8. When this system was abandoned in 1965, we substituted another, only slightly less restrictive, but without the same biases toward the current population mix. As a result, the legal flow changed from overwhelmingly European to mainly Asian and Latin American.
9. The latest reform effort was passed by Congress and signed into law by President Reagan in the fall of 1986. It granted citizenship to aliens who had remained illegally in the United States for several years, and imposed penalties on employers who hired illegal aliens. But in all likelihood it, too, would fail to resolve the underlying contradictions. Western fruit and vegetable growers claim that they need “guest workers” to help pick perishable crops during the harvest season; not enough American citizens are willing to do this work. Small manufacturers claim that without access to cheaper labor they could not compete against Third World importers; thus, if barred from hiring aliens, they would have to move their operations south, across the border. Meanwhile, American labor unions claim that the immigrants take jobs away from American workers. Hispanic groups fear that efforts to penalize employers for hiring illegal aliens will deter employers from hiring Hispanics. Such is the tenor of our inconclusive debate.
10. The ABM treaty was one of two agreements that resulted from SALT I.
11. The agonizing negotiations over arms control during the 1970s and early 1980s did not involve first principles about whether arms control was good, but second and third principles about how it could be achieved without giving one side a strategic advantage in the process. For detailed histories see Strobe Talbott’s two masterly accounts, Endgame: The Inside Story of SALT II (New York: Harper and Row, 1979), and Deadly Gambits (New York: Harper and Row, 1985).
9. OF ENTREPRENEURS AND DRONES
1. Andrew Carnegie, The Empire of Business (New York: Doubleday, Page, 1902), 192.
2. Iacocca: An Autobiography (New York: Bantam Books, 1984), 3.
3. Peter Ueberroth, Made in America (New York: William Morrow, 1985).
4. George Gilder, The Spirit of Enterprise, op. cit., 213.
5. In one survey of the early 1980s, only 24 percent of American workers said they were being as effective as they were capable of being; 63 percent of the public asserted that people did not work as hard as they used to; 69 percent said that workmanship was growing worse; and 73 percent agreed that worker motivation was down. See Daniel Yankelovich and John Immerwarn, Putting the Work Ethic to Work (New York: Public Agenda Foundation, 1983).
6. George Gilder, op. cit., 147.
7. Several of these empirical issues are addressed in Robert Kuttner’s The Economic Illusion (Boston: Houghton-Mifflin, 1985).
8. One government-sponsored study found that 40 percent of the 11.5 million workers who lost their jobs because of plant shutdowns or relocations between 1979 and 1984 remained unemployed during that period. A large proportion of them were middle-aged, and had been with their former companies for many years. And the factory jobs they lost were not replaced elsewhere in the economy by similarly high-paying jobs. Instead, the new jobs tended to be lower-wage service jobs, such as bank tellers, hotel clerks, and fast-food workers. The study found that two thirds of the displaced workers who found new jobs were paid less than 80 percent of what they had earned before. See Office of Technology Assessment, United States Congress, “The Displaced Worker” (Washington, D.C.: United States Government Printing Office, February 1986); see also Bureau of Labor Statistics, “Survey of Worker Displacement” (Washington, D.C.: United States Government Printing Office, December 1984).
9. Wessily Leontief, Essays in Economics: Theories, Theorizing Facts, and Policies (New Brunswick, N.J.: Transaction Books, 1985), 193–99.
10. Variations on these themes could be found in the pronouncements of labor union leaders and Democratic candidates in the early and mid-1980s. Among the most influential books propounding these views were Barry Bluestone and Bennett Harrison, The Deindustrialization of America: Plant Closings, Community Abandonment, and the Dismantling of Basic Industry (New York: Basic Books, 1982) and Robert Lekachman, Greed Is Not Enough: Reaganomics (New York: Pantheon, 1982).
10. COLLECTIVE ENTREPRENEURIALISM
1. For sophisticated versions of the product life cycle theory, see Raymond Vernon, Metropolis 1985 (Cambridge: Harvard University Press, 1960), and William J. Abernathy, The Productivity Dilemma (Baltimore: Johns Hopkins University Press, 1978).
2. This summary only slightly caricatures the model of competitive strategy first popularized by the Boston Consulting Group. For a more rigorous treatment see D. C. Mueller and John E. Tilton, “Research and Development Cost as a Barrier to Entry,” Canadian Journal of Economics, vol. 2, no. 4 (November 1969), 25.
