ONE THING ABOUT being a U.S. senator—you fly a lot. There are the flights backand forth from Washington at least once a week. There are the trips to other states todeliver a speech, raise money, or campaign for your colleagues. If you represent a bigstate like Illinois, there are flights upstate or downstate, to attend town meetings orribbon cuttings and to make sure that the folks don’t think you’ve forgotten them.
Most of the time I fly commercial and sit in coach, hoping for an aisle or window seatand crossing my fingers that the guy in front of me doesn’t want to recline.
But there are times when—because I’m making multiple stops on a West Coast swing,say, or need to get to another city after the last commercial flight has left—I fly on aprivate jet. I hadn’t been aware of this option at first, assuming the cost would beprohibitive. But during the campaign, my staff explained that under Senate rules, asenator or candidate could travel on someone else’s jet and just pay the equivalent of afirst-class airfare. After looking at my campaign schedule and thinking about all thetime I would save, I decided to give private jets a try.
It turns out that the flying experience is a good deal different on a private jet. Privatejets depart from privately owned and managed terminals, with lounges that feature bigsoft couches and big-screen TVs and old aviation photographs on the walls. Therestrooms are generally empty and spotless, and have those mechanical shoe-shinemachines and mouthwash and mints in a bowl. There’s no sense of hurriedness at theseterminals; the plane is waiting for you if you’re late, ready for you if you’re early. A lotof times you can bypass the lounge altogether and drive your car straight onto thetarmac. Otherwise the pilots will greet you in the terminal, take your bags, and walk youout to the plane.
And the planes, well, they’re nice. The first time I took such a flight, I was on a CitationX, a sleek, compact, shiny machine with wood paneling and leather seats that you couldpull together to make a bed anytime you decided you wanted a nap. A shrimp salad andcheese plate occupied the seat behind me; up front, the minibar was fully stocked. Thepilots hung up my coat, offered me my choice of newspapers, and asked me if I wascomfortable. I was.
Then the plane took off, its Rolls-Royce engines gripping the air the way a well-madesports car grips the road. Shooting through the clouds, I turned on the small TV monitorin front of my seat. A map of the United States appeared, with the image of our planetracking west, along with our speed, our altitude, our time to destination, and thetemperature outside. At forty thousand feet, the plane leveled off, and I looked down atthe curving horizon and the scattered clouds, the geography of the earth laid out beforeme—first the flat, checkerboard fields of western Illinois, then the python curves of theMississippi, then more farmland and ranch land and eventually the jagged Rockies, stillsnow-peaked, until the sun went down and the orange sky narrowed to a thin red linethat was finally consumed by night and stars and moon.
I could see how people might get used to this.
The purpose of that particular trip was fund-raising, mostly—in preparation for mygeneral election campaign, several friends and supporters had organized events for mein L.A., San Diego, and San Francisco. But the most memorable part of the trip was avisit that I paid to the town of Mountain View, California, a few miles south of StanfordUniversity and Palo Alto, in the heart of Silicon Valley, where the search enginecompany Google maintains its corporate headquarters.
Google had already achieved iconic status by mid-2004, a symbol not just of thegrowing power of the Internet but of the global economy’s rapid transformation. On thedrive down from San Francisco, I reviewed the company’s history: how two StanfordPh.D. candidates in computer science, Larry Page and Sergey Brin, had collaborated ina dorm room to develop a better way to search the web; how in 1998, with a milliondollars raised from various contacts, they had formed Google, with three employeesoperating out of a garage; how Google figured out an advertising model—based on textads that were nonintrusive and relevant to the user’s search—that made the companyprofitable even as the dot-com boom went bust; and how, six years after the company’sfounding, Google was about to go public at stock prices that would make Mr. Page andMr. Brin two of the richest people on earth.
Mountain View looked like a typical suburban California community—quiet streets,sparkling new office parks, unassuming homes that, because of the unique purchasingpower of Silicon Valley residents, probably ran a cool million or more. We pulled infront of a set of modern, modular buildings and were met by Google’s general counsel,David Drummond, an African American around my age who’d made the arrangementsfor my visit.
“When Larry and Sergey came to me looking to incorporate, I figured they were just acouple of really smart guys with another start-up idea,” David said. “I can’t say Iexpected all this.”
He took me on a tour of the main building, which felt more like a college student centerthan an office—a café on the ground floor, where the former chef of the Grateful Deadsupervised the preparation of gourmet meals for the entire staff; video games and aPing-Pong table and a fully equipped gym. (“People spend a lot of time here, so wewant to keep them happy.”) On the second floor, we passed clusters of men and womenin jeans and T-shirts, all of them in their twenties, working intently in front of theircomputer screens, or sprawled on couches and big rubber exercise balls, engaged inanimated conversation.
Eventually we found Larry Page, talking to an engineer about a software problem. Hewas dressed like his employees and, except for a few traces of early gray in his hair,didn’t look any older. We spoke about Google’s mission—to organize all of the world’sinformation into a universally accessible, unfiltered, and usable form—and the Googlesite index, which already included more than six billion web pages. Recently thecompany had launched a new web-based email system with a built-in search function;they were working on technology that would allow you to initiate a voice search overthe telephone, and had already started the Book Project, the goal of which was to scanevery book ever published into a web-accessible format, creating a virtual library thatwould store the entirety of human knowledge.
Toward the end of the tour, Larry led me to a room where a three-dimensional image ofthe earth rotated on a large flat-panel monitor. Larry asked the young Indian Americanengineer who was working nearby to explain what we were looking at.
“These lights represent all the searches that are going on right now,” the engineer said.
“Each color is a different language. If you move the toggle this way”—he caused thescreen to alter—“you can see the traffic patterns of the entire Internet system.”
The image was mesmerizing, more organic than mechanical, as if I were glimpsing theearly stages of some accelerating evolutionary process, in which all the boundariesbetween men—nationality, race, religion, wealth—were rendered invisible andirrelevant, so that the physicist in Cambridge, the bond trader in Tokyo, the student in aremote Indian village, and the manager of a Mexico City department store were drawninto a single, constant, thrumming conversation, time and space giving way to a worldspun entirely of light. Then I noticed the broad swaths of darkness as the globe spun onits axis—most of Africa, chunks of South Asia, even some portions of the United States,where the thick cords of light dissolved into a few discrete strands.
