Everything for Sale, Part I

THE OPEN MIND
Guest: Robert Kuttner
Title: “Everything For Sale”
VTR: 3/4/97

I’m Richard Heffner, your host on The Open Mind. I began this program, as you know, in 1956 when, for the second time, liberal Democrat Adlai Stevenson was running for the presidency against Republican Dwight D. Eisenhower. He lost again, of course, but the fact is that the legacy of New Deal and Fair Deal Democratic liberalism still seemed to be embraced by many Americans. John F. Kennedy’s New Frontier was just four years away, after all, to be succeeded by Lyndon Johnson’s Great Society.

After that, however, “liberal” and “liberalism” seemed almost to become, and to remain, dirty words. In their place, free marketplace, laissez faire, and deregulation, deregulation, deregulation became instead the mantra of modern times. Until now perhaps, when an interesting and growing group of younger intellectuals to a large extent symbolized by my guest today and by those associated with his 1990s publication, “The American Prospect”, would seem to shed a rather negative light once again on any supposed primacy of the marketplace and to share a preference for old fashioned full-strength as opposed to any watered-down neo-liberalism.

Well, now Knopf has published Robert Kuttner’s compelling Twentieth Century Fund study of the virtues and limits of markets, titled Everything for Sale. And I would ask my guest today to précis for us its central thesis.

KUTTNER: Well, the central thesis — and thank you for those kind words, both about the magazine and the book — the central thesis is that the natural form of capitalism is not laissez faire; that the best economy and the best society is a mixed economy. That there many things that the market does well; but there are many things that shouldn’t be a market, there are many kinds of markets that don’t even optimize economic outcomes, and there are values that we have as citizens that are not optimized by turning everything into a market. And so, even though it’s much more complicated than a bumper sticker that says, “Just get the government out of the way,” we need to reclaim a middle ground where, as the late Arthur Oakin said, “The market deserves a place, but the market deserves to be kept in its place,” and we need a balance between those realms of society that can be efficient markets and those realms of society that should not be markets or that need to be mixed markets.

HEFFNER: You know, I find something strange — interesting, but strange — about what you just said. You said “the natural form of capitalism.” And I thought to myself, my gosh, he’s falling into that same Darwinian, or at least social Darwinian trap of the newer capitalists, that there are natural forms and there are unnatural forms. Aren’t you talking about the form you want?

KUTTNER: Well, if I said that, I didn’t mean to. I meant that as a negative. That is to say, there is no such thing as a natural form of capitalism. Capitalism requires private property. Private property requires rules. And once you have rules, it’s not a Robinson Caruso world anymore. Once you have rules, those rules have to be determined by government and politics. And so you’re already one removed from this grail of a perfectly free market. So the idea that the best form of capitalism, the most natural form of capitalism, is absolute laissez faire is a fantasy to begin with. And what I try to do in Everything for Sale is to look at the structural characteristics of different realms of the economy — I didn’t say, “different markets” — different realms of the economy. And some of them work perfectly well as nearly free markets, like retailing. But at the other extreme, something like healthcare, even though it is riddled with commercialism, does not work well as a free market. It should not be a free market. Once we decide that doctors have to be educated and licensed, once we decide that people shall not die on the street for lack of medical care, then the supply discipline and the demand discipline is already compromised, and we need other forms of accountability.

HEFFNER: Do you think I’m just whistling in the dark, or just expressing wishful thinking when I said in my introduction there seems now to be a movement away from the natural form of things, as marketplace laissez faire capitalism?

KUTTNER: I think there are many straws in the wind. And let me tick off some of them. I think the backlash against private-profit-motivated forces trying to regulate healthcare by denying people healthcare because they might get sick, by coming in between the doctor and the patient, is one big straw in the wind. People, ordinary people, intuitively do not like what the market is doing to healthcare.

I think a second straw in the wind is the popular revulsion against the market trying to take over the polity. And I think properly understood, the campaign-finance scandals of the past weeks are a case of money trying to intrude into a realm that is supposed to be beyond money. After all, the first principle of a market is “One dollar, one vote.” The first principle of a democratic polity is, “One citizen, one vote.” And yet we are having these scandals because market forces are trying to take over political life. So there’s a revulsion against that.

There are cases of deregulation that did not perform as advertised. My favorite case is airline deregulation. Meaning you can fly from Boston to Washington on any airline of your choice, as long as it’s US Air. You can fly the Delta shuttle or the US Air shuttle between Boston and New York, and the fairs are identical, and they’re almost a dollar per seat-mile, even though the costs are 10 or 15 cents per seat-mile. So, instead of bringing us greater competition, airline deregulation has brought us greater concentration, less consumer choice, and costs that are declining at a slower rate than they declined before deregulation once you adjust for fuel prices.

