Tales of a New America

by Robert B. Reich

  8

  When opportunism becomes an accepted feature of commercial life, no legal formulation can fully deter it. Language is never free from ambiguity. Loopholes can be discovered even in the most detailed of contracts or rules. The exploitation of such loopholes invites, in turn, still more tedious and constraining rules the next time around. As purchasers slip out of supply contracts, future supply contracts become longer and more complex. As takeover defenses proliferate, takeover tactics become ever more intricate. As corporate borrowers manage to pile new debt upon old, earlier creditors demand burdensome new guarantees for additional loans. As corporations smoothly circumvent pension plans or wage agreements, subsequent pension and wage agreements grow ever more specific.

  The principle is understood by every practicing lawyer, accountant, and investment banker in America: Red tape multiplies with the profusion of finagles it seeks to contain, and vice versa. And as contractual refinements progress, litigation over them also escalates, for each party feels compelled to contest adverse interpretations of the ever more convoluted contracts and rules. Employees sue managers, shareholders sue directors, creditors sue those who audited the corporate books, everyone sues the companies that insure everyone else against liability.

  Those who get paid for rearranging economic assets, rather than enhancing their value, have a not inconsiderable pecuniary interest in the continued deterioration of commercial trust. The business pages of the morning paper offer continuous news of novel ploys and counterploys, as paper entrepreneurs seek to outmaneuver one another. Every new thrust invites a more sophisticated parry, requiring an ever larger number of lawyers, accountants, and financial advisers to execute it. Between 1970 and 1985 the yearly total of private contractual disputes brought before federal courts tripled, to 35,400.15 And the number and remuneration of lawyers and financial specialists steadily rose through the ups and downs of the real economy.16

  The party that refuses to take part in the game is at a distinct disadvantage. Self-righteousness is a poor substitute for strategy. The probability that others may try to exploit a relationship inspires a widespread resolve to be the exploiter rather than the exploitee. Taking immediate advantage of ambiguities in contracts and rules, for example, makes eminent sense when the other party, given a chance, can be expected to twist them to serve its own purposes. Similarly, in a context of suspicion and opportunism, information is transformed from a tool to a weapon. Withholding technical and economic data that, if shared, could boost joint productivity can be the only logical strategy for individuals who have learned to distrust their coworkers and managers.

  Such stratagems, while rational from the standpoint of the parties involved, absorb time and effort and undermine joint endeavors. They make it far more difficult for enterprises to shift and evolve in response to new commercial opportunities. They reduce the system’s capacity to generate wealth.

  A culture of opportunistic individualism aborts collective entrepreneurialism. It induces collective gridlock. When drivers going north and south opportunistically crowd into an intersection as the light turns red, they block the drivers moving east and west from going through on the green light. The maneuver is perfectly understandable from the standpoint of the first motorists, who thus ensure they will not be the ones trapped by other drivers using the same ploy. Gridlock violators seldom suffer directly from their opportunism; city driving is a sufficiently anonymous activity that they are likely to get through with their reputations intact. But the cumulative effect of such behavior is to ensnarl traffic, and the greater the pressure on the traffic system, the more tightly gridlock takes hold.

  Collective entrepreneurialism depends on commercial trust. Collective gridlock ensues when trust breaks down. The American economy, now in transition, generates countless opportunities for mutual endeavor and joint gains, but at the same time countless invitations to opportunism. Each participant, knowing this and wary of being victimized, foreswears trusting collaboration. Thus the system’s evolution is stymied. This—not the contest between lone entrepreneurs and regiments of drones—is the dilemma we face.

  CHAPTER 12

  TRIUMPH RECONSIDERED

  1

  The Triumphant Individual has been a permanent character in American mythology. He has appeared in different guises throughout our history: the pilgrim, the minuteman, the explorer, the pioneer and homesteader, the cowboy, the inventor, the path-breaking aviator, the combat hero. During recent decades the parable has been retold with the business entrepreneur cast in the lead role. In this version, it is his daring and imagination that propels the economy. His is the role to which we all aspire but which few of us can ever hope to attain. Most of us are fated for routine tasks implementing entrepreneurs’ Big Ideas. The prevailing economic debate, accordingly, has turned on how to induce the entrepreneur to unleash his efforts, and how sternly to discipline the drones and how briskly to keep them moving out of obsolete functions and into more productive jobs. The question, in short, has been the proper balance between economic growth and fairness. Conservative disciplinarians have tended to put more stress on growth; liberal conciliators have emphasized fairness.

  But this debate, like that over the Mob at the Gates, has been strangely out of sync with the new challenges America confronts. Global competition and rapid technological change have strained the system of stable mass production. Big Ideas devised by lone entrepreneurs—major inventions, scientific breakthroughs, dramatically new ways of doing things—can now move readily to the far reaches of the globe, where huge pools of willing low-wage labor await. The alternative to matching Third World wage bids—or to opting out of the competition through protectionism—lies in seeking the future not in stable mass production, but in continuous refinement and elaboration. These two paths entail quite different choices.

