regulatory frameworks are clear and fairly applied, they engender a high level of trust and security for investors and consumers alike. Many of the institutions already exist in Washington to regulate markets fairly&mdashthe SEC, FTC, Department of Justice, NLRB, CFPB, and the regulatory responsibilities of the Federal Reserve are just a few.

In addition to smart regulation, markets need public investment to flourish. In order to facilitate commerce at the Lancaster market, the local government had to invest. In 1889, the City built a large, red-bricked, open-air market house in response to the demands of vendors and business owners for protected, indoor space. Once the physical infrastructure was in place, the cost of setting up a stand went down for the merchants, and commerce could happen no matter the weather.

Similarly, a managed economy on a national scale needs public investment to flourish. When government invests in public goods like roads, airports, public transit, schools, solar panels, economic growth soars&mdashjust like when you put a roof over a farmer&rsquos market. President Biden has begun his term as President by proposing a $2 trillion infrastructure investment and calling it a prerequisite for creating growth in the future.

Finally, the new managed market recognizes the need for the state to buffer shocks and surprises. The market building in Lancaster has survived through the centuries, but the growth of the suburbs and supermarkets threatened the viability of a central downtown market. Local government in Lancaster stepped in the modernize the market, and a non-profit managing the market helps ensure a balance of vendors that can serve the local community and tourists alike. Today, Amish women wearing traditional bonnets serve fresh-baked pies steps away from a stand of Middle Eastern foods and another selling mozzarella cheese made from local goat&rsquos milk.

At a national level, monetary and fiscal authorities employ macroeconomic policy to mitigate the blows of unexpected crises. Just last year in response to the pandemic, the Federal Reserve took rates to zero, restarted its bond buying program, and broke new ground by moving into corporate and municipal debt markets. Meanwhile, political leaders of both parties passed three emergency aid bills to keep tens of millions of Americans out of poverty and thousands of businesses above water.

Without this support, economists believe we would be living through the darkest time in modern economics. &ldquoWithout them, without those fiscal and monetary measures, the global contraction last year would have been three times worse,&rdquo said the managing director of the IMF. &ldquoThis could have been another Great Depression.&rdquo

We have always used regulation, public investment, and macroeconomic management to make our economy work, but we&rsquove done so sporadically and often weakly because we&rsquove told ourselves a different story about how the economy works. It&rsquos time for the story we tell to match the reality of economic growth&mdashand to fully embrace the opportunity that creates.

We can look at shifting attitudes on childcare. Free market orthodoxy told parents with young kids that they were on the hook to find and pay for affordable, safe childcare. A managed markets outlook recognizes the obvious: cheap access to good childcare makes it easier for parents, particularly mothers, to join the labor force, boosting economic activity. In many cases, it also improves educational outcomes for their kids. Virtually all Democrats and almost three quarters of Republicans support the idea of offering optional public pre-K to all three- and four-year-olds, and nearly half of Republicans go further and support universal child care from birth to age five.

Similar numbers of Republicans&mdashalongside the vast majority of Democrats&mdashsupport new thinking on student loan debt. Free market orthodoxy told college students that their only choice was to take out tens of thousands of dollars in debt to get a good education. A managed markets outlook recognizes that when students are not burdened with massive amounts of student loan debt, they invest their incomes in their families and homes. That creates more growth and a more educated public. Public polling shows that 85% of voters, including 76% of Republicans, support the cancelation of up to $20,000 in student debt per person.

And across party lines, Americans want government to take a more active role in enforcing the nation&rsquos antitrust policies. Free market orthodoxy told small business owners that there was little the government could do to even the playing field unless they could conclusively prove massive corporations hiked prices on consumers after consolidating. A managed market outlook recognizes that antimonopoly policy is premised on reining in the abuse of market power and helping small businesses compete. Over 80% of voters say they are concerned about the impact that consolidation of big technology corporations in particular have had on small businesses, and 70% of Republicans support breaking them up.

The cross-partisan support for this new paradigm does not mean there are not deep, abiding differences between conservatives and progressives on policy matters. But it does offer hope for a new path forward, even on the role of race in American politics.

