Tales of a New America

by Robert B. Reich

  With the New Deal, government again held sway, and business was once more on the defensive. Industrial production in 1932 was 52 percent of its 1929 level, and industry’s ability to deliver the goods was thrown into doubt. Meanwhile, well-publicized disclosures of corruption and gross privilege undercut its legitimacy. Out of this environment came a wave of regulations, imposing on business the obligations to engage in collective bargaining, offer employees minimum wages (and maximum hours), pay for part of Social Security, open the books to prospective shareholders, and pay taxes on undistributed profits.

  It was not until the 1970s that the pendulum swung firmly once again. The effusion of regulations and expenditures of the 1960s was largely a continuation of what had begun thirty years before; government—its status bolstered by victory over fascism and depression—had remained ascendant. But in the 1970s America was stymied by a massive and novel set of economic phenomena as inexplicable as the Depression had once been: low productivity growth and stagnating real incomes, coupled with spiraling inflation. It was easy to blame the crippling effects of regulation, and the excessive spending of the welfare state. Amid growing public apprehensions, the long ascendancy of government came to an end, and the myth reverted to a former set of villains.

  Beginning in 1968 no one became President of the United States, and few were elected to Congress, without denouncing the government. It became a staple of campaign rhetoric to rail against unresponsive bureaucrats, Washington insiders, arrogant public officials, and cumbersome intervention with the market. Every successful contender was an “outsider”—like the rest of “us”—campaigning against “them” in the nation’s capital. Every successful bid for public office was cast as a crusade to “send a message” to Washington.

  Even before Ronald Reagan entered the White House, the public’s attention was focused on the perils of centralized government: Solutions were sought in tax revolts; “privatization” of services; deregulation of the transportation, communications, and securities industries; block grants and revenue sharing that delegated authority to the states; a scaling back of antitrust prosecutions; and efforts to pare environmental and health regulations. Federal expenditures did not shrink, nor did the number of federal personnel substantially fall. But the rate of increase was stalled, and the terms of debate fundamentally altered. The burden was now on government to justify its interventions into the economy, rather than on business to justify its power in society.

  Each of these swings of the pendulum marked a shift in the core definition of the economic problem: It was due either to the unregulated and unaccountable power of business or to the overreaching of government. Each swing marked a corresponding shift in the pronouns of political discourse: “They” were, respectively, Wall Street moguls or Washington politicos; “we” were, respectively, common folk ground under the heel of big business, or entrepreneurs trapped in the clutches of big government. Each manifestation of the mythic warning was silent about the other demon lurking in the shadows: When business was indicted, there was little mention of the failings to which government was prone; when blame shifted to government, we forgot what had ever troubled us about private economic power.

  4

  By the 1980s the pendulum had swung all the way. Not since the 1920s had business been so unconstrained. In 1965, for example, corporate tax payments had accounted for 26 percent of federal revenues; by 1983 the portion was down to 6 percent. The biggest corporations enjoyed their lowest effective tax rates in fifty years. General Electric, for one, paid no taxes at all between 1981 and 1983, on profits of $6.5 billion. John Kenneth Galbraith had written reassuringly in the 1950s of the “countervailing power” within the American system, which offset the influence of large corporations. But in the America of the eighties, these counterweights were all but removed. Health, safety, and environmental regulations were deferred or cut back; consumer groups and environmentalists no longer claimed the influence or the media attention they once did. Organized labor was all but routed; union membership was down to 17 percent of the private-sector work force, and wage concessions were the order of the day.

  Few voices any longer broached the subject of corporate responsibility to the poor or to the communities and nations in which they did business. With increasing alacrity, American-based corporations abandoned communities and laid off workers as they shifted their production abroad. Egregious displays of corporate negligence provoked little public outrage or regulatory response. A Union Carbide plant spewed poisonous fumes that killed 2,000 Indians in Bhopal and injured many thousands more. Johns Manville retreated into the shelter of bankruptcy law to dodge the claims of workers sickened by exposure to its asbestos. A. H. Robbins continued to market a contraceptive device it apparently had known for years could cause sterility and worse. In earlier eras, and surely in times to come, such revelations would inspire denunciation and legislation, but not while it was government’s turn in the dock.

  America’s defense contractors similarly continued to display stunning greed and incompetence: General Electric admitted to defrauding the U.S. Air Force by forging workers’ time cards; McDonnell Douglas produced fighter jets whose tail fins cracked; General Dynamics overcharged the Pentagon and was indicted for fraud. By 1985 forty-five of the nation’s hundred largest military contractors were under criminal investigation for kickbacks, illegal overcharges, and other sins, although none was long barred from profitable Pentagon contracts.

  Corporate lobbyists swarmed over Capitol Hill. Political action committees (PACs) upped their contributions to congressional candidates from $16 million in 1978 to $57 million in 1984.7 Access and influence flowed in return for these contributions. Governors and mayors eagerly offered tax breaks and subsidies to any company that might locate within their jurisdictions; not a few firms learned the art of playing off desperate localities against each other.