My reverie was broken by the appearance of Sergey, a compact man perhaps a fewyears younger than Larry. He suggested that I go with them to their TGIF assembly, atradition that they had maintained since the beginning of the company, when all ofGoogle’s employees got together over beer and food and discussed whatever they hadon their minds. As we entered a large hall, throngs of young people were already seated,some drinking and laughing, others still typing into PDAs or laptops, a buzz ofexcitement in the air. A group of fifty or so seemed more attentive than the rest, andDavid explained that these were the new hires, fresh from graduate school; today wastheir induction into the Google team. One by one, the new employees were introduced,their faces flashing on a big screen alongside information about their degrees, hobbies,and interests. At least half of the group looked Asian; a large percentage of the whiteshad Eastern European names. As far as I could tell, not one was black or Latino. Later,walking back to my car, I mentioned this to David and he nodded.
“We know it’s a problem,” he said, and mentioned efforts Google was making toprovide scholarships to expand the pool of minority and female math and sciencestudents. In the meantime, Google needed to stay competitive, which meant hiring thetop graduates of the top math, engineering, and computer science programs in thecountry—MIT, Caltech, Stanford, Berkeley. You could count on two hands, David toldme, the number of black and Latino kids in those programs.
In fact, according to David, just finding American-born engineers, whatever their race,was getting harder—which was why every company in Silicon Valley had come to relyheavily on foreign students. Lately, high-tech employers had a new set of worries: Since9/11 a lot of foreign students were having second thoughts about studying in the Statesdue to the difficulties in obtaining visas. Top-notch engineers or software designersdidn’t need to come to Silicon Valley anymore to find work or get financing for a start-up. High-tech firms were setting up operations in India and China at a rapid pace, andventure funds were now global; they would just as readily invest in Mumbai orShanghai as in California. And over the long term, David explained, that could spelltrouble for the U.S. economy.
“We’ll be able to keep attracting talent,” he said, “because we’re so well branded. Butfor the start-ups, some of the less established companies, the next Google, who knows?
I just hope somebody in Washington understands how competitive things have become.
Our dominance isn’t inevitable.”
AROUND THE SAME time that I visited Google, I took another trip that made methink about what was happening with the economy. This one was by car, not jet, alongmiles of empty highway, to a town called Galesburg, forty-five minutes or so from theIowa border in western Illinois.
Founded in 1836, Galesburg had begun as a college town when a group of Presbyterianand Congregational ministers in New York decided to bring their blend of social reformand practical education to the Western frontier. The resulting school, Knox College,became a hotbed of abolitionist activity before the Civil War—a branch of theUnderground Railroad had run through Galesburg, and Hiram Revels, the nation’s firstblack U.S. senator, attended the college’s prep school before moving back toMississippi. In 1854, the Chicago, Burlington & Quincy railroad line was completedthrough Galesburg, causing a boom in the region’s commerce. And four years later,some ten thousand people gathered to hear the fifth of the Lincoln-Douglas debates,during which Lincoln first framed his opposition to slavery as a moral issue.
It wasn’t this rich history, though, that had taken me to Galesburg. Instead, I’d gone tomeet with a group of union leaders from the Maytag plant, for the company hadannounced plans to lay off 1,600 employees and shift operations to Mexico. Like townsall across central and western Illinois, Galesburg had been pounded by the shift ofmanufacturing overseas. In the previous few years, the town had lost industrial partsmakers and a rubber-hose manufacturer; it was now in the process of seeing ButlerManufacturing, a steelmaker recently bought by Australians, shutter its doors. Already,Galesburg’s unemployment rate hovered near 8 percent. With the Maytag plant’sclosing, the town stood to lose another 5 to 10 percent of its entire employment base.
Inside the machinists’ union hall, seven or eight men and two or three women hadgathered on metal folding chairs, talking in muted voices, a few smoking cigarettes,most of them in their late forties or early fifties, all of them dressed in jeans or khakis,T-shirts or plaid work shirts. The union president, Dave Bevard, was a big, barrel-chested man in his mid-fifties, with a dark beard, tinted glasses, and a fedora that madehim look like a member of the band ZZ Top. He explained that the union had triedevery possible tactic to get Maytag to change its mind—talking to the press, contactingshareholders, soliciting support from local and state officials. The Maytag managementhad been unmoved.
“It ain’t like these guys aren’t making a profit,” Dave told me. “And if you ask ’em,they’ll tell you we’re one of the most productive plants in the company. Qualityworkmanship. Low error rates. We’ve taken cuts in pay, cuts in benefits, layoffs. Thestate and the city have given Maytag at least $10 million in tax breaks over the last eightyears, based on their promise to stay. But it’s never enough. Some CEO who’s alreadymaking millions of dollars decides he needs to boost the company stock price so he cancash in his options, and the easiest way to do that is to send the work to Mexico and paythe workers there a sixth of what we make.”
I asked them what steps state or federal agencies had taken to retrain workers, andalmost in unison the room laughed derisively. “Retraining is a joke,” the union vicepresident, Doug Dennison, said. “What are you going to retrain for when there aren’tany jobs out there?” He talked about how an employment counselor had suggested thathe try becoming a nursing aide, with wages not much higher than what Wal-Mart paidtheir floor clerks. One of the younger men in the group told me a particularly cruelstory: He had made up his mind to retrain as a computer technician, but a week into hiscourses, Maytag called him back. The Maytag work was temporary, but according to therules, if this man refused to accept Maytag’s offer, he’d no longer be eligible forretraining money. If, on the other hand, he did go back to Maytag and dropped out ofthe courses he was already taking, then the federal agency would consider him to haveused up his one-time training opportunity and wouldn’t pay for any retraining in thefuture.
