1. Carl J. Friedrich et al., Problems of the American Public Service (New York: McGraw-Hill, 1935), 12.
2. Scholars of American history and politics disagree about whether these deeper premises have endured, essentially unchanged through time (see, for example, Louis Hartz, The Liberal Tradition in America [New York: Harcourt, Brace and World, 1955]; Richard Hofstadter, The American Political Tradition and the Men Who Made It [New York: Alfred A. Knopf, 1948]), or have repeatedly cycled back and forth between periods of experimentation and consolidation (Arthur M. Schlesinger, Sr., Paths to the Present [Boston: Houghton Mifflin, 1964], 89–103; Arthur M. Schlesinger, Jr., The Cycle of American History [Boston: Houghton Mifflin, 1986], chap. 2). There is ample evidence to confirm either view, depending upon whether one regards the extremes of the cycle as representing fundamentally distinct worldviews or merely the ends of a rather truncated and predictable spectrum. As the reader will shortly discover, my own view departs somewhat from both of these positions.
3. In this book I use the terms “myth,” “parable,” and “morality tale” interchangeably, but they are not exactly the same. Myths are almost unconscious; they are woven into our very language in the metaphors, allusions, and analogies we use to express ourselves. See, for example, Ernst Cassirer, Language and Myth, Suzanne Langer, trans. (London: Dover Publications, 1946), 83–97. Parables, or morality tales, are more deliberate attempts to teach lessons through narrative. In between the two categories are found folktales, fairy tales, epic poems, and a broad range of heroic adventures. The entire spectrum can be understood as means through which cultural values are transmitted and understood. As the philosopher Alistair MacIntyre has written, “man is in his actions and practice … essentially a story-telling animal.” Our personal narrative histories are embedded in the stories of our time, our people, and our collective strivings. It is through narratives that we come to understand the actions of others. After Virtue: A Study in Moral Theory (South Bend, Indiana: Notre Dame University Press, 1981), 197, 201.
4. The best of these tales, illuminating the universal joys and longings of mankind, still resonate in cultures far removed in time and space from those that first took the stories as their own. Consider The Epic of Gilgamesh; the tales of Lao-tse, Buddha, Mohammed, and Zoroaster; the Illiad and the Odyssey; the tragedies of Aeschylus or the novels of Tolstoy.
5. Older fears and disillusionment about the tractability of public opinion (see, for example, Walter Lippman’s Public Opinion, published in 1922) have given way in recent years to a new understanding of the public’s active role in sorting, screening, and criticizing what it hears. See, for example, Wilbur Schramm, “The Nature of Communication Between Humans,” in The Process and Effects of Mass Communications, W. Schramm and D. Roberts, eds., rev. ed. (Urbana: University of Illinois, 1971), 8; Gerald M. Pomper, “From Confusion to Clarity: Issues and American Voters, 1956–1968,” in American Political Science Review, lxvi (June 1972): 415–27.
6. Annual message to Congress, December 4, 1917, in Arthur S. Link, ed., The Papers of Woodrow Wilson, vol. XLV (Princeton, N.J.: Princeton University Press, 1984), 194.
7. For a more detailed look at this theme in popular American fiction, see John G. Cawelti, Adventure, Mystery, Romance: Formula Stories as Art and Popular Culture (Chicago: University of Chicago Press, 1976); E. G. Bormann, “Fantasy Theme Analysis,” in J. L. Golden, G. F. Berquist, and W. E. Coleman, eds., The Rhetoric of Western Thought, 3rd ed. (Dubuque, Iowa: Kentall/Hunt Publishing, 1969), 433–49; Will Wright, Sixguns and Society: A Structural Study of the Western (Berkeley, Cal.: University of California Press, 1975).
8. John Kenneth Galbraith, American Capitalism (Boston: Houghton Mifflin, 1952).
9. For an account of American conspiracy theories, see Seymour Martin Lipset and Earl Raab, The Politics of Unreason: Right-Wing Extremism in America, 1790–1970 (New York: Harper and Row, 1970).
10. On the uniqueness of the American form of satire, see Leon Samson, The American Mind (New York: Jonathan Cape and Harrison Smith, 1932), 13.
11. For a cogent and thoughtful analysis of this tendency, see Samuel P. Huntington, American Politics: The Promise of Disharmony (Cambridge, Mass.: Harvard University Press, 1981).
