“New Blueprints for the Left,” sighs a contented Newsweek headline over a story about Robert Kuttner’s The End of Laissez-Faire: National Purpose and the Global Economy After the Cold War1 and Robert B. Reich’s The Work of Nations: Preparing Ourselves for 21st-Century Capitalism.2 The Washington Post sees the two as leaders of “a new group of upstarts, liberals trying to upend the conservative revolution,” and whose books “are bidding to do for this decade what [Jude] Wanniski’s and [George] Gilder’s did for the last.” For “both of these books,” we are told, “are more sophisticated than much of what has passed for Democratic economic thinking.”
Just in the nick of time. Long in search of a coherent view of the post-New Deal world, liberal Democrats have lurched from Jimmy Carter’s stagflation to Walter Mondale’s threatened tax increases to Michael Dukakis’s attempt to spread to the nation the benefits of the Massachusetts economic miracle. All overlaid with a dash of Gephardt-style protectionism. Now come the two Roberts with diagnoses of the nation’s economic ills, and with proposed cures that are to provide Democrats with a road map leading them out of the wilderness.
The Reich/Kuttner map is certainly well drawn, a result of the admirable ability of both authors to present economic arguments in clear, if somewhat excited, prose. But unfortunately for their cheering section, the map leads nowhere—except perhaps back to where the Democrats got stalled in the first place.
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It is not that Reich/Kuttner have nothing to say. They both tellingly demonstrate that, thanks to the post-World War II liberalization of the world trading system, nations can now specialize in producing things they make best and most cheaply, and exchange those things for the efficiently produced goods of other nations. This permits Americans to buy Japanese cars that better suit their tastes and pocketbooks than do American cars, and Japanese to buy Boeing airplanes. True, there are protectionist distortions: America puts Detroit on the dole by limiting the number of cars Japan can sell here, and Japan forces its consumers to subsidize small rice farmers and large property speculators by keeping cheap American rice out of Japanese shops. But these exceptions aside, the liberal trading system works: witness the almost tenfold growth in the value of world trade in the postwar period.
Kuttner excels in describing how that trading system was constructed during what he calls “a remarkable half-decade of statecraft [that] began at Bretton Woods.” Reich excels in providing striking instances of the ways in which trade has blurred the national identities of the world’s leading corporations. He notes as one striking instance that Canada’s Northern Telecom sells in America equipment produced in a Japanese-owned factory in North Carolina, and that “American” vehicles contain a large portion of parts produced in Japanese-owned plants, both here and abroad. An even more striking example appeared after Reich’s book was published, when a Japanese producer of office equipment, Brother, which manufactures here, accused a U.S. company, Smith-Corona, of dumping its made-in-Singapore typewriters in the U.S. market!
In formulating their proposals, both Reich and Kuttner obviously feel constrained by the fact that national economic policies can no longer be formulated entirely without reference to those of one’s trading partners. High German interest rates make it difficult for America to lower its rates without at the same time weakening the dollar; European restrictions on Japanese imports divert Japanese products to more open U.S. markets; and economic mismanagement in Latin America threatens the viability of creditor-banks here.
But if this phenomenon of increasing interdependence is neatly described by both Reich and Kuttner, they both also go too far with it. Kuttner claims novelty for the fact that “America’s industrial fate [is] partly the captive of other nations’ industrial policies.” Yet it was ever thus. In the 19th century Britain’s policy of allowing free export of capital helped us to build our railroads; in the 1930’s other nations’ decisions to join us in a mutually destructive tariff war contributed to the length and severity of the Great Depression. All economies were in the same convoy then. Now they are in the same boat.
As for Reich, he goes too far when he tells us that “there are no longer separate economies to be managed.” Not so. Exports, although growing, still account for less than 7 percent of U.S. GNP. And we retain substantial ability to manage our own economic affairs. Just recently America cut its interest rates after Germany loudly announced that it would not follow suit—and the dollar did not collapse. The truth is that the linkages which economists like to think they know exist among deficits, interest rates, exchange rates, and other variables may not exist at all or, at most, may be so weak as to be dwarfed by purely domestic developments. To cite only the most obvious instances: perennial budget deficits have not destroyed the economy; trade deficits have not reduced the dollar to the condition of the ruble and other third-world currencies; low interest rates are supposed to stimulate investment in goods-producing plants; but since they also reduce the income consumers derive from their savings, they may instead reduce the need for new plants.
In short, the case that burgeoning world trade and internationalization rob a country as large, wealthy, and powerful as ours of the ability to fashion its own economic destiny is far from proven.