I told the group that I’d tell their story during the campaign and offered a few proposalsthat my staff had developed—amending the tax code to eliminate tax breaks forcompanies who shifted operations offshore; revamping and better funding federalretraining programs. As I was getting ready to go, a big, sturdy man in a baseball capspoke up. He said his name was Tim Wheeler, and he’d been the head of the union atthe nearby Butler steel plant. Workers had already received their pink slips there, andTim was collecting unemployment insurance, trying to figure out what to do next. Hisbig worry now was health-care coverage.
“My son Mark needs a liver transplant,” he said grimly. “We’re on the waiting list for adonor, but with my health-care benefits used up, we’re trying to figure out if Medicaidwill cover the costs. Nobody can give me a clear answer, and you know, I’ll selleverything I got for Mark, go into debt, but I still…” Tim’s voice cracked; his wife,sitting beside him, buried her head in her hands. I tried to assure them that we wouldfind out exactly what Medicaid would cover. Tim nodded, putting his arm around hiswife’s shoulder.
On the drive back to Chicago, I tried to imagine Tim’s desperation: no job, an ailingson, his savings running out.
Those were the stories you missed on a private jet at forty thousand feet.
YOU’LL GET LITTLE argument these days, from either the left or the right, with thenotion that we’re going through a fundamental economic transformation. Advances indigital technology, fiber optics, the Internet, satellites, and transportation haveeffectively leveled the economic barriers between countries and continents. Pools ofcapital scour the earth in search of the best returns, with trillions of dollars movingacross borders with only a few keystrokes. The collapse of the Soviet Union, theinstitution of market-based reforms in India and China, the lowering of trade barriers,and the advent of big-box retailers like Wal-Mart have brought several billion peopleinto direct competition with American companies and American workers. Whether ornot the world is already flat, as columnist and author Thomas Friedman says, it iscertainly getting flatter every day.
There’s no doubt that globalization has brought significant benefits to Americanconsumers. It’s lowered prices on goods once considered luxuries, from big-screen TVsto peaches in winter, and increased the purchasing power of low-income Americans. It’shelped keep inflation in check, boosted returns for the millions of Americans nowinvested in the stock market, provided new markets for U.S. goods and services, andallowed countries like China and India to dramatically reduce poverty, which over thelong term makes for a more stable world.
But there’s also no denying that globalization has greatly increased economic instabilityfor millions of ordinary Americans. To stay competitive and keep investors happy in theglobal marketplace, U.S.-based companies have automated, downsized, outsourced, andoffshored. They’ve held the line on wage increases, and replaced defined-benefit healthand retirement plans with 401(k)s and Health Savings Accounts that shift more cost andrisk onto workers.
The result has been the emergence of what some call a “winner-take-all” economy, inwhich a rising tide doesn’t necessarily lift all boats. Over the past decade, we’ve seenstrong economic growth but anemic job growth; big leaps in productivity but flatliningwages; hefty corporate profits, but a shrinking share of those profits going to workers.
For those like Larry Page and Sergey Brin, for those with unique skills and talents andfor the knowledge workers—the engineers, lawyers, consultants, and marketers—whofacilitate their work, the potential rewards of a global marketplace have never beengreater. But for those like the workers at Maytag, whose skills can be automated ordigitized or shifted to countries with cheaper wages, the effects can be dire—a future inthe ever-growing pool of low-wage service work, with few benefits, the risk of financialruin in the event of an illness, and the inability to save for either retirement or a child’scollege education.
The question is what we should do about all this. Since the early nineties, when thesetrends first began to appear, one wing of the Democratic Party—led by Bill Clinton—has embraced the new economy, promoting free trade, fiscal discipline, and reforms ineducation and training that will help workers to compete for the high-value, high-wagejobs of the future. But a sizable chunk of the Democratic base—particularly blue-collarunion workers like Dave Bevard—has resisted this agenda. As far as they’re concerned,free trade has served the interests of Wall Street but has done little to stop thehemorrhaging of good-paying American jobs.
The Republican Party isn’t immune from these tensions. With the recent uproar aroundillegal immigration, for example, Pat Buchanan’s brand of “America first” conservatismmay see a resurgence within the GOP, and present a challenge to the BushAdministration’s free trade policies. And in his 2000 campaign and early in his firstterm, George W. Bush suggested a legitimate role for government, a “compassionateconservatism” that, the White House argues, has expressed itself in the Medicareprescription drug plan and the educational reform effort known as No Child LeftBehind—and that has given small-government conservatives heartburn.
For the most part, though, the Republican economic agenda under President Bush hasbeen devoted to tax cuts, reduced regulation, the privatization of government services—and more tax cuts. Administration officials call this the Ownership Society, but most ofits central tenets have been staples of laissez-faire economics since at least the 1930s: abelief that a sharp reduction—or in some cases, elimination—of taxes on incomes, largeestates, capital gains, and dividends will encourage capital formation, higher savingsrates, more business investment, and greater economic growth; a belief that governmentregulation inhibits and distorts the efficient working of the market; and a belief thatgovernment entitlement programs are inherently inefficient, breed dependency, andreduce individual responsibility, initiative, and choice.
Or, as Ronald Reagan succinctly put it: “Government is not the solution to our problem;government is the problem.”
So far, the Bush Administration has only achieved one-half of its equation; theRepublican-controlled Congress has pushed through successive rounds of tax cuts, buthas refused to make tough choices to control spending—special interest appropriations,also known as earmarks, are up 64 percent since Bush took office. Meanwhile,Democratic lawmakers (and the public) have resisted drastic cuts in vital investments—and outright rejected the Administration’s proposal to privatize Social Security.
Whether the Administration actually believes that the resulting federal budget deficitsand ballooning national debt don’t matter is unclear. What is clear is that the sea of redink has made it more difficult for future administrations to initiate any new investmentsto address the economic challenges of globalization or to strengthen America’s socialsafety net.
I don’t want to exaggerate the consequences of this stalemate. A strategy of doingnothing and letting globalization run its course won’t result in the imminent collapse ofthe U.S. economy. America’s GDP remains larger than China’s and India’s combined.