12. See Richard Hofstadter, The Age of Reform (New York: Knopf, 1956), 228.
13. Samuel I. Rosenman, ed., The Public Papers and Addresses of Franklin D. Roosevelt, 13 vols. (New York: Random House, 1938–50), vol. 5, 8–18, 230–36.
14. Ibid. Professor Samuel Beer provides an insightful analysis of Roosevelt’s nation-building efforts, and their subsequent relevance, in “In Search of a New Public Philosophy,” in The New American Political System, Anthony King, ed. (Washington D.C.: American Enterprise Institute, 1978), 5–44.
15. State of the Union Speech, 1984. See Paul D. Erickson, Reagan Speaks: The Making of an American Myth (New York: New York University Press, 1985), 98.
1. Polling data reveal a striking consistency in conservative or liberal views. Such basic orientations frequently do a better job of predicting a respondent’s views than does objective self-interest in the outcome of a particular political choice. See David O. Sears et al., “White’s Opposition to Busing: Self-interest or Symbolic Politics?,” in American Political Science Review 73 (June 1979): 369–84; Richard Lau et al., “Self-interest and Civilian’s Attitudes Toward the Vietnam War,” Public Opinion Quarterly 42 (Winter 1978): 464–83.
2. Public opinion polls clearly revealed a shift in political ideology. In 1977, 30 percent of Americans considered themselves “conservative”; by 1986, 40 percent had adopted that appellation, while only 18 percent called themselves “liberal” (about the same as two decades before). Moreover, while 24 percent attested that their views were “more conservative” than they had been five years before, only 16 percent said their thinking had moved in the opposite direction. (Data based on the Harris Poll of March 1986, and the New York Times–CBS Poll of January 1986.)
3. For a theory about why the public seems to waiver in this way, see Albert O. Hirschman, Shifting Involvements: Private Interest and Public Action (Princeton, N.J.: Princeton University Press, 1982).
4. See Walter Fisher, “Romantic Democracy, Ronald Reagan, and Presidential Heroes,” Western Journal of Speech Communication 46 (Summer 1982): 299–310.
5. Thus writes Professor Richard Pipes in Survival Is Not Enough (New York: Simon and Schuster, 1984), 280.
6. This from Herbert Stein, Presidential Economics (New York: Simon and Schuster, 1984), 315.
7. Ibid., 328.
8. George Gilder, The Spirit of Enterprise (New York: Simon and Schuster, 1985), 290.
9. Charles Murray, Losing Ground: American Social Policy 1950–1980 (New York: Basic Books, 1984).
10. For a discussion of this view, see Diane Ravitch, The Troubled Crusade: American Education, 1945–1980 (New York: Basic Books, 1983).
11. According to this view, America in the nineteenth and early twentieth centuries managed crime through a massive investment in “impulse control.” Self-discipline was inculcated in schools, churches, and other socializing institutions; and this investment apparently paid off, in terms of reversing the upsurge in crime that had marred the early nineteenth century. Gradually, however, this emphasis was replaced by an “ethos of self-expression” that reached its height after World War II. See James Q. Wilson and Richard Hernstein, Crime and Human Nature (New York: Simon and Schuster, 1985).
12. See Fred L. Israel, ed., The State of the Union Messages of the Presidents, 1790–1966, vol. 3 (New York: Chelsea House, 1967), 2814.
13. From Roosevelt’s first inaugural address, cited in Henry Steele Commager, ed., Documents of American History, 7th ed., vol. 2 (New York: Meredith, 1963), no. 476.
14. The appellations “liberal” and “conservative” were infrequently used during this era, and when they were used they often meant different things than they do today. In the 1928 presidential campaign, for example, when Herbert Hoover identified his cause with “liberalism,” he was referring, as do modern European liberals, to the nineteenth-century movements asserting civil and economic independence from the ancien régime. Even after the term became associated with the New Deal, the former meaning lingered on; Robert Taft called himself a “liberal” to the end. Nor was the term “conservative,” with its connotations of British paternalism and elitism, particularly welcomed by opponents of the New Deal. The first American politician to embrace the term was Barry Goldwater, in 1964.
