Bipartisan Baloney

An industrial policy will mean wise regulation by independent experts? History tells otherwise.


Some of Gary Hart's "new ideas," like the former Democratic presidential candidate himself, seem on their way to becoming footnotes in American political history. But others, like the establishment of a "grand coalition" of economic and political leaders—representing both major political parties—who would unite to create greater governmental economic authority, are on display in this year's Democratic Party platform.

While many eyes are on vice-presidential nominee Geraldine Ferraro—the campaign season's big attention-getter—the party of the people is demanding appointment of an "economic cooperative council" and endorsing "industrial strategies to create a cooperative partnership of labor, capital and management." And the House Banking Committee already has endorsed legislation to create an economic council, which would include businessmen, labor leaders, and academicians.

The fashionable buzzword describing the notion of a single governmental economic authority had been, of course, "national industrial policy." Now, as the election campaigns gear up, Hart's "grand coalition" may become a front-runner among the linguistic candidates to popularize this latest version of central planning. But while the phrases in which the idea is couched may be of recent vintage, the idea itself, like many others in all the election-year rhetoric, is actually quite old—at least as old as Plato's Republic, with its ideal of "philosopher kings."

The reasons behind the popularity of such a Platonic concept in this notably Aristotelian age become more apparent if we compare the "grand coalition" idea not only to its predecessors among the ancient Greeks, but to its American ancestors, as well. After all, the United States Government Manual lists 57 such small-scale "grand coalitions"—bipartisan boards designed to oversee entire industries or activities and remove their particular attempts to pursue happiness from the supposedly dreary intervention of the populace and its elected representatives. These baby-grand coalitions are called "independent agencies."

Their charters vary widely and include everything from the trivia of the American Battle Monuments Commission to the judgments of the Federal Trade Commission or the Securities and Exchange Commission, which can make or break companies. But this bureaucratic Heinz 57 has two common denominators. First, all of these agencies are outside the ordinary executive-branch chain of command used to manage the Cabinet-level departments (State, Defense, etc.). Second, all of these agencies are more or less patterned after the first major independent agency, the Interstate Commerce Commission. The ICC was created almost 100 years ago, largely upon the suggestions of early public-relations "experts" whose views were similar in some ways to those of our latter-day speechwriters.

To understand the similarities, we need a quick look at the political economy of a century ago. The 1880s are sometimes looked back upon as a time of great national optimism and excitement concerning the industrial and mechanical advances that were becoming evident almost every year. Such reminiscences are correct, but economic advance also was accompanied by social pressure—and pressure created worry about the growth of the first genuinely national business enterprises. There especially was concern about the development of the "steel horses" and steel lines—the railroads—which provided the transportation base for America's rapid economic growth.

Into this thicket of worry swash-buckled the railroad entrepreneurs of the time, fulfilling societal needs by laying more track faster than anyone would have imagined possible a few years before and, through their efficiency, opening up new lands for small farmers and prairie immigrants. But they also raised concerns about a possible centralization of economic power. The railroad industry had grown fast, going from 30,000 miles of track during the Civil War to 141,000 miles in 1882. With such a great leap noticeable to all, the railroads quickly became the focal point for concern about rapid industrialization and the new organizational forms that accompanied it.

Naturally, the political and economic powers of the time attempted to make the new economic structure work to their advantage by obtaining special privileges from the state. For instance, some Chicago merchants became irate because they could not get special rates from the Chicago, Burlington and Northern line. Chicago businessman William H. Beebe told a Senate investigating committee that he did "not lean very much toward paternal legislation on the part of the Government," but felt that in this case, "regulation by a commission or by some other governmental agency would be beneficial." Similarly, when Pittsburgh merchants were unable to get a special deal from the railroads, the Pittsburgh Chamber of Commerce called for federal rail regulation.

Political pressure from those generally favoring statist solutions also grew during the 1880s. As labor upheavals resonated through the decade, with some demonstrations leading to violence, there were claims that the American flag was unraveling stripe by stripe, and only strong governmental hands could sew it together.

The initial response of railroad-industry leaders was not a principled defense of their business, but a series of not-so-subtle attempts to swing public sentiment to their side. William K. Ackerman, president of Illinois Central, wrote to a colleague that increasing public attacks made it necessary for industry leaders to "manufacture public opinion" and he set about doing so by commissioning books and articles favorable to the rail industry, which would be published as independent pieces of analysis and scholarship. Political IOUs also were called in.

Other industry leaders provided free passes to newspapermen in return for favorable articles. Henry Ledyard, president of Michigan Central, noted that "the newspapers do, to a greater or lesser extent, mold public opinion," and he agreed with Norfolk and Western vice-president Frederick J. Kimball that "giving passes to newspapermen is about the cheapest form of advertising we can get."