At a time of major racial reckoning, a new cohort of leaders is making a case for setting aside zero-sum thinking that suggests that progress for some Americans must come at a sizable cost for others. One of the most prominent leaders, scholar and activist Heather McGhee, makes the case for a renewed commitment to creating abundant public goods&mdasheducation, parks, infrastructure, and care centers&mdashopen to all and with particular attention paid to ensure that people of color benefit. These kinds of public investments will become more possible over time as the managed markets paradigm cements itself in the American psyche.

The transition from one paradigm to another won&rsquot happen overnight. Many Americans still distrust government and don&rsquot hesitate to complain about its failures. They are often right&mdashvaccine sign-ups have been unnecessarily confusing, and unemployment insurance has been difficult to access.

These complaints are unlikely to go away, nor should they. Constructive criticism is a key part of accountable government.

But Americans also realize that without government&rsquos investment and management of pharmaceutical companies and distribution sites, we would not have a vaccine. Without government&rsquos historic expansion of unemployment benefits and stimulus checks, we would not have kept 16 million out of poverty. Giving up on government is not an option improving it can benefit us all.

The counterassault on the idea of managed markets is assured. Free market ideologues will call the push for smarter regulation or more public investment &ldquosocialist.&rdquo They will suggest that managed markets will benefit &ldquoundeserving&rdquo Americans, implying less prosperity for white Americans and more handouts to people of color. Their criticism will no doubt energize a loud minority.

But the vast majority of American&rsquos won&rsquot buy it. They know that capitalism is not the problem&mdashit&rsquos the variety of capitalism that&rsquos been practiced over the past 40 years. When an accountable state effectively manages markets, those markets can create widely shared, stable prosperity. The challenge to come will be shaping the new common sense about political economy into a practical program to deliver on its promise. That era begins now.

Great Depression Photographs

Historical Context : The Great Depression in the United States started in 1929 when the stock market crashed. It caused an economic depression. The depression last over ten years and had long-term social, economic, and political effects on American society. It is still one of the greatest defining eras in US History. In general, we know what caused the Great Depression, but these causes are still debated even today. It happened after a period of great prosperity (The 1920s) when American commerce was growing. The issues that surround the causes of the depression are still issues today.

Suggested Teaching Instructions

To the extent possible under law, BELL Academy has waived all copyright and related or neighboring rights to " Great Depression Photographs ".

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Development-led Globalization: Towards Sustainable and Inclusive Development Paths

Report of the Secretary-General of

Development-led globalization: Towards sustainable and
inclusive development paths

United Nations
New York and Geneva, 2011

Preface: The world turned upside down. 3

A. Goodbye finance-driven globalization. 4

B. The future is not what it used to be. 6

C. Hello development-led globalization . 7

I. Finance-driven globalization and its limits . 10

B. Development matters . 12

C. The emergence of finance-driven globalization. 14

3. Cycles, shocks and crises . 24

D. Trade, technology and TNCs . 27

E. Development interrupted . 35

F. The ongoing downturn. 42

II. Rebalancing the global economy through sustainable and inclusive development. 47

B. Inclusive development and the investment challenge . 48

C. Trade, technology and industrial policy. 55

D. Developmental states . 59

E. From social protection to inclusive development . 63

2. Turning trade and investment towards development. 77

3. Managing new threats . 83

G. New partnerships in the South . 86

III. The political economy of development . 92

A. Towards a new development consensus . 93

Preface: The world turned upside down

1. In my report to UNCTAD XII (TD/413), I warned that, despite an unprecedented
global boom over the previous five years, significant risks and vulnerabilities threatened
growth prospects and could undermine moves towards a more equitable and effective
global partnership for development. In particular, I argued that “putting liberalized markets
and flexible prices at centre stage has proved to be insufficient in the light of the complex
challenges that the new generation of globalization poses”.

2. At that time, I was swimming against the tide of conventional thinking. Even though
there were clouds on the economic horizon, notably the housing market in the United States
and (closely related) concerns about global imbalances, the consensus forecast was for fair
economic weather sustained by strong market fundamentals. Indeed, at the time that I was
writing, the International Monetary Fund (IMF) was raising its global growth projections.

3. With the benefit of hindsight, my report underestimated the seriousness of the global
imbalances. Sharply rising food prices were an early indication that the world economy was
out of kilter. The danger signs became apparent during the UNCTAD conference in Accra,
when prices for cereals, soybeans and rice were all at historic highs. In the following
months, further rises led to political unrest in several countries. There were also concerns
about the price of oil, which had risen above $100 per barrel, raising inflationary worries
along with the possibility of geopolitical tensions.

