For the Progressives and New Dealers, who accepted capitalism but abhorred its excesses, government regulation of business was the answer to Marx. It resolved the contradiction between America’s concentrated economic structure and its democratic political faith. Through regulation, the liberals believed, the people retained sovereignty over the interests. As Arthur M. Schlesinger, Jr., put it in a book reissued as recently as 1962,
The capitalist state…far from being the helpless instrument of the possessing class, has become the means by which other groups in society have redressed the balance of social power against those whom Hamilton called the “rich and the well-born….”1
But this optimism is now a thing of the past. Thanks to Ralph Nader and his followers, it has been replaced by a new orthodoxy, a populist vision of government as the captive of corporate power—in Nader’s words, a “bustling bazaar of accounts receivable” for industry and commerce.2
The new populism comes in two versions. What could be called the “soft” view pictures the regulatory state, like the Avignon papacy, as a noble institution fallen into unworthy hands. High-minded at their outset, the federal agencies are said to have been subsequently corrupted and turned aside from the “public interest” they were designed to serve. To get them back on the track, all we need are a liberal president and statutory reform—these will give the agencies more power or create new bureaucracies to watch the old ones. Much in this spirit, the old New Dealer Rexford G. Tugwell proposed as part of his revised US constitution a fourth branch of government—the regulatory—to be headed by a Regulator who would manage industry in behalf of the public.
A different group of critics offers a systematic, “hard” diagnosis of the failure of regulation. They argue that American industry will inevitably govern the regulators rather than the other way around. One source of this criticism has been the conservative economists associated with the “Chicago School,” who combine free market ideology with right-wing politics. But in recent years the Chicago economists have been joined by equally harsh critics on the left. Inspired by Gabriel Kolko’s study of the Populist-Progressive era of reform,3 revisionist scholars have discredited the conventional wisdom that regulation came because the public demanded it. Often in its very conception regulation has been an instrument of the regulated; today’s corruption flows from yesterday’s original sin.
A telling document on this point is a letter written in 1894 by Richard Olney, who had just been appointed Attorney General by President Cleveland, to President Perkins of the Chicago, Burlington and Quincy Railroad. Written to discourage Perkins from lobbying to dismantle the new Interstate Commerce Commission, Olney’s letter reads like the inter-office communications of the current Washington office of ITT. Olney counseled against doing away with the ICC, because:
My impression would be that, looking at the matter from a railroad point of view exclusively, [abolition of the ICC] would not be a wise thing to undertake…. The attempt would not be likely to succeed; if it did not succeed, and were made on the ground of the inefficiency and uselessness of the Commission, the result would very probably be giving it the power that it now lacks.
The Commission, as its functions have now been limited by the courts, is, or can be made, of great use to the railroads. It satisfies the popular clamor for a government supervision of railroads, at the same time that the supervision is almost entirely nominal. Furthermore, the older such a Commission gets to be, the more inclined it will be to take the business and railroad view of things. It becomes a sort of barrier between the business corporations and the people and a sort of protection against hasty and crude legislation hostile to railroad interests…. The part of wisdom is not to destroy the Commission but to utilize it.
The revisionists have produced other evidence to justify their conspiracy theory of the birth of business regulation. Both Kolko and the MIT economist Paul MacAvoy have shown that the railroads in the late nineteenth century were plagued by fierce competition, rate wars, and declining profits; that the shrewder railroad magnates favored regulation as a means of establishing a stable cartel system; and that until regulation was firmly established, the railroads’ private cartels could not survive since member companies continually chiseled through secret price cuts and rebates.4
Other industries shared the railroads’ view of regulation. Around the turn of the century, Standard Oil’s John D. Rockefeller and US Steel’s Elbert Gary proposed comprehensive federal regulation of all major industries. Theodore Vail of AT&T pleaded for FCC regulation when the original Bell patents expired and his company faced tough competition. Later in this century, the trucking, maritime, airline, oil, dairy, and other industries all turned to government when the competition got rough. They built a system of regulation which protects existing producers, excludes new entrepreneurs, fixes prices, and extorts from customers tens of billions of dollars a year.
For decades the shenanigans of the regulatory agencies went virtually unremarked outside academic journals. But recently anxiety about “corporate power” is back in public view, thanks to GM’s snoopers, ITT’s shredders, and the events of the Sixties, including the rising popularity of “ecology” and “consumer” issues among the upper middle class. The shift in opinion has been remarkable. In 1966, Louis Harris reported that 58 percent of Americans felt “a great deal of confidence” in the nation’s major companies; in 1972, only 29 percent did. Congress, in response, enacted a great many consumer and environmental protection laws. Indeed, this has been one of the most productive epochs in the history of American economic reform so far as the amount of new legislation is concerned; Nader himself already rivals progressive presidents Roosevelt and Wilson as a Stakhanovite of the statute book.
But the question remains whether anything lasting will come of it. Is Nader’s consumer movement guided by a realistic vision of change, or simply by the discredited rhetoric of past reform generations? Won’t Nader’s new agencies recapitulate the dishonor of the old?
