The presidential election of 2012 is shaping up to be an epic contest. It is uncommon for an incumbent president to be considered an underdog, yet as of this writing President Barack Obama’s odds of winning reelection, according to the Intrade prediction market, stand at less than 50 percent. An endangered incumbent always makes for a fascinating political dynamic, one that will be compounded by the enormously high stakes of the upcoming battle. With the unemployment rate stuck at near nine percent and the Democrats’ new health entitlement set to go into effect relatively soon, the winner of 2012 will have unusual power to set American domestic policy for the rest of the decade.

But 2012 is shaping up to represent much more than even all this. It is a very rare event in American electoral politics that the country is faced with such a stark choice between two competing visions for the government’s role in the society. Using a strict standard, there have really been only two such elections, those in 1832 and 1896. In other cycles, nonideological issues or national concerns ultimately kept the country from focusing on the ideological contrasts between the two parties. For instance, the election of 1800 was fought in part over large differences in economic policies, but much of it had to do with foreign affairs and extreme ad hominem attacks. The election of 1936 was certainly consequential for the long-term political economy, but the substantial rebound from the depths of the Great Depression gave Franklin Roosevelt an easy “valence” issue to campaign on. Even the Election of 1860 — unquestionably the most important in the nation’s history — was confused by the presence of four candidates, each offering different approaches to the slavery issue and ensuring that Lincoln could not claim a popular mandate.

So, it is an extremely unusual event in the nation’s public life that the people are posed with such a straightforward question of ideology — 1832, 1896, and now perhaps 2012. Interestingly, the broad ideological contours of the 2012 contest resemble those prior contests. On the one side is a nationalist coalition dedicated to advancing the public interest by sponsoring American commerce. On the other side is an egalitarian faction that believes that those pro-business policies undermined the republican character of the government, and instead offers proposals to redistribute political power, economic resources, or both.

The division’s roots

The idea of a strong national government to facilitate American commerce and industry is as old as the nation itself. Frustrated by the experiences of the American Revolution, where runaway inflation, lack of pay for soldiers, and poor infrastructure to move men and materiel hampered the war effort, American nationalists were downright appalled by the crackup in society during the 1780s under the measly Articles of Confederation. Leading nationalists like Alexander Hamilton, John Jay, James Madison, and George Washington were prime movers in organizing the Constitutional Convention, where they pushed for a robust national government capable of solving big problems.

One of the first articulations of this nationalist philosophy can be found in Hamilton’s contributions to the Federalist Papers. In his famed “Federalist No. 10,” Madison focuses on the ability of a large republic to protect the public interest from the machinations of factions, but Hamilton offers a different approach in the oft-overlooked “Federalist  No. 11.” In it, he suggests that a strong central government could engender national greatness, in part by encouraging trade between the states:

An unrestrained intercourse between the States themselves will advance the trade of each by an interchange of their respective productions, not only for the supply of reciprocal wants at home, but for exportation to foreign markets. The veins of commerce in every part will be replenished, and will acquire additional motion and vigor from a free circulation of the commodities of every part. Commercial enterprise will have much greater scope, from the diversity in the productions of different States.

As secretary of the Treasury during the Washington administration, Hamilton was central in enacting an economic program that included the federal assumption of state war debts, the repayment of all debt at face value, and above all the chartering of the semi-public Bank of the United States (bus). Hamilton believed that this program would establish the creditworthiness of the United States, and thus promote economic growth and broad prosperity. In his Report on Manufactures in1792, Hamilton went beyond this to anticipate much of the 19th-century Republican economic program by calling for protective tariffs, tax exemptions for certain raw materials, and facilitation of transportation.

This view forms the foundation of the modern Republican party, especially its conservative wing, although at first blush this might be difficult to appreciate. After all, today’s conservatives consistently promote limited government, whereas Hamilton and the Federalists were in favor of an activist government. How to bridge this apparent gap? The difference is accounted for in the rise of progressivism, the political philosophy developed at the end of the 19th century that promoted an active government to regulate business and redistribute income among the classes. Today’s conservative Republicans generally favor “limited” government when compared to modern progressives, but they are as “activist” as ever when viewed from the Hamiltonian perspective in that they prefer a government that encourages American commerce and industry.

The Hamiltonian view of the federal government has long provoked intense backlash, with critics usually blasting the philosophy as being inherently unequal and anti-republican. This was the charge leveled by the Jeffersonians, who took control of the government in 1800 by demagoguing the Hamiltonians as an aristocratic clique plotting to impose monarchy upon the United States.