4. Financial turbulence hit in August 2007, and the collapse of Northern Rock in
February 2008 and Bear Stearns in March 2008 revealed serious stresses in the financial
markets. Concerns over subprime lending in the United States housing markets intensified
in the middle of 2008. But it was the bankruptcy of Lehman Brothers in September that
triggered a crisis that few had anticipated or even imagined possible, exposing the full
extent of global financial fragility. Credit markets froze and equity prices collapsed.
Leading financial institutions failed, while many others turned to their governments for
support. The speed of contagion was breathtaking, and the sense of panic in the financial
markets and among policymakers was palpable.

5. The first lesson to draw from the crisis is that leaving markets to regulate themselves
is both ineffectual and costly. Bailing out financial institutions has already run into trillions
of dollars, and despite unprecedented fiscal and monetary responses, the global economy
experienced its first contraction since the Great Depression. An estimated 10 per cent of
global output was lost between 2008 and 2010, and tens of millions of jobs were destroyed
according to estimates by the International Labour Organization (ILO), 200 million people
are currently unemployed worldwide. The impact was felt even in those communities that
had seen few benefits during the boom years: due to the crisis, the number of people living
in extreme poverty jumped by between 50 and 100 million.

6. A second lesson is that when a large number of economies collapse so dramatically,
there must have been underlying weaknesses and fragilities missed or ignored by
policymakers prior to the crisis. No one doubts the creative impulse of market forces, but
the private pursuit of short-term gain can sometimes result in insufficient productive
investment and concentrate the rewards with the favoured few. The risks are particularly
pronounced when financial markets detach themselves from the real economy, tying wealth
creation to the rapid accumulation of debt and rising asset prices rather than to steady
productivity improvements and increasing incomes, and channelling innovation to financial
engineering rather than to technological progress. Such a growth strategy is likely to be
neither stable nor fair.

7. A third lesson is that when things do fall apart, the state remains the only institution
capable of mobilizing the resources needed to confront large and systemic threats. The idea
that the nation state had somehow outlived its usefulness in a borderless world was never
very serious. Since the state is pivotal to establishing an inclusive social contract and
strengthening participatory politics, it is both imprudent and unrealistic to reduce or bypass
its role in managing economic development and change. The more worrying trend in recent
years has been the growing influence of financial markets in bending public policy and
resources to their own needs and interests – leading a former IMF chief economist to warn
of “a quiet coup” – including in the post-crisis period.

8. Even as a tentative recovery has set in, the imbalances that arose during the previous
boom, particularly in advanced countries, have proved very difficult to overcome. The
private debt overhang remains a drag in many countries, while the combined effect of
financial bailouts and recession has led to rising public deficits, triggering sovereign debt
crises in some countries and stalling the recovery in others. Everywhere, employment
creation has lagged behind, raising the threat of jobless growth and the spectre of
protectionist responses. This provides a fourth lesson from the crisis, namely that in an
interdependent world, countries cannot be expected to tackle destabilizing threats and
imbalances on their own. And yet, to date, effective rebalancing strategies have not
materialized at the multilateral level. The initial reaction to the food and financial crises
was swift, with significant resources committed on both fronts, along with improved policy
coordination and protectionist responses have so far been kept in check. But the reforms
required to prevent a repetition of the crisis have proved elusive. In the resulting
interregnum, the burden of adjustment has been shifted onto overstretched public and
household finances, with growing threats to the social peace and stability.

9. Neither IMF nor the World Bank, having abandoned their original raison d’être to
the siren calls of unregulated financial markets, have been able to forge a vision of a post-
crisis world economy consistent with changed economic and political realities. This failure
points to a wider hiatus in global governance. The Doha Development Round is fast
approaching its tenth anniversary, and its completion – as initially conceived – is still to
happen. Progress on reducing greenhouse gas emissions has stalled following the failure to
reach a comprehensive deal in Copenhagen. Finally, even before the latest crisis, keeping
the Millennium Development Goals on track was a struggle: their achievement by 2015 is
now only a distant possibility. It is telling that even a small proportion of the resources used
to save financial institutions deemed “too big to fail” could never be found in better
economic times for social and economic development, infrastructure-building and social
welfare, or to address environmental challenges.