3. The Next American Frontier (New York: Times Books, 1983), 130–39.
4. For ways in which computers have been used to enhance labor value, see Shoshana Zuboff, “New Worlds of Computer-Mediated Work,” Harvard Business Review, September-October 1982, 142.
5. Dr. Robert K. Merton of Columbia University found that in 1920, single authors accounted for 93 percent of scientific papers; by 1940, the proportion had dropped to 65 percent; by 1960, a mere 26 percent were authored by lone individuals. See William Broad, “Era of Big Science Diminishes Role of Lonely Genius,” New York Times, January 1, 1985, 15.
6. E. S. Browning, “Sony’s Perseverance Helped It Win Market for Mini-CD Players,” Wall Street Journal, February 27, 1986, p. 1.
11. THE GENERAL THEORY OF GRIDLOCK
1. On contractual difficulties that might arise under these circumstances see, for example, Benjamin Klein, “Transaction Cost Determinants of ‘Unfair’ Contractual Arrangements,” 70 American Economic Review Papers and Proceedings 356 (1980).
2. Arthur M. Okun, “The Invisible Handshake and the Inflationary Process,” Challenge, January-February 1980; see generally, Arthur M. Okun, Prices and Quantities: A Macroeconomic Analysis (Washington, D.C.: The Brookings Institution, 1981). For an extension of this concept to high-wage industries, see Jeremy Bulow and Lawrence Summers, “A Theory of Dual Labor Markets with Application to Industrial Policy, Discrimination, and Keynesian Unemployment” (NBER Working Paper no. 1666, October 1985).
3. Data from Eugene Raudsepp, “Reducing Engineering Turnover,” Machine Design, September 9, 1982, p. 52.
4. In Japan, the term “engineer” is used broadly to denote almost any-one responsible for complex tasks. In most firms producing complex products, there are more “engineers” than production workers. See Andrew Weiss, “Simple Truths of Japanese Manufacturing,” Harvard Business Review (July-August 1984): 119.
5. The New York Times, November 26, 1985, p. 34.
6. “Information Thieves Are Now Corporate Enemy Number One,” Business Week, May 5, 1986, p. 120.
7. Empirical support for this proposition is contained in Charles Ferguson, Jr., “American Microelectronics in Decline” (Massachusetts Institute of Technology, VLSI Memo 85–284, December 1985). See also Harley Rogers, “Silicon Valley: People, Values, and Organizations” (unpublished, 1985).
8. When they purchased the firm, the new owners paid some of these expropriated benefits to the former shareholders in the form of a premium over the market price of their shares. Indeed, that may be where the premium came from. If, as is often the case, the new managers do not bring any particularly valuable skill to the acquired company, and there is no reason to suspect additional economies of scale or “synergy,” then any new wealth must come from somewhere else. A likely source: employees and other stake holders, who mistakenly assumed that they would receive a return on their implicit investments made in the past. On this point, see Steven Johnson, Richard Zeckhauser, and John D. Donahue, Contract and Commitment (forthcoming).
9. See Reich and John D. Donahue, New Deals: The Chrysler Revival and the American System (New York: Times Books, 1985).
10. On the plight of Eastern Airlines, see Kenneth B. Noble, “Labor Takes a Chair in the Board Room,” The New York Time
s, March 9, 1986, sec. D, p. 5.
11. See Robert McGough, “Are Contracts Obsolete?” Forbes, April 29, 1985, p. 101.
12. The average American company lost half of its labor force each year, either because the workers quit or they were fired. See United States Department of Commerce, Handbook of Labor Statistics (Washington, D.C.: United States Government Printing Office, 1986), 171.
13. Study by Lamallie Associates, cited in The New York Times, November 11, 1985, sec. D, p. 5. See also, Larry Reibstein, “After a Takeover: More Managers Run, or Are Pushed, Out the Door,” Wall Street Journal, November 15, 1985, p. 33.
14. My colleague Richard Zeckhauser has referred to these phenomena as “reputational externalities.” See his “The Muddled Responsibilities of Public and Private America,” in Knowlton and Zeckhauser (eds.), American Society: Public and Private Responsibilities (Cambridge, Mass.: Ballinger, 1986), pp. 55–57.