Free passes were also given to many politicians, clergymen, and educators. But the strategy backfired. On some railroads, one critic complained, two-thirds of the passengers were paying higher rates so that one-third could ride free. The free-pass strategy mainly allowed railroad-industry critics to add to their list of complaints the industry's attempt to "bribe" the real or potential opposition.

A second railroad-industry strategy emerged: Do not fight the idea of government control over the railroad industry, but lobby the state legislatures to get favorable terms. This, however, turned out to be the worst of all possible worlds. Expressing his scorn of this strategy, Illinois Central president William Ackerman told his company treasurer that Illinois state senators "pass their nights in rollicking, will drink all you offer them, and make you any amount of wild promises, but their actions…give lie to the promise. In short, they are utterly unreliable."

With these false starts, the political mood became increasingly frustrating for the railroad executives. By 1886, the House of Representatives had passed a bill favoring legislative oversight of the railroads, and the Senate was holding hearings on rail regulation. Railroad executives were in desperate need of a new public-relations strategy. They found the basis for one in a "new idea" for governance then being discussed in academic and political circles and tried out in some of the states: the concept of a bipartisan governing council of wise men.

Charles Francis Adams, Jr., both a railroad executive and a summer scholar, was among those to argue that increasing complexities of industrial technology made necessary "a new phase of representative government"—the regulatory commission. Rapid change, according to Adams, required control by a body of dispassionate experts who would use "statistics" rather than emotions or political considerations to harmonize "the interests of the community" with the interests of business.

Many politicians also liked the idea of philosopher-kings in suits and ties. For instance, Rep. Robert Hitt of Illinois pointed out in 1886 that the railroad industry is "the most complex business known to our civilization and the most extensive, involving the largest amount of property and the greatest number of individual interests in the whole world." Huge enterprises of this type, according to Hitt, could best be controlled by "five wise, able, experienced men of reputation, commanding general confidence."

There had been proposals of this sort before. In the 1870s one such bill even passed the House of Representatives. Rep. G.W. McCrary's bill provided for the creation of a nine-person commission to investigate and prepare schedules of maximum railroad rates, watch for violations of new regulations, and enforce those rules through legal suits. But at the time, the railroad industry opposed the commission form on grounds of political principle, believing that private enterprise should remain private, and had enough practical savvy to sideline equivalent measures proposed in the Senate.

By the mid-1880s, however, railroad executives were ready to embrace the commission form as an alternative to popular rule. George Blanchard of the Erie line wrote in the Chicago Railway Review that "a national railway commission" could give "the railways conservative protection against radical assaults." Charles Perkins of the Chicago, Burlington & Quincy threw in the towel and wrote, "The public will regulate us to some extent—and we must make up our minds to it." Henry B. Ledyard of the Michigan Central stressed the necessity of having "commissioners to stand between the railroad and the public." Railroad reporter William P. Shinn summed up the change in an 1886 Railroad Review article: "The leading railroad companies, which formerly (and as I then thought, unwisely) opposed such a commission, are now almost without an exception in its favor…because it places between the companies and the public a responsible organization to which both will acquiesce."

Some senators had serious concerns about the constitutional dangers of establishing an independent commission to which all were expected to "acquiesce." Sen. John T. Morgan of Alabama argued that the 1886 bill to establish an "Interstate Commerce Commission" for railroad regulation gave an independent agency "powers, a large admixture of power, quite a voluminous array of powers.…It is the first bill I have ever known to be brought into the Senate…where the authors of it were not willing to enter into a definition as to whether the powers they conferred by the bill" were executive, legislative, or judicial. Sen. E.C. Walthall of Mississippi opposed establishment of the ICC because of "the fullness of its powers, the disastrous consequences of its mistakes, and the dangers and temptations incident to the position of its members." Sen. George F. Edmunds of Vermont similarly argued that the commissioners would have too much discretionary power.

In the House of Representatives, rhetoric was even harsher. Rep. John H. Reagan of Texas argued that "the American people…are not accustomed to the administration of the civil law through bureau orders. This system belongs in fact to despotic governments, not to free republics." Rep. Jacob Campbell of Ohio warned that "this commission, which may be ignorant, willful, or corrupt, [will be] all the while responsible to nobody for their actions." But railroad interests supported the bill, arguing that railroads should be controlled by a government agency "removed from politics," and enough of the wavering representatives were convinced to back the bill. The Interstate Commerce Commission, it was determined, would be bipartisan, with nearly equal representation from each major party, and would be composed of the best and the brightest philosopher-kings within earshot. At the least, it was believed, this baby-grand coalition could make the trains run on time.

Based on that rationale, the House and Senate eventually agreed on a bill to establish the commission. On February 4, 1887, President Grover Cleveland signed into law the Interstate Commerce Act. The act set a precedent that Congress has regularly followed throughout the past century: when in doubt about either the equity of market decisions or the efficiency of political tugging, go for the baby-grand coalition. For instance, when questions concerning marketing practices arose in the years preceding the formation of the Federal Trade Commission in 1914, Sen. F.T. Newlands argued that successful resolution of problems could result from the deliberations of a bipartisan group of experts with "a very comprehensive knowledge of the practical economic and legal aspects of the whole field of industry of the country, and exceptional experience, training, and judgment."