A. Goodbye finance-driven globalization

10. It has become commonplace to view these developments as part of the inevitable
stresses and strains of moving to a borderless world economy, and the price to be paid for
the greater efficiency and dynamism of global market forces. Doing so requires a good deal
of faith in the textbook logic of how markets work. In fact, the past 30 years have seen a
persistent slowdown in global growth, weaker investment performance in many countries,
and a sharp rise in income inequality almost everywhere. Moreover, describing the global
economy as a natural system with a logic of its own ignores the policy choices
underpinning it.

11. The extensive deregulation of the financial sector in the advanced countries, the
dismantling of controls on cross-border financial activities, and the ensuing surge in capital
flows marked a radical break with the post-war international policy framework. The rapid
ascent of financial interests has eroded the checks and balances that had previously helped

channel market forces into the kind of creative and productive activities needed for long-
term growth, and has instead encouraged short-term, and at times destructive, behaviour by
banks, businesses, and households. Ideological support came from the efficient market
hypothesis, which made the case for a hands-off policy approach applicable to all economic
circumstances and challenges.

12. The crisis has put to rest the idea that there is a “one-size-fits-all” policy agenda. It
has also been a considerable shock to the confidence of the developed world, and to the
belief that economic disasters only occur in developing countries because of weak
institutions, corruption and mismanagement. The former head of IMF, Dominique Strauss-
Kahn, was right to conclude that events since 2008 have “devastated the intellectual
foundations of the global economic order of the last twenty-five years” and have shattered
confidence in simple policy fixes to complex development challenges.

13. Since the early 1990s, against the grain of conventional economic wisdom,
UNCTAD has been arguing that the risks from the premature liberalization of trade and
capital flows are significant, that the benefits are not simply there for the taking, and that a
more pragmatic approach to development strategy is essential. In 1993 UNCTAD warned
of an emerging financial crisis in Mexico, in 1995 we flagged the systemic risk from
growing derivatives markets, and in 1997 we were not only alert to the dangers of rapid
financial liberalization in East Asia but also suggested that a combination of repeated
shocks and growing inequalities could produce a backlash against globalization. We have
consistently argued that, in the face of large and unruly capital movements, neither fixed
nor flexible exchange rates can provide the macroeconomic stability needed to secure
strong growth, and that capital controls should be a permanent part of the policy toolkit. We
have warned that an undue emphasis on inflation targeting would likely fuel damaging
boom-and-bust cycles, particularly in developing countries, arguing instead for greater
fiscal space and a more balanced approach to demand management. Throughout the past
decades, we have been warning that the build-up of private and public sector debt was
feeding unsustainable imbalances at the household, national and global level, and that
“bailouts” were neither an effective nor a desirable solution. In 2008, we argued that the
financialization of markets of strategic interest to developing countries had reached
dangerous levels, and that it had become a more significant influence on trade and
development than real economic fundamentals.

14. With all this in mind, I have chosen the term finance-driven globalization (FDG) to
characterize the dominant pattern of international economic relations during the past three
decades. This is intended to convey the idea that financial deregulation, concerted moves to
open up the capital account, and rapidly rising international capital flows have been the
main forces shaping global economic integration since the breakdown of the Bretton
Woods system. Financial markets and institutions have become the masters rather than the
servants of the real economy, distorting trade and investment, heightening levels of
inequality, and posing a systemic threat to economic stability.

15. The latest crisis has served as a further reminder that FDG is a political project and
is, therefore, the subject of legitimate discussion and debate. To date, the response has
largely been one of muddling through, with ad hoc measures to mitigate the damage from
economic shocks, informal partnerships to tackle global imbalances, and impromptu
alliances to push for greater market transparency. There has been progress: the G20 has
added a new and more focused layer of coordination in international economic matters, and
has helped to nudge the multilateral financial institutions towards (marginally) more
representative governance structures and (slightly) less dogmatic advice. However,
divisions have emerged among the advanced economies on how to reform the international
financial system, with alarming signs of a reversion to “business as usual”. Indeed, their
financial sectors have already returned to many of the old practices, even as public finances

deteriorate and the recovery stalls. Austerity measures are back on the agenda, and
resistance to financial regulation has begun in earnest.

