The Free Enterprise System’s ‘Dirty Dance with the State’

THE OPEN MIND
Host: Richard D. Heffner
Guest: Peter Passell
Title: The Free Enterprise System’s “Dirty Dance With The State”
VTR: 5/27/98

I’m Richard Heffner, your host on The Open Mind. And joining me today, as he has over the years when one or another or many of his economic reports in The New York Times particularly intrigued or jolted me, is Peter Passell, longtime economic news columnist for The Times.

Well, now it’s the end of May 1998 as we record this program, and the recent Passell columns that have particularly gotten to me are those titled “Capitalism Victorious, Thanks Everyone,” and “When Megamergers Are Megabusts.” With tongue in cheek, of course, in the first of these, he describes the new Daimler-Chrysler merger as “the model for global capitalism, a marriage of champions of free enterprise whose success has been driven by their ability to deliver products that customers around the world want at prices they are willing to pay. But,” Peter snipes, “not quite. For, in fact, Adam Smith’s famous Hand of God wasn’t ever really that invisible as German governments, including Adolph Hitler’s Third Reich, propped up the Daimler-Benz combination, and our government later kept Chrysler alive.”

As my guest notes, “While no one disputes the technological or marketing savvy of these giant automakers, their profitability, their staying power, and at times of crisis their very survival, have depended as much on cozy relations with the state.” He insists that “None of this reflects badly on Daimler-Benz or Chrysler.” And he wants us to realize that they aren’t the only ones that are masters of the free enterprise system’s dirty dance with the state. All over the world, after all, others dance to the same tune.

Now, in his other Times piece, “When Megamergers Are Megabusts,” my guest gives the lie to other current wisdom, namely that “The globalization of markets and the speed of technological changes has tied efficiency to size.” So let’s talk with him now about this notion that bigness is no longer a threat to consumers, but the salvation of affluent economies struggling to stay ahead of the pack. True or false, Peter? Which one?

PASSELL: Probably neither. My guess is that bigness is inevitable because of internal incentives within corporations, but it doesn’t have much effect on consumers in general. I hate to deflate something here. I probably should say something nasty. But I don’t particularly feel nasty about it. I think that we’re, what’s crucial here is that capitalism has its own momentum. And at the moment that momentum is toward bigness. I think probably there’s less here than meets the eye though.

HEFFNER: Less in terms of benefits to the consumer.

PASSELL: Certainly less in terms of benefits to the consumer, but also less in terms of the power of corporations. There’s an old idea — it’s not so old — but an idea that certainly has, that corporations were a threat to us all, that bigness was bad in some fundamental sense. My guess is these days that pluralism, political power, is so diffusely spread, or, to put it another way, that interest group coalitions don’t depend on corporations for their power, that frankly bigness isn’t truly dangerous.

HEFFNER: Yes, but suppose you look at it the other way around: political groups may be that diverse, but economic power may be what counts now.

PASSELL: Well, that’s a nice way to put it. But think of even the automobile industry, which you could argue, it’s full of giants now, and getting more concentrated. It’s still ferociously competitive, there’s still enormous overcapacity in world production. There seems to be none of the signs, the old-fashioned signs of monopoly that, or cartelization that we used to think were coming. In fact, frankly, one argument is this is sort of a futile effort at the moment to reduce the total capacity to build automobiles in the world, which will be almost certainly unsuccessful.

HEFFNER: Well, you know, I should’ve looked it up. I’m a historian, and I knew this would come up. Was it Brandeis or Cardoza who said, “Let them grow, let them get bigger, let them consolidate, because at some point that will make it easier for the public interest to step in and take over giant political … ah … economic organizations.”

PASSELL: You know, these are old battles that I think are almost irrelevant today.

HEFFNER: Why irrelevant?

PASSELL: Well, I mean, right now, what drives power in America? I think that Chrysler matters a lot, but only on a few very narrow issues that Chrysler cares about. And frankly, an alliance with Daimler-Benz will probably reduce that power, because its interests will be more diffuse. For example: protectionism. The fact that Ford owns a piece of Mazda has frankly embarrassed Ford in efforts to protect the domestic automobile industry against imports, Japanese imports, for example. In the Daimler-Chrysler merger, my guess is that the single most important thing to Chrysler is the salaries that Chrysler pays its executives, and at the moment that’s also under challenge precisely because of the merger with a company with a very different ethic about corporate salaries.