For now, at least, U.S.-based companies continue to hold an edge in such knowledge-based sectors as software design and pharmaceutical research, and our network ofuniversities and colleges remains the envy of the world.
But over the long term, doing nothing probably means an America very different fromthe one most of us grew up in. It will mean a nation even more stratified economicallyand socially than it currently is: one in which an increasingly prosperous knowledgeclass, living in exclusive enclaves, will be able to purchase whatever they want on themarketplace—private schools, private health care, private security, and private jets—while a growing number of their fellow citizens are consigned to low-paying servicejobs, vulnerable to dislocation, pressed to work longer hours, dependent on anunderfunded, overburdened, and underperforming public sector for their health care,their retirement, and their children’s educations.
It will mean an America in which we continue to mortgage our assets to foreign lendersand expose ourselves to the whims of oil producers; an America in which weunderinvest in the basic scientific research and workforce training that will determineour long-term economic prospects and neglect potential environmental crises. It willmean an America that’s more politically polarized and more politically unstable, aseconomic frustration boils over and leads people to turn on each other.
Worst of all, it will mean fewer opportunities for younger Americans, a decline in theupward mobility that’s been at the heart of this country’s promise since its founding.
That’s not the America we want for ourselves or our children. And I’m confident thatwe have the talent and the resources to create a better future, a future in which theeconomy grows and prosperity is shared. What’s preventing us from shaping that futureisn’t the absence of good ideas. It’s the absence of a national commitment to take thetough steps necessary to make America more competitive—and the absence of a newconsensus around the appropriate role of government in the marketplace.
TO BUILD THAT consensus, we need to take a look at how our market system hasevolved over time. Calvin Coolidge once said that “the chief business of the Americanpeople is business,” and indeed, it would be hard to find a country on earth that’s beenmore consistently hospitable to the logic of the marketplace. Our Constitution places theownership of private property at the very heart of our system of liberty. Our religioustraditions celebrate the value of hard work and express the conviction that a virtuous lifewill result in material reward. Rather than vilify the rich, we hold them up as rolemodels, and our mythology is steeped in stories of men on the make—the immigrantwho comes to this country with nothing and strikes it big, the young man who headsWest in search of his fortune. As Ted Turner famously said, in America money is howwe keep score.
The result of this business culture has been a prosperity that’s unmatched in humanhistory. It takes a trip overseas to fully appreciate just how good Americans have it;even our poor take for granted goods and services—electricity, clean water, indoorplumbing, telephones, televisions, and household appliances—that are still unattainablefor most of the world. America may have been blessed with some of the planet’s bestreal estate, but clearly it’s not just our natural resources that account for our economicsuccess. Our greatest asset has been our system of social organization, a system that forgenerations has encouraged constant innovation, individual initiative, and the efficientallocation of resources.
It should come as no surprise, then, that we have a tendency to take our free-marketsystem as a given, to assume that it flows naturally from the laws of supply and demandand Adam Smith’s invisible hand. And from this assumption, it’s not much of a leap toassume that any government intrusion into the magical workings of the market—whether through taxation, regulation, lawsuits, tariffs, labor protections, or spending onentitlements—necessarily undermines private enterprise and inhibits economic growth.
The bankruptcy of communism and socialism as alternative means of economicorganization has only reinforced this assumption. In our standard economics textbooksand in our modern political debates, laissez-faire is the default rule; anyone who wouldchallenge it swims against the prevailing tide.
It’s useful to remind ourselves, then, that our free-market system is the result neither ofnatural law nor of divine providence. Rather, it emerged through a painful process oftrial and error, a series of difficult choices between efficiency and fairness, stability andchange. And although the benefits of our free-market system have mostly derived fromthe individual efforts of generations of men and women pursuing their own vision ofhappiness, in each and every period of great economic upheaval and transition we’vedepended on government action to open up opportunity, encourage competition, andmake the market work better.
In broad outline, government action has taken three forms. First, government has beencalled upon throughout our history to build the infrastructure, train the workforce, andotherwise lay the foundations necessary for economic growth. All the Founding Fathersrecognized the connection between private property and liberty, but it was AlexanderHamilton who also recognized the vast potential of a national economy—one based noton America’s agrarian past but on a commercial and industrial future. To realize thispotential, Hamilton argued, America needed a strong and active national government,and as America’s first Treasury secretary he set about putting his ideas to work. Henationalized the Revolutionary War debt, which not only stitched together theeconomies of the individual states but helped spur a national system of credit and fluidcapital markets. He promoted policies—from strong patent laws to high tariffs—toencourage American manufacturing, and proposed investment in roads and bridgesneeded to move products to market.
Hamilton encountered fierce resistance from Thomas Jefferson, who feared that a strongnational government tied to wealthy commercial interests would undermine his visionof an egalitarian democracy tied to the land. But Hamilton understood that only throughthe liberation of capital from local landed interests could America tap into its mostpowerful resource—namely the energy and enterprise of the American people. This ideaof social mobility constituted one of the great early bargains of American capitalism;industrial and commercial capitalism might lead to greater instability, but it would be adynamic system in which anyone with enough energy and talent could rise to the top.
And on this point, at least, Jefferson agreed—it was based on his belief in ameritocracy, rather than a hereditary aristocracy, that Jefferson would champion thecreation of a national, government-financed university that could educate and traintalent across the new nation, and that he considered the founding of the University ofVirginia to be one of his greatest achievements.
This tradition, of government investment in America’s physical infrastructure and in itspeople, was thoroughly embraced by Abraham Lincoln and the early Republican Party.
For Lincoln, the essence of America was opportunity, the ability of “free labor” toadvance in life. Lincoln considered capitalism the best means of creating suchopportunity, but he also saw how the transition from an agricultural to an industrialsociety was disrupting lives and destroying communities.