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What, then, really worries this liberal Democratic duo? As best one can determine from what are, in key places, murky statements, it seems to be that increased international competition makes it difficult to adopt high-cost social-welfare programs, and to levy the taxes to fund them.
Thus, Kuttner shrewdly recognizes that “the hallmark” of the postwar mixed economy was “a series of barriers, both overt and covert, to absolutely free flows of capital; things had tended to stay put—which enabled Center-Left parties to broker and defend social contracts that benefited their constituencies.” This “political logic” was “all but obliterated” by Ronald Reagan and Margaret Thatcher who, by ending controls on capital flows, left high-cost welfare states and trade-union practices naked in the ensuing gale of international competition. So unless foreign goods can be locked out, and domestic capital locked in, the scope for expensive social-welfare programs will be sharply reduced in the U.S.
Kuttner therefore opts for “managed trade,” sufficient constraints on a free trading system to allow U.S. policy-makers to set “industrial goals” and implement plans for selected industries. These, he feels, would put U.S. industrial policy back where it belongs—in the hands of domestic bureaucrats and politicians, rather than of international markets.
Reich, too, worries about international competition. Until now, economists always thought that specialization produced greater efficiency and wealth—more output from fewer units of input of labor and capital. Reich is careful not to deny this. But to him the important consequence of increased trade is that it helps to make our rich richer by making our poor poorer. Telephone assemblers in Singapore and data processors in Barbados and Ireland will work for less than their American counterparts, thereby drawing jobs away from America, and putting pressure on American workers to lower their asking prices. Only some few Americans can sell their talents in a global marketplace—at least at prices (wages) they find acceptable. Under such circumstances, we face this horror: “Some Americans may command much higher rewards; others, far lower.”
Reich attributes this to the fact that the new internationalized world consists of three categories of work: routine production services (“repetitive tasks performed by the old foot soldiers of American capitalism”); in-person services (salespersons, taxi drivers, hairdressers); and symbolic-analytic services (problem-solving, strategic-brokering). It is the third group, made up of mostly “white males” and accounting for some 20 percent of the work force, that will grow richer in an internationally competitive world. To Reich this is unacceptable. For one thing, some of those in the symbolic-analytic service sector “can create substantial value for individual consumers, but these services do not necessarily improve society.” They might, for example, discover “yet another extravagant use for fossil fuel or nonbiodegradable plastic,” or design a nuclear power plant that could melt down and “poison the air.”
Reich has a point here, even if his colorful examples do not help him to make it (nuclear power may be far more environmentally benign than other sources of energy). It is that markets malfunction when prices do not reflect the full social costs of production. A consumer of gasoline who does not pay the costs of the pollution he creates is underpaying, and therefore will consume too much fuel, while passing the costs of his pollution on to others. Reich is right in saying that it is the job of government to prevent such market failure by forcing producers to internalize these social costs, and consumers to bear that burden.
Here he differs from Kuttner. Both distrust markets, but Reich is willing to take a stab at improving their efficiency. He wants government to organize markets so that they work better. Kuttner would replace “laissez-faire,” his carefully constructed straw man, with government intervention when a market system “does not efficiently or fairly distribute certain necessary social goods,” and in order to produce “an efficient and just civil society.” His genuflection in the direction of efficiency and his statement that he seeks a “practical middle ground” between pure socialism and pure laissez-faire notwithstanding, we have here the cri de coeur of an old-fashioned redistributionist, one less loath than Reich, I think, to substitute regulation for functioning markets.
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To say that Reich has a bit more respect for markets than does Kuttner, however, is not to say that he is a candidate for president of the Adam Smith fan club. Reich, as we have seen, is far from satisfied with the inequality produced by markets, even well-functioning ones. To correct this alleged flaw, we need “good education, training, health care, and public infrastructure” available to “all Americans.” This “will be costly.” But since “most working Americans . . . cannot afford to shoulder the added financial burden of higher levels of public spending,” other sources of funding infrastructure enhancement and income transfers will have to be found.
One place to which high-tax liberals have always looked is immobile resources. Real estate was at one time the most obvious such revenue source: it could not flee in the face of extortionate taxes. Alas for the public-sector enthusiasts, the factories sitting on that real estate could move to economically more congenial climes—and did. So, today, can facilities that house executives, computer programmers, and attendant shops. And, as politicians throughout the nation have discovered, homeowners may be relatively (although not totally) immobile, but they are politically potent, opposed to higher taxes on the houses they worked so hard to acquire. Therefore higher taxes on land are no longer feasible.
