Tales of a New America

by Robert B. Reich

  Free marketeers (including not a few trade associations and large businesses) periodically argued that because the costs of enforcing the Clean Air Act far exceeded its benefits, the regulations should be scaled back. Environmentalists (and, if polls are to be believed, a majority of the American public) disagreed. The debate centered on the value of clean air versus the costs and inefficiencies of regulations to achieve it. But posed in this way, the debate left out a far more useful line of inquiry: How could government better organize the market to attain the cleanest possible air at the lowest possible social cost? This way of framing the debate may have invited consideration of numerous options, such as a system of transferable pollution permits. Such permits, issued in numbers equal to the maximum amount of pollution allowed in a particular region, could be bought and sold by polluters. Thus each polluter could decide which was cheaper, in light of its own special circumstances: cutting pollution or buying permits. As a result, the air would be as clean as before, but most of the cost of curbing emissions would fall on firms that could do it most cheaply. In addition, all firms would have an incentive to develop more efficient methods of cleaning up in the future.3

  Or consider the question of how tall and wide buildings should be in a crowded city. For years American cities struggled with complex zoning regulations designed to assure adequate sunlight and fresh air for their inhabitants, notwithstanding office construction that was rapidly depleting the air space downtown. As the price of office space increased and developers became cleverer and more demanding, the regulations typically grew more complicated and less effective. But the answer was neither to bar further development, as some argued, nor to abandon all efforts to save some modicum of fresh air and sunlight. It was for government to organize a market in air space, featuring a three-dimensional form of property that could be purchased and sold, like any other. Some of this property would be reserved for the public’s fresh air and sunlight (rather like a three-dimensional park). Thus as developers purchased the air space that their proposed buildings would displace, construction would occur on sites where it was most valuable, and fresh air and sunshine would be retained at least cost.4

  A final example concerns product safety. Here again, the most important choice is not between government intervention and the free market. In the absence of regulations governing product safety, consumers injured by a faulty product would not simply take their business elsewhere. They would seek compensation for their injury from the producer or from their insurer. The practical choice, then, was between (1) regulations specifying how safe products should be, (2) lawsuits by injured consumers against the firms that produced the products, and (3) a more comprehensive system of insurance that would fully compensate injured consumers for any lost wages, pain, and suffering they endured. To the extent that government withdrew from the task of regulating product safety directly, it would find itself more involved in the latter two alternatives. Indeed, by the mid-1980s there was some evidence that the Reagan administration’s disinclination to regulate had prompted a rise in product liability lawsuits. The action had simply moved from the regulatory agencies to the courts. The central question, however, remained: Which response, or combination of responses, comprised the most efficient and equitable way of coping with products that caused injury?

  As these examples suggest, the absence of government regulation does not necessarily mean an abrogation of government authority nor the abandonment of public goals. It often calls for a different governmental role—organizing and maintaining decentralized markets that can align the publicly desirable with the privately profitable. The debate over the relative merits of government intervention or free enterprise has obscured this more difficult and subtle task. It has distracted the attention of the public and of opinion leaders, who continue to fulminate against either government incompetence or corporate irresponsibility. Because neither free marketeers nor interventionists are accustomed to view the challenge in terms of market design, this potentially more fruitful course has often been left unattended.

  3

  Precisely the same lesson applies to corporate activities that have positive social effects, such as creating new knowledge and skills. Here again, the mythic choice between government intervention and an unfettered market has obscured the central issue. Our debates often have degenerated into diatribes about whether government should attempt to steer the direction of the nation’s economy by selecting for favorable treatment certain “industries of the future,” or leave it to the market to decide who comes out the winner. Some liberal interventionists have talked wistfully of tripartite boards comprised of business, labor, and government, which would plot industrial strategies and outcomes. Free marketeers have argued in response that the government is incompetent to pick winners, and that any such attempt would just end up as another trough at which the special interests fed. The debate has been less than edifying.5

  The debate should be about how the market can be better organized to stimulate new knowledge and skills. The government has already tipped the scales in certain directions: Countless decisions about taxes, publicly sponsored research and development, the enforceability of commercial contracts, defense procurement, the organization of banks and securities markets, labor, patents and copyrights, antitrust, and international trade (to name only a few pertinent areas) influence how the American economy is evolving. Because each industry6 has a distinct competitive position relative to all others—based upon the costs it bears and the markets it serves—any seemingly evenhanded rule is likely to affect it differently from others. The notion of “neutral” policy is simply fantasy. Even something so apparently neutral as tax depreciation rules for plant and equipment alters the relative prospects of industries whose competitive success hinges on the careful hiring and training of personnel or on the use of sophisticated marketing techniques (the costs of which can be deducted in the year they occurred) vis-à-vis those that depend on factories and machines. Gross disparities in effective rates of corporate income tax among industries7 have been due not so much to tax breaks targeted to particular groups of firms as to differences in the ability of firms to take advantage of superficially neutral deductions and credits. Notwithstanding the determined efforts of tax reformers—which in 1986 did indeed manage to eliminate some of the less rational disparities—no conceivable tax system can raise revenue with no effect on the structure and dynamics of the economy. The same general point applies for every other rule of the game. Most industry lobbyists—and not a few legislators and government officials—well understand that no rule, however neutral in appearance, is neutral in competitive effect.