So I’m not so concerned. I must say though I don’t think this is being done for, out of, there’s nothing driving this fundamentally except the egos of the people running the show.

HEFFNER: Yes, in both of these recent pieces this surfaces as Peter Passell’s point of view: the egos, and the year-end bonuses.

PASSELL: Sure. Well, this is an old story, and one I do believe in. We fight a lot of battles from the Thirties that are irrelevant. But the one that was brought up in the Thirties, was originated in the Thirties, which I do believe in, is that managerial capitalism doesn’t work for you and me; it works for the folks in the boardroom. Now, that doesn’t necessarily mean it’s been a disaster. It hasn’t. But it has meant things like grotesque salaries. And it’s hard to argue that the heads of corporations in America work for anybody but themselves.

HEFFNER: Not even for the stockholder?

PASSELL: Well…

HEFFNER: But let’s not, let me not ask the question, “Are they working for the Stockholder”; but “Doesn’t the stockholder benefit?”

PASSELL: I guess what I don’t think is that the typical executive who’s making ten or fifteen million dollars a year wouldn’t do the same job for half a million dollars a year. That typically the boss has it all fixed. I mean, come on, maybe I’m just a cynic, but I don’t think corporations would be very different if you cut everybody’s salary by a factor of ten.

HEFFNER: Okay, but that’s not answering the question. I probably put it poorly.

PASSELL: Try me again.

HEFFNER: If, as they benefit as they do, are others benefited too? Stockholders?

PASSELL: We don’t have the counterfactual, to use a three-dollar word. We don’t know how any other system would work here. I do not dispute the notion that the American economy, led by large corporations, has done rather well. I would not be the one to change things dramatically, because it ain’t really broke, and I intend to fix it. But what I don’t believe is that if you look inside most corporations that they are particularly well run or that anybody in particular is looking out for the stockholders.

HEFFNER: And certainly not for the general public.

PASSELL: Certainly not for the general public. But that’s different. Because, in a way, that’s how capitalism is supposed to work.

HEFFNER: Say that again.

PASSELL: Well, you know, Milton Friedman used to talk about this. It’s one, you know, corporations love to give money to charity and things, and they love to go to benefit dinners and things, corporate executives love to give benefit dinners. And Milton Friedman was always standing in the background saying, “That’s not what corporations are supposed to do; they’re supposed to benefit society by maximizing profits, by doing their best to make the best products which make the most money; not to give it away to somebody other than the stockholders.” The idea of social responsibility as a primary function of corporation, I think, is foolish. First of all, they’re not particularly socially responsible. But, second of all, that’s not how capitalism is supposed to work. Government and the marketplace competition are supposed to make them socially responsible. We, the public, sets the rules, the corporations fight like dogs to beat the rules. That’s the way the world’s supposed to work.

HEFFNER: But certainly no one is giving away anything. Certainly the generosity that you referred to on the part of corporations is a function of attempting to get better and better public relations, presumably in order to increase profits in the long run, or to keep the government off their backs.

PASSELL: Well, that’s why, in fact, I kind of brush it aside. But the reality is the, the rhetoric of corporate responsibility, the endless seminars you can go to about corporate ethics, etcetera, etcetera, about how corporations have to help their communities, that, it’s mostly eyewash, and thank goodness it’s mostly eyewash, because corporations should do what they do best, which is to make products, and do them well, and fall by the wayside if they don’t do it well.

HEFFNER: Now, wait a minute, wait a minute, wait a minute, Peter. Are you suggesting that what they do do doesn’t make any difference anyway because it doesn’t impact upon how well they do?

PASSELL: Well, let’s take an example: Do we want corporations to train workers with bad educations? I guess I don’t unless it’s in the interest of the stockholders of the corporation. I want that to be public responsibility. I don’t want corporations sort of bouncing around, effectively running the state for us, running the… So I guess I want a smaller definition of what corporations are supposed to be doing, which is making money.

HEFFNER: Are you suggesting that corporations, to the extent that they’re doing this, are doing it in the public interest, or in their own interest?

PASSELL: Good question. I mean, look, a lot of what they do, when — I won’t name names, because it’s really not very friendly — when…

HEFFNER: Who’s friendly?

