It seems a requirement of modern
politics that Democrats criticize big business and Republicans criticize big
government.
There is one problem with these
shibboleths, these tests of the faithful: they ignore how the interplay between
big government and big business has made us prosperous. History suggests that
any politician successful at impeding either government or business will
effectively slow economic progress.
Some people know the amazing story of
Elisha Gray arriving at the patent office just hours after Alexander Graham
Bell with his patent application for the phone. Bell went on to fame and
fortune and Gray to a life of anonymity. There’s more to it, though. Our
founding fathers were intent on creating an accessible, affordable patent
system. One might even say it was democratic. Fewer people know that the
Italian Antonio Meucci had invented the telephone years – not just hours –
before Bell but could not afford to patent it through Italy’s expensive patent
system. Had Italy been more visionary about subsidizing the work of its
inventors by making it cheaper to file for a patent, it may have hosted the
myriad, great inventions that defined the decades around 1900 or had the
equivalent of Bell Labs from which communication satellites and transistors
emerged as catalyst for huge industries. Our government enabled invention.
In his book The Rise and Fall
of American Growth, Robert Gordon shares this story of Bell, Gray and
Meucci and gives a host of other examples of government and business
interacting to create prosperity.
During the second world war, the
federal government led initiatives to increase industrial capacity. The
government invested capital equal to half the capital that existed at the start
of the war, capital in the form of factories and machine tools (which doubled
during the war). Even better was the problem-solving that resulted in better
production methods. During the war, Kaiser initially took 8 months to complete
a ship; they accelerated that to just a few weeks by the next year. A plane
factory of Ford's increased its rate of 75 planes per month in February of 1943
to 432 per month by August of 1944. By D-Day, the Germans could launch only 319
aircraft; the US and its allies launched 12,837. American factories won the war.
After the war, the government turned
all this over to private companies. Armed with these investments in capital and
knowledge, these companies began making consumer products like cars and TVs.
Before the second world war, the economy had lurched in and out of recession.
After, it took off. Government regulations helped raise wages and government investment
helped raise productivity. Workers both made and bought these new products.
Eisenhower had been a solider during
the first world war and was part of a group transporting vehicles across the
US. It took them 62 days to go from coast to coast. Head of the Allies’
conquering army, he experienced first-hand the German autobahn and was amazed
at the contrast. The interstate highway legislation Eisenhower signed increased
American productivity by tens of percent. Like the railroads the
government subsidized a century earlier, the highway system gave customers and
producers easier, more affordable access to products and markets. Decades
earlier, life expectancy had gone up as a result of similar, local efforts to
build out the infrastructure that brought safe water into homes and piped
sewage out, another initiative dependent on the cooperation of government and
business.
Another outcome of the second world
war was increased investment in research and education. In WWII we didn't just
pump unprecedented amounts of money into research but FDR asked Vannevar Bush
to institutionalize that, which he did with what become the NSF (National
Science Foundation) and DARPA (the Defense
Advanced Research Projects Agency). From DARPA we got the
Internet which has enabled the creation of trillions in new wealth and millions
of new jobs. The GI Bill was another product of the second world war and it led
to a huge increase in college enrollment, creating a new generation of better
educated, more productive workers.
Possibly the most
important interplay between big government and big corporations comes in
R&D. Research is hugely uncertain and most of it results in nothing. If
it does result in something cool it may happen a decade or three later than
expected. Also, not every cool thing becomes profitable. Because of this,
corporations rarely finance basic research and it needs to be heavily funded by
institutions like DARPA or the University of California. This research is
crucial to corporations' later developments. "The parts of the smart phone that make it smart—GPS,
touch screens, the Internet—were advanced by the Defense Department," as
Mariana Mazzucato points out in her book The Entrepreneurial State. Corporations try to find a way to translate research that has taken one
to two decades into development that
takes two to four years. It's a great system and at its best we tax successful
corporations to fund the next round of research which could be transformed into
new products by corporations. Symantec and
Qualcomm were among the new companies funded by The Small Business Innovation
Research program - a program started by Ronald Reagan. Google's basic algorithm
was funded with a NSF grant.
Of late, our
policies seem less reflective of this interdependence. As corporations pay less
in taxes the government has less money for initiatives that could help the next
generation of companies and workers to prosper. Our productivity, wages and GDP
were growing faster during a time when corporate tax rates were maxed out at
about 50% and personal income tax rates maxed out at about 70%. The trick is to
tax what is successful now to fund what will become successful next.
Government has an important job as a
referee, a role Elizabeth Warren articulates well. Government has an important
job of moderating wealth and income inequality. (Trump looked at the world with the biggest gap between rich and poor in history and concluded that the rich were not rich enough and the poor were not poor enough, giving the first a tax break and cutting assistance to the second. Few people would reach such a conclusion.) Those jobs of referee and moderator are important but
over the long term, they are not as important as the job of collaborating with
business and labor to create the next generation of technologies, products,
industries and companies. It is in that direction that lies the kind of
progress we had from 1900 to 2000 that increased real incomes by 8X and let us
buy myriad objects like airplane tickets, personal computers and antibiotics
that did not even exist at the start of the century.
The world is full of communities who
would love our problem of big government and big business. Big projects are not
done by small organizations. It should be a cliché to say what is too rarely
said: progress is not a product of markets or democracies but rather their
interaction. Strong companies and strong government go together in vibrant
economies. Even within the US, the states that keep taxes and investment lower
and have few big companies have lower household income and create fewer jobs.
Big businesses and government agencies are not a sign that we’re off the rails.
They are, instead, the way we got both the rails and the trains.
