Vision Quest

Listen a little closer, however, and you may pick up a subtle but important difference in the Shrumian phraseology this time. Unlike past Democratic hopefuls, Kerry more pointedly distinguishes who he thinks the bad guys are: not corporations or the rich per se, but “lobbyists,” “the privileged,” and others who “cut corners and break laws and get special benefits, while those who do what’s right get the short end of the stick.” This terminological difference is very good news for anyone who wishes the senator well in November. Kerry is signaling one of the real problems before this country: the increasing power of Washington’s crony capitalists. As this magazine has pointed out (see “Welcome to the Machine” by Nicholas Confessore, July/August 2003), the K Street lobbying community, which once played (and corrupted) both sides of the political aisle, has in the last few years formed a virtual phalanx around the GOP and George W. Bush, and the lobbyists’ wish lists form the essence of that party’s agenda. Bush has been perfectly open about his association with these groups, and the mischief that at least some of them have caused is clear to the vast majority of the public. Kerry needs only mention “Halliburton” or “Enron” to make the point.

Kerry’s populism, then, is not the kind likely to alienate middle-class voters. Far from it. Rather, his real Achilles’ heel is his lack of a theory of how he would create jobs. He talks a lot about how to preserve existing jobs–for instance, by taking away tax breaks that enable “Benedict Arnold” corporations to outsource work overseas. There’s nothing really wrong with such ideas. But the emphasis on them boxes him in. Too much talk about protecting existing jobs, and you begin to sound like a protectionist whose policies would actually reduce overall employment.

By contrast, George W. Bush does have a theory of how to create jobs: Cut taxes to put more money in people’s pockets, so they’ll spend it and create demand for new hires. Yes, it’s a dumb theory. Yes, it’s been tried twice in the last three years and demonstrably failed. But that does not completely subtract from its surface plausibility. And anyway, when you’re running for office, even a dumb theory is better than no theory at all.

It is worth noting that the last Democrat who took on a sitting president named Bush had a theory for how he was going to expand employment. During the 1992 campaign, Bill Clinton argued that for the previous 12 years, the Republicans had allowed the Japanese to pummel American industry. If he became president, Clinton vowed, he would use trade agreements to force open other countries’ markets for American goods, while helping American workers obtain the extra training they needed to fill those high-paying export-driven positions. Soon after being elected, Clinton added another component to the theory: that cutting the federal deficit would lower interest rates, which would raise incomes, spur investment, and lead to the creation of jobs. Whether or not you credit these policies with producing any of the 22 million jobs created on Clinton’s watch, there’s no denying the fact that he had a theory, and that voters understood it.

If he hopes to win, John Kerry needs a theory, too. Though Clinton’s may still have some merit, these are different times. Bush’s doesn’t work, and, anyway, it’s taken. Fortunately, Kerry’s own populist rhetoric points directly to an untapped but promising theory of job creation: take on the Washington lobbyists.

President Bush and his defenders argue that the administration can’t be blamed for the decline in employment and the slow pace of job creation over the last three years. And there’s something to that. It was inevitable that the end of an historic boom should be marked by a contraction of the labor market. Presidents have only so many levers they can pull to stimulate growth and employment, and the Bush administration has pulled all the obvious ones. It has vastly increased government spending, largely in defense and homeland security, jawboned down the value of the dollar to help American exports, supported Alan Greenspan’s low interest rates policy, and pushed through two massive rounds of tax cuts. Democratic critics point out that the tax and spending initiatives could have been enacted in such a way as to produce more jobs. Larger breaks for middle-class families rather than the wealthy might have been more stimulatory and less detrimental to the nation’s long-term fiscal health. The billions spent in Iraq might have gone to keep state governments from purging their payrolls. These are valid points; had we followed the Democrats’ advice, there’s a good argument that we’d be in a substantially better economic position now. But, we’d probably still be facing a dearth of jobs.

In the long run, what creates new work opportunities is innovation: new technologies, new products and services, new designs, new markets, new ways of reaching customers. There are many ways in which government can enhance or retard the economy’s ability to innovate. Neither party is focused on this right now, but it’s really what the campaign debate on the economy should be about.

Traditionally, government has done the most to stimulate innovation when it has used its power to open up new economic opportunities and made it easier for individuals and firms to take advantage of them. Probably the greatest job creation program in the history of the Republic was Jefferson’s Louisiana Purchase: Government used its unique buying power to acquire new land, on which individual frontier families carved out farms. But there are many other examples. Lincoln’s creation of the land-grant college system provided farmers with productivity-enhancing techniques to increase their yields. The GI Bill gave working-class veterans the education they needed to enter the emerging knowledge economy. The expansion of the suburban economy–from single-family home subdivisions to office parks to minivans to fast-food restaurants–was made possible by the creation of the interstate-highway system. The Web economy owes its very existence to the Defense Department’s creation of the Internet.