The record so far is mixed. Nader is responsible for such genuine achievements as the aggressive highway safety agency, and his attacks have revived the Federal Trade Commission. But many of his regulatory creations have already proved weak in operation—such as his gas pipeline safety, meat and poultry inspection, and occupational health and safety laws—and some have even turned out to be barriers against effective public redress rather than instruments of reform.
Nader has invested his hopes in grandiose regulatory schemes much resembling the daydreams of the old Progressives and New Dealers. He has mustered his allies on Capitol Hill for a new “Independent” Consumer Protection Agency. The job of this new bureaucracy would be to intervene in the affairs of all the old agencies as a spokesman for consumer interests. Nader has called this proposal “the most important consumer legislation ever considered by the Congress,” but the odds against this new agency are heavy. No president will be anxious to appoint tough, independent commissioners to an agency whose job it is to expose the shortcomings of other presidential appointees.
Another Nader enthusiasm, not yet proposed in legislation, is the idea of creating a Federal Corporation Agency, to issue licenses to those on Fortune’s list of the 500 largest corporations and to revoke the licenses if the corporations misbehave. Evidently Nader believes that a federal agency that had the power to tell GM to shape up or shut down would use it, that it would not knuckle under to the pressure that now invites Nader raids on the existing agencies. But why should this particular flesh be incorruptible? In fact, a federal licensing agency was originally proposed by turn-of-the-century capitalists like Gary and Rockefeller, who thought it would be less expensive to work their wills on Congress and a federal bureaucracy than on forty-eight state legislatures.
Although these proposals are discouraging, other Nader undertakings show a more guarded and realistic view of the limits of regulatory reform, particularly two recent books by Nader’s group, The Monopoly Makers, edited by Mark J. Green, and Sowing thy Wind, by Harrison Wellford.
Green’s book is a detailed indictment of the regulatory operations of six agencies and two cabinet departments that direct over one-fifth of the private economy. The book describes activities of the federal government that promote monopoly—cartel-management by the transport regulation agencies; profligate creation of patents by the US Patent Office; the vast procurement operations of the Defense Department; the feeble efforts of the Federal Power Commission and the Federal Communications Commission to supervise the regional power monopolies and the national telephone monopoly.
These cases are familiar in a general way but are freshly outrageous in detail. The FCC, before heartland Republicans began to eye its potential for attacking the Eastern liberals, had been used by the big broadcasting companies to protect themselves from cable television competitors. The Civil Aeronautics Board is in the business of raising air fares—often 30 to 80 percent above competitive levels. The Department of Defense awards more than 70 percent of all prime contracts to the one hundred largest contractors, of which the twenty-five largest receive more than half the total awards, while five get more than 20 percent. The Department of Agriculture imposes bizarre size limitations on the diameter of tomatoes that can be marketed in the United States, because a semi-official committee of the Florida tomato industry wants to “cut out a lot of Mexican tomatoes and…eliminate our competition.”
These essays provide scant support for the idea that captive government agencies can be liberated for some noble mission they supposedly were once meant to serve. In most of the cases covered by the book, anti-consumer policies are the product not of bureaucratic decay but of legislative design. Before the special interests got to the regulators, they got to the legislators. “We were,” says the confidential assistant to the chairwoman of the Federal Maritime Commission, “created to grant exemption from the antitrust laws. That was and is our only reason for existence.” Sensibly, the authors have freed themselves from the traditional liberal compulsion to cure abuses of regulatory power by conferring even greater power on the relevant bureaucracy. Mark Green openly embraces the teachings of the Chicago conservatives. Agencies that serve no function other than managing cartels for their corporate clientele should, he says, simply be abolished.
Harrison Wellford’s book provides a more dramatic illustration of a sense of self-criticism among the Nader group. In part it describes one of Nader’s early accomplishments, the Wholesome Meat Act of 1967. Unlike the bureaucracies described by Green, this reform was not originally intended to help the industry and harm the public; it has only worked out that way.
The new law directs the federal Department of Agriculture to clean up state-inspected meat plants if the state agencies won’t do it themselves. But the department has refused either to force state agencies to meet federal standards or to supplant them. Beyond that, it has suggested that the “fact” that state departments now meet federal standards (a “fact” in the sense that the department has declined to find that they do not) means that state-inspected meat should be permitted into interstate commerce (which it has not been since Upton Sinclair’s The Jungle led to the first federal meat inspection law in 1906). The reformer’s Wholesome Meat legislation has now become their poison.
Wellford’s analysis helps to explain why liberal reformers tend to pass laws they cannot enforce. The original band—Nader, Congressman Neal Smith, Senator Walter Mondale, and an investigative reporter, Nick Kotz—were unable to exert any direct influence on Congress; the relevant committees and the Department of Agriculture took their orders more or less directly from the industry’s political organizations. The reformers had one useful constituency, the national press and television, through which they kept up a steady series of sensational attacks on filthy conditions in processing plants. At length, the head of the American Meat Institute grew worried that people would eat less meat if the bad publicity continued. He persuaded Swift and Armour, the industry giants, to support a compromise bill strong enough to quiet the reformers. Congress obliged.