  The first path—toward stable mass production—relies on cutting labor costs and leaping into wholly new product lines as old ones are played out. For managers this path has meant undertaking (or threatening) massive layoffs, moving (or threatening to move) to lower-wage states and countries, parceling out work to lower-cost suppliers, automating to cut total employment, and diversifying into radically different goods and services. For workers this path has meant defending existing jobs and pay scales, grudgingly conceding lower wages and benefits, shifting burdens by accepting lower pay scales for newly hired workers, seeking protection from foreign competition, and occasionally striking.

  The second path—toward collective entrepreneurialism—involves increasing labor value. For managers this path means continuously retraining employees for more complex tasks, automating in ways that cut routine tasks and enhance worker flexibility and creativity, diffusing responsibility for innovation, taking seriously labor’s concern for job security, and giving workers a stake in improved productivity via profit-linked bonuses and stock plans. For workers this second path means accepting flexible job classifications and work rules, agreeing to wage rates linked to profits and productivity improvements, and generally taking greater responsibility for the soundness and efficiency of the enterprise. The second path also involves a closer and more permanent relationship with other parties that have a stake in the firm—suppliers, dealers, creditors, even the towns and cities in which the firm resides.

  On this second path, all those associated with the firm become partners in its future. The distinction between entrepreneurs and drones breaks down. Each member of the enterprise participates in its evolution. All have a commitment to the firm’s continued success. Both paths can boost profits and improve competitiveness in the short run. But only the second can maintain and improve America’s standard of living over time.

  The problem is that the first path is easier to follow, at least in the short term. It economizes on that perilously rare commodity, trust. In the more fluid and more dangerous commercial world of the late twentieth century, each group has been ever more anxious to preserve its status, even at the expense o
f others. Claimants have dug in. They have sought to immunize themselves against change by defending their grip on the status quo and shifting risk to others. Managers have sought stability by resorting to intricate, economically sterile legal and financial dodges that dump risk on employees, suppliers, or investors. Investors, meanwhile, have rewarded managers who cut short-run labor costs and abrogated burdensome contracts. Unionized workers have doggedly demanded increases in wages and benefits, even at the expense of more junior workers whose jobs may have to be sacrificed. Other workers have absconded with valuable training and experience. Each party has spent ever greater time and effort trying to outmaneuver the others.

  The frequent result has been collective gridlock. The resulting loss is largely invisible, because we cannot see the potential in our economy that remains unfulfilled. The only evidence is circumstantial: a failure to improve productivity, stagnant incomes, a loss of competitiveness. We blame the shadowy “them” for our problems and also fret over the federal deficit or the supply of money. But the failure lies deeper, and closer. Our productive organizations are too often marked by suspicion, insecurity, and opportunism. Employees know they can be sacked at any time. Executives are dumped in response to a short-run drop in earnings, or they preemptively walk off with the goods. This fearful atmosphere inhibits the flow of accurate information. Bad news is buried below until it blossoms into a major crisis or scandal; good ideas rarely surface. Job insecurity discourages cooperation even among employees at roughly the same level. Why help your junior colleague if there is a risk he will displace you when he learns his job? Since the system appears to be rigged, the only rational response is to be self-seeking and cunning. Within a productive system that depends ever more on cooperation and good faith, we have spawned a dominant work ethic characterized by cynicism and manipulation. Its most visible symptom is shoddy workmanship. Its more insidious manifestation is paper entrepreneurialism.

  2

  There is no ready technique for overcoming gridlock. Collaboration cannot be enforced. (Not even police officers stationed at every intersection during rush hour can always keep the way clear.) The central challenge is to foster collective commitment and reduce exploitative maneuver. Outside incentives can help. (If I’m convinced the police will keep the intersection open, I’m less determined to block it lest I be blocked.) But incentives are not central; culture is, the deep culture that shapes and is shaped by our common mythology.

  In recent years we have been treated to a number of inspirational management texts that instruct executives to be kinder to employees, treat them with respect, listen to them, and make them feel they are part of the team. Bookstores bulge with new volumes of anecdotes about creating, achieving, or becoming impassioned about excellence—preferably within one minute. Managers are supposed to walk around, touch employees, get directly involved, effervesce with praise and encouragement, stage celebrations and indulge in hoopla. Some of this is sound, some of it is hogwash. But most of it, even the best, is a matter of atmospherics, superficial, and treated as such. The effervescent executive will be gone in a few years, many of the employees will be gone, and the owners will be different as well. The hoopla is transient; the praise and involvement, mere devices to motivate people. The firm itself is assumed to be an instrument for making money, nothing more. When times require it, employees will be sacked. Contracts will not be renewed. Everybody knows this. Everybody responds accordingly.

  Indeed, the legal and economic foundations of the American corporation support this instrumental view. Within the network of contractual relationships that comprise the firm, managers are formally empowered to act on behalf of the investors of capital, to maximize the value of their shares, and nothing more. Internal working relationships have value only insofar as they are directly instrumental to this goal. Productive alliances are simply the temporary devices by which Triumphant Individuals may eventually triumph. American culture accepts, even encourages the breaking of commercial relationships when they get in the way.

