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.
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