But government power can also be used to dampen innovation, most often when interest groups prevail upon lawmakers to give them special protections. Unions famously act this way–by insisting, for instance, on complex work rules that limit management’s ability to impose efficiencies. But industry trade groups can play the game, too. For decades, trucking company lobbies defended complex federal regulations that set hauling prices and routes and limited competition. After those regulations were eliminated, beginning in 1980, not only did transportation prices plummet and service improve, but trucking-dependent manufacturing and retail companies were able to put in place “just-in-time” inventory systems that revolutionized their industries.

Today, certain key sectors of the economy ought to be producing millions of jobs but are not, for the same reason: Their Washington lobbies are protecting them from the need to innovate. One such area is broadband. For the last half-dozen years, telecommunications analysts have been predicting that once a sufficient portion of American households get high-speed Internet connections, entire new modes of work will be born to take advantage of the fantastic new opportunities afforded by the bandwidth. Customers will be able to download movies on demand, play video games online, make long-distance phone calls virtually for free. But this access is spreading much more slowly than anyone expected, especially when compared with other countries. Just four years ago, the United States had the world’s third highest rate of broadband penetration. Today, we are tenth. That’s a rather depressing figure for the nation which invented the Internet, and a terrible one for our economy, since it means not only that we are deprived of new jobs now, but also that our competitors are getting a jump on creating the industries that will produce jobs in the future.

How did this happen? The Clinton administration was almost maniacally focused on spreading the Internet, succeeding, among other achievements, in getting most of the nation’s schools and libraries wired. It also passed legislation in 1996 to spur the spread of the Internet by forcing the regional phone companies to compete for customers with independent firms that were given the right to lease the phone companies’ own lines in order to deliver high-speed service. This regulatory scheme worked for a few years. But the Baby Bells soon became adept at blocking competitors’ access to their lines. (See “Disconnect”by Karen Kornbluh, October 2001.) And when the competitors complained to the federal government, they did not get much sympathy from the newly-elected Bush administration. Instead, its freshly-inserted FCC chairman, Michael Powell, freed the Baby Bells (which are, surprise, surprise, major GOP contributors) from having to share their lines at all. Powell argued that this would give them more incentive to invest in broadband, and that there was sufficient competition from cable companies, which also sell broadband access. Yet broadband prices have not gone down, and America continues to fall behind the rest of the world.

Another sector of the economy that has been producing innovation and jobs at levels seemingly far below its potential is medicine–particularly the pharmaceutical industry and biotech, which just a few years ago seemed poised to take off. Billions of dollars of taxpayer-funded research had opened up new vistas for drug companies to explore (most prominently the decoding of the human genome). Meanwhile, Congress loosened some FDA testing requirements, thus easing industry’s ability to bring important new drugs to market quickly. Yet the number of truly innovative new drugs approved by the FDA annually not only failed to rise, but has fallen precipitously since the mid-1990s.

There’s a running debate as to why this is so. Scientists point out that translating the revolutionary new knowledge coming out of university labs about the molecular structure of disease into specific drug therapies has been harder than expected–a fact which may indeed explain why the number of new therapies hasn’t skyrocketed. But why has the number, in fact, fallen? Industry’s explanation is that the “low-hanging fruit” has already been picked: We’ve found most of the simple chemical compounds that interact with the enzymes and molecules we know the most about.

There are reasons to be skeptical. Industries innovate not so much because they want to, but because they must to survive. The pharmaceutical industry, however, has figured out ways to profit without big new discoveries, thanks to the innovations of their Washington lobbyists. First, the industry’s trade groups convinced the FDA in the late 1990s to ease regulations on advertising drugs directly to the public. The result: the explosion of drug company ads you see on TV and in magazines. This has done wonders to create new demand for existing drugs. But it’s also diverted billions of dollars into industry marketing budgets, leaving less for research. Second, the companies have mined loopholes in federal patent regulations. They’ve slightly tweaked existing drug formulas (not necessarily producing any superior medicinal effects) to gain patent extensions on existing drugs or repatent them as “new.” Indeed, the percentage of these so-called “me-too” drugs has increased, while the percentage of legitimately new medications has gone down.

But perhaps the biggest hindrance to pharmaceutical innovation is the explosion of patents at the “upstream” end of the research process. In 1980, Congress passed the Bayh-Dole Act, making it much easier for universities to patent discoveries arising out of their labs, the better to get those discoveries to market. The act has done much good. The universities have fattened their budgets by licensing such discoveries exclusively to pharmaceutical and biotech firms, which in turn have used the licenses to attract investment capital. The problem is that many of the patented discoveries–from new DNA sequences to genetically-engineered lab animals–are now tools that other scientists require to do their own basic research. It’s extremely costly and cumbersome for scientists to apply for and acquire permissions to work with the several dozen patented discoveries that may be required for a given course of research. Leading scientists, such as former National Institutes of Health chief Harold Varmus, fear that the proliferation of “upstream” patents is hindering innovation.