  But collective entrepreneurialism rests on a different set of cultural premises. The firm is a community. The relationships that comprise it have a value in themselves; they are not merely instrumental. Personal satisfactions derive, in part, from commitment to this community. And such commitments transcend contractual agreements. Thus when the relationships sour, the first responsibility of all those involved with them is to try to adapt them and restore their value. By this view, the market is a signaling device to the organizations that inhabit the economy, not their reason for existence. Membership within such organizations entails reciprocal responsibilities and mutual benefits. Loyalty, trust, and cooperation matter more than the ease of exit.

  The myth of the Triumphant Individual may have been appropriate to a simpler and more insular economy. But within a complex system such as ours, there are so many potential bottlenecks and critical levers, so many transactions to be coordinated among so many people, that opportunistic individualism more often short-circuits progress than advances it. The fear of exploitation, firmly founded on experience, mandates defensiveness and preemptive exploitation. Each party is led to limit his own responsibility and commitment, and to take refuge in explicit contracts, rules, and other guarantees. Such a culture inhibits economic flexibility.

  The skeptic warns that collective entrepreneurialism is at odds with American culture; we should stick to the individualistic variety we do best. But there’s a catch. The Triumphant Individual’s Big Ideas are now footloose, and can be turned into realities by drone workers anywhere; his Big Finagles are likely to remain at home, and confound collaboration. Thus the current version of the American myth of the Triumphant Individual may have outlasted its time. It is no longer useful as a guide to our place in the world.

  CHAPTER 13

  THE SYSTEM OF SOCIAL BENEVOLENCE

  1

  The parable of the Benevolent Community speaks of the nature and the degree of Americans’ obligations to one another. Like the other myths, this one has altered over time. During wars and depressions, the theme has been social solidarity, mutual sacrifice, and joint progress. In more recent years, however, it has been a tale of our charity and compassion toward the poor, and of their dependency and the stubborn persistence of poverty.

  Yet as the stories we tell about obligation and benevolence have shifted, the instruments of benevolence—the programs we enact and fund—have come to have less to do with aid to the poor and more to do with redistribution among the relatively comfortable majority of Americans. As with the other myths, the reigning version of the Benevolent Community may be too far adrift from reality to reliably guide our discussions and debates. We do indeed transfer large sums of money to one another to avoid or compensate for hardship. But little of this goes to the groups we think of when we refer to “the poor.” We talk a good deal, and sincerely, of charity and compassion. But most of the social programs we support are based on the idea of insurance. We worry about welfare dependency and the irresponsibility of the poor, but—as with the other mythic realms—we have paid scant attention to the mutual responsibilities that should undergird these relationships, and to the reciprocal benefits that could emerge from them.

  Our ideas about benevolence are inchoate, and in some ways simply mistaken. The instruments of benevolence are poorly considered and unexamined in their effects; some of the flows of resources are much too large, some much too small. There are yawning gaps. The system continues to evolve, without much public awareness or debate about the whole of it, in ways unrelated to the nation’s emerging needs in a radically different world.

  2

  The Benevolent Community’s most well-endowed and popular efforts have not been for “the poor”; they have been for all of us. These include Medicare and Social Security’s cash benefits; unemployment insurance; tax-favored pensions, tax-free health insurance, and other social services delivered through corporations; and even liability awards in tort suits. Together
, they comprise the system through which most Americans have insured themselves, their families, and their compatriots against adversity.

  We have distinguished these forms of benevolence from “welfare,” on the rationale that their purpose is not to eradicate poverty, but rather to avoid a precipitous decline in anyone’s standard of living brought on by hardship. On closer examination, however, the distinction begins to blur. Both social insurance and welfare redistribute income in response to perceived need. Under both schemes, the most obvious redistribution is from those who have avoided a particular hardship to those who have not. Moreover, because hardship is only rarely just a matter of bad luck, both welfare and social insurance to some extent shift resources from the prudent to the careless.

  Aside from levels of funding, and intimately linked to them, the principal difference between the two sets of programs lies in the degree to which most of us identify with those in need. Americans do not perceive Social Security, Medicare, and other forms of social insurance as taking money from “us” and giving it to “them.” We think of ourselves as among the beneficiaries of social insurance. Most of us assume that we face the same risks as do those who draw upon these programs—any of us could die, leaving spouses and children behind; we could reach old age without adequate savings to see us through; we might succumb to illness or disability, or suffer temporary unemployment. By the same token, the weaknesses and foibles of our fellow recipients of social insurance are somehow familiar and understandable, and thus forgivable: Those who have not taken good care of their health, or willingly subjected their bodies or their savings to larger than normal risks, with the result that they are now in dire straits, perhaps have been foolish and negligent. But we have been willing to support them nonetheless. By pooling our resources we spread these potential losses widely among us, so that each of us ends up bearing only a small part of the burden. Such loss spreading is presumed to be one of the advantages of living in civilized society. Such expenditures are legitimized by a pervasive sense of “there but for the grace of God go I.”