Unfortunately, the Jeffersonians would have to learn the hard way that Hamilton’s nationalistic policy was sound. Having all but vanquished their Federalist opponents, the Jeffersonian Republicans cut government spending to the bone and allowed the charter of the Bank of the United States to expire in 1811. The next year, amid a wave of nationalistic sentiment, they entered the country into another war with England — with calamitous results. A lack of internal infrastructure again prohibited the efficient movement of men and supplies, a lack of a standing army left ill-prepared state militias to handle most of the fighting, and a lack of strong financial institutions made it extremely difficult for the government to fund the war operation. The country had to suffer the ignominy of seeing the capital city burned to the ground, and it was only Andrew Jackson’s victory at the Battle of New Orleans that salvaged the national pride. The Treaty of Ghent accomplished none of the goals America had set when it initiated the conflict, and the “War of 1812” has been all but forgotten by 21st-century America.

The Jeffersonians would have to learn the hard way that Hamilton’s nationalistic policy was sound.

Yet it had a profound effect on the Jeffersonians. Almost immediately after the war, the party split apart based on the old Jefferson-Hamilton divide of twenty years prior. Moderate Jeffersonians like John Quincy Adams, Henry Clay, and Madison rediscovered the virtue of a strong central authority to promote internal development, and chartered a second bus. Indeed, Clay, who would dominate American politics for the next 30 years, elaborated a neo-Hamiltonian political program that he dubbed “the American System”: a national bank to stabilize currency and credit, protective tariffs to grow nascent American industries, and infrastructure improvements to promote internal development.

Mismanagement of this second bus abetted the Panic of 1819, but under the stewardship of president Nicholas Biddle, it contributed to the robust economic growth of the 1820s, when real gdp increased by an estimated four percent per year. Yet the bus had its detractors: Debtors in the South and West often viewed it as an institution that transferred wealth from their regions into the more prosperous Northeast; “radical” Jeffersonians considered it an unconstitutional expansion of government and a threat to simple republican virtue; and a growing number of observers would articulate a critique that has since become common in American political discourse — the idea that the bus executives played political favorites and created a climate of cronyism and corruption.  

Andrew Jackson would come to expound all of these criticisms. His rough-hewn exterior belied a cunning political mind and firm belief that hard “specie” was superior to bank notes as the national currency, and Jackson set about to cut the power of the bank down to size, virtually from day one of his administration. Though Jackson would himself expand and enhance the powers of the presidency — by vetoing bills for political purposes and by standing up to the South Carolina Nullifiers — he was certainly no advocate of Hamiltonian, big government nationalism, believing that such intervention in private affairs inevitably favored the prosperous classes and therefore threatened the republican character of the government.

When Biddle requested that Congress renew the bus charter just as the 1832 election season began, Jackson’s worst fears seemed confirmed. Biddle was clearly in cahoots with Jackson’s opponents, above all Clay, the nominee of the “National Republicans” who was casting about for an issue to campaign on. Hence the petition for an early re-charter, and to Jackson a clear signal that an unelected financial elite were trying to influence the democratic process. Despite the fact that Jackson’s allies in Congress generally supported Biddle’s petition, the president vetoed the new charter and issued a stern rebuke in his veto message:

It is to be regretted that the rich and powerful too often bend the acts of government to their selfish purposes. Distinctions in society will always exist under every just government. Equality of talents, of education, or of wealth can not be produced by human institutions. In the full enjoyment of the gifts of Heaven and the fruits of superior industry, economy, and virtue, every man is equally entitled to protection by law; but when the laws undertake to add to these natural and just advantages artificial distinctions, to grant titles, gratuities, and exclusive privileges, to make the rich richer and the potent more powerful, the humble members of society — the farmers, mechanics, and laborers — who have neither the time nor the means of securing like favors to themselves, have a right to complain of the injustice of their Government.

To this day, Jackson’s veto message remains the most cogent and effective critique of the Hamilton/Clay approach to policy. A government that is powerful enough to facilitate economic growth is also powerful enough to play favorites, and will inevitably favor the elite over the “humble members of society.” Though modern-day Democrats have since embraced big government progressivism, they nevertheless still regularly invoke this Jacksonian critique against today’s Republican Party and its pro-business policies, instead calling for reforms that address the “injustices” the “humble” suffer.