  By the close of 1986, Wall Street was awash in scandal. Many millions of dollars had been pocketed by trading on “insider” information unavailable to the general public.

  The point of this catalogue of iniquities and improprieties is not to inspire yet another swing of the pendulum; if the pattern holds, the cycle will not easily be either hurried or retarded. What is remarkable about this list is the failure of such examples, individually or as part of a pattern, to excite any appreciable protest from a chronically suspicious citizenry. Such displays of unaccountable power would surely have inspired a general indictment of business in an era when the pendulum of righteous fulmination was swinging in a different direction. But in the 1980s, with government cast as the demon, there was little interest in attacking business. It is the purity of the myth of Rot at the Top that is here so strikingly displayed; Americans are determined to take their devils one at a time. Editors and politicians occasionally pontificated indignantly about this or that corporate enormity. But until the spell of antigovernment fervor had run its course, business would remain largely proof against abuse.

  If the past offered any guide, business would eventually overreach. Public tolerance, or indifference, would invite ever more egregious displays of power until one day—with the economy once again in shambles—America would swing to the other side. Campaign orators would once again fulminate against “them” in the boardrooms of corporate America. There would be talk of “sending a message to Wall Street.” A new set of regulations and restrictions, doubtless hastily assembled and ill-considered, would be invoked. And the corruption, incompetence, and arrogance of government would pass for a time from American consciousness.

  5

  Placing blame is among the most comforting cognitive acts, for it allows one to cast away responsibility. The cycles of righteous fulmination, first against corporate malfeasance and then against government intervention and then back again, have enabled us to keep at bay some troubling questions regarding how a complex economy is to be organized, and how responsibilities should best be divided between public and private realms. Perhaps we
could once avoid answering those questions. But as we lose the luxuries of economic isolation or preeminence that we once enjoyed, the costs of dodging these issues increase.

  The first legal function of the modern corporation is to generate profits for those who risk their money supporting it. No serious person who has thought about the issue, however, believes that the unfettered pursuit of profit will always be consistent with the public’s best interests. Economic activities have social consequences, for good or ill, that go beyond returns to shareholders. But contrary to the condemnation of profit seeking per se that periodically erupts in American politics, corporate executives do not necessarily behave irresponsibly when they ignore these social consequences in the pursuit of private profit—unless these social concerns are codified in law. In the absence of laws and rules that tell corporate executives where the public interest lies, they should be under no obligation to guess. They are neither trained nor selected to make such choices.

  Corporations, and those who lead them, do have a public responsibility to obey the law, however. This obligation is meaningless if it applies only to the literal letter of the law and scorns its spirit and purpose. Government agencies, and those who lead them, for their part, do have a responsibility to address the social consequences of business activity—to constrain and channel economic endeavors in accordance with the public interest. But this does not mean that government is authorized or competent to organize the economy through commands and controls. The roles and responsibilities of business and government to together define and animate our market economy is the broad topic to which we next turn.

  CHAPTER 18

  THE MIASMA OF REGULATION

  1

  Ask any business executive about government regulation, and he will tell you a horror story of bureaucratic excess. This is his version of the Rot at the Top. But the executive will not, most likely, object to the goal of regulation. Most executives agree that the public deserves protection from toxic wastes, nuclear accidents, air and water pollutants, unsafe products, fraudulent claims, and monopoly. Even in eras like the present, when business is ascendant and government suspect, the public supports these broad objectives. The complaints of American business center not on the purposes of regulation, but on the ways they are designed and implemented: Statutes are overly complicated; the rules devised to fulfill them are excruciatingly detailed, comprising voluminous rulings and interpretations, interpretations of interpretations, opinions and dissenting opinions of interpretations of interpretations. Even the simplest public goal spawns an imposing herd of rules requiring exhaustive filings, reports, nitpicking inspections, and picayune compliance with every jot and tittle of the law. And they are subject to constant alteration, elaboration, and ever more detailed explication. Under the spell of congressional committees, regulatory agency officials, hearing examiners, administrative law judges, appellate judges, and scores of zealous government lawyers, inspectors, and bureaucrats, regulations grow more complicated by the hour. They multiply in the Federal Register; they engorge the Code of Federal Regulations; they inundate companies with their petty requirements.

  Tales of bureaucratic atrocities abound. The chairman of one large pharmaceutical firm complains that his company spends more hours filling out government forms and reports than it does on research for cancer and heart disease combined.1 Others tell of trivial, often silly requirements, like giving loan applicants pages of detailed information that nobody ever reads, or putting a toilet within one hundred yards of each employee. The laws are impenetrable: The Employee Retirement Income Security Act, which regulates private pension plans, runs to more than two hundred pages. It has been estimated that federal agencies each year require American businesses to fill out 4,400 different forms, together consuming 143 million hours of executive and clerical time, and costing $25 billion.2

  Nitpicking regulation has been blamed for slowing America’s productivity and impairing the nation’s competitiveness.3 Yet other advanced industrial nations require that their companies achieve similar regulatory goals. Environmental, health, and safety requirements in Japan and most of Western Europe are no less stringent than in the United States.

