What Can Save the Economy?

1.

For a well-known writer, Lester Thurow has a peculiar prose style. His book is not exactly a heartening example of the pride in American craftsmanship he is trying to revive. Early in his book, Thurow refers to Gianni De Michelis, Italy’s foreign minister, as “the rotating head of the EEC.” You know what he means, but surely Thurow could have found a less clownish way to make the point. Twice on the next page, and in many other places in the book, Thurow makes singular terms like “no one” or “anyone” correspond to “they” or “their.” (For instance, “No one will plant apple trees…if they do not expect to be around when the apples are harvested.”) Thurow also seems indifferent to the burdens that writers normally bear in order to sustain the reader’s interest. He provides surprisingly few examples or anecdotes to illustrate the contrasts that he draws among American, European, and Japanese economic behavior. He doesn’t introduce previously unpublished facts, or use interviews to support his arguments. He seems to have written his book as if it were a series of lectures for his economics classes at MIT: the students have signed up, they’re obliged to listen to what he says, and they will be penalized if they don’t.

His book is one long, oracular statement of his opinions and theories. If Thurow didn’t have anything to say, this approach would become tiresome. Fortunately, he does, and by the time I reached the end I found that the artlessness of Thurow’s presentation did not undermine the appeal of his pithy, clarifying, and important book. Its subject—the long-term weakness of the American economy—is in itself hardly news. But Thurow adds a number of nuances and surprising observations that could help our thinking about economic policy.

One observation concerns the nature of the economic competition the United States now faces. The standard view, routinely presented in Wall Street Journal editorials and by various other editorial writers, is that the Japanese, Germans, Koreans, and so on have simply bested America at its own game. Their auto executives are paid less than ours, but they plan better for the long term. Their governments can reduce deficits by passing measures like a gasoline tax; ours cannot. Their students spend their evenings studying trigonometry or other worthy subjects; ours are at the local shopping mall, or watching smutty (but made-in-America!) music videos on Japanese-made TVs.

When I was living in Japan, I saw references nearly every week to a comparative survey of the opinions of teen-agers in America and Japan. When asked what worried them most, Japanese high-school seniors answered, “Exams.” The Americans answered, “Sex.” The Little League World Championships, held each summer in Pennsylvania, can serve as a metaphor for this interpretation of America’s problems. For the last two decades the teams from Taiwan and Korea have just been better—harder-working, better trained—than the young Americans, who have no one but themselves to blame for their long string of defeats.

Thurow is as aware as anyone else of the weaknesses in America’s productive culture. In this book, as in his previous work, he suggests a detailed plan for improving it. But he argues that the interpretation that “we’re being beaten at our own game” is flawed in a fundamental way. It’s not simply that America is playing its own game badly; the other countries are playing a different game—and, in particular, are applying a different model of capitalism. Thurow says that the contrast is between “Anglo-Saxon capitalism,” whose spirit was exemplified by Margaret Thatcher and which now applies mainly to the United States, and the “communitarian capitalism” that, in varying forms, prevails in Western Europe and Japan.

I prefer the term “Anglo-American” to Thurow’s “Anglo-Saxon,” since it puts the system in national rather than ethnic terms. By either name, this approach to capitalism rests on the faith that society really works the way elementary economics texts say it does. People are free agents, moving from job to job and place to place in search of the best opportunities. Companies exist only to maximize the return to shareholders; when they cease to do so, the shareholders put their money elsewhere. Government intervention is almost always destructive, and it certainly can’t help industries grow.

“Communitarian” capitalism, on the other hand, gives weight to various factors that the market is likely to ignore. The clearest illustration of the difference between the two systems involves leveraged buyouts and other forms of corporate takeovers. In Anglo-American capitalism, takeovers are by definition beneficial. They will happen only if the new investors think they can make money—and if there’s money to be made by reorganizing or dismantling a company, then it must not have been as efficient as it should have been before. But according to communitarian capitalism, a functioning corporation creates social benefits that aren’t fully reflected in its price-per-share, not the least of which are the benefits of maintaining trained manufacturing and sales forces and research facilities whose disruption could be costly. Therefore, it is in a country’s interest to protect its companies from being dismantled. America’s capitalist ideology decreed that, for instance, the takeover of RJR-Nabisco, as described by Bryan Burrough and John Helyar in Barbarians at the Gate,¹ had to be beneficial—otherwise it wouldn’t have happened. The Japanese and German ideology and business systems prevent such transactions from taking place.

