Liberal Trade Winds

September 1, 1991 Topics: Economics Tags: Soft Power

Liberal Trade Winds

Mini Teaser: Robert Kuttner, The End of Laissez-Faire: National Purpose and the Global Economy After the Cold War (New York: Alfred A.

by Author(s): Thomas J. Bray

Robert Kuttner, The End of Laissez-Faire: National Purpose and the Global Economy After the Cold War (New York: Alfred A. Knopf, 1991).  304 pp., $22.95.

Robert B. Reich, The Work of Nations: Preparing Ourselves for 21st Century Capitalism (New York: Alfred A. Knopf, 1991).  331 pp., $24.00.

It was always a mistake to think that in the wake of the collapse of the Marxist model, the Left would fold up its interventionist tent and steal away into the night.  It is probably no accident, for example, that global warming and "sustainable development" have suddenly become serious concerns in liberal salons.  Environmentalism, at least in its more extreme forms, provides excellent cover for those who distrust markets and would prefer to see a larger role for government.  Though protectionism, "industrial policy," and other forms of essentially autarkic behavior have fallen on hard times recently, they constitute a hardy species in American history.

Now come Robert Kuttner and Robert Reich, two reliable guides to left-liberal thinking, to argue anew for the "mixed economy."  The mixed economy is needed now, not to save capitalism from Marxism, but to prevent America from losing its competitive position in the world.  Though they approach their subject from sharply different angles, they arrive at similar conclusions: the 1980s were an economic disaster, America is poorly prepared to maintain its place in the world, and government is needed to redress the balance.Along the way, both Kuttner and Reich make a number of interesting arguments and, though neither author is fully persuasive, their efforts to revive the case for economic nationalism should be taken seriously. 

In The End of Laissez-Faire, Kuttner makes the more conventional case for economic nationalism.  In essence, he argues that laissez-faire ideology in its present form rose to prominence primarily because of the need for a rallying point against communism.  Now that the Cold War is over, the United States can get back to the serious business of protecting itself from economic aggression by its quondam allies.  His prescription: a regime of managed trade agreed upon by the leading industrial nations, subsidies to key industries, re-regulation, and more spending on education and infrastructure.

"The prevailing ideology of economic liberalism," Kuttner writes,

has eschewed having industrial goals in the United States: in principle, it is none of the government's business where steel, or automobiles, or semiconductors, or VCRs, or civilian aircraft are produced; if production migrates abroad, this must be the market speaking, and if foreign industrial policies are the guiding, not the invisible hand of global markets, this is deemed to make no significant difference.

The flaw in such thinking, in Kuttner's view, is that foreign companies do not play by the same rules as American companies.  Because the Great Depression demonstrated "the chronic instability of capitalism," Americans should learn to accept the "stabilizing role" of the public sector.  They should also forget about trying to convert other countries, Japan in particular, to laissez-faire: "If Commodore Perry failed with gunboats to make Japan over in the Western image, and General MacArthur failed despite a full-fledged occupation after an unconditional military surrender, it is inconceivable that the United States can succeed now when its economy grows daily more dependent on Japan."

As other reviewers have pointed out, Kuttner spends much of his time knocking down a straw man: pure "laissez-faire" has never existed, even in the United States.  For Kuttner, all successes are "Keynesian," all defeats due to "Reaganomics."   And while Kuttner, an economics columnist for Business Week and the New Republic, may be correct that capitalism suffers from "chronic instability," that is not saying much.  The instabilities of capitalism seem rather less severe than the instabilities of other systems we have witnessed in the twentieth century.  It can also be argued that the Depression, far from proving the inherent flaws of capitalism, proved just the opposite.  What began as a fairly mild recession, after all, promptly deepened into something far worse after the Smoot-Hawley tariffs took effect.  But that would not fit well with Kuttner's case for more, rather than less, government intervention in trade.

