Correction to This Article
This column misidentified the Jim Manzi who authored the lead article in the winter edition of the magazine National Affairs. It was Jim Manzi, the executive chairman of Applied Predictive Technologies in Arlington, Va., not Jim Manzi, the former chief executive of Lotus Development Corp. and chairman of ThermoFisher.
Big business vs. big government: An age-old balancing act

By Steven Pearlstein
Wednesday, December 30, 2009; A08

If you step back and look at the big economic policy issues-- health care, financial regulation, immigration, education reform, the budget deficit -- they appear to boil down to one fundamental question: What is the best trade-off between fairness, stability and social cohesion on the one hand and disruptive and growth-inducing innovation on the other?

At its most simplistic level, this debate plays itself out as the choice between big government and small government, between regulation and deregulation, between European-style socialism and Anglo-American free-market capitalism. The one side takes its intellectual roots from Adam Smith, Karl Marx, John Maynard Keynes and the recently departed Paul Samuelson, the other from Adam Smith, Friedrich von Hayek, Joseph Schumpeter and Milton Friedman.

Over the years, the center of political gravity has swung toward one camp or the other in response to economic crises brought on by overdoing things in one direction. The pendulum has now begun to swing back from Reagan Republicanism to some still-evolving form of Obama Democracy.

Jim Manzi provides a perceptive analysis of these trade-offs in the latest issue of National Affairs, a new conservative journal published here in Washington. Although best known as a corporate executive and high-tech investor, Manzi actually began his career in a newsroom, and he hasn't lost his knack for clear writing and critical thinking.

"We are between a rock and a hard place," he writes. "If we reverse the market-based reforms that have allowed us to prosper, we will cede global economic share; but if we let inequality and its underlying causes grow unchecked, we will hollow out the middle class -- threatening social cohesion, and eventually surrendering our international position anyway. This, and not some 'world-is-flat' happy talk, is what the challenge of globalization means for America."

Like many in the business community, Manzi is concerned that the pendulum is about to swing back too far, that the United States is on the verge of turning itself into France. In truth, those fears are as overblown as they are self-serving, and have less to do with reality than with the abiding disrespect the business community has for the political process.

But the debate, it seems to me, needs to go beyond simply determining where the pendulum should come to rest. For equally important is how effective the two sectors are in actually delivering all that social justice and growth-inducing innovation.

Americans understand that free markets are the best vehicle for generating innovative products and ever more efficient ways of producing them. But recent experience also reminds that innovation and the competitive dynamic are not always what they are cracked up to be.

When investors engage in herd behavior and deploy scarce capital merely to bid up the price of real estate or financial assets, that does nothing to improve economic output or efficiency.

The nation's stock of human capital is not increased when people compete for admission to elite universities and graduate programs by spending ever-increasing amounts of money on consultants and test-preparation courses, or when the schools themselves raise tuitions to finance a self-destructive race to lure the best students, the best athletes and the best teachers.

What good is competition if it drives corporate executives to knowingly engage in increasingly risky behavior simply to boost short-term profits and stock prices even at the expense of long-term value creation?

And what good is innovation that is used to snooker consumers, mislead investors or subvert sensible regulation?

The question is not simply whether innovation will be "stifled," as the business community likes to suggest, but whether those innovations serve a larger social purpose.

At the same time, just because markets have recently failed us does not excuse giving a free pass to those who argue for tougher regulation or bigger government.

History is replete with examples of well-intentioned regulation that turned out to be easily evaded or resulted in unintended and unwanted consequences. And too much of what passes for vital public expenditure turns out to be nothing more than special interest rent-seeking and economy-distorting subsidies.

Despite repeated efforts at reform, government accountability remains an oxymoron. Simply put, public employees are paid too much just for showing up and too little for outperforming their peers or our expectations.

And while it is now beyond dispute that labor markets today are generating incomes that are increasingly unequal, governments have found it remarkably difficult to come up with cost-effective programs that successfully offset those effects.

"An America that wants to keep its global edge cannot neglect the necessity of innovation and growth, any more than it can ignore the necessity of social cohesion and stability," Manzi writes at the conclusion of his essay. The political challenge for the next decade is not only to strike the proper balance between them but to perfect the public and private institutions that can deliver on those promises.

Happy New Year.

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