PASSELL: Who’s friendly? Okay, we’ll name names. Take a really fine company like Merck. Merck is a wonderful and very efficient manufacturer of drugs. When they invest in the rain forest in Costa Rica, it’s not my belief that it’s a good investment. I think they’re mostly doing it for public relations. And it’s a little thing. It’s fine. It’s a few million dollars from the stockholders. But it probably wasn’t a very good investment on behalf of the stockholders. In general though, if Merck did that on a large scale, I wouldn’t want it to happen. And I don’t think the stockholders would want it to happen. And I think probably the marketplace would punish Merck if they did it on a large scale.

HEFFNER: Well, wouldn’t you have to say that until the marketplace punishes, what they’re doing makes sense?

PASSELL: Okay. Fair enough. You know, you know, the thrust of that article about Daimler-Benz is that it’s kind of a world full of grays. It’s a messy world out there. I don’t want to dig myself a hole in which I’m a holier-than-thou capitalist here. I guess I get a little edgy when corporations do something other than what they’re supposed to be doing, which is making stuff and benefiting stockholders.

HEFFNER: Now, what’s going to happen, Peter, as you see it, as increasingly major corporations merge? They’re going to have to show the rest of us something of value as a consequence. What happens then?

PASSELL: Well, first of all, they may unmerge. You know, this has happened before. [Laughter]

HEFFNER: The spinoffs?

PASSELL: Oh, absolutely. You know, we’ve talked about the egos of the corporate executives a little bit, and that certainly has had a lot to do with driving these mergers. But there’s something much more practical at work here, which are the investment bankers. Because every time there’s a merger, they make a lot, they make some money. But…

HEFFNER: You started to say, “Make a lot of money.”

PASSELL: Well, they make a lot of money, yes. But they also make a lot of money when they take the same corporations apart. And in the Seventies, the great merger movement of the Sixties was taken apart. And my guess is that’s one thing that’s going to happen, we’ll see a lot of spinning off from this great wave of mergers. We’ll also probably see a lot of fairly harmless increase in size. Fairly harmless in the sense that it won’t generate much efficiency; on the other hand, it won’t generate much market power. It won’t mean higher prices for consumers either.

HEFFNER: What has happened to the rest of us in terms of the spinoffs, of the mergers and the spinoffs? And by “the rest of us,” I mean not in terms of my owning stock, but in terms of my being an employee.

PASSELL: Yeah. Now, that’s, of course, that’s where, in some ways, this all gets a little serious. Because you could see the games people play in the boardroom really do have real effects on real people out there. And I’ll confess that, in general, they’re not good effects. The redeeming feature of this is, for all the publicity about this, is the number of jobs that are affected by either mergers, hostile takeovers, spinoffs, the number of jobs affected by these are usually much smaller than we think about. When AT&T says they’re going to lay off 10,000 workers, we forget the fact that, gosh knows how many workers they have. It’s some grotesque number, like a half a million. That in this huge economy of ours all this taking apart and putting together has relatively little impact on job stability, mercifully.

HEFFNER: That’s interesting, Peter, because you and the press — and I don’t mean you, Peter Passell — but the press doesn’t really give us much room to think that way.

PASSELL: Well, I’ll confess it’s less interesting to think that way, you know. You know, sort of gray news. “Things aren’t nearly so bad or nearly so good as you thought,” is not really news, you know. So be it. It’s my profession.

HEFFNER: Okay. That’s your profession.

PASSELL: [Laughter]

HEFFNER: Your profession, and your practice of it seems to include — you used the word before, “cynical” — seems to include a lot more cynicism than I remember it, oh, a decade ago, a decade and a half ago.

PASSELL: Well…

HEFFNER: Getting older, Peter?

PASSELL: Who? Are we talking about me, or in general? [Laughter]

HEFFNER: No, I meant you.

PASSELL: I don’t think, I think I bounce back and forth. I think cynicism is a way I defend myself against the realities of the world. You know, it’s, the way good economists think, I think, is that all sorts of people acting in their own self-interest produce a collective good. And I want to think that. But what I don’t want to think is that we have to have those individuals trying to do good.

HEFFNER: Now, wait a minute. Are you saying that, first you pooh-pooh the idea that this was a function of the invisible hand of God; really it was the dance with the Devil.

PASSELL: Sure.

HEFFNER: And then you say, “But that’s okay, because in the long run that invisible hand of God really does show through, and it works out better, and everything’s okay, and they all went to the beach.”