The idea that a few wise men could best judge the interests of all has also been a popular one among the regulatory commissioners themselves. For example, Federal Communications Commission members once noted: "As guardians of the public interest, we are entrusted with a wide variety of discretionary authority and under that authority [we] bring to bear upon the problems an expert judgment from our analysis of the total situation as to just where the public interest lies."

Ironically, though, a variety of scholars have found that such claims, and the more-general claims that the commission process leads to wiser decision-making "divorced from politics," have little basis. For example, historian G. Cullom Davis studied the transformation of the Federal Trade Commission from 1914 to 1929, and found that the decisions of the FTC during those years generally followed the election returns. George E. Roberts, vice-president of National City Bank, writing in a 1924 issue of Nation's Business, noted that findings of the "independent" agencies, "if opposed to the popular view, are overwhelmed by a storm of protest and clamor; and it is exceedingly difficult for public officials to withstand the pressure of public criticism."

In a 1961 article appearing in Law and Contemporary Problems, political scientist Mark Massel concluded that in commissions, "both policy formulation and execution are dependent on political outlook and pressures." Economist Sam Peltzman, of the University of Chicago, contended in a 1976 Journal of Law and Economics article that agency officials, charged to take into account the interests and political strengths of a variety of competing groups, act almost the same as they would if vote-gathering considerations impinged directly on their proceedings. And government-affairs expert Jeremy Rabkin, in a 1979 article entitled "The Dues of Due Process at the FTC" published in the American Enterprise Institute's Regulation magazine, concluded: "Commissioners must continually make difficult judgments about how much the Congress—or the public—expects in different areas.…Even the determination that commissioners must reach in formal proceedings are often closer to those considered in legislative debate than in the typical courtroom proceeding."

What both scholars and innocent bystanders have found repeatedly is that the independent commission form results in an extension of the governmental process into areas that once were private. The establishment of governmental philosopher-kings, under the guise of removing economic questions from politics, actually leads to the creation of a vast new domain for politics.

Yet after a century of failed experimentation with baby-grand coalitions, we are facing the next step—the development of a grand coalition. Some wish to take such a step because they persist in arguing, against the evidence, that baby-grand coalitions have helped more than they have hurt. The more sophisticated, however, claim that a grand coalition is needed precisely because baby-grand coalitions working (to some extent) independently of one another cannot adequately consider all the elements and effects of their actions.

Up to now, the United States has been spared the necessity of producing empirical evidence to show the disastrous effects of putting immense power in the hands of one individual or group commissioned to take into account everything going on in society. We have never had such a grand coalition ruling over us, so its proponents are indeed challenging us to proceed to starry realms where the American people have not gone before. But countries such as the Soviet Union have had experience with experiments of similar or greater grandeur. And the sad results are there for all to observe.

Moreover, scholars have developed powerful theoretical arguments explaining why political attempts to procure economic harmony eventually tend to produce the peace of a slave camp. For instance, the Nobel Prize–winning economist Friedrich Hayek, in a chapter of his classic work The Road to Serfdom entitled "Why the Worst Get on Top," explains that central planners first find it impossible to satisfy the wishes of people with widely divergent plans and beliefs, then find it necessary to appeal to lowest-common-denominator instincts—such as envy—and must eventually turn rule over to ruthless demagogues, who can keep the pot of envy bubbling.

There is an alternative to the grand-coalition method of fighting disharmony. As Wilhelm Röpke put it in his book Economics of the Free Society, "Our economic system can remain viable only if disharmony is redressed by effective and continuous competition." Wherever producers and consumers, with their many and varied skills and interests, have been free to develop the temporary coalitions that we call contracts, they have proven the wisdom of diminishing government power and promoting truly private enterprise.

But the illogical tendency of some is to imitate those Marxists who, when they found socialism in one country unworkable, demanded the internationalization of failure. Since the baby-grand coalition to rule one industry has not been effective, the grand coalitionists argue, we must establish a single central authority to oversee all industries. So the public-relations machinery of those who oppose free enterprise is now gearing up to proclaim the virtues of "public-private partnerships," bipartisan decision-making on economic and political matters, and creation of "national industrial policy boards."

The decrepitude of today's US railroad industry has many causes, but one of them is clearly government control. Indeed, it was largely the inception of baby-grand coalitions like the Interstate Commerce Commission that initiated the process of choking private enterprise with government rules and regulations. And what the commissions have individually done to particular industries, a "grand coalition" would do to the political economy generally.

Marvin Olasky is on the faculty of the Department of Journalism at the University of Texas in Austin.