So in the midst of civil war, Lincoln embarked on a series of policies that not only laidthe groundwork for a fully integrated national economy but extended the ladders ofopportunity downward to reach more and more people. He pushed for the constructionof the first transcontinental railroad. He incorporated the National Academy ofSciences, to spur basic research and scientific discovery that could lead to newtechnology and commercial applications. He passed the landmark Homestead Act of1862, which turned over vast amounts of public land across the western United States tosettlers from the East and immigrants from around the world, so that they, too, couldclaim a stake in the nation’s growing economy. And then, rather than leave thesehomesteaders to fend for themselves, he created a system of land grant colleges toinstruct farmers on the latest agricultural techniques, and to provide them the liberaleducation that would allow them to dream beyond the confines of life on the farm.
Hamilton’s and Lincoln’s basic insight—that the resources and power of the nationalgovernment can facilitate, rather than supplant, a vibrant free market—has continued tobe one of the cornerstones of both Republican and Democratic policies at every stage ofAmerica’s development. The Hoover Dam, the Tennessee Valley Authority, theinterstate highway system, the Internet, the Human Genome Project—time and again,government investment has helped pave the way for an explosion of private economicactivity. And through the creation of a system of public schools and institutions ofhigher education, as well as programs like the GI Bill that made a college educationavailable to millions, government has helped provide individuals the tools to adapt andinnovate in a climate of constant technological change.
Aside from making needed investments that private enterprise can’t or won’t make onits own, an active national government has also been indispensable in dealing withmarket failures—those recurring snags in any capitalist system that either inhibit theefficient workings of the market or result in harm to the public. Teddy Rooseveltrecognized that monopoly power could restrict competition, and made “trust busting” acenterpiece of his administration. Woodrow Wilson instituted the Federal ReserveBank, to manage the money supply and curb periodic panics in the financial markets.
Federal and state governments established the first consumer laws—the Pure Food andDrug Act, the Meat Inspection Act—to protect Americans from harmful products.
But it was during the stock market crash of 1929 and the subsequent Depression that thegovernment’s vital role in regulating the marketplace became fully apparent. Withinvestor confidence shattered, bank runs threatening the collapse of the financialsystem, and a downward spiral in consumer demand and business investment, FDRengineered a series of government interventions that arrested further economiccontraction. For the next eight years, the New Deal administration experimented withpolicies to restart the economy, and although not all of these interventions producedtheir intended results, they did leave behind a regulatory structure that helps limit therisk of economic crisis: a Securities and Exchange Commission to ensure transparencyin the financial markets and protect smaller investors from fraud and insidermanipulation; FDIC insurance to provide confidence to bank depositors; andcountercyclical fiscal and monetary policies, whether in the form of tax cuts, increasedliquidity, or direct government spending, to stimulate demand when business andconsumers have pulled back from the market.
Finally—and most controversially—government has helped structure the socialcompact between business and the American worker. During America’s first 150 years,as capital became more concentrated in trusts and limited liability corporations, workerswere prevented by law and by violence from forming unions that would increase theirown leverage. Workers had almost no protections from unsafe or inhumane workingconditions, whether in sweatshops or meatpacking plants. Nor did American culturehave much sympathy for workers left impoverished by capitalism’s periodic gales of“creative destruction”—the recipe for individual success was greater toil, not pamperingfrom the state. What safety net did exist came from the uneven and meager resources ofprivate charity.
Again, it took the shock of the Great Depression, with a third of all people findingthemselves out of work, ill housed, ill clothed, and ill fed, for government to correct thisimbalance. Two years into office, FDR was able to push through Congress the SocialSecurity Act of 1935, the centerpiece of the new welfare state, a safety net that wouldlift almost half of all senior citizens out of poverty, provide unemployment insurancefor those who had lost their jobs, and provide modest welfare payments to the disabledand the elderly poor. FDR also initiated laws that fundamentally changed therelationship between capital and labor: the forty-hour workweek, child labor laws, andminimum wage laws; and the National Labor Relations Act, which made it possible toorganize broad-based industrial unions and forced employers to bargain in good faith.
Part of FDR’s rationale in passing these laws came straight out of Keynesianeconomics: One cure for economic depression was putting more disposable income inthe pockets of American workers. But FDR also understood that capitalism in ademocracy required the consent of the people, and that by giving workers a larger shareof the economic pie, his reforms would undercut the potential appeal of government-managed, command-and-control systems—whether fascist, socialist, or communist—that were gaining support all across Europe. As he would explain in 1944, “People whoare hungry, people who are out of a job are the stuff of which dictatorships are made.”
For a while this seemed to be where the story would end—with FDR saving capitalismfrom itself through an activist federal government that invests in its people andinfrastructure, regulates the marketplace, and protects labor from chronic deprivation.
And in fact, for the next twenty-five years, through Republican and Democraticadministrations, this model of the American welfare state enjoyed a broad consensus.
There were those on the right who complained of creeping socialism, and those on theleft who believed FDR had not gone far enough. But the enormous growth of America’smass production economy, and the enormous gap in productive capacity between theUnited States and the war-torn economies of Europe and Asia, muted most ideologicalbattles. Without any serious rivals, U.S. companies could routinely pass on higher laborand regulatory costs to their customers. Full employment allowed unionized factoryworkers to move into the middle class, support a family on a single income, and enjoythe stability of health and retirement security. And in such an environment of steadycorporate profits and rising wages, policy makers found only modest political resistanceto higher taxes and more regulation to tackle pressing social problems—hence thecreation of the Great Society programs, including Medicare, Medicaid, and welfare,under Johnson; and the creation of the Environmental Protection Agency andOccupational Health and Safety Administration under Nixon.
There was only one problem with this liberal triumph—capitalism would not stand still.
By the seventies, U.S. productivity growth, the engine of the postwar economy, beganto lag. The increased assertiveness of OPEC allowed foreign oil producers to lop off amuch bigger share of the global economy, exposing America’s vulnerability todisruptions in energy supplies. U.S. companies began to experience competition fromlow-cost producers in Asia, and by the eighties a flood of cheap imports—in textiles,shoes, electronics, and even automobiles—had started grabbing big chunks of thedomestic market. Meanwhile, U.S.-based multinational corporations began locatingsome of their production facilities overseas—partly to access these foreign markets, butalso to take advantage of cheap labor.