Unsurprisingly, the 1832 election became a referendum on these competing ideologies. The result was a decisive win for Jackson, who carried nearly 55 percent of the vote, the most for any Democrat until fdr’s victory a century later.

The Jacksonians dominated politics for the next quarter-century, but their inability to deal with the slavery issue meant that the new Republican Party would rise to power starting in 1860. Dominated by former Whigs, the Republicans would not only put an end to slavery, they would also push through a version of Clay’s American System over the next 30 years: protective tariffs to grow American industry, a stable currency pegged to gold, and federal land grants to nurture education and transportation. It seemed as though “Prince Hal,” as Clay was known during his lifetime, had finally been crowned king; though he would lose three presidential elections, his economic platform was largely implemented after he died, with the result being fantastic economic growth for the next 30 years.

The problem with a dynamic, industrialized economy is the persistent cycle of boom and bust, and the economic collapse of the 1890s was the worst depression the country had suffered to that point. The fallout from the “Panic of 1893” exacerbated an already bad situation in the South and Great Plains, where indebted farmers labored to make ends meet despite a tight money supply, falling crop prices, and railroad monopolies that soaked them for every last penny. The frustration of the hardscrabble farmers gave rise to the Populist Party, whose spirit in turn overtook the Democrats in 1896. At its convention in Chicago, the party all but disowned Democratic President Grover Cleveland — an eastern conservative who favored the gold standard — and nominated the young, brash William Jennings Bryan after he gave a stunning speech.

The issue that year was not the bus, which had never been revived since Jackson killed it some 60 years prior, but rather the de facto gold standard the country had adopted to stabilize the currency in lieu of a central financial institution. Bryan and his populist Democrats favored the unlimited coinage of silver, which would bring about inflation (or so they hoped) and thus transfer a portion of the national wealth from the creditors in the Northeast to the debtors in the South and West. Bryan’s convention address in praise of “free silver” hit on many of the same themes from Jackson’s veto message, and has since become the template for modern Democratic politicking:

There are two ideas of government. There are those who believe that if you just legislate to make the well-to-do prosperous, that their prosperity will leak through on those below. The Democratic idea has been that if you legislate to make the masses prosperous their prosperity will find its way up and through every class that rests upon it.

This argument is like nails on a chalkboard for the political descendants of Hamilton and Clay, then and now. Their belief is that a government that actively encourages commerce and industry may disproportionately help a few individuals at the top, but it is of lasting benefit to all classes of people. The Democratic view, then and now, was that this “trickle down” approach only made the rich richer and the poor poorer.

In 1896 the nationalists found a champion who was more than a match for Bryan — Ohio Governor William McKinley. A bona fide expert on the tariff who won the gop nomination over the objection of the party bosses, McKinley was more than happy to fight Bryan on the issue of the currency. He framed his support for the gold standard in the context of the tariff and the entire national program for economic growth, arguing that it was all part of a package that had brought about vast improvements in the national standard of living since the Civil War, and that it would continue to do so if the country just retained the present course. Republican campaign literature hailed McKinley as the “advance agent of prosperity,” and the country agreed, electing him over Bryan by a 51–46 margin, the largest presidential victory in 28 years.

While the concept of an electoral “realignment” remains a problematic and controversial idea in academic circles, it is a pretty fair assertion that something substantial and enduring happened to both parties during 1890s. That election reaffirmed the Republican Party’s commitment to the pro-growth, pro-development policies of Hamilton and Clay, while the conservative “Bourbons” such as Cleveland in the Democratic Party lost out to the populists and later the progressives, both of whom advocated the use of the federal government to “legislate to make the masses prosperous,” as Bryan put it.

The division’s return

It is curious, then, that the country has not had another clear referendum on the McKinley/Bryan divide since 1896. Why is it that, despite the fact that there are great differences between the two sides in terms of their core economic philosophies, Americans have not been forced to choose one path or the other since 1896?

One reason is the spectacular economic growth over the last 100 years. Despite the persistence of the business cycle, including a nasty downturn after World War I, the real size of the American economy nearly quadrupled between the Panic of 1893 and the Great Depression. And while the latter shaved off nearly 25 percent of the national income, the country began climbing out of the hole by 1934 — and over the next 70 years real gross domestic product grew fifteen-fold. This miraculous growth seemed to be independent of the party in office or the ill-conceived proposals one side or the other cooked up; Democrats or Republicans, liberals or conservatives, the economy seemed to grow like gangbusters year in and year out. To put this growth in perspective, the 1970s — which people today generally remember as a period of weak growth — saw real gross domestic
product increase by some 38 percent, the private sector create some seventeen million new jobs, and real disposable income per capita increase by 27 percent.