15. Robert McGough, op. cit.
16. See, for example, The American Lawyer, annual surveys of lawyer compensation and law firm hiring.
13. THE SYSTEM OF SOCIAL BENEVOLENCE
1. Robert Reinhold, “Public Found Against Welfare Idea But in Favor of What Programs Do,” The New York Times, August 3, 1977, sec. A, p. 1.; Michael Schiltz, “Public Attitudes Toward Social Security, 1935–1965,” Research Report #33, United States Department of Health, Education, and Welfare Social Security Administration (1970).
2. Quotation from Frances Perkins, The Roosevelt I Knew (New York: Viking, 1946), 282–83.
3. Farmers and agricultural workers were also excluded from the original act, with the result that 90 percent of black males were excluded from its coverage. See Raymond Walters, “The New Deal and the Negro,” in John Braeman et al., eds., The New Deal, The National Level (Cleveland: Ohio State University Press, 1975).
4. Quotation from Arthur M. Schlesinger, Jr., The Coming of the New Deal (Boston: Houghton Mifflin, 1959), 308.
5. These and further data were gleaned from Board of Trustees, Federal Old Age and Survivors Insurance and Disability Insurance Trust Fund (Washington, D.C.: United States Government Printing Office), annual reports; Board of Trustees, Federal Hospital Insurance Trust Fund (Washington D.C.: United States Government Printing Office), annual reports. See also Lawrence H. Thompson, “The Social Security Reform Debate,” Journal of Economic Literature 21 (December 1983): 1425–67.
6. By the 1980s over 85 percent of the total cost of nursing homes was borne by the federal government; 40 percent of all Medicaid funds went to pay for nursing home care. Data are gathered in Victor Fuchs, How We Live: An Economic Perspective on Americans from Birth to Death (Cambridge, Mass.: Harvard University Press, 1983), 201.
7. Quotation from an interview with Luther Gulick by Michael McGreary, Institute of Public Administration, New York, Feb. 28, 1980. For a fuller discussion of the metaphors and myths which have grown up around Social Security, see Richard Neustadt and Ernest May, Thinking in Time (New York: Free Press, 1986).
8. United States Chamber of Commerce, Employee Benefits (Washington, D.C.: United States Chamber of Commerce, 1984).
9. Pensions are not literally tax-free; they are tax-deferred. Taxes on earnings put into pension funds, and on what these funds accumulate, are taxed only when the pensions are withdrawn.
10. Estimates based on data from the U.S. Office of Management and Budget, Special Analyses, Budget of the United States Government (Washington, D.C.: United States Government Printing Office, 1985); Bureau of the Census, U.S. Department of Commerce, Statistical Abstract of the United States (Washington, D.C.: United States Government Printing Office, 1985), 357.
11. Welfare is defined to include Medicaid, AFDC cash benefits, food stamps, and low-income housing.
12. Jennifer Hull, “Growing Number in U.S. Lack Health Insurance As Companies, Public Agencies, Seek to Cut Costs,” Wall Street Journal, June 3, 1986, p. 62.
13. Administrative Office of the United States Courts, Annual Report (Washington, D.C.: United States Government Printing Office), various issues; Survey by Jury Verdict Research Inc., Solon, Ohio, as reported in The Wall Street Journal, January 21, 1986, p. 32.
14. By 1986 private insurance companies had grown sufficiently concerned to seek legislative limits on these damage awards, and occasionally deny coverage to their customers. But this was not because the private insurers had suddenly become enamoured of profits. It was because, as the number and magnitude of the awards grew, the insurance companies found it difficult to predict how much they would have to pay out. Nothing upsets private insurers more than the uncertainty of the risk they bear. Were judges and juries to provide more predictable awards—regardless of their magnitude—the insurance companies would again be able to set their premiums at a rate that would cover future losses and yield a profit.
14. THE LIMITS OF BENEVOLENCE
1. Campaign speech, Peoria, Illinois, September 12, 1984.
2. Inaugural speech, January 20, 1981.
3. In 1985 the poorest 20 percent of American families received about 6 percent of the nation’s total personal income; this percentage had not substantially changed in twenty years. Of advanced industrial nations, only France came close to matching the United States in inequality of (after-tax) income. See United States Bureau of the Census, Current Population Reports, Series P-60 (Washington, D.C.: United States Government Printing Office), 1980–85 issues; see generally, Sidney Verba and Gary Orren, Equality in America: The View from the Top (Cambridge, Mass.: Harvard University Press, 1985).
