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.

Kuttner talks insistently of American "industrial decline," for example.  But manufacturing as a share of GNP has remained remarkably constant since World War II.  Meanwhile, manufacturing exports as a share of the OECD total are actually higher now than they were ten years ago, suggesting that it is our trading partners who are suffering from "industrial decline," not the United States.  In the 1980s, according to Commerce Department data that became available this spring, U.S. manufacturing productivity rose at its fastest rate since World War II--nearly twice the rate of the 1970s.  It would appear that the American economy still has considerable capacity to right itself if given the chance.

True, the number of people who work in manufacturing (as defined by largely outmoded Labor Department statistics) has declined sharply.  But millions of other jobs have been created, and for the most part they are very good ones.  While there has been some increase in the wage gap between very rich and very poor, which is cause for concern, the big story of the 1980s is that a large chunk of the middle class "vanished" upward into income classes formerly reserved for the "rich," as Warren T. Brookes and others have noted.  America may not yet be the land of the "fortunate four-fifths" and the "unfortunate fifth," but it is still headed in the right direction to achieve that result.

Meanwhile, the stunning successes of American arms in the Gulf War, from the M-1 tank to the Patriot missile, suggest that America has not become a high-tech backwater just yet.  While Japan has seized much of the semiconductor business, America remains predominant in the higher-value-added software business, precisely because of the dynamism and creativity of our economy.

The rise of Japan, and to a lesser extent West Germany, is viewed with alarm by Kuttner and others.  While MITI, group loyalty, and mercantilism may explain some of Japan's success, they do not explain it all.  It is quite likely that such phenomena are swamped by more prosaic factors.  For example, in seeking to explain differentials in economic growth and productivity, it is incredible that neither Kuttner nor Reich raises taxes as a possible factor in the Japanese and German "miracles."  Although marginal income taxes in Germany and Japan are in fact higher than in America (50 percent in Japan and 56 percent in Germany compared with America's top rate of 31 percent), their taxes are riddled with deductions that sharply reduce the effective rates and favor savings and investment.  Equally important, both countries have cut the tax on capital gains and savings to practically zero.  Indeed, both may have over-biased their systems toward savings (one reason the Japanese aren't buying as much from us as we are from them).  Neither Kuttner nor Reich deals with other conventional explanations for Japanese and German success--low inflation, which encourages the willingness to invest for the long term, or the way that the Japanese government allowed industry to effectively break the power of major labor unions in the 1950s.  And while MITI may have attempted to micro-manage the Japanese industrial miracle, the results have been mixed.  The government lost huge sums subsidizing ship-building, for example.  And Japanese auto-makers turned a cold shoulder in the 1950s to government demands that they "rationalize" production through mergers.  The result was a highly competitive internal auto market of nine producers who were forced by circumstance to keep costs under tight control and fight for every customer.  It is not surprising that they soon became very competitive globally.

Much of what we hear about Japan these days has a familiar ring, as Reich himself points out.  He quotes from Jean-Jacques Servan-Schreiber's 1967 polemic, The American Challenge:

"American industry spills out across the world primarily because of the energy released by the American corporation."  That energy, in turn, derived from America's "highly organized economic system based on large units, financed and guided by national government....One by one, U.S. corporations capture those sectors of the economy...with the highest growth rates."

The American trade deficit is generally taken as evidence that America is not as competitive as it once was.  But the trade deficit may be the flip side of America's attractiveness as a place to invest, a reflection of faith in America's future rather than a sign of weakness.  The money sent to America by eager investors must eventually flow back out in the form of import purchases.  The question is whether those imports help build productive potential for the future or simply represent wasteful consumption.  The rising productivity figures suggest that the former may be the case.

In a 1989 study, Productivity and American Leadership: The Long View, Princeton economist William Baumol and two colleagues concluded that "[T]he data offer no clear basis for a conclusion that the long-run growth rate of productivity in the United States has fallen below its historical level, or that it is about to do so."  Baumol confesses surprise, since he had long shared the conventional view that things were going to hell in a handbasket.  "This book is perhaps most easily summed up as a compendium of evidence demonstrating the error of our previous ways," the authors begin with refreshing candor.

In the end, it is government, not business, that both Reich and Kuttner appear most concerned about protecting.  Kuttner is, perhaps unwittingly, fairly explicit on the point.  The hallmark of the postwar economy, he claims, was a series of barriers to the free flow of capital.  This "enabled center-left parties to broker and defend social contracts that benefit their constituencies.  Social democratic and labor parties had been the natural custodians of these social contracts, and the voters reciprocated by returning them to office."  The globalization of trade and capital brings great pressure to bear on the welfare state that was ushered in by Franklin Roosevelt and brought to a high point under Lyndon Johnson.

Reich at least recognizes that the world economy is developing in ways that make the old politics difficult to sustain, but he is no more successful than Kuttner at constructing a rationale for an updated version of the "social contracts" that Kuttner talks about.  The world is moving away from economic nationalism and toward markets, in part because technology is driving them in that direction but also because of the stunning successes of the market model.  The interest of the United States, this reviewer would argue, lies in broadening and deepening this trend, particularly here at home.  It would be dispiriting in the extreme to political and economic reformers elsewhere, particularly in Eastern Europe, if the world's largest single marketplace, the United States, turned its back on markets just as their success is being vindicated.  Progressively freer trade and the openness of the American market were major factors in the remarkable recoveries of Western Europe and Japan after World War II, which in turn helped to drive American prosperity to heights unparalleled in human history, and ultimately helped contain the Soviet threat.  Rarely has an array of policies worked so brilliantly.

Likewise, access to Western markets will be indispensable for progress in Eastern Europe and the Third World.  Readers are not likely to be persuaded by Kuttner's notion that government can "manage" world trade, as many Americans have come to doubt whether government can manage its own budget.  American economic policy abroad must reflect America's economic policy at home in emphasizing growth over redistribution and incentives over government-directed mercantilism.  If George Bush's New World Order is to have any meaning, it must spring from an understanding that if America allows markets to do their work, tempered only where necessary and then very carefully, the rest of the world will have little choice but to follow in America's train.

Thomas J. Bray is editorial page editor of the Detroit News.

Essay Types: Book Review