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The Struggling Regions Newsletter

Issue 03 - October 4, 2019


“We are where we are in American politics, in part, because all these big-picture projects succeeded in enriching private interests … but failed to achieve their stated public goals.”

Ross Douthat

 

After a busy month for the Struggling Regions Initiative (SRI), we return you to your regularly scheduled newsletter programming.

Returning readers will know that, while SRI is ostensibly about exploring ideas in economic development policy, our mission is lofty. Slow and geographically unbalanced economic growth is a problem worth solving in its own right. But it becomes exponentially more urgent when the imbalances begin to create fraying perceptions of legitimacy in our governing institutions and the policymakers within them.

A legitimation crisis and a financial crisis have a few things in common. They tend to be preceded by a long period of relative complacency. By the time one begins, it’s too late to reverse. And once the dust settles, hindsight miraculously snaps onto a set of historical indicators, often stretching back years, demonstrating that a crisis had been imminent for a long time—but which we were, for whatever reason, blind to.

Writing at the New York Times, Ross Douthat digs into some of those obvious indicators (The Corruption Before Trump):

Every republic, large and small, lives with a tension between the need for public-spirited, civic-minded leaders and the inevitable pull of private interests and affections. … The Roman republic in its waning years managed this tension by creating a zone of self-enrichment that was outside the res publica. … The American republic, more idealistic and less brutal than its Roman antecedent, doesn’t send former cabinet officials and senators off to practice extractive taxation everywhere that we have military bases. Instead, we’ve developed a more complicated interplay between public service and private enrichment, a labyrinthine system of consultancies and adviserships and directorates and boards in which the dedicated public servant can make enough money to keep up with the cost of tuition at Sidwell or Exeter without ever taking anything so embarrassing as a bribe.

In his exposition of elite-public disconnect, Douthat graciously links to my new article for National Affairs, The China Shock Doctrine, which digs into the political ramifications of establishing PNTR or permanent normal trading relations with China. I argue that political realignment underpinning the rise of Trump and the anti-globalization right is directly connected to rural deindustrialization, and our rising comparative advantage in college educated, urban human capital.

The China Shock, and the concentrated costs of globalization more generally, are clear cases where elite policy complacency increased the odds of a legitimation crisis — not least when specific elites can be seen profiting from their global connections. Restoring that legitimacy requires reformers to renew their appreciation for the historical embeddedness of markets in lower-level norms and institutions that can’t simply turn on a dime. As I write: 

For American conservatives, a commitment to history will always retain a kernel of the founders' revolutionary spirit. But in the long shadow of PNTR, it's clear that our old doctrines about trade and development have failed in practice, even if they worked in theory. For free trade to be truly positive-sum, for example, experience shows that labor markets must be buttressed with robust re-employment supports and continuous investments in a wide variety of human capital. In other words, the demand side matters just as much as the supply side.

Codetermination Meets Coevolution

The new issue of National Review magazine is all about Elizabeth Warren, with a contribution from me that digs into her corporate governance reforms. My critique zeros-in on two major proposals from the Warren campaign:  

  • Automatically breaking-up tech companies that cross $25 billion in global revenue, while designating all tech platforms with revenue greater than $90 million as “platform utilities” with common-carrier style regulation.

  • Requiring all U.S. corporations with annual revenue over $1 billion to obtain a federal charter, reserve 40 percent of their boards of directors for employee representatives, and enable their charter to be revoked by a new Office of United States Corporations if they illegally damage various “stakeholders”( including consumers and business partners). 

The piece digs into precisely why I think these are bad ideas. But in a way, my critique of Warren is simply the flipside of my view on trade liberalization with China. History and path dependency counsel against sweeping “shock therapy”-style reforms — in both the regulatory and deregulatory direction. 

Consider the idea of mandating board representation for workers, a concept known as “codetermination.” Proponents are quick to point out that codetermination is already law in Germany, and can even cite studies suggesting it has had a small, positive effect on labor productivity. Nevertheless, the German system of codetermination wasn’t suddenly enacted from on high. While the current law dates to 1976, it was the product of decades of historical development and co-evolved with many other institutions. Indeed, worker committees in German firms go back to at least 1850. 