In light of this, both sides could have their cake and eat it, too. The Democrats could emphasize greater social welfare benefits without technically “redistributing” wealth, as Bryan had proposed. Instead, they would take a relatively small slice of the annual national surplus and distribute it to the less fortunate. Republicans, meanwhile, were generally able to keep taxes low and business regulations from becoming too onerous without challenging the social welfare programs Americans had come to support. What’s more, both sides were able to dabble in policy realms usually dominated by the opposition — Democrats could cut taxes and Republicans could enact social programs. Indeed, the domestic policies of the second Clinton term and the first George W. Bush term seem interchangeable; either man could have embraced welfare reform, No Child Left Behind, the Medicare prescription drug benefit, financial deregulation, school uniforms, the v-chip, or faith-based initiatives, and both cut taxes multiple times.

But the old McKinley/Bryan cleavage is beginning to come back to the forefront because the American political economy has shifted decisively in the last few years. Two substantial problems have emerged. First, the great American prosperity machine has slowed noticeably. Economic growth in the last decade has averaged less than 1.6 percent per year, compared to 3.3 percent over the prior twenty years. Along with this slowdown in growth has come a decade-long jobs recession: The employment-to-population ratio peaked in April 2000 at nearly 65 percent and has never recovered; today it stands at an anemic 58 percent. More people out of work naturally means those still employed are less able to bargain for higher incomes, and so unsurprisingly the average inflation-adjusted salary per private sector worker has declined over the last decade.

The American prosperity machine has slowed, and the federal government is unable to pay its bills.

The second problem is the inability of the federal government to pay its bills. This deficit problem is both short- and long-term in scope. Over the past few years, tax revenues have fallen off while government efforts to stimulate the economy have expanded dramatically — thus yielding the $1 trillion and larger annual deficits of the last few years. As daunting as these numbers are, they pale in comparison to the long-term deficit problem, which is above all a consequence of the social welfare obligations that politicians made generations ago, when gdp growth averaged nearly four percent per year and the retirement of the Baby Boomers was too far in the future for the actuaries to consider. But the day of reckoning is quickly approaching: According to the Congressional Budget Office, if all current policies are kept in place for the next 70 years, total federal spending will equal more than 34 percent of gdp, nearly double what we have seen over the last 40 years.

Combined, these two points offer a grim vision of the future. Economic growth is already slowing markedly, and to fund federal entitlement obligations already on the books, the government will have to nearly double in size, further impeding the ability of the private sector to create wealth for subsequent generations. A continued weak economy, in turn, will put pressure on government to grow the safety net even more, which would mean more spending, taxes, and thus a vicious cycle.

This means, in turn, that the ideological contrasts between the Democrats and Republicans will only grow sharper — as the two parties articulate more clearly their side of the McKinley/Bryan cleavage.

Democrats have made the first move, although one would not recognize that by listening to their rhetoric alone. President Barack Obama and former House Speaker Nancy Pelosi talk a good game about reigniting the American economy, but their rhetoric does not match the reality. Time and again, the president and his liberal allies in Congress have chosen to expand the size and scope of the federal government, further hampering the private sector and stalling the economic recovery.

The stimulus bill passed in 2009, for instance, promised to pump $800 billion of borrowed money into the economy, but the point of entry was largely through core Democratic clients: tax credits for the poor, public works projects that employed the trade unions, and bailouts for state governments full of public workers made up most of the package. Businesses saw very little in terms of tax incentives to spur a private sector rebound.

With the economy supposedly fixed, Democrats turned their attention to redistribution of the national wealth. The cap-and-trade bill passed by the House in 2009 would have cut gross domestic product by nearly 0.5 percent by 2020, and cost the median household more than $200 per year. The winners in the scheme would be the environmentalist groups that are now essential to the Democratic coalition, the big banks and industries with insider connections that yielded special payoffs hidden in the legislation, and the poorest of Americans, who would actually receive a modest increase in annual income due to the redistribution programs in the bill.

