Issue #13, Summer 2009
The Case for Goliath
FDR understood that when it comes to business, big is beautiful-for
workers, consumers, and the economy.
On June 3, 2003, the Treasury Department's James Gilleran brought a
chainsaw to a photo-op. While speaking to reporters, he promised to cut
up piles of paper representing regulations of the financial sector.
Joining him were representatives of four other U.S. regulatory agencies
in charge of overseeing finance, armed with less formidable (but still
sharp) gardening shears. The message was clear: The Bush Administration
was tearing down the final pieces of the New Deal regulatory wall.
In hindsight, that publicity stunt was the high point of the
deregulation wave that swept over the U.S. economy beginning in the
Carter years. The wave is now receding fast: In the aftermath of the
collapse of the global financial system, there is a consensus on the
need for greater regulation of the financial sector. But it is time as
well to assess and reconsider the generation-long deregulation of
industries other than finance, including transportation and
telecommunications. While many progressives are studying the New Deal
for ideas about how to deal with today's crisis, most have focused on
Keynesian countercyclical spending, public works, the social safety net,
and what John Kenneth Galbraith called the "countervailing power" of
unions and government. They have neglected, however, one of the major
achievements of New Deal Democrats between World War II and the 1970s:
the use of regulation deliberately to shape certain critical industries,
from energy utilities to transportation to telecommunications.
In a number of industries, the New Deal replaced competitive markets
with price and entry regulations, common-carrier rules, cartelized
markets, and regulated monopolies. The result was a distinctively
American version of industrial capitalism-call it "utility
capitalism"-in which protection from both competition and antitrust
permitted firms in many regulated sectors to pay high wages to unionized
workers, provide universal service to rural and poor customers, and, in
some cases, fund R&D on a massive scale.
For the last generation, however, the demonization of regulated
monopolies and cartels of the kind that the New Deal created has united
the small-is-beautiful romanticism of the liberal left with the
utopianism of the libertarian right. The assault on regulation has found
a powerful constituency among corporations, many of them big firms that
are dominant in their fields and seek to shake off regulation. After
three decades of well-funded propaganda spreading the views of champions
of unregulated markets, the very idea that regulated monopolies or
cartels could serve the public interest-in some cases precisely because
they are protected, to some degree, from competition-is utter heresy.
The heretical truth is that rapid economic growth and unionization may
sometimes require markets that are deliberately made less competitive by
regulation. Monopolistic and oligopolistic corporations are more likely
to invest in breakthrough innovation than firms struggling to break even
in highly competitive markets. And cartelized industries are far
friendlier to organized labor than ultra-competitive markets. If
progressives really want to promote technology-driven growth and a
union-based middle class, then they need to reconsider the lessons of
the New Deal's successful experiment in utility capitalism.
The Rise and Fall of American Utility Capitalism
During the first half of the twentieth century, the American center-left
was divided on the subject of monopoly and oligopoly in the private
sector. Early-century progressives debated whether there could be "good
trusts" as well as "bad trusts." Later, New Dealers were divided among
trust-busters and those who argued that large, dominant firms be
regulated rather than broken up.
On assuming office in 1933, Franklin Roosevelt, like his predecessor
Herbert Hoover, sought to prevent further disastrous deflation by
stabilizing prices, wages, and production. The National Industrial
Recovery Act (NIRA) created the National Recovery Administration, which
was charged with overseeing industry-devised price codes. The NRA was
declared unconstitutional by the Supreme Court in 1935 in Schechter
Poultry Corporation vs. United States, and because of its cumbersome
approach, its passing was not even lamented by New Dealers.
The demise of the NRA did not, however, mark the end of New Deal
cartelization policies. The second wave was sector-specific; among the
regulatory agencies it created was the Civil Aeronautics Board (CAB).
The New Deal also gave new powers to Progressive-era agencies like the
Federal Trade Commission (FTC) and the Federal Power Commission (FPC).
Historian Robert Britt Horwitz writes in The Irony of Regulatory Reform,
"The New Deal regulatory agencies created structures of mutual
benefit-cartels-among the major interests (often including organized
labor) in the industries placed under regulatory oversight. Industries
and markets were saved precisely by not permitting marketplace controls
to function freely." Price and entry regulations determined the range of
rates that firms could charge and the number of firms in a sector. Other
laws exempted oligopolies in these industries from antitrust rules. Many
regulated industries also were subject to "common carrier" laws,
particularly those in what Horwitz calls "infrastructure industries"
like airlines, trucking, railroads, telecommunications, banking, oil,
and natural gas: "They are 'infrastructures,' the basic services which
underlie all economic activity. They are central to the circulation of
capital and commerce. Historically, regulatory agencies have exercised
administrative controls over infrastructure industries as part of the
state's effort to construct a national arena for commerce and to
stabilize the essential services upon which commerce depends."
