Investing in America.

• Author: Roa, Carlos

American policymakers, foreign policy experts, and business leaders remain attached to a eupeptic view of history that has its origins in the end of the Cold War. The received view is that, since democratic capitalism was what won the Cold War, future policy should focus on the twin goals of reorganizing modern democratic society around free-market-oriented principles and exporting this program to the rest of the world. Putting aside the fact that capitalism alone is not what brought down the Soviet Union, this worldview was flawed from the outset: basing society around market principles, a drive toward efficiency, and the atomization of the individual could only result in government austerity, deregulation, and the erosion of shared values. Cost-benefit analyses became king, prompting policymakers to outsource what were once core government roles, including defense. The state came to be seen as merely an enabler of market economics, to be minimized wherever possible. Moreover, that which it defended came under attack as well. Borders? A roadblock to economic efficiency. National identity? Otiose in a globalized world of a universal market. Other examples abound.

The result: a hollowing out of state capacity, a collapse of the political center's legitimacy, and boundless internal division. Economic inequality has grown dramatically, trust in politicians and institutions has fallen, and government is seen as unable to build anything. An Axios-Ipsos poll from earlier this year found that 79 percent of respondents agree with the notion that the country is "falling apart." Any doubts concerning the current state of affairs were lain to rest with what will in coming years be known as, to borrow Asian naming style, the January 6 Incident--a protest-turned-riot that resulted in the breach of the Capitol building in Washington, DC as the 2020 election vote was being certified. This close personal encounter with political instability should spur policymakers to address the grave reality: our current problems are so severe that domestic insurrections are no longer an abstract impossibility. Political, economic, and social reform are needed urgently.

No doubt the United States has faced eras of worse internal division, hardship, and yes, political violence. These are the Confederation Period (following the American Revolution), the Civil War era, and the Great Depression. If America is to find its way through its current troubles, we must look to our past and draw inspiration from the efforts of our forebears. It contains many salutary lessons which Congress and the Biden administration, along with future ones, would do well to draw upon.

During the Confederation Period, fledging America was a deeply divided country in the midst of a severe economic crisis. States competed with each other for commerce. The rural countryside was neglected. The gap between the rich and poor widened. The war's end, according to a working paper for the National Bureau of Economic Research, led to a collapse in per capita income that was as severe "as the 1929-33 drop into the Great Depression." Wartime spending in critical industries--everything from gunsmiths and shipbuilders to salt and market crops--disappeared, driving entire towns out of business. Economic activity was down. Inflation was up. Revenue from taxes collapsed.

Not that the government, such as it was, could do much about it. The Articles of Confederation, which governed the thirteen states until 1789, were totally inadequate. The Congress of the Confederation lacked any way of compelling states to pay taxes, and had, in the words of economic historian C. Donald Johnson, "no authority to regulate trade; rather, each state regulated its own trade, imposing such duties as desired--not only on foreign products but also on those of its sister states."

Take New York. It supported its public finances (and the interests of its local elites and investors) through a 5 percent tariff imposed on imported British goods. As the main commercial port of entry for this part of the country, the state thereby managed to secure tax revenue on British imports that should have gone to its neighboring states of New Jersey and Connecticut. Furthermore, New York later extended this tariff to produce entering New York from New Jersey and Connecticut. These states responded in turn: New Jersey refused to pay taxes to Congress so long as New York's tariffs remained in place (Congress had no enforcemenr capability, so it couldn't do anything) while Connecticut's merchants banded together to suspend all trade with New York.

Not only did Congress lack the power to collect taxes and duties and regulate trade, but it was also helpless to prevent foreign powers from taking advantage of the situation by flooding America with cheap, high-quality manufactured products while creating strict barriers for domestic products. British imports to the United States tripled in volume shortly after the war, but London opted to close the West Indies to American products, Newfoundland and Nova Scotia to American whaling and fishing ships, and England itself to U.S. fish, whale oil, and salted meats. So harmful was this flood of imports on local industry--already suffering from the end of demand following the Revolutionary War--that, according to the early twentieth-century economic historian Victor S. Clark, "town artisans and manufacturers experienced enough distress to create the sentiment behind the New England and Pennsylvania tariff laws of 1785 and 1786." Contemporary observers may feel inclined to compare this case and our present situation: cheap Chinese imports flooding the United States, trade barriers preventing American goods from entering China, and shrinking domestic manufacturing driving politicians to advocate for tariffs and other forms of protectionism.

Then there was the matter of Revolutionary War debt. Simply put, securing independence was anything but cheap. The United States, lacking money, had gone into debt, and now it was time to pay up. In Unruly Americans and the Origins of the Constitution, Woody Holton describes the situation in stark terms:

[Between 1781 and 1790,] Americans were hit with taxes that averaged three or four times those of the colonial era. The principal purpose of the levies was to pay interest on state and federal government securities, many of them bought up by speculators. In the mid-1780s, most states earmarked at least two-thirds of their tax revenue to pay foreign and domestic holders of the war-related debt bonds. The tax burden was magnified by a shortage of circulating coin. In other words, state governments were forced to resort to what are known today as austerity measures. Taxation was more onerous than it was before the war, but the money was not flowing towards desperately needed public spending on infrastructure, domestic manufacturing, and anything that could help the economy get back on its feet. Instead, between 75 and 80 percent of state budgets, on average, was going to servicing debt. This was held by other countries and, domestically, by wealthy speculators. Well before the existence of modern-day vulture funds, these individuals earned fabulous, double-digit returns by acquiring bond certificates and pressuring state governments to pay forth what is owed. In other words, the rich got richer at a time when the economy was in shambles and starved for investment.

Perhaps it should come as no surprise that the Confederation Period saw populist unrest and minor attempts at secession. The culmination of this crisis was Shay's Rebellion, in which, to quote Christian Parenti, "indebted middle-class farmers in the western mountains fought debt-owning coast elites and the state government they controlled" in Massachusetts. James Madison captured the national mood in a letter to Thomas Jefferson: "Most of our political evils may be traced to our commercial ones."

It was abundantly clear that the Confederation was on the verge of disintegration at the hands of internal trade war, foreign embargo, and debt. The only way forward was a painful but realistic and holistic assessment of young America's circumstances, followed by the implementation of a program that could balance out competing political and domestic interests. Achieving this would require a sufficiently strong national government, with the power to tax states, regulate trade, issue coinage, and more. And creating such a government would require a constitution.

The aim of the founding fathers was to form a federal government that could create a "more perfect union," ensure "domestic tranquility," and "promote the general welfare" because the Confederation was tearing itself apart. It seems fitting then that the first major piece of legislation passed in Congress was the Tariff Act of 1789, which protected domestic manufacturing industries and secured revenue for the federal government's operation and debt servicing. Other measures soon followed. The Northwest Ordinance of 1789, for example, granted 160-acre plots of land to settlers and farmers in what would eventually be the states of Ohio, Indiana, Illinois, Michigan, and Minnesota. The territories also prohibited slavery and speculators, thus preventing the emergence of large estates owned by a wealthy minority. In 1794, an act "for the erecting and repairing of Arsenals and Magazines" was passed out of a desire to break free from a dependence on foreign arms manufacturers, thus "providing for the common defense." And, as Michael Lind lucidly explains in Land of Promise: An...