Where, then, is a liberal to turn for revenue? Why, to the rich, of course—or to Reich’s “fortunate fifth,” the symbolic analysts. The trouble, however, is that “the fortunate fifth,” now operating on a global rather than a national scale, feels no responsibility to its less fortunate compatriots, and does not want to pay more taxes. These symbolic analysts are “quietly seceding from the large and diverse publics of America into homogeneous enclaves.” Flush with cash, they have come to rely on private telecommunications systems, private jets, private golf and tennis clubs, and private day care, all of which reduces their interest in preserving the nation’s cash-starved and crumbling infrastructure.
Why does the majority allow this, instead of rising up in its tax-raising wrath? Because of its “basic lack of understanding” of the tax code; its outmoded, “vestigial” feeling that the nation’s economic health depends on “private profits”; its apathy, now that it no longer has strong trade unions to mobilize it; and its “profoundly American” assumption that “anyone can make it with enough hard work, guts, and gumption.” The poor—besotted yet again with the false consciousness their champions are always attributing to them—do not want to fleece the rich because they are planning to be rich someday themselves.
Equally important, the top earners cannot be forced to pay more. Like capital, they are mobile. As New York City’s Mayor David Dinkins has learned, his ability to tax his wealthy constituents is limited by their ability to move to the suburbs. And as New York’s Governor Mario Cuomo points out, his ability to tax wealthy residents of the Empire State is limited by their ability to flee to Florida, Arizona, and other more hospitable jurisdictions. Kuttner, who also favors raising taxes on the rich, would correct this unfortunate detail with barriers to the flow of goods and capital.
This is a course of action Reich valiantly seeks to avoid because he fears what the brain drain taught Britain and the opening of borders taught Mikhail Gorbachev: the best and brightest see the world as their oyster, and will take themselves and/or their assets out of nations that do not permit them to realize their material ambitions. These people can, in Reich’s words, “work almost anywhere there exist a telephone, fax, modem, and airport.” They cannot, that is, be forced to pay higher taxes, even if the majority had the will to move against them.
Reich is right, of course. Although taxation at the levels preferred by him and Kuttner will not cause a mass emigration of symbolic analysts, it will have consequences. Some will go; others will stay, but develop overseas tax havens and tax-avoidance schemes; still others will work less hard (yes, there is a supply-side effect, even if it is not as great as the most ardent Reaganauts think).
Knowing this, Reich is reduced to a lame plea for an altruistic “positive economic nationalism,” with everyone recognizing that “our mutual obligations as citizens extend beyond our economic usefulness to one another.”
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The failure of these two related efforts to construct a new platform on which liberals can stand is somewhat obscured by Kuttner’s habit of erecting and then setting fire to straw men and by Reich’s forensic skills. Indeed, Reich writes so well, carries the reader along so rapidly, that there is little occasion to pause, and wonder. His prose is the spoonful of sugar that makes the medicine he prescribes go down easily. Hence a few additional words of caution are in order.
Note, for example, Reich’s value-laden description of the nation’s top earners, the 20 percent of the work force he calls symbolic analysts. These brokers, lawyers, engineers, and bankers are the “fortunate fifth.” Not the most able. Not the most productive. Merely the most fortunate. Who could object to taxing away their rising earnings? Similarly, most writers would refer to states in which the wealthy live; Reich refers to states “harboring” the wealthy, a term that can be accurate only if all property is theft.
Finally, there is Reich’s use of data which, while not dishonest, is so entangled with his policy prescriptions as to require careful scrutiny. At one point, he bemoans the fact that spending on infrastructure “has declined steadily.” Fair enough. But he goes on to tell the unwary that expenditure on public elementary and secondary education “has shown a similar pattern.” Surely this means that such expenditure, like that on infrastructure, has declined. But read on. It seems that public spending on education “has increased since the mid-1970’s, but not appreciably faster than it did during the previous fifteen-year period.” A decline, then, is a failure to increase even more rapidly than in the past.
Kuttner, himself not a bad writer, relies more on selecting a pushover opponent: undiluted laissez-faire. This permits him to rail against “the ruthless accountability of markets” and “the inequity [of] . . . pure free-market economies.” But every student knows that there never was a day in which government simply kept hands off the economic system. Certainly, neither Ronald Reagan nor Margaret Thatcher ever pretended to adopt such a completely passive role, either toward internal economic problems or toward international economic relations. Just as certainly, economists who contend that free markets do a better job than bureaucrats of allocating resources long ago accepted the concept of a social safety net for those unable to help themselves. But they sensibly argue that it should not be made so broad and attractive as to decouple reward from effort, and to sap the initiative that creates the wealth needed to pay for the safety net.
Furthermore, even the most ardent believers in free markets acknowledge that regulation is necessary where competition is absent or highly imperfect. But they see such regulation as a last resort, to be adopted only if antitrust policy—dismissed by Kuttner, who prefers the “well-behaved cartels” of Germany and Japan—fails to maintain competitive markets.