Thurow did not, of course, invent the idea of variations within capitalism. With each passing month more books appear on this theme. George Lodge’s Perestroika for America, William Lazonick’s Business Organization and the Myth of the Market Economy, William S. Dietrich’s In the Shadow of the Rising Sun, and Dennis J. Encarnation’s Rivals Beyond Trade are some valuable recent examples.² But Thurow does something that no one has done as clearly or successfully before. He explains what the British and Americans have great difficulty in understanding—the basic motive behind the other kind of capitalism.

Supplying a motive is necessary, because standard Anglo-American theory simply can’t explain why a society would put up with the communitarian approach, in the long run. An American-trained economist who looks at Japan soon starts wondering: How can the average Japanese person stand it? Why doesn’t he complain about a system that squeezes him so hard?

From the perspective of the Toyota company or Dai-Ichi Kangyo Bank, the benefits of the Japanese approach may seem obvious. But the average Japanese person still lives a hard-pressed, high-priced life. He is rich compared to his parents a generation earlier, but he is poor—in goods, living space, public facilities, leisure time—compared not just to prosperous Germans but to lazy Americans as well. Thurow points out that, despite the famous egalitarianism of Japanese society, “Japan’s work force gets the lowest share of national income in the five leading industrial countries, and its share is falling.”

Even the large Japanese institutions look as if they’re being shortchanged, too. By normal measures of profitability, such as return on assets, Japan’s companies are less successful than their American or European counterparts. Thurow cites a survey of the thirty most profitable large companies in the world: twenty-three are American, and four are British; none is Japanese. The big Japanese companies keep expanding their share of the market and building huge accumulations of capital for new investment. But if their goal were to make as much money as they can—which, according to Anglo-American theory, must be the ultimate goal—they could have done better by selling out and investing in more profitable foreign firms.

What Japanese-style capitalism has achieved, therefore, is a system that pays its own workers less than they theoretically should earn, and gives its shareholders less too—and meanwhile antagonizes competitors in the rest of the world. From the Anglo-American perspective, it has been hard to understand just why this “rich country, poor people” system endures.

Some Americans try to explain the system as a residue of the postwar effort to rebuild the country. Now that Japan is rich, the austere efforts to reinvest capital and keep workers relatively poor will presumably peter out. They can also explain it as the result of a rigged political and legal system. Japanese consumers, union members, and shareholders might like to protest, but they have little hope of filing a successful shareholder suit or challenging the political monopoly of the Liberal Democratic Party. Americans can even understand the Japanese system as an unintended consequence of the US Occupation. During the late 1940s. Occupation authorities concluded that rebuilding Japanese business was the best way to keep the country from “going Communist,” and that truculent unions, led by left wingers, were the main threat to Japan’s recovery. The US joined with Japanese conservatives to break the unions, only to find in succeeding years that the tame company unions that resulted had become another competitive advantage for Japan. The occupation also left Japan with a “Fair Trade Commission” that had, in principle, the right to break up trusts and cartels; but the realities of Japanese politics have prevented the FTC from taking effective action.

All these Western explanations share a fundamental trait: they assume that the Japanese economy would naturally be unsustainable, and that it survives only because the country’s legal and political systems keep complaints bottled up. This assumption, in turn, rests on the belief that the material welfare of individual citizens—lower prices, more days off—is the object of social evolution. If a system suppresses its people’s welfare, they will eventually rebel—as the former Communists are now doing.

This is where Thurow steps in, trying to make the motive behind the Japanese social bargain (which he describes as the extreme example of “communitarian capitalism”) comprehensible to Anglo-American minds. Our prevailing economic theory tells us very precisely how people strive to improve their welfare as consumers—they shop for bargains, try to get more income for less work. But our daily experience should tell us that there is more to human motivation than the search for the best possible prices.

In certain circumstances, people like to work hard, and to save, and to make sacrifices for their families. Even though state-lottery winners typically don’t have society’s most desirable jobs, many of them decide to keep working even after they have cashed in their tickets. For many years, studies have shown that people who own small businesses behave in an economically “irrational” way. They typically work longer hours than employees of most corporations, and earn less money than they could if they sold off their assets and invested the proceeds. Their decision to keep working fits awkwardly with standard economics, which says that work is a “disutility” that people tolerate only because they must generate “income streams.” (True, economic theory has been forced to allow for the “utility” of certain kinds of work, but the idea that people take satisfaction in labor goes against the grain of Anglo-American economics which puts its central emphasis on consumption.)