The fact that regulatory agencies permitted firms in regulated
industries to charge above-market rates allowed elaborate systems of
cross-subsidies in the public interest. For example, AT&T, during its
decades as a regulated national monopoly, was able to cross-subsidize
rural and poor Americans. Monopoly or oligopoly status also gave some
industrial giants like AT&T both the resources and the incentive to
engage in sustained and complex technological R&D, at the price of
shutting out competitors.
Utility capitalism was central not only to the New Deal but also the
thought of John Maynard Keynes, whose reputation is enjoying a
post-crash revival. In his essay "Was Keynes a Corporatist?", James
Crotty observes that "Keynes...argued that the government should not
only accept the current movement toward cartels, holding companies,
trade associations, pools and other forms of monopoly power, but should
proactively assist and accelerate this trend." In "The End of
Laissez-Faire," written in 1926, Keynes noted "the trend of joint stock
institutions, when they have reached a certain age and size, to
approximate to the status of the public corporations rather than that of
individualistic private enterprises."
The economist Edmund Phelps, a critic of the corporatism of the
Keynesian kind, concedes: "The increase in hourly productivity and of
total factor productivity over both those decades [1920 to 1941] were
unprecedented and have not been matched since with the possible
exception of the past ten-year span"-that is, the late 1990s and early
2000s, which saw the emergence of quasi-monopolies like Microsoft and
Google. The maturity of the New Deal's system of regulated, utility
capitalism coincided with the post-World War II boom and the greatest
expansion of the middle class in American history.
Rolling Back the Regulatory State
By the 1960s and 1970s, however, New Deal regulation was being
criticized from across the political spectrum. Libertarian economists
and radical leftists shared a common understanding of New Deal-era
regulation as a conspiracy by rent-seeking industries to gouge
consumers. Liberal activists in the "broadcast reform movement" claimed
that licensed media companies froze out progressive and minority
viewpoints. Political scientists like Theodore Lowi denounced
"interest-group liberalism." And populists like George Wallace showed
the appeal of denouncing bureaucratic big government and regulatory red
The result, in the years from Carter to Clinton, was the rapid
dismantling of most of the system of governing the U.S. economy erected
during Roosevelt's four terms. The Carter Administration supported the
deregulation of airlines (1978), rail (1980), and trucking (1980); the
bus industry was deregulated in 1982. Telecommunications was partly
deregulated in 1996; in 1999 came the Gramm-Leach-Bliley Act, repealing
the separation of commercial from investment banking established by the
Glass-Steagall Act of 1933. In 1981 the Reagan Administration's Justice
Department broke up AT&T, although other market-dominant firms like
Microsoft, Google, and Wal-Mart have been allowed to survive.
The critics weren't completely wrong; utility capitalism sometimes led
to slow diffusion of new technologies and preserved archaic distinctions
among industries. But some deregulation arguably went too far in turn.
Take airline regulation. The Civil Aeronautics Act of 1938 essentially
turned the U.S. airline industry into a regulated utility under the CAB.
Like other regulated industries, the airline industry was exempt from
antitrust laws so that airlines could set rates together. Among the
enlightened regulations of the CAB were prohibitions on charging more
for short flights than long ones and rate floors to prevent "fare wars."
But by the 1970s, the example of independent local airlines like
Southwest in Texas persuaded many analysts that airlines could not only
increase routes but also combat inflation by lowering fares. The Carter
Administration supported the Airline Deregulation Act of 1978, which
eliminated federal controls over entry, routes, schedules, financing,
and fares. In 1984, the CAB itself was abolished.
In many cases, lower prices for consumers were indeed achieved-consider
today's no-frills airlines-but at the sacrifice of other goals, like
unionization, universal service, and high levels of private R&D in basic
science and technology. These goals were not abandoned by Democrats, but
neoliberal economists and policymakers argued that they were best
pursued not by New Deal-style regulation but rather by direct government
outlays to individuals, like wage subsidies and higher social insurance
along with higher levels of public R&D. Unfortunately, this academic
synthesis of deregulated markets with much higher public spending never
prevailed in the political realm, where Congress and state and local
governments dismantled New Deal-era utility capitalism without
compensating those who lost universal service, union jobs, and high
The Real Meaning of "Creative Destruction"
The problems with the New Deal system were genuine: capture of
government agencies by the industries they regulated; corruption; and
delays in using or disseminating innovative technologies that leviathans
with deep pockets had developed. But New Deal regulatory policies not
only created dominant firms able to finance innovation, but also made it
much easier for workers in regulated industries to raise their wages and
benefits by joining unions.