B. The future is not what it used to be

16. Money and finance have dominated policy discussions and grabbed the headlines.
However, there are other important trends shaping development prospects. Soon after
UNCTAD XII in Accra, the United Nations concluded that the planet was now truly urban,
with over half the world’s population living in cities. This figure is expected to rise to over
60 per cent by 2030. Urbanization has long been seen as a progressive trend, closely linked
to a series of cumulative processes raising economic and social well-being. However the
links are not automatic, and considerable challenges lie ahead. Rapid urbanization,
premature deindustrialization and a degraded public sector have led to speculations about a
“hollowing out” of the middle-class, and, more dramatically, a “planet of slums”. Where
these trends have collided with the ambitions of a youthful population, economic
frustrations have spilled over into political unrest, as witnessed recently in North Africa.

17. It would be equally amiss to ignore environmental challenges, and, in particular,
what the United Nations Human Settlements Programme (UN-HABITAT) has dubbed the
“deadly collision” between urbanization and climate change. It is widely acknowledged that
global warming is the unwelcome (and unpriced) result of successful development of
today’s advanced economies. But solving it will require a global policy response that brings
about a new economic trajectory without compromising existing development goals. That
will entail low-carbon, high-growth paths based around new technologies that can deliver
an adequate supply of energy and rising incomes to a growing global population, with
greatly reduced greenhouse gas emissions. A large investment push, with adequate
financing and technology transfer from richer countries, is essential to this rebalancing
challenge, and serves as a reminder of the interrelated nature of the challenges facing the
international community. To date, the requisite economic incentives, degree of political will
and appropriate partnerships have been noticeable by their absence.

18. The rise of new growth poles in the South also heralds a significant shift in the
global economic and political landscape. China has already become the world’s second-
largest economy and its largest exporter. India has now posted two decades of strong
growth and is steadily climbing the export ladder. Growth in other large developing
countries, such as Brazil and Indonesia, picked up in the second half of the last decade.
Since the Accra conference, the share of developing countries in world income has risen by
more than 3 percentage points, to 30 per cent. Trade and investment patterns have shifted
accordingly, and new political alliances and groupings have emerged, suggesting that a new
world order is already taking shape.

19. The resilience to, and rebound from, the crisis in parts of the developing world
certainly marks an important break with the past and has raised hopes of a prolonged period
of convergence ahead. UNCTAD has always looked to an emerging South as being key to a
more balanced global economy. However, a degree of caution is warranted. To date, this
shift has been uneven, with large differences between developing regions and among
individual countries many of the least developed countries (LDCs) have seen the income
gap between them and other countries widen further during the past two decades,
suggesting that polarization pressures continue to shape global economic relations.
Moreover, many emerging markets remain dependent on the leading economies and
vulnerable to changes in policy and in economic conditions there. The impact of the
Northern debt crisis on developing countries will need to be monitored carefully. The
emerging South is still work in progress, and new forms of cooperation and partnership will
be needed to consolidate recent gains and to meet the challenges ahead.

C. Hello development-led globalization

20. Against a backdrop of economic imbalances and political tensions in interwar
Europe, John Maynard Keynes called for “new policies and new instruments to adapt and
control the working of economic forces, so that they do not intolerably interfere with
contemporary ideas as to what is fit and proper in the interests of social stability and social
justice”. A new deal did eventually emerge, but only after a push for “business as usual”
had left a trail of currency disorders, wasted resources and shattered communities. Today’s
global economic landscape bears some unnerving similarities to the interwar years as then,
neither muddling through nor a return to business as usual will get things back on track.
The challenge is to rebalance economies in a way that is timely, sustainable and just.

21. This time around, rebalancing will need a global new deal that can “lifts all boats”,
in developed and developing countries alike. It is a basic truth that people everywhere want
much the same thing: a decent job, a secure home, a safe environment, a better future for
their children and a government that listens and responds to their concerns. UNCTAD has
consistently suggested a battery of policy measures and institutional reforms at the national
and the international level to support rising living standards in developing countries, build
their resilience to external shocks, and help them pursue a balanced integration with the
global economy. The challenge, as I outlined in my report to UNCTAD XII, was less about
“getting prices right” and more about “getting development right”, through a pragmatic,
proactive and socially inclusive approach to macroeconomic, trade and industrial policies.