“Man is a consumer, but he is also a tool-using animal,” Thurow says.

As a tool-using animal, work is not a disutility. [Another grammatical howler, but we know what he means.] It determines who one is. Belonging, esteem, power, building, winning, and conquering are all human goals just as important as maximizing consumption and leisure. Work is where one achieves such goals.

He goes on to offer an eloquent explanation of why it might be rational and satisfying for the Japanese to behave as they do:

Those remembered in human history are not the great consumers. They are the conquerors, the builders, the producers—Caesar, Genghis Khan, Rockefeller, Ford. Being part of a collective effort, of a powerful group, may in fact be more important to some individuals than having a lot of personal consumption.

No believer in consumer economics would have built the cathedrals that play such an important part in the Kingdom of God, the buildings and roads of Rome, or the monuments of ancient Egypt. All of these projects took too long to complete and required too much up-front capital. Yet humans built them all. In Japan, the generals, the capitalists, have been willing to invest too much, but in doing so they are being very human, even though they’re not Anglo-Saxon.

A second fresh theme in Thurow’s book arises from the first: the stakes for nations, not corporations or individuals, in the new form of business competition.

The bedrock assumption of modern economics is that competition and trade are activities that ultimately benefit all the participants, a “positive sum game” in the jargon. There may be incidental victims and losers—the buggy-whip makers when the automobile arrives, the mediocre local company that cannot compete with more efficient foreign production—but the march of progress should in principle enrich virtually everyone in the long run.

Thurow says that this is generally true and it was especially true during the post–World War II competition among industrialized countries. At the end of the war, America was rich and had a near monopoly on modern productive methods. Everyone else was poor. Therefore, nearly every Western nation could prosper if work was sorted out according to its national wage level. Each country had a “niche” in which it could profitably make certain products. But now workers in Western Europe, North America, and Japan all demand similar wages, and those outside America are often better trained and equipped than Americans are. Moreover, all advanced countries are interested in attracting the same kinds of industries, in hopes of earning higher wages in the future.

Rather than “niche” competition, Thurow says, the next decades will bring “head to head” competition—which will mean something more like a “zero-sum game,” in which every winner has a corresponding loser. Japan would like to have a commercial aircraft industry; and Europe has been trying with some success to make the Airbus the aircraft of choice. The better they do, the worse it will be for Boeing and (more immediately) McDonnell-Douglas. Technology will no doubt take unexpected turns and create new markets; new opportunities will certainly arise in ways no one can now foresee. Still, Thurow says, the years ahead will force countries into “winner” and “loser” categories more clearly than the last few decades have done.

Thurow demonstrates with depressing thoroughness that American companies will generally end up among the losers. Their basic weakness arises from the American financial system, which is theoretically the most “efficient” in the world. By standards emphasizing consumer satisfaction the system can indeed be described as efficient. Its goal is to make sure investors get the highest possible return on their money, and to that end it requires companies to publish quarterly profit statements and it obliges pension funds to move money in and out of stocks in search of the maximum return. The system allows the use of computerized trading programs, and generally permits any new trading tactic that does not rely on inside information. By the same standards, the Japanese and German financial markets are woefully outdated and inefficient. In both countries it is hard to get reliable information about profits, especially in Japan; the market works in more opaque and traditional ways. Yet the non-American markets have a goal of their own: not maximizing returns to shareholders, but putting money in the hands of industrialists who will invest it. By their own standards, they succeed—and in the long run, Thurow concludes, industries funded through this “producer-oriented” system will prevail over those that rely on America’s “consumer-oriented” financial system. Germany and Japan, he says,

have organized a system [dominated by powerful business groups] to minimize the influence and power of impatient shareholders, while the United States has organized a system [dominated by pension funds and mutual funds] to maximize the influence of impatient shareholders…. Anyone who is in a capital-intensive business and doesn’t have a huge technological advantage over the Japanese should get out!

2.

Thurow contends that America’s corporate failure will be bad for all Americans, not just the legendarily overpaid CEOs. This is hardly a new argument, but it is unusual to hear it from a scholar, and not from a union official or Democratic politician. Most academic experts on the economy subscribe to the “big, borderless world” theory—the idea that companies don’t really belong to any nation any more. Chrysler buys engines from Mitsubishi, Sony makes TVs in San Diego, the largest, most modern factories in Kuala Lumpur are owned by Texas Instruments, Motorola, and Matsushita. In principle, it shouldn’t matter where the corporate headquarters are.