15. Goals for Americans (Englewood Cliffs, N.J.: Prentice-Hall, 1960).
16. After a best-selling book by the social critic, Michael Harrington.
17. See The Public Papers of Lyndon Baines Johnson, vol. 1 (1963–64) (Austin, Texas: University of Texas, 1965), 283, 611.
18. Ibid., (1965) vol. 2, 636.
19. Ibid., (1965) vol. 2, 224.
20. Ibid., (1963–64) vol. 1, 597, 704.
21. See, for example, William Kornhauser, The Politics of Mass Society (Glencoe, Ill.: Free Press, 1959); Harry Eckstein, A Theory of Stable Democracy (Princeton, N.J.: Center of International Studies, Princeton University, 1961).
22. Cited in Richard Hofstadter, The Progressive Historians (New York: Vintage, 1970), 438.
23. Quotations from campaign speeches, Nashua, New Hampshire, December 8, 1975, and Cleveland, Ohio, February 7, 1976.
1. Data on world population growth and its relationship to economic development can be found, for example, in U.S. Policy and the Third World: Agenda 83 (Washington, D.C.: Overseas Development Council, 1983); and Ruth Leger Sivard, World Military and Social Expenditures (Washington, D.C.: World Priorities, 1985).
2. Although manufacturing’s share of America’s gross national product has remained fairly constant over the last two decades, the number of workers engaged in manufacturing has steadily declined.
3. It is necessary to be a bit cautious with these figures, in part because the definition of an “American” producer is becoming less clear as time goes by. If the output of American manufacturers operating in other nations is included, the story is more upbeat. See Irving Kravis and Robert Lipsey, “The Competitive Position of U.S. Manufacturing Firms,” National Bureau of Economic Research Reprint No. 659, September 1985.
4. This stagnation has been particularly apparent in comparisons between the United States and other nations. From 1973 to 1984, for example, while American productivity improved by an average of .7 percent a year, the Japanese were producing 2.8 percent more each year. Western European nations also raised the productivity of their workers more rapidly than we did (although it must be noted that several of them accomplished this feat with a smaller portion of their work force actually at work). See United States Department of Commerce, International Economic Indicators (Washington, D.C.: United States Government Printing Office), various issues.
5. A distinction must be drawn between average family income, which declined between 1973 and 1985, and average per capita income, which, by some measures, increased over the same interval. Even if one is to focus on the more positive calculation, however, there is evidence that for any given age cohort within the population, per capita income declined. For example, a man passing from age forty to age fifty between 1953 and 1963 increased his real earnings 36 percent; one who passed from age forty to fifty in the following decade increased his real earnings 25 percent. But a forty-year-old in 1973 saw his real income drop 14 percent during the subsequent ten years. See Frank Levy and Richard Michel, The Economic Future of the Baby Boom (Washington, D.C.: Urban Institute, 1986).
6. In fact, in all of the ten years between 1970 to 1980 annual cash assistance for each nonelderly poor person in the United States rose by just $93. Few would decline a gift of $93, but this is not a sum likely to tempt crowds of Americans away from honest labor, or to lure poor teenage girls into motherhood. Adjusted for inflation, benefit levels for Aid to Families with Dependent Children, which is the largest cash-assistance program for the poor, actually declined during the decade, and they have continued to decline since 1980.
1. Quoted in Samuel Eliot Morison and Henry Steele Commager, The Growth of the American Republic (New York: Oxford University Press, 1940), 280.
2. Life, vol. 10, February 17, 1941, 63.
3. This is not to discount the moralistic strain of American policy toward the Mob at the Gates. Nineteenth-century missionaries set out to convert “heathens” toward the west and the south. Teddy Roosevelt launched a holy war on the Spanish and Mexicans. Woodrow Wilson sought a “community of nations” that would subscribe to universal laws and principles of human freedom. John F. Kennedy envisioned America as a beacon light, toward which the poorer nations of the world inevitably strove, and could reach with our help. Jimmy Carter sought to promote international human rights. Ronald Reagan echoed all these themes. But these moralistic ideas were never as significant, in practice, as either of the other two. Americans have never had the stomach for prolonged moral crusades in faraway places. At most, these sentiments provided partial justification for assertiveness in protection of our interests, or rationales for tolerance and magnanimity in the service of isolation.