PASSELL: Well, look, I have, I don’t have boundless faith in capitalism, but I have substantial faith that for all the foibles and for all the obvious cynicism of the actors, the primary actors, that the system has done a fairly good job. Look at us. We really are doing pretty well. We’re doing pretty well on living standards, we’re doing semi-well in terms of the fact that there are fewer poor people than there used to be, that capitalism has been a fantastic savior in Asia. I mean, that it is a better world than we had, and it is the invisible hand in the sense that it’s not any individual saying, “Let’s do X, Y, and Z, and get it done.”

HEFFNER: Peter, let me push you a little on that.

PASSELL: Sure.

HEFFNER: “We’re better off.” Do you think we, as a nation, when you take other factors, not the stock market index, not the incomes of the megabosses in the megacorporations, but rather the questions that we all ask ourselves now about what Dan Quayle called “values,” but which many of the rest of us refer to as values too, feelings, emotions, ideas, sense of being, has this machinery that works so well on the production of goods worked quite as well in these other, more ephemeral areas?

PASSELL: Of course it’s a tough question. Certainly start with the notion that we have more than we need collectively. That is…

HEFFNER: What does that mean, “Collectively?”

PASSELL: Well, it means that if you divide the total output of the American economy by the number of people who benefit from it, potentially benefit from it, it’s enough. It’s more than enough.

HEFFNER: And those who don’t benefit from it in a substantial enough way, let me put it that way…

PASSELL: Sure.

HEFFNER: …in a substantial enough way for us to say they’re really participating in this society, they’re really climbing up with the rest of us?

PASSELL: Well, you say it, you know, if you had given me a conservative spiel, I would’ve instinctively turned liberal on you. But you’re pushing my conservative button here.

HEFFNER: Right. I know.

PASSELL: Yeah. Well, I don’t know. I don’t really know whether people are better or worse off. I think that it certainly doesn’t do any good to slow the machinery down. I can’t think of what to do about the economy, per se, that would make people better off. I have plenty of disagreement about the way we run our government. I have plenty of disagreement about the way we redistribute income through the tax system. I would very much like to use the tax system to redistribute some of that vast wealth that’s accumulated at the top, toward the lower end.

HEFFNER: You would?

PASSELL: I would indeed.

HEFFNER: May I quote you?

PASSELL: Absolutely. Absolutely. This is, you know, for 25 years with this nonsense about capital gains taxes, about how we need to have the very rich people to make this country work, nonsense. You know, we, all that talk persists precisely because there are rich people to pay people to say those things.

HEFFNER: Right. Obviously.

PASSELL: Obviously. [Laughter]

HEFFNER: They’re the ones who can afford to, if not control, then at least to do the spin talking.

PASSELL: Okay. But now, just to confuse you, let me say that I don’t know exactly what I’d do about any of it, in the sense that… I certainly would change tax policy if I could, but what I wouldn’t want to do, for example, is dramatically, is re-regulate corporations, for example. I certainly wouldn’t want to do that. I like the fact that this economy works largely because it’s so flexible, and I wish that we would use what was once thought of as a liberal mechanism, namely tax policy, to redistribute wealth and income.

HEFFNER: You don’t accept the notion that if you start to use the tax system that way — and I really mean “start,” because we haven’t been doing that to the extent that the complaints would indicate — that we will not endanger the whole system?

PASSELL: Look, it’s always a risk. It’s always a risk. Maybe cultures bounce back and forth. I certainly did not… You look back at the Thirties and Forties, and the ideology of liberals in those years, and I think that they look pretty foolish.

HEFFNER: Tell me.

PASSELL: Well, I think that people didn’t pay much attention to incentives. They didn’t pay attention to the fact that individuals are basically pretty selfish, and you can’t just appeal to their greater instinct to get the job done.

HEFFNER: But that takes us back to using the tax policy, doesn’t it?

PASSELL: Well…

HEFFNER: That’s what we were doing in the Thirties, to some extent at least.

PASSELL: You know, mostly we were doing things like regulating prices and regulating wages.

HEFFNER: Okay.

PASSELL: And that’s what I object to. I would very much like to see changes in the tax system that redistributed considerable portions of the income growth of the last 20 years to people on the bottom half of the distribution. And I think it could be done without any loss of efficiency.

HEFFNER: “Loss of efficiency.”

PASSELL: Right.

HEFFNER: Do you also mean loss of the kinds of incentives that have made the wheels spin around?