The reason it matters, Thurow argues with surprising vehemence, is that in the real world corporations still have distinct national identities. They may scatter plants here and there; the American firms (like American society) may be relatively open to foreign citizens. But as a rule, he says, the opportunities available to one country’s people will rise and fall with the welfare of firms based in that country. “The modern industrial leader is not a general who can shoot deserters, but he is a leader who can hand out real punishments and rewards.” The leader organizes men and women so they “can conquer markets much as they used to conquer neighboring clans”:

In doing so, they share in the booty of conquest. Even in friendly takeovers, within a short period of time the top management at the firm being taken over is almost always replaced by managers from the firm doing the takeover. Within a year of the “friendly” American takeovers at Jaguar and Saab, American managers from Ford and General Motors had replaced the local British and Swedish managers…. What is always true is even more true in Japanese corporations. Sixty-nine percent of the senior managers of Japanese subsidiaries in America are Japanese. In contrast, only 20 percent of senior managers of American subsidiaries in Japan are American. American managers working for Japanese firms usually find that there is a promotion ceiling beyond which they cannot go.

Thurow specifically challenges the argument often made by Robert Reich of Harvard that when Japanese companies open plants in America, they become “us.” This is true only in the most cosmetic sense, Thurow says. No matter where a Japanese company invests, virtually all the senior management jobs remain in Japan, and are held by Japanese citizens. So are the jobs in the advanced research centers and factories that pay the highest wages. “Japanese transplant factories in the United States almost never make the most sophisticated, highest value-added products that the company makes.” All companies import components from around the world, but Japanese transplants in America import four times as much per worker as do American-owned companies. When Ford builds an auto plant in Europe or Australia, the overall (and commonsensical) effect is to reduce exports from America. The overall effect of Japanese auto transplants in the United States has been to increase Japan’s exports, since the plants buy so many machine tools, components, and supplies from Japan.

Japanese officials and some American academics routinely claim that Japan’s preference for its own people is a temporary phenomenon. Soon, they say, Honda, Ford, and BMW will be indistinguishable. Thurow says that the preference for one’s own team—from one’s company, and one’s country—is a nearly permanent condition. Canada, he heartlessly concludes, proves the point. Canadians will always be comfortable, but “they can never have the best.” They don’t run their own companies:

The best jobs (CEO, CFO, head of research, etc.) are back at headquarters, and that is somewhere else. Even if Canadians were to get those jobs, and they don’t, they would have to live abroad. There is something at stake!

For years Americans have told Canadians that an economy consisting largely of US-owned branch plants is just fine. Now Canadians may rightly chuckle as Japanese industrialists tell Americans to be happy with branch plants.

Thurow’s third surprising theme is his prediction that, in the head-to-head competition among America, Europe, and Japan, companies from Europe are most likely to prevail. Some contortions go into this argument, since Thurow says that both America and Japan are potentially much more powerful and flexible than the European Community. Japan has money and technology, and its working population has shown a remarkable devotion to national success and commercial power. America is larger, leads in advanced scientific research, and it still has an unmatched combination of military and economic power. At least in principle, it should have the capacity to snap out of its doldrums, as it did after Sputnik.

Although Europe’s potential is more modest, Thurow says, it has one significant advantage. Japan and America must make fundamental changes in order to reach their full potential; Europe has mainly to keep rolling along as it is doing now. We have all heard of the kinds of changes Thurow is talking about for America. The deficit must be reduced, productive investment increased, the schools improved, the transportation system and other parts of the infrastructure must be repaired. For Japan, the challenge is to open itself up, economically and culturally, even though the closed, embattled spirit of ware-ware Nihonjin (“We Japanese”) has been a major part of its organizing strength. Thurow says that if Japan can’t make room for foreigners, especially other Asians, on its own territory and in its overseas holdings, its success will only breed resentment. “The culture that is now the world’s most difficult to join will have to become much easier for outsiders to join if Japan is to win.”

“Winning,” in this sense, means becoming the world’s center of technological and commercial progress, as the US was for several decades after World War II. Either of the transformations Thurow outlines is possible, but neither is likely. I’d bet on America’s solving all its budget problems before Japan manages to embrace immigrants, which is another way of saying that both possibilities are remote. But Europe, Thurow says, is already moving visibly toward its own version of large-scale economic success. It is reducing internal trade barriers, beginning to integrate the Eastern European countries, and working out a sensible balance between the individualistic and communitarian brands of capitalism, including systems of welfare and medical care that Americans can envy.