The first objection that confronts any defender of utility capitalism in
the New Deal tradition is the claim that monopolies and cartels,
regulated or otherwise, stifle invention and retard economic growth. In
a culture in which the popular imagination thinks of technological
progress in terms of a fable in which the David of Bill Gates slays
IBM's Goliath, it takes considerable courage to suggest that big is not
necessarily bad and that small can be stupid. But when it comes to
innovation, Goliaths can be nimble and Davids can be clumsy.
The economist Joseph Schumpeter is known today for a phrase-"creative
destruction"-that is more often quoted than understood. Here is the
original quote from Schumpeter, in 1942's Capitalism, Socialism and
Democracy: "The opening up of new markets, foreign or domestic, and the
organizational development from the craft shop and factory to such
concerns as U.S. Steel illustrate the same process of industrial
mutation-if I may use that biological term-that incessantly
revolutionizes the economic structure from within, incessantly
destroying the old one, incessantly creating a new one. This process of
Creative Destruction is the essential fact about capitalism. It is what
capitalism consists in and what every capitalist concern has got to live
in." Note that Schumpeter's example of technological and economic
progress is the replacement of small craft shops and factories by
industrial titans like U.S. Steel.
Far from celebrating small businesses as the laboratories of innovation,
Schumpeter argued that a major incentive for private-sector innovation
was the prospect that a business could obtain a monopoly or
near-monopoly position on the basis of inventions and be assured that a
stream of assured profits would repay its investment. Schumpeter
believed that in modern industrial capitalism, which he called
"trustified capitalism," the solitary inventor like Alexander Graham
Bell or the young Thomas Edison had been replaced by the corporate
laboratory like mid-century Bell Labs, which existed only because AT&T
was a monopoly. Undercapitalized firms in a competitive market have no
money to invest in basic R&D, and the few firms with deep pockets have
little incentive to bring about technological breakthroughs that will be
shared by their competitors. Schumpeter concluded that the large
corporation in an imperfectly competitive market is "the most powerful
engine" of economic progress: "In this respect, perfect competition is
not only impossible but inferior, and has no title to being set up as a
model of ideal efficiency. It is hence a mistake to base the theory of
government regulation of industry on the principle that big business
should be made to work as the respective industry would work in perfect
Schumpeter's argument that firm size drives innovation received powerful
support in 2002, when one of America's leading economists, William
Baumol, published The Free-Market Innovation Machine. Baumol rejected
the idea that economic progress is driven by the competition of firms to
lower prices. Arguing that innovation has replaced price as the critical
arena of competition, Baumol argued that most important innovations
originate from large, oligopolistic firms, not from individual
entrepreneurs or small businesses. According to Baumol, the sharing of
technology among firms in imperfectly competitive markets can benefit
innovation and economic growth.
Most of the major breakthroughs on which the modern technological
revolution depends took place before the era of deregulation-and often
in the labs of monopolistic corporations like IBM, AT&T, and Xerox. "The
approach to R&D is changing because long-term research was a luxury only
a monopoly could afford," The Economist observed in 2007. AT&T's Bell
Labs invented the transistor and the laser, while Xerox's Palo Alto
Research Center (PARC) devised the mouse and the graphic user interface.
In today's more competitive market, in which a few vertically integrated
firms have given way to outsourced suppliers and kaleidoscopic
alliances, the shrunken remnant of Bell Labs focuses on product
development for France's Alcatel-Lucent. Just as Schumpeter and Baumol
predicted, corporate R&D has shifted from basic research to product
development and marketing research. Many cost-conscious American
companies today try to profit from technological breakthroughs in R&D
carried out by the federal government, universities, and foreign
research labs or foreign corporate allies. Public-sector R & D, more
driven by lobbies and political fashions, has not made up for this
Utility Capitalism and Unionism
Innovation is not the only reason why progressives should reconsider the
poor reputation of New Deal era regulation. Regulation is good for
Several historians argue that New Deal cartelization policies in the
late 1930s were necessary for the successful unionization efforts of the
mid-twentieth century. In his essay "The Other New Deal and Labor,"
Daniel Nelson notes that price-and-entry regulations provided regulated
firms with a premium they could share with organized labor: "The
result...was an upsurge in union organizing and coordinated collective
bargaining." Conversely, the disastrous collapse of the union share of
the U.S. workforce in the late 1970s and 1980s followed, and in large
part was caused by, the deregulation of heavily unionized industries.