With health care, the president pitched his reforms as a way to solve some of the enduring structural problems with the economy. In a February 2009 address to a joint session of Congress, he called attention to “the crushing cost of health care”:

This is a cost that now causes a bankruptcy in America every 30> seconds. By the end of the year, it could cause 1.5> million Americans to lose their homes. In the last eight years, premiums have grown four times faster than wages. And in each of these years, one million more Americans have lost their health insurance. It is one of the major reasons why small businesses close their doors and corporations ship jobs overseas. And it’s one of the largest and fastest growing parts of our budget. Given these facts, we can no longer afford to put health care reform on hold.

Yet cost control was simply a smokescreen to win broad public support. An overwhelming majority of Americans have health insurance, so a reform plan designed mainly to expand coverage — at the expense of those who already have it — was bound to go nowhere fast. So Obama and congressional Democrats disguised what was at its core a coverage expansion bill in the rhetoric of cost containment. By the time the number crunchers at the Center for Medicare and Medicaid Services reported that the bill would actually increase the total cost of health care in this country and only exacerbate the runaway costs of federal health subsidies, the bill had already been made the law of the land. The price that the public will pay for this new entitlement will be broad-based. Independent estimates suggest millions will lose their current health care coverage as businesses drop insurance plans to save money, and in the meantime the bill has only added to uncertainty in the businesses community, which has not fully figured out what the reforms will mean for the bottom line.

From a certain perspective, all of this seems like par for the course for the Democratic Party. Indeed, payouts to unions, tax credits for the poor, reams of new environmental regulations, and health entitlements have more or less been the party’s bread and butter for generations. But what makes this so extraordinary is the shift in the political economy. It is one thing to pass a cap and trade bill when economic growth averages more than three percent per year; quite another when it struggles to rise above two percent. It is one thing to burden businesses with a health insurance mandate when hiring is at an all-time high, quite another when it has hit a 30-year low. It is one thing to promote deficit-financed public works programs when the deficit amounts to less than one percent of gdp, quite another when it is nearly ten percent. This is not about dedicating a portion of the nation’s annual surplus to achieve goals of social welfare; this is about simple redistribution, about taking from Peter to pay Paul to equalize the slice of the national pie both enjoy. No doubt Bryan would heartily endorse all of these programs if he were alive today.

For their part, Republicans are returning to the principles laid out by Hamilton, Clay, and McKinley. No longer are they promoting “Democratic lite” social welfare programs like Bush’s Medicare prescription drug benefit. Instead, the bulk of the gop’s intellectual efforts has lately been in devising entitlement reforms, such as those proposed by House Budget Committee Chairman Paul Ryan, designed to keep the basic social welfare commitments in place without doubling the size of the government. Additionally, Republicans are increasingly pushing fundamental tax reform, something that has not been done in 25 years. What’s more, in an unprecedented shift, Republicans are now talking seriously about comprehensive health care reform — not just wiping “Obamacare” from the books, but making a serious, sustained bid to lower the costs of care. All of these ideas would, if realized, reduce the size and scope of the federal government, alleviate the burdens that are currently carried by businesses, and hopefully rehabilitate private sector growth. In other words, the economic crisis has refocused the Republican Party’s attention on the ways that the federal government can support American private enterprise. McKinley would surely be pleased.

The 2012 decision

One way in which 2012 will likely differ from 1832 and 1896 is that in those prior two contests the combatants were eager advocates of their own side, whereas Barack Obama probably will not be. The man who, as a candidate, declared that it was time for the country to make the hard choices prefers, as president, to recast the hard choices as “false choices”; he probably does not want to get pinned down in the same way that Jackson, Clay, Bryan, and McKinley did. Instead, if recent history is any guide, he will rather prefer to cast himself as the defender of both traditions, and cast his opposition as the representatives of a radical fringe.

Still, this might not matter. A challenger with a slender record in government can define himself whatever way he chooses, but a president is bound by his record; thus, President Obama faces more limitations in 2012 than candidate Obama did in 2008. With persistent weakness in the economy, a massive new health care entitlement set to go in effect, and a looming deficit crisis that will require either massive new taxes or major entitlement reforms — President Obama may have no choice but to defend the political tradition of the liberal Democrats.

If so, 2012 might turn out to be one of those elections that our grandchildren, and their children, talk about. It could be one of those decisive contests where the choice of the electorate sets the course of public policy for generations to come. And once again, it looks to be another battle between the political heirs of Hamilton, Clay, and McKinley against the heirs of Jefferson, Jackson, and Bryan. Will the government continue to facilitate the expansion of the private sector, or will it further burden it with new layers of regulation and taxation? A year from now, we might very well know the answer to that question.

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