PASSELL: Right. Without loss of those. You know, it cuts both ways. When you tax rich people, two things happen: It’s true that they keep fewer of the dollars at the margin; but they also aren’t as rich, and they have to work harder to get rich again. And this is classic economics. It’s called “the substitution effect, and the income effect.” And nobody really knows typically which has greater impact. I am not in the slightest bit worried that Bill Gates would work less hard if he made less money. Not the slightest doubt that he’d work just as hard.

HEFFNER: Now, we have five minutes less. A little less. Tell me what you think are going to be the major tends in this country, and in the world, because it’s very difficult to separate them out, in the next year or so.

PASSELL: Well, of course, this is perfect because these television shows sometimes get shown months later too.

HEFFNER: Absolutely, absolutely.

PASSELL: So I can look really silly, couldn’t I?

HEFFNER: Absolutely.

PASSELL: Well, I’ve been saying for some months, for some years, that the stock market is absurdly high. And I think there will be a correction, and I would, and I find it difficult to predict what the impact of that correction will be.

HEFFNER: But wait a minute. The “C” word: “Correction.”

PASSELL: Correction.

HEFFNER: You mean that “C” word? Or the “C” word, “Crash?”

PASSELL: You know, crash is in the eye of the beholder. If the stock market were to go down ten or fifteen percent, it would, if it happened in a day, we’d all be very unhappy. If it happened in a month…

HEFFNER: Correction.

PASSELL: A correction. We’d call it a correction. I think that’s likely to happen. I think that is likely to take some of the arrogance out of the way Americans think of themselves and their economy. I think we’re much more like the rest of the world, our problems are closer to the rest of the world than we’d like to think. I guess if I’m going to predict something, it’s that America is going to get its comeuppance in the next few years.

HEFFNER: What do you mean, “Much more like the rest of the world?” In what way?

PASSELL: Well, Japan and Europe had both had terrible problems growing in the last ten years. And they’ve had terrible problems growing because, well, they’re quite different cases, but in both cases one sees the productivity capital falling sharply. Because institutions aren’t built to make transitions to modern capitalism. I’m really handing you a mouthful here. We’re very proud of ourselves here in America because we’re the most flexible economy in the world. And we are. And we change as conditions change better than anywhere in the world. On the other hand, we’re not perfect at it. And my guess is we’re going to be a whole lot less, there’s going to be another recession in the next year or two, is my guess, and then we’ll start doing our self-doubting, and we’ll see lots of, we’ll see the water glass as half empty rather than half full. And so much of this notion that America has triumphed will look a little silly.

HEFFNER: Why are we more flexible? How are we more flexible?

PASSELL: Oh, well, you know, we’re not as good at making rules and sticking to them.

HEFFNER: I see.

PASSELL: We, you know, people used to talk about “Eurosclerosis,” which I think is a fine term. Meaning that you can’t change things in Europe. You know, you have a set of rules, and somebody objects to changing them, so you don’t change them. And, in fact, look at a country like France now. In so many ways it’s this marvelous place, but they have 20-25 percent youth unemployment. Now, how could they allow that to happen? And the answer is it’s built into incentives, it’s built into the tax system, it’s built into incentives.

HEFFNER: Peter, these statistics wouldn’t be all that much different if you looked at minority youth in America today.

PASSELL: That’s right. That’s right. But that’s America’s special problem. And I’d say we do better than expected with that problem. This is the most heterogeneous society that I know of. And, all things considered, I don’t think… By the way, I don’t think that’s a tremendous weakness for us; I think we, all things considered, we do rather well with the fact that we are so diverse.

HEFFNER: But wait a minute, wait a minute, wait a minute. “With the fact that we are so diverse.” But what about this problem of youth unemployment?

PASSELL: Look, it’s a very serious problem. But what it really is, it’s a problem about culture clash, it’s a problem about race, it’s a problem about… And frankly I think we handle it somewhat better than any other developed country that I know of.

HEFFNER: Okay, but in the meantime, with no seconds left…

PASSELL: [Laughter]

HEFFNER: …I’ve got to say, whenever this program shows — and I’ve hedged it —

PASSELL: Yes.

HEFFNER: …put the date that we’re on, that we’re taping it on, come back, and let’s see whether your prophecies are proved to be valid. Fair enough?

PASSELL: Fair enough. Fair enough. Absolutely.

HEFFNER: Thanks, Peter Passell.

PASSELL: Thanks for having me.

HEFFNER: And thanks too, to you in the audience. I hope you join us again next time. 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 another 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.