Understanding how difficult it is in these days of collapsing planned economies and growing capitalist ones to persuade readers of the beneficial effects of an expanded role for government, Kuttner grudgingly concedes that markets do some things quite well, and says that he opposes only “simple laissez-faire.” But this ritual obeisance to markets means less than his calls for “global regulatory standards, so that market forces will not overwhelm those of civil society”; tax-law revisions to require pension funds to “behave as patient investors”; government investment “to help develop technologies and production processes for new domestic and export industries”; reregulation of airlines to eliminate “pure price competition”; and higher income taxes on those “with incomes in excess of $100,000.”
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Still, Reich’s prose and Kuttner’s straw man are not the principal problems with these books. Where they really go astray is in relying on old and mostly discredited policies.
Thus, despite the inability of the finance ministers of the industrialized nations to agree on much beyond the menus for their periodic dinners, Kuttner would construct mechanisms to produce, by ministerial consensus, what markets now produce automatically. How this would happen, why national politicians would subordinate domestic political concerns to international goals, is left unexplained. And Kuttner would abandon trade policies that have contributed (as he himself recognizes) to an almost tenfold increase in the international flow of goods, and have provided American consumers with a cornucopia of foreign products.
For his part, Reich would beef up spending on education without first explaining why past increases have proved ineffective, and he would resist the trend toward privatization of services now woefully performed by government. The “pattern of secession” by the wealthy—the emergence of private swimming pools, private day care, private security services, and private roadways—is, he thinks, paid for with “dollars that under a more progressive tax code could have financed better public education” and other public services. But this flight from inefficient public services is, of course, nothing more than creeping capitalism, the development of private-sector competitors seeking to reverse decades of creeping socialism by offering better services at more reasonable prices.
After all, Federal Express does not prosper because its users want to secede from the body politic; it is successful because it offers better service than the incredibly inefficient and politicized postal service. The private Catholic schools are not oversubscribed because they spend more per pupil than the public schools. As it happens, they spend far less, largely because they do not have to fund the school-board bureaucrats or cope with the union chiefs who dominate public-sector education. And private security services—Reich’s pet peeve—have not sprung up because we spend too little on public police forces, but because officers are inefficiently utilized and are restrained by the courts in their efforts to cope with crime in the streets.
Reading these works together shows the dilemma the Democrats face. Reich and Kuttner both want to increase the role of governments, public-sector spending, and taxes on the rich to pay for an ever-larger list of social programs. The ones Reich would expand or initiate include severance payments, relocation assistance, extra training grants, extra unemployment insurance, regional economic aid, funds for retooling or upgrading machinery, reduction of the third world’s debt burden, pre- and postnatal care, child care and preschool preparation, excellent primary and secondary education, access to college regardless of financial condition, subsidies to firms undertaking high-value-added production, grants for research projects such as the high-energy particle accelerator, the human genome, and the exploration of space—and “good infrastructure.”
But recent history surely teaches that such programs often fail to achieve their intended results, that governments are not very good economic managers, and that the public does not want to transfer any more income from itself to the government.
Americans are a generous people, and have always been willing to help the needy and to welcome newcomers to their shores. But they know when an expenditure is effective, and when it is counterproductive. No one argues, as Kuttner seems to charge, that if the market fails to provide a job for an illiterate, unwed, teenage mother, we should let her and her baby starve, or force her to “go on the game,” in Dickensian fashion. What Americans have observed is that throwing more dollars into a welfare system which has spawned the unfortunate teenager seems less likely to solve the problem than a requirement that she acquire training which might liberate her from the cycle of dependency.
Kuttner, even more draconian than Reich, would bite the protectionist bullet, and manage trade and the economy in pursuit of a “civil society” and the elimination of “inequity.” But the public rejected this proposition when it was put forward by Congressman Richard Gephardt in his run for the Democratic presidential nomination in 1988, and, protectionist pockets notwithstanding, Americans seem to prefer, for example, a free-trade agreement with Canada to detailed, managed trade.
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The upshot is that the Democratic strategists who have been directed to these books as a source of policy guidance will be disappointed. They can follow Reich, and end up with no money to fund their programs—barring a last-minute change of heart by the symbolic analysts—or they can follow Kuttner’s protectionist prescriptions, and end up with an inefficient economy, managed by an international army of bureaucrats. Better still, they can read both but follow neither, relying instead on the only map that has proved reliable—the low-tax, incentive-based, market-oriented policies that produced the great Reagan boom of the 80’s.
1 Knopf, 304 pp., $22.95.
2 Knopf, 331 pp., $24.00.
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