The Growth of
The U.S. government grew substantially beginning with President Franklin Roosevelt's administration.
In an attempt to end the unemployment and misery of the Great Depression, Roosevelt's New Deal created many new
federal programs and expanded many existing ones. The rise of the United States as the world's major military power
during and after World War II also fueled government growth. The growth of urban and suburban areas in the postwar
period made expanded public services more feasible. Greater educational expectations led to significant government
investment in schools and colleges. An enormous national push for scientific and technological advances spawned new
agencies and substantial public investment in fields ranging from space exploration to health care in the 1960s.
And the growing dependence of many Americans on medical and retirement programs that had not existed at the dawn of
the 20th century swelled federal spending further.
While many Americans think that the federal government in Washington has ballooned
out of hand, employment figures indicate that this has not been the case. There has been significant growth in
government employment, but most of this has been at the state and local levels. From 1960 to 1990, the number of
state and local government employees increased from 6.4 million to 15.2 million, while the number of civilian
federal employees rose only slightly, from 2.4 million to 3 million. Cutbacks at the federal level saw the federal
labor force drop to 2.7 million by 1998, but employment by state and local governments more than offset that
decline, reaching almost 16 million in 1998. (The number of Americans in the military declined from almost 3.6
million in 1968, when the United States was embroiled in the war in Vietnam, to 1.4 million in 1998.)
The rising costs of taxes to pay for expanded government services, as
well as the general American distaste for "big government" and increasingly powerful public employee unions, led
many policy-makers in the 1970s, 1980s, and 1990s to question whether government is the most efficient provider
of needed services. A new word -- "privatization" -- was coined and quickly gained acceptance worldwide to
describe the practice of turning certain government functions over to the private sector.
In the United States, privatization has occurred primarily at the municipal and
regional levels. Major U.S. cities such as New York, Los Angeles, Philadelphia, Dallas, and Phoenix began to employ
private companies or nonprofit organizations to perform a wide variety of activities previously performed by the
municipalities themselves, ranging from streetlight repair to solid-waste disposal and from data processing to
management of prisons. Some federal agencies, meanwhile, sought to operate more like private enterprises; the
United States Postal Service, for instance, largely supports itself from its own revenues rather than relying on
general tax dollars.
Privatization of public services remains controversial, however. While advocates
insist that it reduces costs and increases productivity, others argue the opposite, noting that private contractors
need to make a profit and asserting that they are not necessarily being more productive. Public sector unions, not
surprisingly, adamantly oppose most privatization proposals. They contend that private contractors in some cases
have submitted very low bids in order to win contracts, but later raised prices substantially. Advocates counter
that privatization can be effective if it introduces competition. Sometimes the spur of threatened privatization
may even encourage local government workers to become more efficient.
As debates over regulation, government spending, and welfare reform all demonstrate,
the proper role of government in the nation's economy remains a hot topic for debate more than 200 years after the
United States became an independent nation.
Markets and Financial Markets
markets in the United States provide the lifeblood of capitalism. Companies turn to them to raise funds needed
to finance the building of factories, office buildings, airplanes, trains, ships, telephone lines, and other
assets; to conduct research and development; and to support a host of other essential corporate activities. Much
of the money comes from such major institutions as pension funds, insurance companies, banks, foundations, and
colleges and universities. Increasingly, it comes from individuals as well. As noted in chapter 3, more than 40
percent of U.S. families owned common stock in the mid-1990s.
Very few investors would be willing to
buy shares in a company unless they knew they could sell them later if they needed the funds for some other
purpose. The stock market and other capital markets allow investors to buy and sell stocks continuously.
The markets play several other roles in the American economy as well. They are a
source of income for investors. When stocks or other financial assets rise in value, investors become wealthier;
often they spend some of this additional wealth, bolstering sales and promoting economic growth. Moreover, because
investors buy and sell shares daily on the basis of their expectations for how profitable companies will be in the
future, stock prices provide instant feedback to corporate executives about how investors judge their
Stock values reflect investor reactions to government policy as well. If the
government adopts policies that investors believe will hurt the economy and company profits, the market declines;
if investors believe policies will help the economy, the market rises. Critics have sometimes suggested that
American investors focus too much on short-term profits; often, these analysts say, companies or policy-makers are
discouraged from taking steps that will prove beneficial in the long run because they may require short-term
adjustments that will depress stock prices. Because the market reflects the sum of millions of decisions by
millions of investors, there is no good way to test this theory.
In any event, Americans pride themselves on the efficiency of their stock market and
other capital markets, which enable vast numbers of sellers and buyers to engage in millions of transactions each
day. These markets owe their success in part to computers, but they also depend on tradition and trust -- the trust
of one broker for another, and the trust of both in the good faith of the customers they represent to deliver
securities after a sale or to pay for purchases. Occasionally, this trust is abused. But during the last half
century, the federal government has played an increasingly important role in ensuring honest and equitable dealing.
As a result, markets have thrived as continuing sources of investment funds that keep the economy growing and as
devices for letting many Americans share in the nation's wealth.
To work effectively, markets require the free flow of information. Without it,
investors cannot keep abreast of developments or gauge, to the best of their ability, the true value of stocks.
Numerous sources of information enable investors to follow the fortunes of the market daily, hourly, or even
minute-by-minute. Companies are required by law to issue quarterly earnings reports, more elaborate annual reports,
and proxy statments to tell stockholders how they are doing. In addition, investors can read the market pages of
daily newspapers to find out the price at which particular stocks were traded during the previous trading session.
They can review a variety of indexes that measure the overall pace of market activity; the most notable of these is
the Dow Jones Industrial Average (DJIA), which tracks 30 prominent stocks. Investors also can turn to magazines and
newsletters devoted to analyzing particular stocks and markets. Certain cable television programs provide a
constant flow of news about movements in stock prices. And now, investors can use the Internet to get
up-to-the-minute information about individual stocks and even to arrange stock transactions.