In this more competitive global environment, the old corporate formula of steady profitsand stodgy management no longer worked. With less ability to pass on higher costs orshoddy products to consumers, corporate profits and market share shrank, and corporateshareholders began demanding more value. Some corporations found ways to improveproductivity through innovation and automation. Others relied primarily on brutallayoffs, resistance to unionization, and a further shift of production overseas. Thosecorporate managers who didn’t adapt were vulnerable to corporate raiders and leveragedbuyout artists, who would make the changes for them, without any regard for theemployees whose lives might be upended or the communities that might be torn apart.
One way or another, American companies became leaner and meaner—with old-linemanufacturing workers and towns like Galesburg bearing the brunt of thistransformation.
It wasn’t just the private sector that had to adapt to this new environment. As RonaldReagan’s election made clear, the people wanted the government to change as well.
In his rhetoric, Reagan tended to exaggerate the degree to which the welfare state hadgrown over the previous twenty-five years. At its peak, the federal budget as a totalshare of the U.S. economy remained far below the comparable figures in WesternEurope, even when you factored in the enormous U.S. defense budget. Still, theconservative revolution that Reagan helped usher in gained traction because Reagan’scentral insight—that the liberal welfare state had grown complacent and overlybureaucratic, with Democratic policy makers more obsessed with slicing the economicpie than with growing the pie—contained a good deal of truth. Just as too manycorporate managers, shielded from competition, had stopped delivering value, too manygovernment bureaucracies had stopped asking whether their shareholders (the Americantaxpayer) and their consumers (the users of government services) were getting theirmoney’s worth.
Not every government program worked the way it was advertised. Some functionscould be better carried out by the private sector, just as in some cases market-basedincentives could achieve the same results as command-and-control-style regulations, ata lower cost and with greater flexibility. The high marginal tax rates that existed whenReagan took office may not have curbed incentives to work or invest, but they diddistort investment decisions—and did lead to a wasteful industry of setting up taxshelters. And while welfare certainly provided relief for many impoverished Americans,it did create some perverse incentives when it came to the work ethic and familystability.
Forced to compromise with a Democrat-controlled Congress, Reagan would neverachieve many of his most ambitious plans for reducing government. But hefundamentally changed the terms of the political debate. The middle-class tax revoltbecame a permanent fixture in national politics and placed a ceiling on how muchgovernment could expand. For many Republicans, noninterference with the marketplacebecame an article of faith.
Of course, many voters continued to look to the government during economicdownturns, and Bill Clinton’s call for more aggressive government action on theeconomy helped lift him to the White House. After the politically disastrous defeat ofhis health-care plan and the election of a Republican Congress in 1994, Clinton had totrim his ambitions but was able to put a progressive slant on some of Reagan’s goals.
Declaring the era of big government over, Clinton signed welfare reform into law,pushed tax cuts for the middle class and working poor, and worked to reducebureaucracy and red tape. And it was Clinton who would accomplish what Reagannever did, putting the nation’s fiscal house in order even while lessening poverty andmaking modest new investments in education and job training. By the time Clinton leftoffice, it appeared as if some equilibrium had been achieved—a smaller government,but one that retained the social safety net FDR had first put into place.
Except capitalism is still not standing still. The policies of Reagan and Clinton mayhave trimmed some of the fat of the liberal welfare state, but they couldn’t change theunderlying realities of global competition and technological revolution. Jobs are stillmoving overseas—not just manufacturing work, but increasingly work in the servicesector that can be digitally transmitted, like basic computer programming. Businessescontinue to struggle with high health-care costs. America continues to import far morethan it exports, to borrow far more than it lends.
Without any clear governing philosophy, the Bush Administration and its congressionalallies have responded by pushing the conservative revolution to its logical conclusion—even lower taxes, even fewer regulations, and an even smaller safety net. But in takingthis approach, Republicans are fighting the last war, the war they waged and won in theeighties, while Democrats are forced to fight a rearguard action, defending the NewDeal programs of the thirties.
Neither strategy will work anymore. America can’t compete with China and Indiasimply by cutting costs and shrinking government—unless we’re willing to tolerate adrastic decline in American living standards, with smog-choked cities and beggarslining the streets. Nor can America compete simply by erecting trade barriers andraising the minimum wage—unless we’re willing to confiscate all the world’scomputers.
But our history should give us confidence that we don’t have to choose between anoppressive, government-run economy and a chaotic and unforgiving capitalism. It tellsus that we can emerge from great economic upheavals stronger, not weaker. Like thosewho came before us, we should be asking ourselves what mix of policies will lead to adynamic free market and widespread economic security, entrepreneurial innovation andupward mobility. And we can be guided throughout by Lincoln’s simple maxim: thatwe will do collectively, through our government, only those things that we cannot do aswell or at all individually and privately.
In other words, we should be guided by what works.
WHAT MIGHT SUCH a new economic consensus look like? I won’t pretend to haveall the answers, and a detailed discussion of U.S. economic policy would fill up severalvolumes. But I can offer a few examples of where we can break free of our currentpolitical stalemate; places where, in the tradition of Hamilton and Lincoln, we caninvest in our infrastructure and our people; ways that we can begin to modernize andrebuild the social contract that FDR first stitched together in the middle of the lastcentury.
Let’s start with those investments that can make America more competitive in theglobal economy: investments in education, science and technology, and energyindependence.
Throughout our history, education has been at the heart of a bargain this nation makeswith its citizens: If you work hard and take responsibility, you’ll have a chance for abetter life. And in a world where knowledge determines value in the job market, wherea child in Los Angeles has to compete not just with a child in Boston but also withmillions of children in Bangalore and Beijing, too many of America’s schools are notholding up their end of the bargain.
In 2005 I paid a visit to Thornton Township High School, a predominantly black highschool in Chicago’s southern suburbs. My staff had worked with teachers there toorganize a youth town hall meeting—representatives of each class spent weeksconducting surveys to find out what issues their fellow students were concerned aboutand then presented the results in a series of questions to me. At the meeting they talkedabout violence in the neighborhoods and a shortage of computers in their classrooms.