Biomedicine and high-speed Internet are not your average industries; they’re crucial choke points on the road to prosperity. America has a significant competitive advantage in the biotech area. Broadband can make possible the creation of whole new high-tech industries. Anything that threatens the vitality of these fields of commerce threatens the country’s economic future.

Of course, no one can really predict an economy’s path. If the past is any guide, most new jobs will come from businesses and industries we haven’t imagined, at the hands of entrepreneurs of whom no one has yet heard. Somewhere out there, toiling away in a university lab or clerking at a Dress Barn, is the next Bill Gates or Calvin Klein. Government can’t pick these people out in advance. But it can create conditions that make it more or less likely that they will take the entrepreneurial plunge.

Politicians who talk about helping entrepreneurs usually focus on easing regulations or reducing the cost of capital. These are not unimportant considerations. But anyone who has contemplated leaving a job to start a new venture knows that there is perhaps no greater obstacle than the fear of depriving one’s family of health insurance.

Virtually all of our economic competitors provide universal health insurance, so their citizens don’t have to face this dilemma. Americans do, thanks to the concerted efforts of Washington interest groups which over the years have derailed every legislative attempt to provide universal coverage–remember the “Harry and Louise” ads paid for by the insurance industry that helped kill Bill Clinton’s health reform legislation in 1995?

We’ve managed to maintain a dynamic economy for many years despite this coverage deficit, but that might not be so easy in the future. Skyrocketing health-care costs are already a serious disincentive not only for companies to hire workers, but also for employees to quit in order to try something new. Policies in Washington tend to stem from either the party in power’s siding with a favored trade group or, just as often, an acceptable deal being struck between competing interests. This often leads to bad economic policy because, almost by definition, the most economically crucial interests seldom have a seat at the table. Most new jobs and growth, after all, come from fresh enterprises and emerging industries that, for the most part, haven’t gotten around to opening fancy government affairs shops on K Street.

This natural Beltway tendency to bow to established interests can sometimes be overcome. But it almost always takes a president with a vision of where the economy can and should go, and a willingness to crack some heads to get there.

John Kerry shows signs of having such a vision, at least in one area: the environment. He argues passionately and persuasively that stricter environmental laws, far from being job killers as industry groups say, can spur new, cleaner technologies–more fuel-efficient cars, for instance–that our companies can sell to increasingly eco-friendly foreign markets, creating jobs in the United States.

But Kerry needs to expand his range. He should call for accelerating the spread of high-speed Internet by forcing more competition among existing players. He’ll also need to clear a path for new technologies to enter the field. The most promising way to spread broadband quickly is through some version of the wireless technology that now allows yuppies sitting at airports and coffee shops to surf the web on their laptops without plugging into a phone line. But for wireless broadband to cover the whole nation, government will have to free up some of the high-quality, publicly-owned spectrum that TV broadcasters are currently sitting on, aren’t using and don’t need. The broadcasters won’t give up that spectrum without a fight. Nor will phone and cable lobbyists welcome the new competition.

Ultimately, neither wireless, nor phone lines, nor any of the other currently available means of delivering broadband are as promising as fiber-optic cables, which can transmit many times more data. Wiring every home and business to fiber-optics could spark an economic renaissance; it could be the 21st century equivalent of the Louisiana Purchase or the interstate highway system. Which is to say: It will take vision, money, and political will–especially to face down those industry groups which prefer to keep things as they are.

Similarly, the pharmaceutical and bio-tech industries need to be stripped of the regulatory privileges that have allow them to prosper without innovating. A top-to-bottom reform of patent laws could go a long way towards restoring the jobs-producing ability of this sector.

We might also consider the idea suggested by, among others, Shannon Brownlee of the New America Foundation that the federal government run its own clinical trials to test whether “me-too” drugs for which companies are seeking patents truly work better than older versions of those drugs.

Finally, the time may have come for a final showdown with the doctors, insurance companies, and other groups that have blocked universal health care. It’s a moral outrage that millions of Americans lack health insurance. But it is just as outrageous that tens of millions of Americans are stuck in jobs they consider unrewarding–whether sweeping floors or debugging code–when, but for the fear of losing their health coverage, they could be following their dreams and taking a shot at making themselves and the country richer. One can already sense that there’s something tectonic about the upcoming presidential election. In foreign affairs, the candidates are engaged in a fundamental debate about how America will use its power in the world. But the economic stakes are just as great. The fragile jobless recovery; the outsourcing of the service industry; the resurgence of our European competitors; the overhang of debt: These are troubling indications that America’s economic preeminence is not necessarily secure.

As with so much else, Washington is a big part of both the problem and the solution. John Kerry’s been in D.C. a long time. He’s now adopting the right rhetoric. What’s hard to tell is whether that rhetoric is just a means of connecting with voters, or the sign of a deeper vision.

Paul Glastris

Paul Glastris is the editor in chief of the Washington Monthly.