Thurow’s proposals in the final chapter of the book, which is called “An American Game Plan,” range from tax policy to defense cuts to changes in antitrust and securities-market law, to education reform. He believes that the United States should make use of the value-added tax (or VAT), a form of national sales tax commonly used in Europe. The VAT, he says, is the “least bad” way to raise money to close the federal deficit. All taxes distort economic activity to some degree, but the VAT could distort the economy in a useful way. It discourages consumption (by taxing it) and implicitly subsidizes both savings and export, neither of which is taxed. Its main drawbacks are that it should not be imposed while a recession is going on, and that it weighs heavily on the poor (who spend a larger proportion of their income than others do). This regressive effect could be offset, he says, by offering income-tax relief to the working poor.

Thurow suggests a variety of other changes to make pure financial speculation less lucrative, and long-term investment in manufacturing more profitable and attractive. As one symbolic step toward a longer-term outlook, he says that the SEC’s requirement for quarterly profit reports should be abolished. Instead, American companies should be required to report their profits once a year, as Japanese companies do. But Thurow has a much more basic change in mind. In Japan, Korea, and much of Western Europe, banks and industries are linked together in close business alliances. The banks provide a steady source of capital for the industrial allies; the industries, in turn, give the bank a part in management, consulting with them on major decisions. Americans are most familiar with this practice in its Japanese manifestation, called keiretsu; for instance, the Sumitomo Bank is at the center of an industrial alliance that includes the electronics giant NEC and many other manufacturers. The critical ingredient in the keiretsu-style relationship, which has counterparts in many countries other than Japan, is the intimate connection between financiers and manufacturers. One group cannot profit unless the other does.

In America, as Thurow explains, the reforms of the last century—trust-busting in the Progressive era, banking regulation after the Great Depression—have had just the opposite effect. Banks must maintain an arm’s-length relationship with industries, and the ups and downs of the stock market have less and less connection to fundamental industrial strength. Thurow says that the US should still be vigilant about certain kinds of trusts and monopolies, in order to prevent strangleholds over particular industries like the one J. P. Morgan once held in steel. But apart from that, government policy should encourage links between banks and industries. Thurow recommends repealing various anti-trust laws and provisions of the Glass-Steagall Act of 1933, so as to promote the growth of merchant banks—“financial institutions that own and control industrial corporations or are owned by them.”

Some of what were once America’s most successful companies—General Electric, U.S. Steel, International Harvester—were founded by merchant bankers before that financial species was outlawed during the Great Depression. These groups are simply necessary to compete in today’s world. What is needed is a framework of mutual support where raiding is difficult (ownership of each other’s shares makes it hard [for outsiders] to acquire a majority interest), but where directors have real clout to fire bad managers, since they represent real owners.

Finally, Thurow examines two concepts that are rarely discussed seriously, since they have been reduced to political slogans—“industrial policy” and “protectionism.” American politicians are not eager to be associated with either of these terms. “Industrial policy” has come to imply a centralized, doomed-to-fail effort to let bureaucrats run businesses; perhaps the Japanese can carry it off successfully, the Washington experts say, but it could never work here. Yet Thurow patiently points out that the United States has, historically, carried out some very ambitious and partly successful industrial policies. Through defense contracting and airline regulation, it has fostered an aerospace industry. Through government-sponsored research and programs like Medicare, which provides a market for high-tech medical services, it has built the health care and pharmaceutical industries. By making mortgage interest deductible, by establishing the FHA, by keeping gasoline cheap and building a vast network of roads, it has promoted the home-building industry and the spread of suburbs, and has made Americans by far the best housed people in the world.

These are all industrial policies, in which the government has helped to develop industries that would not otherwise have grown as much or as fast. But in part because they’re not called that, the prevailing American assumption is that industrial policies will always fail. Thurow discusses in some detail the situations—particularly in the development of such industries as biotechnology—in which government assistance is most likely to succeed.

To advocate “protectionism” is also seen by many American politicians as fatal. Yet every country, including America, applies various degrees of protectionism. The difference is that American political leaders, committed to “free trade,” are reluctant to acknowledge that protection exists; so when the US government applies tariffs or other barriers, it does so in a guilty, spasmodic way, in response to regional political pressure from shoe-makers or sugar growers. The United States ends up with all the bad consequences of protectionism—higher prices, resentment overseas, coddling of inefficient producers—without the benefits that Japan, Korea, Taiwan, and Germany have gained by deliberately sheltering important parts of their economy from competition.