4. The principle applies to any complex, evolving system in which the principal actors are dependent on one another. Examples are easily found in nature—among plants and animals that inhabit a particular watershed, among the members of one species, even among the organs or cells of a single animal. “The whole dear notion of one’s own Self—marvelous, old free-willed, free-enterprising, autonomous, independent, isolated island of a Self—is a myth: Yet, we do not have a science strong enough to discipline the myth.” Lewis Thomas, The Lives of a Cell: Notes of a Biology Watcher (New York: Bantam, 1974), 167.
5. OECD Economic Outlook (Paris: Organization for Economic Cooperation and Development, July 1984), p. 21, table 5.
6. More on this in subsequent chapters.
7. International Trade Commission, annual reports (Washington, D.C.: United States Government Printing Office, 1980–85).
8. Robert Z. Lawrence, Can America Compete? (Washington, D.C.: Brookings Institution, 1984).
9. Reported in The New York Times, December 20, 1984, sec. E, p. 4.
10. World Development Report (Washington, D.C.: International Bank for Reconstruction and Development, 1985). To take but one example, Brazil’s exports to the United States, which had increased substantially in 1983 and 1984, thereafter stopped growing; American restrictions on Brazilian steel, shoes, sugar, textiles, ethanol, and other products, had begun to take their toll.
11. See Ruth Leger Savard, World Military and Social Expenditures 1985 (Washington, D.C.: World Priorities, 1985), p. 35, table II.
12. Robert Pastor, “Our Real Interests in Central America,” Atlantic Monthly, July 1982, 36.
13. See The New York Times, January 11, 1986, sec. A, p. 1.
1. On these and other examples, see Reich, “Making Industrial Policy,” in Foreign Affairs (September 1982), 852–87; and “An Industrial Policy of the Right,” The Public Interest (Fall 1983): 3–17; Ann Markusen, “Defense Spending as Industrial Policy,” in Sharon Zuken, ed., Industrial Policy (New York: Praeger, 1985), 76–85; Thomas Egan, “The Case of Semiconductors,” in Margaret Dewar, ed., Industry Vitalization (New York: Pergamon Press, 1982), 121–44.
2. Whether publicly or privately funded, other industrialized nations spent a much higher percentage of their national products on civilian research than America did. In 1986, America’s total research and development spending topped $115 billion, of which $73 billion was financed by the U.S. government, largely for defense purposes. For an excellent summary of U.S. government sponsorship of private-sector research and development, see Harvey Brooks, “Technology as a Factor in U.S. Competitiveness” (Unpublished, Harvard Business School Division of Research, 1984).
3. In addition to these sums, some $95 billion was spent on procuring new weapons, many of which would incorporate the most sophisticated technologies. See Science Indicators (Washington, D.C.: National Science Foundation, 1986).
4. See Council on Economic Priorities, The Strategic Defense Initiative: Costs, Contractors, and Consequences (New York: Council on Economic Priorities, 1985).
5. Washington Post weekly edition, January 6, 1986, p. 21.
6. On competitiveness in the defense industry, see William W. Kaufmann, “The 1986 Defense Budget,” in Studies in Defense Policy (Washington, D.C.: Brookings Institution, 1985); Robert DeGrasse Jr., Is This National Security? (New York: Council on Economic Priorities, 1984).
7. DeGrasse Jr., op. cit.; see also, George F. Brown Jr., Defense and the Economy: An Analysis of the Reagan Administration’s Programs (Washington, D.C.: Data Resources, April 1982).
8. These data were gleaned from company reports.
9. The New York Times, February 27, 1986, sec. A, p. 1.
10. See John Shattuck, “Federal Restrictions on the Free Flow of Government Information and Ideas,” Government Information Quarterly, 3, no. 1 (1986): 5–29.
11. In a study of technological transfers from the West to the Soviet bloc during the course of fifteen years, the Congressional Office of Technology Assessment concluded that—even in technological areas where significant transfers occurred—the technological gap did not diminish. United States Congress, Office of Technology Assessment, Technology and East-West Trade (Washington, D.C.: United States Government Printing Office, 1979), 220.
1. This account is based on interviews and press reports.
2. Eric Mankin and I analyzed a sample of one hundred joint ventures between American and Japanese companies and discovered the same pattern in almost every one. See Reich and Eric D. Mankin, “Joint Ventures with Japan Give Away Our Future,” Harvard Business Review (March-April 1986).