  There is one significant difference, however. Although the results of regulation are about the same among all advanced nations, the means of regulating are quite distinct. In these other nations, regulations are far less detailed than they are in the United States. Their regulations involve fewer rules and interpretations, impose less paperwork, entail only informal inspections and reports, and generate significantly lower compliance costs. If American business is conspicuously burdened by government regulation, it is not due to the ends that regulation seeks, but to the means employed. Among advanced industrial nations, the regulation of American business is uniquely picayune.4 Why should this be so?

  2

  Many who speak from or for American business attribute the trouble to the attitudes and values of the people who inhabit government regulatory agencies: These people want to be nettlesome. In this story, the Rot at the Top is traceable to a “new class” of college-educated social planners and public policy professionals who disdain economic growth and abhor private enterprise. In the words of Irving Kristol, a principal exponent of such views, regulators and their fellow travelers “find it convenient to believe the worst about business because they have certain adverse intentions toward the business community to begin with.” They seek “the power to shape our civilization—a power which, in the capitalist system, is supposed to reside in the free market.” Their ambition is “to see much of this power redistributed to government, where they will have a major say in how it is exercised [emphasis in the original].”5

  In this story, many denizens of the new class populate the staffs of regulatory agencies—surviving administration after administration. These individuals relish any chance to harass American business with endless, trivial commands, to clog the channels of commerce with their piddling requirements and endless forms. They take delight in transforming commonsensical regulatory goals into reams of irritating detail. According to Kristol and others who share his views, the new class is waging a war of attrition against capitalism.

  The New Regulation [to protect the environment, safety, and health] is the social policy of the new class.… They have merely transferred power from those who produce material goods to those who produce ideological ones—to the intellectuals, policy professionals, journalists, and “reformers,” who are arguably much less representative of the American people as a whole than those whose influence has been curtailed.… With each passing year it becomes clearer that the real animus of the new class is not so much against business or technology as against the liberal values served by corporate capitalism and the benefits these institutions provide to the broad mass of the American people.6

  This conspiracy has proven to be an oddly comforting phantom for American businessmen. First, it provides a ready explanation for why business has felt so besieged. It is not any serious failings or erosion of legitimacy on the part of industry, but rather the machinations of a group bent on undermining free enterprise. It is an enemy within, an ally of the Mob at the Gates that seeks to substitute centralized planning for free markets. Second, the story suggests a plan of action. All we need do is to expel from government these ideological traitors and put in their place teams of levelheaded and unbiased civil servants. (Hunting out the miscreants should be no problem; they leave a trail of red tape wherever they wander.) Finally, the story promises a happy ending. Once these saboteurs have been ejected, the present regulatory miasma will be transformed into simple, sensible rules. The public will continue to be protected—as it should be—from the irresponsible acts of a few misguided managers. The rest of American business will be freed of the nitpicks, technicalities, and meticulous excesses of the present system.

  Unfortunately for those who find the story satisfying, it wilts in the face of the facts. To begin with, the “new class” of in
terventionist zealots who are supposedly responsible for the picayune character of so much modern regulation have been far harder to track down than expected. Both the Carter and Reagan administrations were committed to reducing the burden of government regulation. The latter, indeed, installed its own counterzealots at the controlling levels of government agencies to track down the guilty parties. The Reagan administration did succeed in abandoning some regulatory efforts. But—and here is the important point—it did nothing to change the way in which the remaining regulations were administered. Notwithstanding its concerted efforts, the Code of Federal Regulations continued to swell with detail, the Federal Register bulged with new interpretations and elaborations, and American business continued to writhe under the burden of pettifogging directives from Washington. The underlying problem had nothing to do with nefarious forces hidden within regulatory agencies; it was inherent in the American regulatory process itself. A probusiness administration might succeed in rescinding particular regulations, but not in reducing the amount of niggling minutiae surrounding any regulatory goal that survived.

  In addition, it turns out that the vast majority of regulatory agency lawyers and middle-level managers aspire not to undermine American capitalism but to live off it. After gaining experience in government, they move on to the private sector. They gain jobs in law firms, representing companies before regulatory agencies. They join consulting firms, accounting firms, research institutes, and public relations firms. They move into government affairs offices of large corporations, and into trade associations. Some have even been known to join university faculties, from where they sell extracurricular insights to corporations. Their experience in government makes them valuable to the private sector, and they are not reluctant to trade upon that value. Far from comprising a “new class” of intellectuals animated by an antibusiness bias, these former civil servants prove themselves adept at making money off what they have to sell—their inside knowledge of how regulations are made. They bring as much zealousness to their newfound corporate jobs as they did to their former ones.