Thurow’s book is hardly optimistic about the US moving in the directions he recommends, but he reminds American readers that the changes their country would have to make, by the rest of the world’s standards, are not drastic at all. A $1-per-gallon gasoline tax, without any other change in taxes or spending, would by itself reduce most of the federal budget deficit (while also reducing oil imports, which now account for half of the foreign-trade deficit). Even at $2.50 per gallon, gasoline would be a lot cheaper than it is in Europe or Japan. The US is still rich and potentially resilient. It doesn’t have to do much if it is to compete more successfully and address its problems of deficits and growth, but it has to start doing something.

3.

This fall the voters will have a chance at least to give some indication of what direction the country should take. Of the five candidates who were competing until mid-March—George Bush and Pat Buchanan for the Republicans; Jerry Brown, Bill Clinton, and Paul Tsongas for the Democrats—neither of the Republicans was really concerned with issues such as those raised by Thurow. During his years as a columnist, Buchanan was never seriously interested in economics, and his campaign did not issue any substantial economic plan. His economic view seemed mainly nostalgic for the powerful America of the 1950s and the free-lunch tax cuts of the early Reagan years. He was pugnacious in condemning Japanese trade practices as “unfair,” but he did not specify just what he would do about them, or how he’d deal with any retaliatory actions from the Japanese side, or what else he would do to build up America’s productive base.

For his part, George Bush could hardly endorse a program such as Thurow’s, for Bush is committed to the idea that there is nothing fundamentally wrong with the economy. The country may be stuck in “hard times,” but, he insists, this situation is just another turn of the business cycle and does not indicate any long-term decline. Bush’s State of the Union address, which had been advertised as a distillation of his economic plan, did not include the words “Germany” or “Japan.” He referred to a “deficit” only in a dutiful sentence saying that excess spending must be brought under control. The budget and “growth agenda” Bush submitted after his speech will probably lead to a federal deficit of more than $400 billion this year, some $100 billion more than last year’s. Bush’s prospects, for better or worse, depend on whether the recession at least seems to cure itself in the next six months.

Among the Democrats, Paul Tsongas and Jerry Brown both said they had been influenced by Lester Thurow. Brown’s economic platform was obviously the more sweeping, for better and worse. He proposed replacing nearly all current taxes—the graduated income tax, corporate profit taxes, the payroll deductions for Social Security and Medicare, estate and gift taxes—with 13 percent flat tax. Everyone would pay a 13 percent tax on all income, with deductions only for mortgage payments, rent, and charitable donations, and there would also be a 13 percent value-added tax (the Thurovian touch) on all purchases.

Any such plan would have obvious advantages. It would be easier to administer. It would eliminate a major source of corruption, since Congress would not be under pressure to enact new loopholes. It would help businesses to behave more rationally, since they’d be less tempted to make decisions purely to find tax shelters. By eliminating the corporate income tax, the plan would correct the longstanding “double taxation” quirk of US tax law. (Corporations now must pay a tax on the profits they earn, and then the same money is taxed again, when individuals receive it as dividends or capital gains.)

Taken at face value, it would seem certain to shift the tax burden from richer to poorer Americans. Neither the Congressional Budget Office nor the IRS has prepared an official estimate of the effects of the flat tax, but Robert McIntyre, of a group called Citizens for Tax Justice, offered one in March. McIntyre’s calculations showed that, if both the income tax and the VAT were set at 13 percent, overall taxes would rise for the 20 percent of Americans with the lowest incomes, and would fall for the 40 percent with the highest incomes. He estimated that most of the savings would accrue to the richest 1 percent of all taxpayers, whose taxes would be roughly cut in half.³ McIntyre also contended that a flat rate would have to be at least 16 percent to match curent revenues. At 13 percent, the federal deficit would increase by some $200 billion, he said.

Reporters did not initially press Brown to defend the plan, because many of them had written him off as a gadfly. After Paul Tsongas’s withdrawal left Brown as the only visible alternative to Bill Clinton, he was asked to answer objections such as those raised by McIntyre. Brown denied that his plan would increase the deficit, saying that his calculations showed that at 13 percent, it would equal current revenues. He dealt with what he called the “social justice problems” by being both more and less specific than his critics. “Suppose you’re making $10,000,” he told me. “You’re paying most of the money in rent—and you’re having those heavy Social Security taxes. If you can deduct the rent payments and don’t have to worry about Social Security, you’re better off!” And in any case, he said, if “social justice” turned out to be a major problem, the government could spend money directly on poor people, rather than attempting to change income distribution through the tax policy. “Look, we could argue about all the details, and maybe some of them need to be changed. But as an idea, we’ve got to change. The graduated tax has been the cover under which the whole banquet-feast of political corruption has luxuriated.”