3. See Hajime Karatsu, “The Deindustrialization of America: A Tragedy for the World” (Tokyo: KKC Brief, Keizai Koho Center, October 1985).
4. With the opening of the Tokyo stock exchange, it could be expected that more of this money would drift to Japan. See Jill Andresky, “Ready or Not,” Forbes, February 10, 1986, p. 94.
5. There were some notable exceptions. Canadians, for example, have never been wholly enthusiastic about American subsidiaries in their midst.
6. Japanese computer manufacturers (like Hitashi), meanwhile, were linking up with American semiconductor makers (National Semiconductor)—not to buy chips, but to sell Japanese computers in the United States.
7. For example, a small turning machine that Bendix sold in the United States for $105,000 in 1985 could have been made in Cleveland for $85,000. But when made in Japan by Bendix’s partner, Murata Manufacturing, and then shipped to Cleveland, the machine’s total cost was just $65,000. Company report, 1986.
1. In the spring of 1986, the U.S. Commissioner of Customs set off a diplomatic tempest when he blamed America’s drug problem on “massive drug-related corruption” in the Mexican government, including the Mexican president’s cousin and a state governor.
2. Andrew Pasztor, “Meese’s Ambitious War Against U.S. Drug Abuse Is Faltering as Cocaine Use Continues to Spread,” Wall Street Journal, January 9, 1986, p. 48.
3. Estimate of the Drug Enforcement Administration, “Report on Interdiction of Dangerous Drugs” (Washington, D.C.: United States Government Printing Office, 1986). See also Report of the National Intelligence Consumers’ Committee on Cocaine Abuse (Washington, D.C.: 1986).
4. Funding for interdiction, eradication, and surveillance was increased substantially more than that for education and treatment.
5. Stuart Auerbach, “Non-Producers Ship Steel to U.S.: Industry Sees Trend as Way of Getting Around Import Limits,” Washington Post, November 12, 1985, sec. E, p. 1.
6. In 1984, Congress strengthened the laws to allow American companies to get relief even before the “dumped” product actually injured them.
7. Estimates based upon 1980 Census. The Bureau counted 2 million illegal immigrants, and estimated that this represented roughly half of the total.
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).
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).
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.
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 Times, 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.
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.
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.
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.
11. Work requirements imposed under the federal Work Incentives Program, for example, involved little in the way of training. See David L. Kirp, “The California Work/Welfare Scheme,” The Public Interest, 83 (Spring 1986): 34.
12. For examples of programs like this, see Englander and Englander, “Workfare in New Jersey: A Five-Year Assessment,” Policy Studies Review (August 1985): 35; Milton Coleman, “When ET Came to Massachusetts, Welfare Dependency Declined,” Washington Post National Weekly Edition, July 26, 1985, p. 31.
13. In 1950 only one out of four elderly widows was living alone; most of the rest lived with their families. By 1980, two out of three were living alone, largely due to the expansion of Social Security. See United States Bureau of the Census, “Marital Status and Living Arrangements,” Current Population Reports (Washington, D.C.: United States Government Printing Office, March 1980), series P-2, no. 365, table 6.
14. See Reich and John D. Donahue, op. cit., 249.
15. Johnson & Johnson, Annual Report, 1986; see also, Joseph Califano, Jr., America’s Health Care Revolution (New York: Random House, 1986).
16. Under a plan adopted in Wisconsin, a fraction of the absent father’s earnings, sufficient to support a child under eighteen who lived with the mother, was withheld by employers, and then distributed to the mother as child support. If the father fell into arrears, the state would continue to make minimal payments; if the father’s payments dipped below the minimum, the state would also make up the difference.
17. See “Novel War on Teenage Sex,” The New York Times, November 14, 1985, sec. A, p. 20.
18. This approach was being tried in California, among other places.
1. See D. Archer and R. Cartner, Violence and Crime in Cross-National Perspective (New Haven: Yale University Press, 1984); E. Doleschal and A. Newton, “International Rates of Imprisonment,” National Council on Crime and Delinquency (unpublished, 1979).
