Alice M. Rivlin:
A Mainstream View on Capitalism

Edward J. Dodson

[Reprinted from GroundSwell, 2003]


What can we expect to hear about how the American system operates from someone who has spent a long career on the inside? One answer is provided in the commentary, "Challenges of modern capitalism," by Alice M. Rivlin., a New School University professor with a Ph.D. in economics from Radcliffe College (Harvard University) and service on the Board of Governors of the Federal Reserve System and as director of the White House Office of Management and Budget. Professor Rivlin's assessment appears in the Federal Reserve Bank of Boston quarterly, Regional Review (third quarter 2002).

Professor Rivlin begins by asking several important questions. First, "how to make free-market capitalism work better for everyone - not just the educated, the skilled, and the lucky." Second, "how to ensure a culture of integrity, one in which people who run companies, especially big ones, strive to merit the trust of investors and employees." And, third, "how to ensure that our enthusiasm for harnessing private motives to produce goods and services efficiently does not blind us to the need for public goods and to the benefits of communities working together toward shared goals."

Unfortunately, her experience (and, perhaps, her formal training in economics) comes through as a major limitation on her capacity to offer visionary responses to the questions she raises. Her assessment of what occurred during the decade of the 1990s indicates her acceptance of how data is interpreted for our consumption. "We experienced sustained growth, low unemployment, low inflation, and rising incomes," writes Professor Rivlin. U.S. producers awakened to the benefits of improved productivity in the face of intensified global competition, she adds, with government also responding with more economy-friendly fiscal and monetary policies. She makes no attempt to link these trends with the dramatic downturns experienced in Japan and other Asian economies (e.g., the huge sell-off of real estate by Asian investors and financial institutions or the resulting strengthening of the U.S. dollar against the currencies of more economically-troubled countries). Nor does she give even a passing thought to the "inflationary" role played by rising land prices - even that the median price of a house makes it more and more difficult for younger households and immigrants to achieve homeownership.

Professor Rivlin observes that the "pursuit of personal gain" is the engine that drives the world's "high-performance" economies. Yet, governments have a very difficult time "making public policy for a free-market economy." A central problem, she acknowledges, is that those who control economic and political power make every effort to "load costs onto others when they can and leave behind those unable to fend for themselves." Finding the right balance between the public and private interests "requires constantly adjusting incentives and regulations, just enough [my emphasis]…" We have learned important lessons during the last sixty years or so, observing the failures of the centralized command economies and experiencing the limitations of neo-Keynesian demand management, so-called "supply-side" economic policies and of monetarists' schemes to match the growth of monetary aggregates with growth of the economy (neither of which we know how to accurately measure). We know that the motivation of those who have benefited under long-standing socio-political arrangements and institutions is to work against change. The result in the U.S. has been a long history of public policy "tinkering" described by political scientists as a process of "disjointed incrementalism." Perhaps in some other speech or writing Professor Rivlin call upon her colleagues in the social science community to begin to work together to develop and promote holistic approaches to constructive change. Here she does not. Rather, she continues the tradition of advocating utilitarian measures thought to mitigate conditions.

To address the widening gap between the "haves" and the "have nots," she suggests a moderate increase in the minimum wage, an increase in the earned income tax credit, more food stamps, and higher housing vouchers. Most important, she believes, is to see that lower-income families get better access to health care. I do agree with her on one point: the last thing that needed to be done in the U.S. was to "reduce tax rates on the top quarter of the income distribution." What she would do, she does not say. One idea I have proposed elsewhere is to eliminate the Federal income tax for all persons earning up to 100 percent of the national median income. We could combine this progressive step with tax simplification as well by then eliminating all exemptions and deductions from the system but introduce a graduated rate structure that is not overly-confiscatory. For example, using $40,000 as the national median, incomes over $40,000 up to $75,000 would pay a 5% tax; incomes over $75,000 up to $150,000 would pay a 10% tax; incomes over $150,000 up to $300,000 would pay a 15% tax; incomes over $300,000 up to $1 million would pay a 20% tax; and incomes over $1 million would pay a 25% tax.

In response to her second challenge, the level of callousness and greed exhibited by corporate executives is hard to ignore. Clearly, the era of the "robber barons" never ended, and the extent to which elected and appointed officials have been willing participants is one of the great weaknesses of the American system. Professor Rivlin recognizes that the system is well out of balance and that government must intervene to adopt and enforce rules that create a level playing field for participants. She offers no ideas of how this can be accomplished but expresses optimism that investor demands have already produced concrete results.

Professor Rivlin assumes that most of the goods and services now delivered by the public sector could not be effectively (or, more effectively) delivered by a properly regulated and monitored private sector on a "fee or services" basis. At the same time, she reminds readers that government is greatly assisted by "private philanthropy and citizen volunteers." Most of us look to government to provide for the national defense, internal police protection and responses to regional and national disasters. While it may be true, as Professor Rivlin suggests, that "we are underfunding some of our most essential government services," the total bill we pay for government does not stand up to any rigorous benefit-cost analysis. An enormous amount of financial, natural and people resources are squandered with virtually no accountability. Yes, we can vote representatives out of office, but the two-party duopoly and the winner-take-all structure of our electoral system has virtually guaranteed the absence of any serious challenge to the status quo.

Turning her attention to schools, Professor Rivlin concludes a major problem is that "We don't pay enough to attract the most qualified and ingenuous teachers to that demanding profession that affects young people's live so directly." Here, there are clear alternatives the professional public policy analysts either downplay or totally ignore. The primary reason the U.S. has a publicly-funded and publicly-administered system of schools is the late nineteenth-century reaction to the arrival of millions of poor and illiterate immigrants from the Old World. Protection of the American system required that these immigrants be "Americanized" as quickly as possible. The only alternatives available to the working poor were those organized and operated by religious groups. Ironically, there are almost no schools owned by teaching professionals. Adopting public policies that would make it possible for teachers who share a common philosophy of education to come together to form a school - one that succeeded or failed on its ability to attract and retain students - has never been considered. Schools in the U.S. all operate with an elected or appointed board at the top of its hierarchical structure. These boards hire an administrator, who then hire teachers (who depend for their career longevity on collective bargaining or systems of tenure based on seniority). What if educational funding was directed to households based on financial need, as is generally the case with financial assistance for students studying at the college or university level? This type of tuition voucher system would permit parents to enroll their children in whatever school they thought best, and the general public would subsidize the expense up to some maximum based on household income.

Professor Rivlin's commentary ends with what amounts to a moral challenge to those who are among the "haves." She asks that "those who believe in free markets … figure out how to make work pay better for those who do the hardest jobs at the lowest wages; how to maintain integrity in our corporate culture; and how to use our productivity and wealth to ensure that we have top-quality public services as well as private ones." My sincere hope is that leaders such as Professor Rivlin can bring themselves to challenge the fundamental forms of entrenched privilege that cause the problems she hopes to help solve. More "disjointed incrementalism" will not bring us closer to a future without poverty.