I think the concern about the environment, as economists say, this is an externality. The marketplace does not price pollution properly. And unless you have regulation limiting the amount of pollution that’s emitted into the water, into the air, we drown in our own waste products.

I think education is a very mixed case, where there is some concern about bureaucracy, but we also see that the fruits of Mr. Christopher Whittle and his attempts to marketize education.

And I also, finally, think that the attempt by Gingrich and company, when they came in after the 1994 election, to think that all you had to do was get rid of the regulatory agencies and competition would naturally flourish, that was belied by the experience. The people who wanted to abolish the FCC, once they took a good look at what consumer choice, say, in telephones entailed, they realized that you needed regulators to set ground rules. If you were going to have a regime where people had more competition, more choice of carriers, you simply could not let the strong rub out the weak; you had to have a set of ground rules, or the new entrants would never get in the game. And I think actually the telephone, not to be too technical, but the Telecommunications Act of 1996 is a very instructive case of ideologues coming in thinking that all you had to do was put the agency out of business, and taking a closer look, understanding how that industry actually worked, and realizing that regulated competition might be an improvement upon monopoly, but it still had to be regulated.

HEFFNER: Yes, but, of course, you now make it sound as though the movement that I hope I see, this intellectual movement with which I identify you, has come, has been successful, and we’re home free now. You don’t really mean that, do you?

KUTTNER: Oh, let me not leave that impression at all. Liberals are still very, very much on the defensive. The ideas that I’m challenging in Everything for Sale are still very much the ascendant ideas: this romance with the grail of the free market. But I think there’s a counter-movement. I think both in intellectual life and in popular frustrations, the pendulum is beginning to swing back. It’s beginning to become respectable to say, “Well, maybe we can’t deregulate everything.” Beginning to become respectable to say, “Look at all the inefficiencies in the private regulation of healthcare.” And, of course, we haven’t even talked about the labor market, the fact that all of the implicit social contracts of the post-war era in which, if you did your job well, you could expect to have that job tomorrow and next week, and maybe even be promoted. And we’ve gone from that world to a world where, if someone on the sidewalk can do the job cheaper, you’re history. People don’t like that. And it’s not at all clear that this is efficient. So this romance of the free market, I think, is still ascendant politically, it’s ascendant intellectually, but I think there’s a growing challenge to it.

HEFFNER: You say, “People don’t like that.” What indication, succinct, successful, understandable indication is there that that’s the case, that the question of the place of unions, the place of the labor movement, its downgrading, is not to our liking today, or increasingly not to our liking? What evidence is there of that?

KUTTNER: Well, a small, incremental step like the Family and Medical Leave Act saying to the free market, “There are limits to how far you can push people.” The popularity of the minimum-wage legislation last year, even though a great majority of people who supported it did not get any benefit out of it, but there’s a sense of elemental fairness here that people who work hard ought to be able to support their families above a level of poverty, and a feeling that the balance between the individual worker and the corporation has shifted too far in favor of the corporation. Polls show that ordinary people are very unhappy with the degree of insecurity, the backlash against CEO compensation. And then, finally, I think the labor movement has probably bottomed out, and is beginning something of a comeback. You’ve got a new generation of fairly tough, fairly militant people who are beginning to make headway, particularly in service industries, where workers are very, very vulnerable. So I think this romance with laissez faire has probably gone about as far as it’s going to go, and I think both in terms of mass opinion and in terms of intellectual ferment, the pendulum is beginning to swing back.

I must say though, I’m not thrilled with our president. I think our president, as a Democrat, could be helping this pendulum swing back, and he isn’t doing it. He’s going with the flow.

HEFFNER: As I read “The American Prospect”, I realize you don’t, you aren’t all that happy with the president. But let me ask: How did it all happen? What sparked this romance with the marketplace, with laissez faire?

KUTTNER: Yes. Several things. I think, to begin with, the American character is rather individualistic. Our original slogan was, “Don’t tread on me.” This is not a society that likes bureaucracy, even though a great deal of the early development of the United States as an early country was stimulated by public investment. We tend to leave that aside. Arthur Schlesinger has written quite eloquently against the fact that, in the first hundred years of the Republic, long before the New Deal, long before Wilson even, there was a great deal of public involvement, not just in early public works, canals, railroads, that sort of thing, but in the system of land tenure. Jefferson made a very explicit decision that the land acquired in the Louisiana Purchase was not going to be sold off to big land-development companies; it was going to be reserved for freeholders. So political decisions were made early on by government about the form that development would take. But there is this schizophrenia in the American character. We think of ourselves as a libertarian people that doesn’t like government. So that’s the most fundamental layer of context.