The findings of a 1998 commission on the practicality of enacting codetermination in other European countries makes a similar point. According to the commission,

...a major precondition for the relatively smooth functioning of co-determination is the fact that it is embedded in the German "dual system" of company co-determination and branch-level collective bargaining. Since bargaining on "distribution" issues, such as wages or length of working time, is usually externalised from the company to branch-level trade unions and employers' associations, co-determination can operate in a relatively cooperative atmosphere, freed from the more conflictual issues. 

Of course, the U.S. does not have branch-level collective bargaining (though Warren has a plan for that, too). We should therefore be cautious about inferring the likely effects of codetermination on U.S. companies and workers from econometric studies conducted on German data. 

There’s also reason to believe codetermination has suppressed the formation of German capital markets. As Harvard Law School professor Mark J. Roe has noted, “Initial public offers [in Germany] are infrequent, securities trading is shallow, and even large public firms typically have big blockholders that make the big firms resemble 'semi-private' companies.” Roe argues that this is because stockholders “want the firm's governing institutions to have a blockholding 'balance of power,' a balance that, because half the supervisory board represents employees, diffusely owned firms may be unable to create.” 

Germany nonetheless gets by with weak capital markets by relying on its unique public banking system — another case of institutional coevolution. The U.S., in contrast, has a wide and deep public securities market, to the point where even grandma owns a piece of the S&P. If Roe’s thesis is correct, share prices could fall by 25 percent under codetermination. 

History and broader institutional context matters. So perhaps we should think twice before copying a single element of the German model without any of its institutional antecedents!
 

SBA and the Future of American Manufacturing

In September, I had the honor of briefing the House Manufacturing Caucus on the Small Business Administration (SBA)’s role in supporting high-tech American manufacturers. Michigan Congresswoman Haley Stevens delivered some incredible opening remarks, and Caleb Orr of the Senate Committee on Small Business spoke to Chairman Marco Rubio’s recent reports on the state of American investment. A video of the first hour of the briefing is available here, and the slide deck of my presentation is here.

It’s instructive to compare our proposals for the SBA (as discussed in previous newsletters) to plans like Warren’s corporate governance reforms. After all, both are motivated by many of the same structural trends in the U.S. economy, including: 

  • falling business dynamism; 

  • declining labor share of income; 

  • the rise of winner-take-all firms, particularly in “intangible” sectors; 

  • and rural economic decline combined with skyrocketing urban cost of living.  

But whereas Warren pins the blame on profit-motivated corporations and monopoly capitalism, I put far more focus on our inadequate response to globalization itself. Indeed, every one of these trends really only take-off in the 2000s, coincident with the China Shock. Yet the core problem does not appear to be globalization per se, but our decision to dramatically open U.S. markets without many of the complementary institutions that sustain and legitimate trade openness in other liberal market economies. This includes stronger social safety-nets, but also industrial policies to help scale higher productivity firms within the sectors most exposed to disruption, and thus prevent the economy from over-specializing into knowledge work. In short, instead of trying to fundamentally change the American system, we should strive to complete it. 

— Samuel Hammond
Director Poverty and Welfare Policy
Niskanen Center

Assorted Links

 

Lyman Stone’s Testimony Before the Joint Economic Committee

My essay for the American Mind symposium on Adrian Vermeule

FCC Establishes First Two Innovation Zones

Andrew Yang on the FDA and innovation

Boston Review symposium on corporate governance reform 

Our Latest Research
In a new paper, The Trade-Off between Social Insurance and Financialization, Niskanen Center senior fellow Monica Prasad traces the historical development of America's credit-centric welfare state, and suggests there is a better way.
https://www.niskanencenter.org/new-paper-why-intellectual-property-is-a-misnomer/
Brink Lindsey and Daniel Takash unpack the arguments for strong intellectual property rights in their new paper, Why “Intellectual Property” is a Misnomer.
https://www.niskanencenter.org/enabling-the-smart-city-how-can-the-public-sector-light-up-dark-fiber/
Lauren McCarthy makes the case for unleashing so-called "dark fiber" from regulatory purgatory in a new edition of the Smart City series.

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