After Brown’s victory in Connecticut, Clinton also began attacking the flat tax, instead of ignoring it as he generally had before. In a joint appearance with Brown on Nightline, on the night of the Connecticut primary, Clinton argued that the most regressive part of the proposal would be the 13 percent VAT—which, in a jurisdiction like New York with high state and local sales taxes, would in effect mean a total sales tax of more than 20 percent. Brown replied with a fatuous defense. The value-added tax, he said, would apply “only to business,” and since everyone knows that businesses are owned by “the rich,” his approach would make taxes fairer. In fact, by eliminating the corporate income tax, Brown would eliminate a significant burden on business “owners” (who consist, in large measure, of pension funds and mutual-fund investors, not individual tycoons). And in every other country where a VAT has been applied, it has been passed through to the customer as a sales tax.

Especially when campaigning in Michigan, Brown also condemned American corporations for moving jobs overseas. This position, in turn, led him to attack the proposed US–Mexican free-trade agreement. During his years in California politics, Brown had usually expressed an internationalist and pan-American perspective. In explaining why he’d changed, he again spoke at a higher level of generality than that of most of the other politicians. Arguments about the US–Mexican plan usually revolve around the specific terms of the agreement. If the treaty is written one way, it could help the economies of both countries. If it is written another way, it could encourage Mexico to become a “platform” for low-wage industries, from which Japanese, Korean, German, and indeed American companies could export back into the United States.⁴ Brown declined to be bogged down at this level, and instead used the deal as a symbol of the need to “empower” American workers by giving them more control over corporate policies.

That left Paul Tsongas and Bill Clinton as the two candidates willing to talk of concrete plans for long-term economic development, which by mid-March meant Clinton alone. Most voters probably thought that A Call to Economic Arms, the short pamphlet that Paul Tsongas referred to constantly in his campaign, was a detailed list of policies, but it was much more interesting than that. It also seemed an attempt by Tsongas to make sense of his life; in some ways it resembled Jimmy Carter’s Why Not the Best?, written when Carter (like Tsongas sixteen years later) was an obscure but highly intelligent long-shot candidate who felt he had to explain how his experience had shaped his views.

For Tsongas, the formative moments were his years in the Peace Corps, his struggle with cancer, and his experience in America’s corporate boardrooms after he had retired from the Senate. His conclusions were both moral and economic: that the country was in a long-term economic decline, and that the basic reasons were not technical but social and even spiritual. “Economic loyalty to one’s fellow countrymen is not a value that is fashionable in America today,” he said. “To raise the matter in a public speech is to cause more seat squirming than a discourse on safe sex.”

In the month between the primaries in New Hampshire, where he won and Michigan, where he finished third behind Clinton and Brown, Tsongas was put on the defensive as the “trickle-down” candidate who endorsed Republican-style programs. This had less to do with real differences of policy than with Clinton’s very shrewd way of stating his own political positions. During that month, Clinton emphasized in every speech that he was in favor of “bottom-up,” “people-oriented” economics, while saying that Tsongas’s policies would be a continuation of the “top-down” approach of the Reagan-Bush years. This was an exaggeration; Tsongas called for very close coordination between business and government to compete with the Germans and Japanese, which Reagan and Bush have stoutly opposed.

Similarly, Clinton attacked Tsongas on two other questions about which the two candidates did not deeply disagree. These were raising the gasoline tax (Tsongas proposed adding a nickel per year, for a decade), and controlling the increasingly expensive “middle-class entitlements,” notably Social Security and Medicare. Both Clinton and Tsongas favor both these changes in policy; the differences are those of timing and degree. Clinton’s ads used traditional Democratic scare tactics in addressing these issues, especially the dangers of cuts in Social Security to people with high incomes. It was not his finest moment, but the ads were extremely successful in helping him win, particularly in Florida. As soon as Tsongas dropped out, Clinton smoothly shifted his emphasis; his evident task was now to distinguish himself from Bush, rather than Tsongas. In every speech and TV appearance he stressed the theme of “fundamental change,” including the argument that his proposals for change were better thought-through and more plausible than Jerry Brown’s.

