In this more competitive global environment, the old corporate formula of steady profits and stodgy management no longer worked. With less ability to pass on higher costs or shoddy products to consumers, corporate profits and market share shrank, and corporate shareholders began demanding more value. Some corporations found ways to improve productivity through innovation and automation. Others relied primarily on brutal layoffs, resistance to unionization, and a further shift of production overseas. Those corporate managers who didn’t adapt were vulnerable to corporate raiders and leveraged buyout artists, who would make the changes for them, without any regard for the employees whose lives might be upended or the communities that might be torn apart. One way or another, American companies became leaner and meaner — with old-line manufacturing workers and towns like Galesburg bearing the brunt of this transformation.
It wasn’t just the private sector that had to adapt to this new environment. As Ronald Reagan’s election made clear, the people wanted the government to change as well.
In his rhetoric, Reagan tended to exaggerate the degree to which the welfare state had grown over the previous twenty-five years. At its peak, the federal budget as a total share of the U.S. economy remained far below the comparable figures in Western Europe, even when you factored in the enormous U.S. defense budget. Still, the conservative revolution that Reagan helped usher in gained traction because Reagan’s central insight — that the liberal welfare state had grown complacent and overly bureaucratic, with Democratic policy makers more obsessed with slicing the economic pie than with growing the pie — contained a good deal of truth. Just as too many corporate managers, shielded from competition, had stopped delivering value, too many government bureaucracies had stopped asking whether their shareholders (the American taxpayer) and their consumers (the users of government services) were getting their money’s worth.
Not every government program worked the way it was advertised. Some functions could be better carried out by the private sector, just as in some cases market-based incentives could achieve the same results as command-and-control-style regulations, at a lower cost and with greater flexibility. The high marginal tax rates that existed when Reagan took office may not have curbed incentives to work or invest, but they did distort investment decisions — and did lead to a wasteful industry of setting up tax shelters. And while welfare certainly provided relief for many impoverished Americans, it did create some perverse incentives when it came to the work ethic and family stability.
Forced to compromise with a Democrat-controlled Congress, Reagan would never achieve many of his most ambitious plans for reducing government. But he fundamentally changed the terms of the political debate. The middle-class tax revolt became a permanent fixture in national politics and placed a ceiling on how much government could expand. For many Republicans, noninterference with the marketplace became an article of faith.
Of course, many voters continued to look to the government during economic downturns, and Bill Clinton’s call for more aggressive government action on the economy helped lift him to the White House. After the politically disastrous defeat of his health-care plan and the election of a Republican Congress in 1994, Clinton had to trim his ambitions but was able to put a progressive slant on some of Reagan’s goals. Declaring the era of big government over, Clinton signed welfare reform into law, pushed tax cuts for the middle class and working poor, and worked to reduce bureaucracy and red tape. And it was Clinton who would accomplish what Reagan never did, putting the nation’s fiscal house in order even while lessening poverty and making modest new investments in education and job training. By the time Clinton left office, it appeared as if some equilibrium had been achieved — a smaller government, but one that retained the social safety net FDR had first put into place.
Except capitalism is still not standing still. The policies of Reagan and Clinton may have trimmed some of the fat of the liberal welfare state, but they couldn’t change the underlying realities of global competition and technological revolution. Jobs are still moving overseas — not just manufacturing work, but increasingly work in the service sector that can be digitally transmitted, like basic computer programming. Businesses continue to struggle with high health-care costs. America continues to import far more than it exports, to borrow far more than it lends.
Without any clear governing philosophy, the Bush Administration and its congressional allies have responded by pushing the conservative revolution to its logical conclusion — even lower taxes, even fewer regulations, and an even smaller safety net. But in taking this approach, Republicans are fighting the last war, the war they waged and won in the eighties, while Democrats are forced to fight a rearguard action, defending the New Deal programs of the thirties.
Neither strategy will work anymore. America can’t compete with China and India simply by cutting costs and shrinking government — unless we’re willing to tolerate a drastic decline in American living standards, with smog-choked cities and beggars lining the streets. Nor can America compete simply by erecting trade barriers and raising the minimum wage — unless we’re willing to confiscate all the world’s computers.
But our history should give us confidence that we don’t have to choose between an oppressive, government-run economy and a chaotic and unforgiving capitalism. It tells us that we can emerge from great economic upheavals stronger, not weaker. Like those who came before us, we should be asking ourselves what mix of policies will lead to a dynamic free market and widespread economic security, entrepreneurial innovation and upward mobility. And we can be guided throughout by Lincoln’s simple maxim: that we will do collectively, through our government, only those things that we cannot do as well or at all individually and privately.
In other words, we should be guided by what works.
WHAT MIGHT SUCH a new economic consensus look like? I won’t pretend to have all the answers, and a detailed discussion of U.S. economic policy would fill up several volumes. But I can offer a few examples of where we can break free of our current political stalemate; places where, in the tradition of Hamilton and Lincoln, we can invest in our infrastructure and our people; ways that we can begin to modernize and rebuild the social contract that FDR first stitched together in the middle of the last century.
Let’s start with those investments that can make America more competitive in the global economy: investments in education, science and technology, and energy independence.
Throughout our history, education has been at the heart of a bargain this nation makes with its citizens: If you work hard and take responsibility, you’ll have a chance for a better life. And in a world where knowledge determines value in the job market, where a child in Los Angeles has to compete not just with a child in Boston but also with millions of children in Bangalore and Beijing, too many of America’s schools are not holding up their end of the bargain.
In 2005 I paid a visit to Thornton Township High School, a predominantly black high school in Chicago’s southern suburbs. My staff had worked with teachers there to organize a youth town hall meeting — representatives of each class spent weeks conducting surveys to find out what issues their fellow students were concerned about and then presented the results in a series of questions to me. At the meeting they talked about violence in the neighborhoods and a shortage of computers in their classrooms. But their number one issue was this: Because the school district couldn’t afford to keep teachers for a full school day, Thornton let out every day at 1:30 in the afternoon. With the abbreviated schedule, there was no time for students to take science lab or foreign language classes.