22. Finding the appropriate mixture of reflation, redistribution and regulatory measures
to achieve these goals is now the urgent task of policymakers, at the international as much
as the national level. I have chosen the term development-led globalization (DLG) to
describe the principles, priorities and policies that need to be pursued to turn tentative
recovery into an inclusive and sustainable future.

23. Reforming the financial system is the place to begin. Even before the crisis, it was
clear that stable and inclusive development was incompatible with speculative market
behaviour, boom-and-bust cycles, and the austerity programmes to which they invariably
lead. It is telling that the emerging success stories from the South have, in large part,
pursued policies that have avoided these dangers. Finance needs to get back to the business
of providing security for people’s savings and mobilizing resources for productive
investment. Reforms are also needed to replace unruly and procyclical capital flows with
predictable and long-term development finance, to regain stability in currency markets and
to support expansionary macroeconomic adjustments. Surveillance and regulation will need
to be strengthened at all levels, and new institutional arrangements may need to be
considered. Regional financial cooperation, despite the current difficulties in the eurozone,
will, in particular, have a much larger role to play in a more balanced international

24. Stable monetary and financial arrangements are a precondition for making trade and
investment work for inclusive growth and development. But rebalancing requires that
financial and other resources be channelled towards the right kind of productive activities.
Industrial development remains a priority for many developing countries because of the
opportunities it provides to raise productivity and incomes, and to get the most from
international trade. But a wider sectoral approach, including a focus on the primary sector
in many LDCs, is needed in order to ensure that measures to diversify economic activity are
consistent with job creation, the security of food and energy supplies, and effective
responses to the climate challenge.

25. Talk of “picking winners” has been given an unexpected boost by the exigencies of
the financial crisis, but the real challenge is to make sure that industrial policy, broadly
conceived, is properly aligned with other measures needed to build inclusive development

paths. Since diversified economies are the building blocks of a dynamic trading system, it is
essential that trade policies and rules – at all levels – support this agenda. Cutting through
the Gordian knot of existing regional trade and investment agreements and building more
productive forms of integration among neighbouring countries offers a way forward for
developing countries. There is also a case for new global rules in areas of particular interest
to developing countries, including for commodity markets and the effective transfer of

26. An inclusive development agenda cannot depend on economic policies alone. Under
FDG, the stresses and burdens of unregulated markets have, all too often, been shifted to
individuals and households and, in countries where social welfare systems exist, to
government budgets. In many cases, unprecedented increases in income inequality have
gone hand in hand with underfunded public services and rising levels of household
indebtedness. The resulting cost to economic security and social cohesion has been
enormous. Even when growth has accelerated, as it did in many developing countries
between 2002 and 2008, too many people were left behind. A balanced economy depends
on a strong social compact which, in turn, requires a range of universal and targeted social
policies, tailored to specific circumstances, to ensure that the benefits of growth are widely
enjoyed and its risks are shared fairly.

27. The crisis has confirmed UNCTAD’s long-standing insistence on the importance of
policy space. Its role in building new and more inclusive development paths cannot be
understated. This is needed to allow governments – particularly but not only in developing
countries – to correct market failures, promote collaboration among enterprises in areas of
long-term investment, manage integration with the global economy, and ensure that the
rewards from doing so are evenly shared. In order to do so, states must forge a coherent and
inclusive developmental vision and build a strong compact with different interest groups to
better manage the conflicts and trade-offs that change inevitably brings. Effectiveness also
hinges on a more integrated approach to policymaking which not only links
macroeconomic, sectoral, trade and financial policies in support of growth and
development, but also brings together economic, environmental and social policies, leading
to sustainable and inclusive outcomes. Accordingly, in this report, I will stress the critical
role of the developmental state in building balanced growth paths in an economy where the
mobilization and allocation of resources relies on market forces.

28. This should not be taken to imply that states never fail. Indeed, accountability,
transparency and the rule of law are just as important for making states sufficiently
representative as they are for making markets sufficiently stable. However, when we
compare success stories from North America to Scandinavia to East Asia, we find that
market economies can operate within a wide spectrum of social and political arrangements,
and that, beyond a few core principles, there is no single model of state–market relations for
others to emulate. Each country must be able to experiment and discover what
configuration of institutions and governance works best in its circumstances and in line
with the expectations of its population.