2. See Statistical Abstract of the United States (Washington, D.C.: United States Government Printing Office, 1985), tables 213–17; United States Bureau of the Census, “English Language Proficiency Survey” (Washington, D.C.: United States Government Printing Office, April 1986); Edward B. Fiske, “American Students Score Average or Below in International Math Exams,” The New York Times, September 28, 1984, p. 30; University of Texas, “Adult Performance Level Project,” cited in The New York Times, April 16, 1985, sec. I, p. 1.
3. See data from A Children’s Defense Budget (Washington, D.C.: Children’s Defense Fund, 1985).
4. The Perry Pre-School Project in Ypsilanti, Michigan is recounted, along with several other studies, in Richard Darlington and Irving Lazar, The Lasting Effects After Preschool, U.S. Department of Health and Human Services (Washington, D.C.: United States Government Printing Office, 1979).
5. National Academy of Science, Youth Unemployment Training Programs (Washington, D.C.: National Academy Press, 1985).
6. Nathan Glazer, “Education and Training Programs and Poverty: Or Opening the Black Box,” in S. Danziger and D. Weinberg, eds., op. cit.
7. The relevant studies are cited in David Blumenthal and David Calkins, “Health Care and the Poor,” in M. Carballo and M. Bane, eds., The State and the Poor in the 1980s (Boston: Auburn House, 1984).
8. Karen Davis, “Primary Care for the Medically Underserved: Public and Private Financing,” in Changing Roles in Serving the Underserved: Public and Private Responsibilities and Interests (Washington, D.C.: American Health Planning Assn., 1981).
9. Gertrude Himmelfarb, The Idea of Poverty (New York: Vintage, 1985), 12.
1. More specifically, only 16 percent registered “great confidence” in Congress; 24 percent in the executive; 34 percent for corporate leaders; 28 percent for military leaders; 12 percent for labor leaders; and 16 percent for the press. Data are from Seymour Martin Lipset and William Schneider, The Confidence Gap: Business, Labor, and Government in the Public’s Mind (New York: Free Press, 1983).
2. Survey data cited in Samuel P. Huntington, “The United States,” in Michael J. Crozier et al., eds., The Crisis of American Democracy (New York: New York University Press, 1975), 78–85.
3. Boston Globe, October 14, 1971, p. 8.
4. By 1983, 2 percent of the nation’s households owned half of all family holdings of common stock, 40 percent of all bonds, and over 70 percent of tax-free securities. This distribution was not substantially different from that of twenty-five years before. See study by the United States Federal Reserve Board, October 1984, cited in The New York Times, October 9, 1984, sec. A, p. 31.
5. For a detailed discussion of this point, see Samuel Huntington, American Politics: The Promise of Disharmony, op. cit., 33–39.
6. Federal expenditures, which had been $18.5 billion in 1919, fell to $4.4 billion in 1929—a far bigger drop than the end of World War I and deflation alone account for. From 1920 until 1932, the number of federal employees steadily dwindled. These and subsequent data from U.S. Bureau of the Census, Historical Statistics of the United States (Washington, D.C.: United States Government Printing Office, 1965).
7. Federal Election Commission, 1985.
1. Cited by Herbert Kaufman, Red Tape: Its Origins, Uses, and Abuses (Washington, D.C.: The Brookings Institution, 1977), 7–8.
2. U.S. Commission on Federal Paperwork, Final Summary Report (Washington, D.C.: United States Government Printing Office, 1977), 5; “The Regulation Mess,” Newsweek, June 12, 1978, p. 86.
3. One estimate blames government regulation for about 25 percent of the productivity slowdown between 1973 and 1983. See Robert Litan and William Nordhaus, Reforming Federal Regulation (New Haven: Yale University Press, 1983), chap. 2.
4. For a sampling of cross-national comparisons, see Joseph L. Badaracco, Jr., Loading the Dice: A Five-Country Study of Vinyl Chloride Regulation (Cambridge, Mass.: Harvard Business School Press, 1985); Steven Kelman, Regulating America, Regulating Sweden: A Comparative Study of Occupational Safety and Health (Cambridge, Mass.: MIT Press, 1981); David Vogel, National Styles of Regulation: Environmental Policy in Great Britain and the United States (Ithaca, N.Y.: Cornell University Press, 1986).