But their number one issue was this: Because the school district couldn’t afford to keepteachers for a full school day, Thornton let out every day at 1:30 in the afternoon. Withthe abbreviated schedule, there was no time for students to take science lab or foreignlanguage classes.
How come we’re getting shortchanged? they asked me. Seems like nobody even expectsus to go to college, they said.
They wanted more school.
We’ve become accustomed to such stories, of poor black and Latino childrenlanguishing in schools that can’t prepare them for the old industrial economy, much lessthe information age. But the problems with our educational system aren’t restricted tothe inner city. America now has one of the highest high school dropout rates in theindustrialized world. By their senior year, American high school students score loweron math and science tests than most of their foreign peers. Half of all teenagers can’tunderstand basic fractions, half of all nine-year-olds can’t perform basic multiplicationor division, and although more American students than ever are taking college entranceexams, only 22 percent are prepared to take college-level classes in English, math, andscience.
I don’t believe government alone can turn these statistics around. Parents have theprimary responsibility for instilling an ethic of hard work and educational achievementin their children. But parents rightly expect their government, through the publicschools, to serve as full partners in the educational process—just as it has for earliergenerations of Americans.
Unfortunately, instead of innovation and bold reform of our schools—the reforms thatwould allow the kids at Thornton to compete for the jobs at Google—what we’ve seenfrom government for close to two decades has been tinkering around the edges and atolerance for mediocrity. Partly this is a result of ideological battles that are as outdatedas they are predictable. Many conservatives argue that money doesn’t matter in raisingeducational achievement; that the problems in public schools are caused by haplessbureaucracies and intransigent teachers’ unions; and that the only solution is to break upthe government’s education monopoly by handing out vouchers. Meanwhile, those onthe left often find themselves defending an indefensible status quo, insisting that morespending alone will improve educational outcomes.
Both assumptions are wrong. Money does matter in education—otherwise why wouldparents pay so much to live in well-funded suburban school districts?—and many urbanand rural schools still suffer from overcrowded classrooms, outdated books, inadequateequipment, and teachers who are forced to pay out of pocket for basic supplies. Butthere’s no denying that the way many public schools are managed poses at least as big aproblem as how well they’re funded.
Our task, then, is to identify those reforms that have the highest impact on studentachievement, fund them adequately, and eliminate those programs that don’t produceresults. And in fact we already have hard evidence of reforms that work: a morechallenging and rigorous curriculum with emphasis on math, science, and literacy skills;longer hours and more days to give children the time and sustained attention they needto learn; early childhood education for every child, so they’re not already behind ontheir first day of school; meaningful, performance-based assessments that can provide afuller picture of how a student is doing; and the recruitment and training oftransformative principals and more effective teachers.
This last point—the need for good teachers—deserves emphasis. Recent studies showthat the single most important factor in determining a student’s achievement isn’t thecolor of his skin or where he comes from, but who the child’s teacher is. Unfortunately,too many of our schools depend on inexperienced teachers with little training in thesubjects they’re teaching, and too often those teachers are concentrated in alreadystruggling schools. Moreover, the situation is getting worse, not better: Each year,school districts are hemorrhaging experienced teachers as the Baby Boomers reachretirement, and two million teachers must be recruited in the next decade just to meetthe needs of rising enrollment.
The problem isn’t that there’s no interest in teaching; I constantly meet young peoplewho’ve graduated from top colleges and have signed up, through programs like Teachfor America, for two-year stints in some of the country’s toughest public schools. Theyfind the work extraordinarily rewarding; the kids they teach benefit from their creativityand enthusiasm. But by the end of two years, most have either changed careers ormoved to suburban schools—a consequence of low pay, a lack of support from theeducational bureaucracy, and a pervasive feeling of isolation.
If we’re serious about building a twenty-first-century school system, we’re going tohave to take the teaching profession seriously. This means changing the certificationprocess to allow a chemistry major who wants to teach to avoid expensive additionalcourse work; pairing up new recruits with master teachers to break their isolation; andgiving proven teachers more control over what goes on in their classrooms.
It also means paying teachers what they’re worth. There’s no reason why anexperienced, highly qualified, and effective teacher shouldn’t earn $100,000 annually atthe peak of his or her career. Highly skilled teachers in such critical fields as math andscience—as well as those willing to teach in the toughest urban schools—should be paideven more.
There’s just one catch. In exchange for more money, teachers need to become moreaccountable for their performance—and school districts need to have greater ability toget rid of ineffective teachers.
So far, teacher’s unions have resisted the idea of pay for performance, in part because itcould be disbursed at the whim of a principal. The unions also argue—rightly, I think—that most school districts rely solely on test scores to measure teacher performance, andthat test scores may be highly dependent on factors beyond any teacher’s control, likethe number of low-income or special-needs students in their classroom.
But these aren’t insoluble problems. Working with teacher’s unions, states and schooldistricts can develop better measures of performance, ones that combine test data with asystem of peer review (most teachers can tell you with amazing consistency whichteachers in their schools are really good, and which are really bad). And we can makesure that nonperforming teachers no longer handicap children who want to learn.
Indeed, if we’re to make the investments required to revamp our schools, then we willneed to rediscover our faith that every child can learn. Recently, I had the chance tovisit Dodge Elementary School, on the West Side of Chicago, a school that had oncebeen near the bottom on every measure but that is in the midst of a turnaround. While Iwas talking to some of the teachers about the challenges they faced, one young teachermentioned what she called the “These Kids Syndrome”—the willingness of society tofind a million excuses for why “these kids” can’t learn; how “these kids come fromtough backgrounds” or “these kids are too far behind.”
“When I hear that term, it drives me nuts,” the teacher told me. “They’re not ‘thesekids.’ They’re our kids.”
How America’s economy performs in the years to come may depend largely on howwell we take such wisdom to heart.
OUR INVESTMENT IN education can’t end with an improved elementary andsecondary school system. In a knowledge-based economy where eight of the ninefastest-growing occupations this decade require scientific or technological skills, mostworkers are going to need some form of higher education to fill the jobs of the future.