29. Responsibility for the choice of policies to secure a prosperous, fair and stable future
remains to a large extent with national governments, institutions and constituencies.
However, in our interdependent world, a more secure and inclusive global economy
requires strong international leadership and carries collective responsibilities. There are
hard questions to answer about whether current arrangements can help to build socially
inclusive alternatives to FDG, and what governance structures might support DLG.
UNCTAD XIII in Doha provides an opportunity for the international community to discuss
these challenges in a frank, open and constructive manner.

30. This report is presented in three parts. The first sets out some of the main features of
FDG and suggests that its outcomes have been much more uneven, unstable and unfair than

its proponents had claimed or expected. It also shows that there has been a systemic failure
to create the economic environment needed to promote productive investment and
employment. However, this raises the question of why some countries have been able to
grow strongly over the past two or three decades. This section seeks to account for that, and
to draw lessons from their success.

31. The second part outlines a rebalancing agenda which aims to deliver lasting and
inclusive development gains. It sketches a three-pronged strategy focusing on (a) building
developmental states that are able to mobilize domestic resources, strengthen productive
capacities and share the gains in an equitable manner (b) creating more robust multilateral
structures capable of forging collective responses to the challenges that countries will face
in the years ahead, including those required to tame finance and to promote investment-led
responses to climate change and (c) strengthening regional ties, including through South–
South cooperation, in order to enhance stability and open new growth opportunities.

32. The final section will argue that rebalancing is not a narrow technocratic challenge.
A true break with the fundamentalist thinking underlying FDG will involve a change of
attitudes, morals and values. Accordingly, this report insists on the importance of a
normative agenda as an integral part of the broad-based rebalancing involved in the shift
towards DLG.

I. Finance-driven globalization and its limits

33. Liberal political economy has long linked the spread of commerce to economic
prosperity, personal liberty and the control of abusive state power. Its neoclassical offspring
has provided a mathematically eloquent account of how unrestricted markets for goods,
assets and factors of production can generate efficiency gains and bring macroeconomic
stability by tying relative prices to global scarcities. Proponents of neo-liberal globalization
have often claimed that these forces, in combination with advances in information and
communication technology, have been propelling the global economy in the direction of a
borderless world, and that policymakers, particularly in developing countries, should not
resist this epochal shift: indeed, conventional economic logic suggests that developing
countries will be the main winners in this “flatter world”.1

34. Expanding trade and advances in information and communication technology have
certainly been important in connecting and shrinking the world over the past thirty years.
However, these were also prominent features of the post-war era of regulated market
capitalism. In contrast, the main drivers of recent economic transformations have been
financial markets and a finance-friendly policy environment. Pressure for financial and
capital account liberalization has been justified by the argument that this would raise
domestic savings, improve resource allocation and spur productive investment, particularly
in capital-scarce developing countries.2 Despite these ambitious promises, the rewards from
FDG for most countries and communities have fallen short of expectations. Global growth
has slowed down in recent decades (fig. 1), become more unbalanced, and been frequently
punctuated by crises. These crises have been particularly prevalent in the developing world
(fig. 2), but they have been growing steadily larger in the advanced economies, culminating
in the deepest economic collapse since the Great Depression.

1 In his keynote speech to the 2005 Labour Party conference, the then British Prime Minister Tony

Blair summed up the conventional view of globalization when he chastised those wishing to debate it:
“You might as well debate whether autumn should follow summer. They are not debating it in China
and India. They are seizing its possibilities in a way that will transform their lives and ours … In the
era of rapid globalization, there is no mystery about what works – an open liberal economy prepared
constantly to remain competitive. The new world rewards those who are open to it.” Full text of
speech available at On a more technical
level, the globalization debate involves the links between economic convergence and openness see
TDR (1997) and Rodrik (2011b).

See Mishkin (2006) for a standard account. In what follows, domestic financial liberalization includes
the removal of controls on interest rates, the elimination of credit controls and restrictions on foreign
currency deposits, and the liberalization of the stock market to allow foreign investors to buy, earn
income from and sell equities without restriction. Capital account liberalization describes the
unification of the exchange rate and the removal of regulations on capital outflows and offshore
borrowing by financial institutions and non-financial corporations.

Watch the video: Inside Economy of the United States of America US Economy Today


  1. Grozshura

    you don't have to try all of them one after the other

  2. Isidro

    This information is accurate

  3. Shagar

    Yes, sounds attractive

  4. Chanler

    Agree, this idea is right about

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