  Disparities in effect are inevitable as new circumstances impel the design of new rules. A sampling: Should copyright protection be extended to cover computer software? This decision would profoundly affect the development of computers and semiconductors. If no copyright protection is granted, then each semiconductor and computer manufacturer will have a strong incentive to copy another’s software rather than invest money in designing its own. This in turn will create winners out of smaller or more backward segments of the industry, including upstarts in South Korea and Taiwan, at the expense of industry leaders like IBM. It could also be expected to reduce the ardor with which inventors devised new software. On the other hand, a decision that software can be copyrighted would make it difficult for smaller firms to produce peripheral equipment or programs compatible with leading computers, whose innards they could no longer copy. This would have the effect of shouldering them out of the market, and boosting the market power of IBM. Either way, the pace and direction of technological change (and work force experience) will be affected.8

  Should coal slurry pipelines be authorized to lay their pipes beneath railroad lines?9 An affirmative answer would alter both the energy industry (enhancing the competitiveness of coal, reducing that of oil) and transportation (boosting the pipelines, hurting the railroads, which would then carry less coal to market). Should
the government grant fiber-optic cable systems rights of way along interstate highways? An affirmative decision here would spur fiber-optics, but stall the development of communications satellites, which compete with fiber-optic cable for data transmission.

  The list of such questions can be extended indefinitely. Each decision affects how the economy evolves and the sorts of skills and knowledge that will be generated as a result: What computer language should the Defense Department adopt so that its complex networks of military hardware can “talk” to one another? This choice would alter the relative competitiveness of several high-technology industries and firms, each of which has invested in different computer languages and standards. How long should proprietary drugs maintain their patent protection? A decision here would shift the balance between proprietary and “generic” drugs, and determine both the cost of prescriptions today and the pace of drug research and development. Should large firms be permitted to band together in research joint venture, which might spur the pace of technological advance but cut competition? And so on.

  America’s competitiveness is directly at stake in many of these choices. In 1982, for example, a federal judge approved the settlement of a government antitrust suit to break up AT&T, the world’s largest corporation, into seven regional holding companies—“Baby Bells”—and a new, but far smaller, AT&T. This decision boosted competition and reduced prices on long-distance telephone service. It also opened a vast new market to Japanese producers of telecommunications equipment. They could now sell their private-branch-exchanges, fiber cables, cellular phones, digital networks, and other gadgets to the new Baby Bells, who before had got all their equipment from Ma. The decision to dismember AT&T also altered Bell Labs, AT&T’s research arm, which had functioned as a kind of national laboratory for developing new technologies in transistors, semiconductors, and advanced electronics. Before the breakup, Bell Lab’s research had been financed, in effect, by all of us through our telephone bills. But the new, more competitive AT&T could no longer afford such luxuries. Bell Labs shrunk, and much of its work was redirected toward more immediate applications. Thus a national telecommunications policy with major consequences for America’s place in the world economy was set by a solitary unelected judge.

  None of these decisions turn on whether the government should “intervene” in the market, but on how competition within the market should be organized. It is impossible for government not to make these sorts of decisions. A decision not to decide simply forces private parties to rely on prior decisions, or else creates uncertainty in areas where the prior decisions offer no clear guidance for what the market rule should be. Because technologies, tastes, and industries are forever changing, new questions are always arising, and prior decisions are often inadequate.

  The debate over whether government should embark upon a centralized “industrial policy” has tended broadly to miss the point. Our government and every other is continuously engaged in devising industrial policies through their market-structuring decisions. Indeed, the key to Japan’s successful industrial policy has lain not in any elaborate plans emanating from MITI, but in an industrial structure that has been designed and redesigned for the express purpose of pushing Japanese industry (and Japanese workers) into ever more complex and efficient production, thereby enriching their experience and extending outward the frontier of their production possibilities as quickly as possible. Their rules of the game (taxes, public procurement, the organization of banks and labor, and so on) are tilted in favor of the rapid accumulation of new knowledge and skills.

  In the United States, by contrast, the pattern of winners and losers that has resulted from our implicit industrial policy is typically of the “do-it-yourself” variety—spearheaded by the most politically active and sophisticated industries, firms, and labor unions. The pattern bears no particular relation to those economic activities that could be expected to advance as the American work force gained experience and skill in applying new technologies. Our resulting industrial policy has lain fragmented and hidden from view while the larger choices it embodies have never been clearly posed.

  4

  The problem is one of focus and interpretation. The deregulation of airlines has benefited consumers, but so has the regulation of toxic chemicals. The point is that many of the most important choices have nothing to do with the grand mythic division between free markets and control. When almost every discussion about the unwanted or the desirable side effects of corporate activity becomes shoehorned into a debate over the relative merits of centralized planning or a decentralized market, we lose the capacity to design the market in accordance with our values. We thus miss opportunities to better match corporate conduct to public goals through the market. Our cycles of righteous fulmination against, in turn, meddling bureaucrats and irresponsible executives have tended to elicit the worst of both worlds—a rigid tangle of rules that fails to enforce effective accountability. This is particularly lamentable, since it is entirely within our organizational and analytic powers to achieve a good deal more of the best of both.