On the basis of a similar analysis, Michael Wachter of the University of
Pennsylvania Law School predicts that unions are doomed as long as
consumer sovereignty and maximum competition guides U.S. economic
policies: "Unions still bargain for a fair wage, but antitrust or
industrial regulation no longer provides for above-competitive prices to
pay those above-market wages." He predicts that "no change in labor law
or labor market policies, absent changes in overall industrial policy,
will allow unions to become the mass movement they were in 1945." This
is a warning that should be heeded by progressives who think that
measures like the Employee Free Choice Act (EFCA) by themselves can
restore a high level of unionization in the private sector.
The neoliberal alternative to New Deal-style regulated utility
capitalism, based on internal subsidies and slightly higher prices for
consumers, has been a progressive version of deregulated capitalism in
which taxpayers will provide the equivalent of the utility model's
hidden subsidies. If New Deal liberalism preferred regulation to
redistribution, Democratic neoliberalism has preferred the opposite. But
the discussion is academic. There is simply no chance that the American
political system will countenance transfers from the rich to the rest on
the scale that the deregulate-and-subsidize school proposes.
Utility Capitalism Today
If utility capitalism in the New Deal made sense in the mid-twentieth
century, what are the implications in the twenty-first? Rejecting the
conventional wisdom about deregulation does not mean that we should rush
to impose New Deal-style price and entry controls on all industries.
However, we should ask ourselves whether there are particular sectors of
the economy in which versions of utility capitalism make sense. Three
immediately come to mind: the banking sector, the capital-intensive
traded goods sector, and the commercial infrastructure sector.
Nowhere has post-New Deal deregulation been more discredited than in the
realm of national and international finance. Banking deregulation
produced first the S&L crisis and then contributed to the subprime
mortgage crisis and the spread of toxic assets throughout the American
and global financial system. There is growing support for a return to
the kind of separation of ordinary, boring retail banking from
high-octane speculation that was created by the New Deal with the
Glass-Steagall Act and dismantled during the Clinton years.
In February 2009, former Federal Reserve Chairman Paul Volcker argued
that "we ought to have some very large institutions...whose primary
purpose is a kind of fiduciary responsibility to service consumers,
individuals, businesses and governments by providing outlets for their
money and by providing credit." In return for being too big to fail, a
de facto cartel of a few giant commercial banks would be tightly
regulated and forced to be conservative. The argument that this would
reduce financial innovation is an argument in favor of regulated
oligopoly, not against it. Unnecessary financial innovation is what
produced the crisis. The New Dealers, like the progressives and
populists before them, thought of credit as a public service. We should
do the same.
Then there is the traded goods sector, dominated by heavy industries
like automobile, aerospace, and energy. In most industrial nations, the
traded sector tends to be dominated by one or a few state-owned
enterprises or private "national champions" that are formally or
informally supported by the state, like Airbus or the major Japanese car
companies. National champions may be incompatible with competition in
domestic markets, but because the market for manufactured goods is
global, there can be vigorous competition in a state-capitalist world.
It just happens to be competition among national companies.
Now that Obama is in effect the CEO of the U.S. automobile industry, he
should consider whether the country needs three national champions in
the car-making sector, or two, or just one. Likewise, in aerospace and
energy, the federal government can use regulations, subsidies, and other
policies to encourage the formation and survival of American-controlled
firms that have the resources to compete with the state-supported firms
of Europe and Asia, engage in innovative R&D, and take advantage of
increasing returns to scale in production. The government should also
consider policies to promote the "onshoring" of IT manufacturing, much
of which has been outsourced by U.S. corporations, whose goal is to
maximize short-term shareholder value.
Finally, there are the basic infrastructural industries on which other
businesses depend, from telecommunications to transportation and power
distribution. The deregulation of these industries in recent decades was
supposed to lower prices, and sometimes it did. But it also produced
worsening wages, benefits, and working conditions for industry employees
and volatile price swings and major blackouts in deregulated electricity
markets in California.