Many of Kuttner's arguments are effectively rebutted by his own Cambridge colleague, Robert Reich, who teaches political economy at Harvard's Kennedy School of Government and has served as an adviser to leading Democrats.  Reich explicitly rejects the "zero-sum nationalism" of protectionists on both the Left and the Right in favor of a "positive nationalism" that stresses the upgrading of American skills.  As he sees it, countries that try to wall themselves off from competition are engaging in "vestigial thinking."

In the future, claims Reich, "[t]here will no longer be national economies, at least as we have come to understand that concept."  Jobs and investment will be able to move, in the twinkling of a computer's eye, to the most hospitable areas around the globe.  And in any case, classical protectionism is no longer possible.  "By the end of the 1980s, almost a third of the standard goods manufactured in the United States, by value, were protected against international competition."  The chief effect was only to drive up costs for other industries.  "Once the steel industry successfully warded off cheaper foreign steel," Reich notes, "the Big Three American automakers discovered that they had to pay 40 percent more for it than did their global competitors, thus putting American automakers at a disadvantage and, paradoxically, making them all the more needful of protection."

As the world draws closer together, goods can more easily sneak in through third countries.  "Thus, proliferating `voluntary' restraint agreements notwithstanding, between 1969 and 1979 the value of manufactured imports relative to domestic production in the United States surged from less than 14 percent to 38 percent.  By 1986, for every $100 spent on goods produced in the United States, Americans were buying $45 worth of manufactured imports."

Talking in terms of nationality has less meaning than it used to.  To make his point, Reich offers some telling examples: Canada's Northern Telecom sells telecommunications equipment made by Japan's NTT at NTT's factory in North Carolina to American customers.  Under its own trademark and in the United States, Chrysler, led by Japan-basher extraordinaire Lee Iacocca, sells Mitsubishi autos assembled in Taiwan.  And when the U.S. trade representative finally succeeded in opening the Japanese market to American paging devices, the goods were shipped by Motorola--from its plant in Thailand.

Reich overdoes this argument.  As Kuttner notes, the nation-state is still the locus of economic decision-making.  And having marched bravely up the free-market hill, Reich proceeds to march right back down.  His "positive nationalism" has a familiar ring.  Like Kuttner, he favors more spending on education and infrastructure.  Like Kuttner, he would subsidize key industries (though Reich would also make these subsidies available to "high-value-added" foreign businesses that locate within national borders).  And to finance all this, Reich falls back on standard liberal dogma: a sharp increase in progressive taxation, a formula with which Kuttner would not disagree.

America's elite--the "symbolic analysts" who have attended all the best schools and possess the skills necessary to compete globally--are making it.  Most of the rest, perhaps four-fifths of the population, are just scraping by.  And, according to Reich, not only is the gap widening, but "[t]o improve the economic position of the bottom four-fifths will require that the fortunate fifth share its wealth and invest in the wealth-creating capacities of other Americans."  In other words, class politics is alive and well on the liberal side of the spectrum.  The term "fortunate fifth" is the key.  Where some might see success, Reich sees luck and undeserved advantage.  He also believes that the "fortunate fifth" has "seceded" from American society and moved to walled communities in the suburbs and beyond, leaving its countrymen behind in dead-end jobs and despairing communities.  The answer is to tax them and redistribute the proceeds.  This, Reich maintains, can be done with comparative impunity because the victims will have no real option but to grin and bear it: while "money, plants, information, and equipment are footloose....[b]rains, however, are far less mobile internationally."

But is that really true?  If the fortunate fifth has already seceded to the suburbs, how can it be relied upon not to move even further afield, particularly if Reich and his colleagues persist in trying to appropriate their wealth?  Was not the brain drain from England in the 1960s and 1970s a stunning example of what can happen if the tax burden gets out of hand?

There is an even more dubious premise at the heart of both the Reich and Kuttner books: that there is a problem which needs solving in the first place.  In places like Detroit, which are bearing the brunt of the Japanese and European competition, the answer may seem self-evident.  And a fair segment of the public has probably come to believe the media drumbeat: that America's economy is in a shambles, thanks mostly to Ronald Reagan and his voodoo economics.  In fact, the data suggest that things aren't nearly as bad as Kuttner, Reich and other commentators assume.

Essay Types: Book Review