  CHAPTER 20

  NEW VERSIONS, NEW VISIONS

  1

  Political culture in America—as it always has been and will be, as it is anywhere else—is permeated by myth. Mythology is an indispensable conceptual shorthand, the means by which we comprehend, come to terms with, and talk about complicated social realities. Mythology is the vehicle by which we bequeath our political culture to our children, and teach them lessons about what our society is for. This book has suggested that America’s political mythology can be rendered, with only slight gaps, exaggerations, and overlaps, as a set of four core parables: the Mob at the Gates, the Triumphant Individual, the Benevolent Community, and the Rot at the Top. The basic outlines of this mythology are enduring and uniquely characteristic of our culture; the American mythology of today more closely resembles the American mythology of a hundred years ago than it resembles that of France or Germany in any age, for example. Yet within these broad outlines there has always been a good deal of room for adaptation, evolution, and shifts of emphasis. Myths change—quickly or otherwise, successfully or otherwise—as the cultural environment they interpret also changes.

  I have argued that certain peculiar postwar developments have caused the American mythology to evolve in an unfortunate way or, more specifically, to have bred two divergent variants, one conservative, the other liberal, each incomplete and maladaptive. The liberal variant, which has its roots in the unprecedented and irrecoverable domestic prosperity and international preeminence of the earlier postwar decades, and especially the 1960s, is characterized by magnanimity, altruism, an eagerness to conciliate, and to a certain extent, self-reproach. The conservative variant, a response to the disturbing developments at home and abroad that began in the early 1970s, is characterized by defiance, self-assertion, an eagerness to impose discipline, and to a certain extent, aggression.

  Both of the current variants were born as responses to new challenges confronting American culture as it sought to come to terms with, in turn, its role as the leading power in a shattered world, its own poor and its long-oppressed minorities, an increasingly strong and enduringly hostile Soviet bloc, and the shock of economic vulnerability. Despite their differences, both versions share one central feature: Each defines “us”—members of the mainstream American community—in large part by reference and opposition to “them”: the Soviets; other nations, whether cast as dependents or competitors; slackers among us who fail to pull their own weight; the poor; and corrupt or incompetent elites, whether in business or government. We never have been a particularly introspective people, but this obsession with the other that both modern variants of our mythology display has led us, as we seek the source of our troubles, to look outward—with pity, fear, or defiance—to a degree unusual even for America. Thus the most complex questions about our place in a changing world, as they are processed by the conceptual filter of political mythology, are redu
ced to a blunt and binary choice between toughness or charity toward “them.” These are the terms of the stories we tell each other, the level of political discourse that ultimately matters the most.

  This narrow spectrum of choice—assertiveness versus accommodation, discipline versus conciliation—bounds our political debates, limits how problems are defined and solutions weighed, and blinds us to a subtler set of options. Appeasement and aggression do not exhaust the potential repertoire of relationships—within productive organizations, with our needy or troublesome compatriots, or with our allies and rivals abroad. Neither variant, accordingly, has been a very reliable guide. Liberal conciliation has often degenerated into an indulgence that invites exploitation. Conservative assertiveness has often hardened the resistance of the intended objects of discipline, sparked resentment, and undermined trust. Much of America’s recent history can be understood as a series of reactions, first to the failures of conciliation, then to the failures of assertiveness. The conventional wisdom at any given time—for dealing with the Japanese or the Soviets or the Third World, for managing the economy, for coping with the poor, for bridling inept or unscrupulous elites—is usually rooted in revulsion against the dismal results of the contrary approach, which had been the conventional wisdom just before.

  The common error of both variants is the rigid delineation of “us” and “them.” Modern liberalism—as distinct from its more balanced New Deal ancestor—is too ready to coddle the other; modern conservatism, to defy him. Both tend to envision human encounters as blunt conflicts of interest in which one party improves its lot and the other, out of weakness or magnanimity, concedes. The conservative morality tales speak of the other’s strength and deviousness; the liberal morality tales, of his weakness and need. Neither variant of the basic mythology features stories of mutually rewarding encounters, or common efforts to overcome perils. The tension between a basic stance of accommodation or one of confrontation excludes the middle ground of negotiations and collaborations that both assert “our” interests and comprehend “theirs.” It is here, in the premise of generally opposed interests, that the prevailing myths serve worst as guides to reality. For in any of the areas we have discussed there are few encounters in which one side wins and the other loses, apart from sporting events, litigation, and quick wars on small islands. The general case is for interests to overlap, if not completely; for all parties to gain or lose together, if not all to the same extent; for each to depend on the other, if not all to the same degree and in the same encounter. This holds for international commerce as well as for international diplomacy, for dealings between managers and workers as well as dealings between the poor and the prosperous.