The result of airline deregulation has been a chronically sick industry.
Other than Southwest, few new entrants to the market have survived the
Darwinian struggle. No airline went bankrupt in the era of regulation;
since deregulation, more than 160 airlines have gone out of business,
including Pan Am, TWA, Braniff, and Eastern. Many cities lack service,
and quality has plummeted. Compared with state-supported rivals in
Europe, Asia, and the Middle East, America's air carriers, once the envy
of the world, are crowded, unpleasant, and unpredictably priced. The
increase in the number of air travelers might be counted as a benefit of
deregulation, but this assumes that there would not have been similar
growth if the regulated system had been modified rather than abolished.
In 2008, Robert Crandall, the former American Airlines chief executive,
declared, "Experience has established that market forces alone cannot
and will not produce a satisfactory airline industry."
Utility Capitalism in the Service Sector
Utility capitalism might be appropriate in other economic sectors as
well. Three out of four Americans work in the service sector. In the
first half of this decade, most job growth took place in four domestic,
nontraded services: education and health, state and local government,
leisure and hospitality, and finance. According to the Labor
Department's projections for 2004-2014, the top ten occupations in which
there will be the greatest job growth are likewise largely nontraded
domestic jobs, such as retail sales and registered nursing.
The majority of these occupations require no college degree, only a high
school diploma and some on-the-job training. If America is once again to
become a middle-class society, it will not be because nursing aides and
janitors go to college and become software writers, nor will it be
because of an exodus into a new, government-subsidized "green economy
sector." America will be a middle-class nation again only when these
familiar service sector jobs are themselves upgraded-when nursing aides
and janitors are paid more and given benefits. That is unlikely to
happen as long as these service industries contain many small,
struggling firms instead of a few stable and prosperous corporations.
Can low-wage, low-productivity service-sector industries be turned into
regulated utilities or cartelized? Any effort in this direction would
begin with one immense advantage: These domestic service industries
cannot be outsourced. Nor, for the foreseeable future, will automation
eliminate the need for human labor.
The lesson of the era of New Deal regulation is that it is easier to
unionize a few large, cartelized firms that can pass on costs to
consumers than it is to unionize great numbers of fragile,
undercapitalized firms that cannot pay higher wages without going under.
And if conservatives and moderates block laws like the Employee Free
Choice Act that make unionization easier, the default option for
progressives will be to mandate that all employers pay benefits as well
as a much higher minimum wage. The fact that such unfunded regulatory
mandates would drive many small service-sector enterprises out of
business might be a blessing, not a curse. After all, what is the point
of celebrating job creation by small business if the jobs are awful and
unstable? While small businesses play an important role in some parts of
the economy, there is no reason to think that small is beautiful when it
comes to decrepit, undercapitalized nursing homes, fly-by-night child
care centers, and retailers that pay poverty wages.
It is true that in a second age of American utility capitalism, as in
the first, the costs of providing above-market wages and sometimes other
public goods like universal service and cross-subsidies would be passed
on to consumers. Far from being a defect, this kind of internal
cross-subsidization, hidden in prices, is more politically sustainable
than highly visible after-tax redistribution. Progressives should wonder
whether the cost to consumers of slightly above-market wages in
regulated, monopolistic, or oligopolistic service industries would not
be preferable to the cost to taxpayers of welfare subsidies and trips to
the emergency room for a growing number of underpaid and uninsured
The case for utility capitalism should not be mistaken for the theory of
Milton Friedman, Robert Bork, and other economic thinkers of the
conservative Chicago School that most monopolies and oligopolies are
harmless and should be exempt from antitrust prosecution. On the
contrary, the premise of utility capitalism is that regulation is needed
to make monopolies and oligopolies safe for democracy.
It is not my purpose to suggest replacing the market-knows-best theory
that inspired deregulation with another simplistic one-size-fits-all
model. While the government should encourage utility capitalism in some
sectors, in others, like many consumer goods industries, promoting
competition may be the best policy. Regulation and antitrust are
complementary tools and each is appropriate in particular situations.
The prudent, partial reregulation of the economy would not produce
utopia any more than deregulation did. There would be trade-offs among
conflicting values. But at least policymakers would once again
acknowledge that minimizing prices to consumers in the short run should
be only one of the goals of economic policy, along with encouraging
private technological innovation and private-sector unionization.
Whether the free-market ideologues of the right like it or not, we are
always going to have some form of corporatism in this country. The only
question is whether it will be bail-out corporatism or utility