5. Irving Kristol, Two Cheers for Capitalism (New York: Basic Books, 1978), chap. 2.
6. Paul H. Weaver, “Regulation, Social Policy, and Class Conflict,” The Public Interest (Winter 1978): 59–60.
1. Economists call these negative and positive side effects “externalities” because they fall outside the specific market transactions that give rise to them. That is, the parties to the transactions do not consider these consequences in their decisions, with the result that there are apt to be too many external “bads” and too few “goods” from society’s point of view. The notion of an “externality” suggests something inevitable and definitive. It is important to understand, however, that these “bads” and “goods” are external to the transactions only because the prevailing market rules do not include them.
2. See Ackerman and Stewart, “Reforming Environmental Law,” Stanford Law Review, 37 (1985): 1333.
3. In 1979 the U.S. Environmental Protection Agency initiated a “bubble policy” which allows state and local regulators to offset increases in pollution from one plant by decreases at another. On this and related proposals see Albert Nichols, Targeting Economic Incentives for Environmental Protection (Cambridge, Mass.: MIT Press, 1984); see also Richard B. Stewart, “Two Models of Regulation” (unpublished manuscript, Harvard Law School, 1986).
4. In the 1980s, several American cities were experimenting with this approach, with varying degrees of success.
5. For a sampling, see James C. Miller III, “The Case Against ‘Industrial Policy,’ ” The Cato Journal, 4 (Fall 1984); Chalmers Johnson, ed., The Industrial Policy Debate (San Francisco: ICS Press, 1984); Claude E. Barfield and William Schambra, eds., The Politics of Industrial Policy (Washington, D.C.: American Enterprise Institute, 1986).
6. In our rapidly changing competitive environment, the definition of an “industry” becomes problematic (see chapter 10). For present purposes, let us define an industry as a collection of firms pursuing similar strategies.
7. In 1982 commercial banks paid 2 percent of their income to the government; food processors, 25 percent; auto makers, 48 percent. See Joint Committee on Taxation, “Taxation of Banks and Thrift Institutions,” (Washington, D.C.: United States Government Printing Office, March 9, 1983), table 2.
8. This issue arose in Apple Computer, Inc. v. Franklin Computer Corporation, 714 F.2d 1240 (C.A. 3, 1983); Congress grappled with it in enacting the Semiconductor Chip Protection Act of 1984; but in important respects the issue has remained unresolved. While circuit designs may be protected, it remains unclear to what extent the functions performed by a design may also be protected.
9. The technical question was whether the government should confer to the pipelines the power of “eminent domain” to take the land, paying the railroads only an appraised market price.
1. For an earlier and pessimistic discussion of this phenomenon, see Thomas Hobbes, The Leviathan (Liberal Arts Press edition) (New York: Bobbs Merrill, 1958).
2. The exception is organized crime groups, where members are made to understand that in the event of capture silence will be rewarded and betrayal punished; this device for bonding trust, indeed, is an example of why organized crime is so successful.
3. For an appraisal of alternative strategies in repeated rounds of the prisoner’s dilemma, see Robert Axelrod, The Evolution of Cooperation (New York: Basic Books, 1984).
4. Thus their interest charge would fluctuate from year to year according to their ability to pay; such a swap of debt for equity, familiar to bankruptcy proceedings, would give creditors a stake in their future growth.
5. Tracy Kidder’s fine book The Soul of a New Machine (Boston: Atlantic, Little, Brown, 1981) was widely read and cited not because it described an unusual occurrence, but because it captured clearly what was increasingly recognized as the norm in important sectors of the economy.
6. The observation that American workers are already major equity owners will come as no surprise to anyone familiar with the central role of pension funds in corporate finance. But the motivating force of this sort of ownership is severely limited, because pension funds are invested in a broad portfolio of stocks over which employees have no direct control, and upon which their job performance thus has no effect.
7. For a representative discussion of these issues see Derek C. Jones and Jan Svejnar, eds., Participatory and Self-Managed Firms (Lexington, Mass.: Lexington Books, 1982). See also Howard Frant, “Is There Any Point to Employee Ownership?” (unpublished, Kennedy School of Government, Harvard University, June 1986).
8. On this point, see Martin Weitzman, The Share Economy (Cambridge, Mass.: Harvard University Press, 1984).
9. Negligence could be punished by fines rather than judgments; the current system, which attempts to merge deterrence and compensation in a single transaction, has proven unworkable.