On December 15, 1967, President Johnson signed the Meat Act into law with Upton Sinclair in a wheel chair by his side. The public was told that the problem was solved and the press quickly lost interest. The reformers thereby surrendered their only weapon, while the meat industry retained all its influence over Congress and USDA. The rest of the story was inevitable.
Can any reform measures escape the corporate grasp? No doubt the new law mandating disclosure of campaign contributions will help. Partly because his contribution was exposed, Robert Vesco was gypped: not even $250,000 could keep the government off his back. But power over entire sectors of government—the power of the Meat Institute at USDA and in Congress, of defense contractors at the Pentagon, of shipping companies and maritime unions at the Maritime Administration—is not secured simply by a few big pay-offs. Nor can these corporate fiefdoms be eliminated simply by legislating that organized bribery be conducted in public.
The problem can be illustrated by comparing the fate of Mr. Vesco with that of the big dairy cooperatives (which act as huge marketing corporations). In March, 1971, they exchanged $422,500 in contributions to the Nixon campaign for huge price support increases. As the head of one dairy cooperative wrote to a member:
On March 23, 1971, along with nine other dairy farmers, I sat in the Cabinet Room of the White House, across the table from the President of the United States, and heard him compliment the dairy-men on their marvelous work in the consolidating and unifying of our industry and our involvement in politics. He said, “You people are my friends, and I appreciate it.” Two days later an order came from the United States Department of Agriculture increasing the support price for milk to 85% of parity, which added from 500 to 700 million dollars to dairy farmers’ milk checks.
Early in the 1972 campaign the milk deal was made public by Jerry Landauer in the Wall Street Journal and by a lawsuit filed by William Dobrovir, a public interest lawyer, on Nader’s behalf. Their exposures are far more damaging than those on which the Vesco-Mitchell indictments were based. Yet one hears few protests from Congress—whose membership received $1.6 million in 1972 contributions from the dairy lobby. George McGovern, who like most farm-state Democrats has benefited from the dairy-men’s largesse, rarely mentioned the dairy scandal when he attacked the Nixon Administration’s offenses against the consumer.
Some “populist” leaders, most notably John Gardner, insist that entrenched corruption can be ended by public financing of political campaigns. This reform, their argument runs, will free politicians from their dependence on special interests. Obviously, Gardner is partly right—though even without financial leverage, a politically savvy industry like the dairy lobby would command decisive power through its extensive organizational network and its large constituency. As farm legislators know, every body needs milk.
But even if a guaranteed quadrennial income for presidential aspirants might free the White House from special interests, economic regulation will still not fulfill the liberal yearning to “redress the balance of social power.” Even the best-run agencies with the best intentions are continually dependent on the industries they regulate. Regulators must rely on the regulated simply for the basic information they need to make decisions. Once decisions are made, enforcement throughout an industry’s operations typically would overwhelm the agency’s staff if it were taken seriously—which it usually is not. The Environmental Protection Agency, for example, perhaps the most popular and vigorous regulator in Washington at the moment, has an impressive record of churning out new anti-pollution regulations. But a recent Wall Street Journal study concluded that the agency, with ten employees monitoring the entire annual output of all domestic and foreign car manufacturers, has virtually no idea whether its regulations are being obeyed:
As it stands now, the auto makers themselves, at great cost in time and money, are ultimately the chief enforcers of the standards they are supposed to meet, and federal regulators, hopelessly out-gunned, can do little more than monitor the industry’s self-regulation.5
It is a rare regulatory system that could not be described in the same way.
This is not to say that regulation should never be attempted, or that it is always futile. The lesson, rather, is that regulation can rarely be what liberals continue to expect—a means of dictating the terms on which business must function. At its best, it is mainly a platform for publicizing abuses in order to embarrass an industry into an accommodation with public grievances.
This implies that regulatory agencies should only be given “defensive” or policing responsibilities, such as the authority to outlaw deception, pollution, hazardous or unsafe practices, and to expose fraud and corruption. Even if neutralized by political pressure, an agency with such limited powers ordinarily won’t do more harm than good. But giving an agency broad “managerial” responsibility is a much more hazardous business. Agencies with sweeping powers over prices and entry into the market, like the ICC or the CAB, give industry far more power than it would have had without regulation. In the current state of American political life, no agency is likely to work unless its mission is exceptionally popular—and unless it can be achieved swiftly, before the network news goes on to other matters. It is uncomfortable to acknowledge these limits on reform, but it is pernicious to ignore them.
June 28, 1973
Arthur M. Schlesinger, Jr., The Vital Center (Houghton Mifflin), p. xii. ↩
Ralph Nader in Mintz and Cohen, America, Inc. (Dial, 1971), p. xi. ↩
G. Kolko, Railroads and Regulations: 1877-1916 (Princeton, 1965); G. Kolko, The Triumph of Conservatism (Free Press, 1963; Quadrangle, 1967). ↩
MacAvoy’s book is The Economic Effects of Regulation (MIT, 1965). ↩
Walter Mossberg and Charles Camp, “Sniffing the Tailpipe,” Wall Street Journal, June 6, 1972, p. 1. ↩