Clinton and Tsongas were both adroit in dealing with the questions of “protectionism” and “industrial policy.” Each used rhetoric strongly favoring free trade—Clinton even won praise from the Wall Street Journal’s editorial page for “keeping his free trade credentials essentially intact.” But, in different ways, each emphasized the need for a new, non-laissezfaire approach to international competition, with the government offering help or protection to certain American industries in return for their creating jobs in the United States.

Tsongas’s emphasis was mainly on tax incentives—a selective reduction in capital gains taxes for long-term investment within the United States, further tax credits for research and development in the US, a strong but unspecified emphasis on “buying American” wherever possible. Clinton’s economic plan begins with a promise to “empower every American to be more productive,” which in practice means an emphasis on Head Start programs, reform of the public schools, nationwide tests to measure academic achievement, apprenticeship programs, and other attempts to improve the average competence of the American work force.

“Human capital” measures like these have been Clinton’s specialty during his decade as governor of Arkansas, and although the results of his programs in that backward state are controversial—Clinton’s critics claim, for example, that education has not been much improved—he can discuss their nuances, strengths, and weaknesses at length. Clinton’s plan also includes several kinds of tax breaks for investments in new facilities, tax penalties for companies that “move jobs overseas,” and vague promises to compete with the “communitarian capitalists” on their own terms. “Protectionism is just a fancy word for giving up,” Clinton’s “Plan for America’s Future” says. But:

We need a new trade policy that says to Europe, Japan and our other trading partners: we favor an open trading system, but if you won’t play by those rules, we’ll play by yours.

The most contentious difference between Tsongas and Clinton was Clinton’s support for a “middle class tax cut.” Clinton proposed reducing the lower two tax brackets slightly, from 15 percent to 13.5 percent and from 28 percent to 26.5 percent, and to raise the top bracket from 31 percent to 38.5 percent. This change would generally raise taxes for people with incomes above $200,000 per year, apparently the upper limit of the “middle class.” Clinton advocated the tax not as a way to stimulate the economy out of the recession but as a modest step toward “fairness.” He estimated that it would bring in about as much revenue as the current tax schedule does, but would take more of it from the top income brackets. Tsongas argued that this was a meaningless gesture, amounting to a few dollars a week for most families—and that another Clinton plan, to give parents a greater tax credit for their children, would simply add to the deficit. Clinton defended the tax cut on grounds of redressing the “class warfare” of the Reagan years. “I have watched the rank and file people of this country whom I represented get murdered in the 1980s,” he said in a March 23 Time interview.

With Tsongas out of the way, with Brown likely to persist but not likely to win the nomination, Clinton has a chance to present his economic program in more detail. Its goals generally are to provide immediate stimulus to help end the recession (mainly through a speeded-up public works program and larger tax breaks for families with children); to control some of the costliest public programs, especially medical care; to deal with class inequities by changing the tax, welfare, and educational systems to “empower every American to get ahead”; and to help American companies compete overseas.

Some parts of this package are pure pie-in-the-sky. For decades politicians have pretended that they can save significant amounts of money by cutting “waste, fraud, and abuse” in the federal bureaucracy. Of course the government is wasteful, but the really serious outflow of money runs elsewhere (as Thurow emphasizes in his book), especially to entitlement programs like Social Security and Medicare. Clinton proposes to finance some of his schemes with a 3 percent across-the-board cut in administrative costs. Many before him have promised this, and no one has yet made it stick. His health proposal, too, rests on the dubious proposition that “by eliminating administrative waste in the current system, controlling costs and ending fraudulent billing practices, we can generate $100 billion in savings to finance a new national health care system.”

Clinton acts quite confident when he discusses the sorts of issues he has concentrated on as governor: education, crime-control, welfare-reform, race relations, and the other elements that affect a society’s morale. To the extent that the election turns on a rational consideration of alternatives, he might be judged on his record in Arkansas. He claims that his state, which usually contends with Mississippi and Louisiana for last place in measures of income, education, and general social welfare, has come a long way in the last decade. Others say that it’s barely budged. Presumably the reporters who are in Little Rock looking into Clinton’s personal background could fan out across the state and examine the effects of his plans. ⁵ Perhaps other reporters will judge George Bush by the same standard—what he’s done to improve income, education, and general social welfare during his administration.

Clinton’s economic scheme is not as far-reaching as Thurow’s, but of the proposals offered by the remaining candidates, only Clinton’s meet the test that Thurow says is the standard for political seriousness: they take account of the country’s economic problems and recognize that they are not solving themselves.

—March 26, 1992