Secondly, I think, in some sense, the period bracketed by the New Deal and World War II was something of an exception. Government was given more legitimacy to play a major role in the economy than ordinarily would be given, first, because of the Depression, and then because of the war, and then again because of the Cold War. And I think in the 1970’s when the economy faltered because of the collapse of the Breton Wood system, because of the OPEC oil shock, Keynesians were in charge of the economy at that period, and they were blamed for the fact that the economy faltered. And so that created an opening for a second romance with laissez faire in the economics profession, in the business community, and among public officials. A feeling that maybe we’d gone too far in the role that government was playing in the economy, and that maybe the pendulum needed to swing back.

HEFFNER: Do you feel — did you feel then — that that was correct, that the pendulum had gone too far and needed to swing back?

KUTTNER: No. I mean, I think we constructed maybe two-thirds of a welfare state. We did not go as far as the Europeans went in constructing, say, universal health insurance, and there were areas where I thought and still think that the public sector should play an even larger role. I do think that there are some areas where regulated competition is an improvement on the old kind of monopoly franchise regulation. For example: telephones.

HEFFNER: Now, you mean deregulated competition, or you mean regulated?

KUTTNER: No, I mean… I’m choosing my words carefully.

HEFFNER: Right. I assumed so, but I wanted to…

KUTTNER: Yeah. Right. I mean, regulated competition. For example, in the old days, before the Bell breakup, it was assumed that telephones were a natural monopoly, and that you would have one telephone company, you would guarantee it a rate of return, you would protect it from competitors, and that would be your telephone system. Now, it’s clear that telephones are not a regulated monopoly, that you could get prices to come down faster if you have competing phone companies. But, in order to have competing phone companies, you have to have a referee, and you have to have a complicated set of rules of fair play. It’s not enough to simply put the FCC out of business and expect that competition will flower. So I think there are industries, like telephones, or like electric power, where you can have regulated competition instead of regulated monopoly. But that’s not the same as pure deregulation. And I think, in the case of airlines, we made a huge mistake by not embracing a system of regulated competition, which would have been much more conducive to real consumer choice.

HEFFNER: Why did we make that particular mistake?

KUTTNER: Well, that’s the other character in this drama, and that’s the economist. The economic profession, having, in the middle of this century, embraced the ideal of a mixed economy, the ideal of Keynesian demand management, and the idea that some things had to be regulated, in the 1970’s the, most economists commenced a second romance with laissez faire. Milton Friedman being the most visible and extreme case, but a lot of democratic economists basically felt in the 1970’s that the economic slowdown and the inflation was substantially caused by too much regulation.

HEFFNER: De-deregulation began under Jimmy Carter on the national level.

KUTTNER: Yes. It was Charlie Schultz, who was Carter’s chief economist. Schultz, and Fred Kahn, and Allen Enthoven, all of whom consider themselves liberal democrats. These were really the fathers of deregulation. And Kahn, a brilliant, brilliant man who had done a great deal as Public Service Commission head in New York State to reform regulation of electricity, I think overreached. I think he felt, as he once famously put it, that airplanes were basically “marginal costs with wings,” and that this was not a natural monopoly; that anybody could go into the airline business, that barriers to entry were low, that all you had to do was get the CAB, the regulatory agency, out of the way, and competition would flourish. Well, what happened was that for a few years competition flourished, and then the big guys gobbled up the little guys, and what you have now is a cartel. You have a system of private regulation with a tremendous amount of price gouging, where price and cost diverge instead of converging, as Kahn predicted. And Kahn, I think, very discreetly, without getting a megaphone, has recanted some of what he predicted. But I think the fathers of deregulation of airlines have so much invested in this experiment that no one practically of the original group that sponsored it is quite willing to step forward and say, “This really misfired. We need regulated competition on the model of telephone competition rather than complete deregulation.”

HEFFNER: Why was this so much, almost exclusively, a matters of dollars and maybe no sense? Why wasn’t it a matter of the public good, the public interest, the well-being of the infrastructure, in some instances, whatever it might have been?

KUTTNER: Well, I think the sponsors of it, believing in the kind of economic model that they believed in, felt that this was just scripture: you get the regulator out of the way, and the market produces efficiencies.

HEFFNER: And safety? Or was that not the concern?

KUTTNER: In theory they did not think they were deregulating safety. They put the CAB out of business; they did not put the FAA out of business. But, of course, when you get an industry like this, that has some elements of a natural monopoly, and you get it into a kind of competitive frenzy on the one hand, to take market share from each other, but a kind of cartel-like behavior on the other hand, you run the risk that the new guy who wants to come in and under-price the majors is going to skimp on safety, and that’s the Value Jet story. And you can look at a graph of declining fatalities in civil aviation, and you have a nice, steady decline to about 1978, the year of deregulation, and then it sort of plateaus. It’s a lower plateau. I mean, on average it hasn’t gone up. But the safety record hasn’t continued to improve the way it had been improving in the previous 20 or 30 years. So I don’t, I mean, I don’t argue against airline deregulation mainly on safety grounds. I think planes… I wouldn’t fly Value Jet. But I think, for the most part, flying is safe. I just think it didn’t work out the way it was supposed to economically because the people who brought us airline deregulation were projecting a perfect, textbook model onto an industry that is structurally imperfect.