And just as our government instituted free and mandatory public high schools at thedawn of the twentieth century to provide workers the skills needed for the industrialage, our government has to help today’s workforce adjust to twenty-first-centuryrealities.
In many ways, our task should be easier than it was for policy makers a hundred yearsago. For one thing, our network of universities and community colleges already existsand is well equipped to take on more students. And Americans certainly don’t need tobe convinced of the value of a higher education—the percentage of young adults gettingbachelor’s degrees has risen steadily each decade, from around 16 percent in 1980 toalmost 33 percent today.
Where Americans do need help, immediately, is in managing the rising cost ofcollege—something with which Michelle and I are all too familiar (for the first ten yearsof our marriage, our combined monthly payments on our undergraduate and law schooldebt exceeded our mortgage by a healthy margin). Over the last five years, the averagetuition and fees at four-year public colleges, adjusted for inflation, have risen 40percent. To absorb these costs, students have been taking on ever-increasing debt levels,which discourages many undergraduates from pursuing careers in less lucrative fieldslike teaching. And an estimated two hundred thousand college-qualified students eachyear choose to forgo college altogether because they can’t figure out how to pay thebills.
There are a number of steps we can take to control costs and improve access to highereducation. States can limit annual tuition increases at public universities. For manynontraditional students, technical schools and online courses may provide a cost-effective option for retooling in a constantly changing economy. And students can insistthat their institutions focus their fund-raising efforts more on improving the quality ofinstruction than on building new football stadiums.
But no matter how well we do in controlling the spiraling cost of education, we will stillneed to provide many students and parents with more direct help in meeting collegeexpenses, whether through grants, low-interest loans, tax-free educational savingsaccounts, or full tax deductibility of tuition and fees. So far, Congress has been movingin the opposite direction, by raising interest rates on federally guaranteed student loansand failing to increase the size of grants for low-income students to keep pace withinflation. There’s no justification for such policies—not if we want to maintainopportunity and upward mobility as the hallmark of the U.S. economy.
There’s one other aspect of our educational system that merits attention—one thatspeaks to the heart of America’s competitiveness. Since Lincoln signed the Morrill Actand created the system of land grant colleges, institutions of higher learning have servedas the nation’s primary research and development laboratories. It’s through theseinstitutions that we’ve trained the innovators of the future, with the federal governmentproviding critical support for the infrastructure—everything from chemistry labs toparticle accelerators—and the dollars for research that may not have an immediatecommercial application but that can ultimately lead to major scientific breakthroughs.
Here, too, our policies have been moving in the wrong direction. At the 2006Northwestern University commencement, I fell into a conversation with Dr. RobertLanger, an Institute Professor of chemical engineering at MIT and one of the nation’sforemost scientists. Langer isn’t just an ivory tower academic—he holds more than fivehundred patents, and his research has led to everything from the development of thenicotine patch to brain cancer treatments. As we waited for the procession to begin, Iasked him about his current work, and he mentioned his research in tissue engineering,research that promised new, more effective methods of delivering drugs to the body.
Remembering the recent controversies surrounding stem cell research, I asked himwhether the Bush Administration’s limitation on the number of stem cell lines was thebiggest impediment to advances in his field. He shook his head.
“Having more stem cell lines would definitely be useful,” Langer told me, “but the realproblem we’re seeing is significant cutbacks in federal grants.” He explained that fifteenyears ago, 20 to 30 percent of all research proposals received significant federal support.
That level is now closer to 10 percent. For scientists and researchers, this means moretime spent raising money and less time spent on research. It also means that each year,more and more promising avenues of research are cut off—especially the high-riskresearch that may ultimately yield the biggest rewards.
Dr. Langer’s observation isn’t unique. Each month, it seems, scientists and engineersvisit my office to discuss the federal government’s diminished commitment to fundingbasic scientific research. Over the last three decades federal funding for the physical,mathematical, and engineering sciences has declined as a percentage of GDP—just atthe time when other countries are substantially increasing their own R & D budgets.
And as Dr. Langer points out, our declining support for basic research has a directimpact on the number of young people going into math, science, and engineering—which helps explain why China is graduating eight times as many engineers as theUnited States every year.
If we want an innovation economy, one that generates more Googles each year, then wehave to invest in our future innovators—by doubling federal funding of basic researchover the next five years, training one hundred thousand more engineers and scientistsover the next four years, or providing new research grants to the most outstanding early-career researchers in the country. The total price tag for maintaining our scientific andtechnological edge comes out to approximately $42 billion over five years—realmoney, to be sure, but just 15 percent of the most recent federal highway bill.
In other words, we can afford to do what needs to be done. What’s missing is notmoney, but a national sense of urgency.
THE LAST CRITICAL investment we need to make America more competitive is in anenergy infrastructure that can move us toward energy independence. In the past, war ora direct threat to national security has shaken America out of its complacency and led tobigger investments in education and science, all with an eye toward minimizing ourvulnerabilities. That’s what happened at the height of the Cold War, when the launchingof the satellite Sputnik led to fears that the Soviets were slipping ahead of ustechnologically. In response, President Eisenhower doubled federal aid to education andprovided an entire generation of scientists and engineers the training they needed to leadrevolutionary advances. That same year, the Defense Advanced Research ProjectsAgency, or DARPA, was formed, providing billions of dollars to basic research thatwould eventually help create the Internet, bar codes, and computer-aided design. And in1961, President Kennedy would launch the Apollo space program, further inspiringyoung people across the country to enter the New Frontier of science.
Our current situation demands that we take the same approach with energy. It’s hard tooverstate the degree to which our addiction to oil undermines our future. According tothe National Commission on Energy Policy, without any changes to our energy policyU.S. demand for oil will jump 40 percent over the next twenty years. Over the sameperiod, worldwide demand is expected to jump at least 30 percent, as rapidly developingcountries like China and India expand industrial capacity and add 140 million cars totheir roads.
Our dependence on oil doesn’t just affect our economy. It undermines our nationalsecurity. A large portion of the $800 million we spend on foreign oil every day goes tosome of the world’s most volatile regimes—Saudi Arabia, Nigeria, Venezuela, and,indirectly at least, Ira