4. For a sampling of poll data, see Michael Schiltz, op. cit.; surveys by CBS-The New York Times, January 14–24, 1984.
5. See Richard Coughlin, Ideology, Public Opinion, and Welfare Policy (Berkeley, Cal.: Institute for International Studies, 1980).
6. Address to the Annual Concretes and Aggregates Convention, January 31, 1984. See also William A. Schambra, “Progressive Liberalism and the American ‘Community,’ ” The Public Interest, 80 (Summer 1985).
7. United States Bureau of the Census, “Current Population Reports,” Series P-20; 1980 Census of Population, Supplementary Report, PC 80-S1-9.
8. The 1980 Census revealed a marked trend toward geographic concentration of the poor in many of our largest cities. See 1980 Census of the Population: Poverty Areas in Large Cities (PC80-2-8D), and Low-Income Areas of Large Cities (PC(2)-913), (Washington, D.C.: United States Government Printing Office, 1985).
9. Most Americans continued to oppose laws requiring employers to give special preference to minorities when filling jobs. See Opinions and Values of Americans Survey (1975–1977), cited in Herbert McClosky and John Zaller, The American Ethos: Public Attitudes Toward Capitalism and Democracy (Cambridge, Mass.: Harvard University Press, 1984).
10. Michael Harrington, The Other America: Poverty in the United States, rev. ed. (New York: Penguin, 1981).
11. The first poverty index was devised by the Social Security Administration in 1964, reflecting the different consumption requirements of families based on their size and composition; the index has been updated every year to reflect changes in the Consumer Price Index, but it only reflects money income and does not include the value of noncash benefits such as food stamps and public housing.
12. For a detailed history of these developments see Hugh Heclo, “The Political Foundations of Antipoverty Policy,” in S. Danziger and D. Weinberg, eds., Fighting Poverty: What Works and What Doesn’t (Cambridge, Mass.: Harvard University Press, 1986).
13. These data were derived from M. Hill, “Some Dynamic Aspects of Poverty,” in M. Hill et al., eds., 5000 American Families: Patterns of Economic Progress, vol. IX (Ann Arbor, Mich.: Institute for Social Research, 1981); and William O’Hare, “The Eight Myths of Poverty,” American Demographics, vol. 8, no. 5 (May 1986): 22.
14. For a detailed look at these withdrawals, see John Palmer and Isabel Sawhill, The Reagan Record (Washington, D.C.: Urban Institute, 1984), 185–86.
15. A MATTE
R OF RESPONSIBILITY
1. Hearings before the Senate Finance Committe, 74th Cong., 1st sess., 1935, 940.
2. The argument was first advanced by Martin Feldstein. See his “Social Security, Induced Retirement, and Aggregate Capital Accumulation,” Journal of Political Economy (September-October 1974): 905; and “Social Security and Private Saving: Reply,” Journal of Political Economy (June 1982): 630.
3. These data are offered in Christopher J. Zook et al., “Catastrophic Health Insurance—A Misguided Prescription?” The Public Interest (Winter 1981): 66.
4. In the parlance of insurers, economists, and others who dwell in gloomy realities, this psychological phenomenon is termed “moral hazard.”
5. These and other related data can be found in James T. Patterson, America’s Struggle Against Poverty, 1900–1980 (Cambridge, Mass.: Harvard University Press, 1981), 172.
6. By 1983 over 60 percent of all teenage mothers nationwide required welfare assistance. The majority of black children were being brought up in poor families headed by women. See Gregory J. Duncan et al., Years of Poverty, Years of Plenty: The Changing Fortunes of American Workers and Families (Ann Arbor, Mich.: Institute for Social Research, University of Michigan, 1984), 18–28; Current Population Reports, series P-70, no. 1, “Economic Characteristics of Households in the United States” (Washington, D.C: United States Government Printing Office, 1983).
7. Charles Murray, Losing Ground: American Social Policy 1950–1980 (New York: Basic Books, 1984), 228.
8. U.S. Bureau of the Census, “Current Population Reports,” series P-60, no. 144 (1983).
9. Zook et al., idem.
10. One model of such a system was New Zealand, which in 1974 replaced personal injury lawsuits with a system of automatic compensation—providing accident victims with medical care, lost wages, and onetime payments no larger than $8,500. See Nicholas Kristof, “Experts Look to Other Countries’ Approaches to Problems of Liability Claims,” The New York Times, April 6, 1986, p. 32.
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