HEFFNER: But going back to this question of the romance, the romance of the marketplace. You talk about American tradition, and American values, and how they fit into this. But there had to have been more at that time. What was it that drove us…

KUTTNER: Yeah. I think organized business, as a political actor, as a political factor, was weakened by the combination of the Great Depression and the war. And so you had business groups like the Committee for Economic Development, which sounded almost like Social Democrats: business groups that felt that a mixed economy was just inevitable, that they had to make their peace with unions, that they had to make their peace with regulation. And that was the norm for the first 20 or 30 years after World War II. But I think, after about 1970, the natural antipathy of business to government regulation started resurging. And I think the fact that the economy faltered in the 1970’s gave business’s political influence a boost. And then, of course, along comes Reagan. And 12 years of Republicans bracketed by the administrations of two rather conservative Democrats: Carter and then Clinton, probably the two most conservative Democrats since Grover Cleveland. So you had a period in which the natural defenders of the mixed economy, liberal democrats, were getting weaker and weaker politically; and the natural opponent of the mixed economy, organized business, is getting stronger and stronger; and economists, who, a generation earlier, had believed in a mixed economy, were reverting to a kind of Adam Smith, Milton Friedman conception of “The market can do no wrong.” So all these factors converged.

HEFFNER: And you think… I made the grand statement at the beginning of our program that I sensed this intellectual ferment. But we both concede that that intellectual ferment exists within a continuing, if not triumph, a continuing domination of the romance, that the notion of the marketplace is still one that’ll get you a greater response than the notion of a balanced economy…

KUTTNER: Yes, and it…

HEFFNER: …than driving the money-changers from the temple.

KUTTNER: Right. And it also has the tactical virtue of being very simple. You can put it on a bumper sticker: “Get the government out of the way.” You can’t put this book on a bumper sticker. The case for a mixed economy is necessarily a complicated case, where you’re telling a different story depending on which sector of the economy you’re talking about. You’re telling one story about airlines, and another story about pollution control, and another story about healthcare. I would like to think that the stories that I’m telling about each of these sectors of the economy reflects the structure of those industries. And I would like to think that I’m not being the same kind of ideologue as the other side in reverse. I’m trying to be a pragmatist. And I think, as a pragmatist, I would concede — not just concede, but acknowledge with appreciation — that much of the economy works well as a market. This is a capitalist society. It ought to be a capitalist society. But that doesn’t mean everything should be a market.

HEFFNER: You say, “Much, but not everything.” I was fascinated by the letter that Jude Wanniski wrote to The New York Times, its Book Review section, about this wonderful book of yours, Everything for Sale. I expected to find an unmitigated, untouched attack upon you. Lo and behold, it’s not there. He says you’ve got some good ideas. You don’t carry them as far as he would, but, etcetera. Is this part of, do you think, of that movement away from the romance? Or was it never as thorough-going? Were there spots in those early years that you talk about in the Reagan and Bush years, where some of the people who were on the other side were not that fanatical?

KUTTNER: I think conservatives, principal conservatives, have always had an ambivalent view about letting markets determine everything. I mean, two generations before Marx, after all, you had conservatives like Carlisle and Burke worrying about what the marketization of everything would do to society. Bill Bennett, the conservative-culture czar, in November gave a very interesting speech warning about the effect of untrammeled capitalism on culture. George Soros, the world premier currency trader, a billionaire many times over, wrote the cover piece in the Atlantic Monthly in February, saying in so many words, “I used to worry that the principal menace to civil society was communism; now I worry that it’s capitalism.” So I think people who believe that markets are wonderful in the realm of getting and spending worry about what happens when you try to entrust to markets education, culture, political life, realms that ought not to be for sale. And the church, after all, is the oldest counterweight to the idea that everything ought to be on the auction block. And, in many respects, the church is a conservative force.

HEFFNER: That’s where I’m getting the sign to say goodbye for now. Stay where you are. Let’s continue this discussion for next week. Okay?

KUTTNER: Thank you.

HEFFNER: Thank you, Robert Kuttner, for joining me today on The Open Mind.

And thanks too, to you in the audience. I hope you join us again next time as well. If you would like a transcript of today’s program, please send $4 in check or money order to: The Open Mind, P.O. Box 7977, FDR Station, New York, NY 10150.

Meanwhile, as an old friend used to say, “Good night, and good luck.”

N.B. Every effort has been made to ensure the accuracy of this transcript. It may not, however, be a verbatim copy of the program.