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The Collapse of the Blue Model for the Economy and Government

…great analysis by Walter Russell Mead.

(To my readers: I would like to apologize for not posting original commentary in the past few days. I am studying for the Bar exam and the days grow short. However, please look back at my most recent posts and  you will see I predicted some big events happening in the news today. Essentially, Obama has failed as a president and I think given his recent decisions on terror and his terrible foreign policy, that it is time for him to step aside. His horrendous attack on the Supreme Court at the State of the Union address, where he not only criticized them at a state event, but got the substance of the decision he was criticizing wrong, should drive the point of his incompetence home. Today, Obama apparently ordered that a new venue for the KSM trials be found, amidst growing opposition from the principles that this was a bad idea. How much more of this can the United States take? Do we really need to sit back and watch while Iran gets nuclear capable and they hang leaders of the opposition without the leader of the free world barely saying a word about it? Do we really need to be silent about the ridiculous criticisms by Latin American Marxists that we exploded a device beneath the ocean which- they claimed- caused Haiti’s earthquake without responding? The time is nigh for Obama to step down. Believe me, if and when he does, most of the country will breathe a sigh of relief. And, it might be a bit humorous to watch raging leftists take to the streets for a few weeks while they express the truth that’s in their hearts; their vile hatred for the United States. Below, I include a great article about the breakdown of the “Blue Model” of the American economy. It is this model, the Rooseveltian, Keynesian model, that Obama intended to save. If we believe Mead that the days of welfare state  are numbered, then we should welcome the end of its supposed savior. With the end of the old New Deal, it will be very useful to hasten the  end of  the main proponents of the New New Deal, the statist/socialist intellectuals who now occupy and people the White House.)

The Blue Model Breaks Down

(from American Interest Online)

Here in the quiet precincts of the stately Mead manor in exclusive Queens, as the dew gently falls over the mist-shrouded lawns and the pigeons coo soothingly from the historic-landmarked eaves, it is sometimes hard to believe, but out there in the workaday world the long and graceful decay of the American social model is accelerating into a more rapid and dangerous decline.  The core institutions, ideas and expectations that shaped American life for the sixty years after the New Deal don’t work anymore, and the gaps between the social system we’ve inherited and the system we need today are becoming so wide that we can no longer paper them over or ignore them.


In the old system, both blue collar and white collar workers hold stable jobs, a professional career civil service administers a growing state, with living standards for all social classes steadily rising while the gaps between the classes remain fairly stable, and with an increasing ’social dividend’ being paid out in various forms: longer vacations, more and cheaper state-supported education, earlier retirement, shorter work weeks and so on.  Graduate from high school and you were pretty much guaranteed lifetime employment in a job that gave you a comfortable lower middle class lifestyle; graduate from college and you would be better paid and equally secure.

Life would just go on getting better.  From generation to generation we would live a life of incremental improvements — the details of life would keep getting better but the broad outlines of our society would stay the same.  The advanced industrial democracies of had in fact reached the ‘end of history’: this is what ‘developed’ human society looked like and there would be no more radical changes because the picture had fully developed.

Call this the blue model, and the chief division in American politics today is between those who think the blue model is the only possible or at least the best feasible way to organize a modern society and want to shore it up and defend it, and those who think the blue model, whatever benefits it had in the past, is no longer sustainable.

That division is going to begin to erode in the next few years because the blue model is breaking down so fast and so far that not even its supporters can ignore the disintegration and disaster that it entails.

AT&T and Ford Are Blue in More Than Just Their Logo

The blue model rested on the post-Second World War industrial and economic system.  The ‘commanding heights’ of American business were controlled by a small number of monopolistic and oligopolistic firms.  AT&T, for example, was the only serious telephone company in the whole country, and both the services it offered and the prices it could charge were tightly regulated by the government.  The Big Three car-makers had a lock on the car market; in the halcyon days of the blue model there was no foreign competition.  A handful of airlines divided up the routes and the market; airlines could not compete by offering lower prices or by opening new routes without special government permission.  Banks, utilities, insurance companies, trucking companies had their rates and, essentially, their profit levels set by federal regulators.

The stable economic structure allowed a stable division of the pie.  Workers (much more heavily unionized then than now) got steady raises and stable jobs.  The government got a stable flow of tax revenues.  Shareholders got reasonably steady dividends.

There were a lot of problems with the old system.  For one thing, it rested in large part on systematic discrimination against women and minorities.  For another, consumers had very little leverage.  If you didn’t like the way the phone company treated you, you were perfectly free to do without phone service.  If you didn’t like badly made Detroit gas guzzlers that fell apart in a few years, you could get a horse.

The old system slowed innovation; AT&T had no interest in making huge investments in new and untested telecommunications technologies.  Rival companies and upstart firms were kept out of the controlled markets by explicit laws and regulations intended to stabilize the position of the leading companies in the system.

The blue model began to decay in the seventies.  Foreign producers began to erode the market share of lazy, sclerotic American firms–like the Big Three automakers.  The growth of offshore financial markets forced the financial services industry to become more flexible as both borrowers and lenders were increasingly able to work around the regulations and the oligopolies of the domestic market.  Demand for new communications services created an appetite for competition against Ma Bell.  The consumer movement attacked regulations that were clearly designed to protect companies; Teddy Kennedy was a cosponsor of the bill to deregulate the airlines.  Anti-corporate liberals rebelled at the way government power and regulation was being used to allow corporations to give their consumers the shaft.

As the old system dissolved, companies had to become more flexible.  As industry became more competitive, private sector managers had to shed bureaucratic habits of thought.  Lifetime employment had to go.  Productive workers had to be lured with high pay.  The costs of unionization grew; in the old days, government regulators simply allowed unionized firms to charge higher prices to compensate them for their higher costs.  The collapse of the regulated economy (plus the rise of foreign competition from developing countries) made unions unsustainably expensive in many industries.

Some companies (like the automakers) seemed large enough and rich enough that they clung to the blue model long after the sell-by date.  The result was a long, slow and grueling decline whose late stages are still unfolding today.  They lost market share to more nimble rivals.  Their workforce became old and expensive, and they were supporting ever larger numbers of retirees on the basis of smaller market shares and shrinking profitability.

These days, private sector blue companies can only survive with vast and continuing government support.  Government protection from foreign competition (economically wasteful and illegal under our trade agreements) is one option; direct subsidies and cash transfers (bailouts and tax breaks) is another.  Neither works very well or very long.  Both are expensive.

The blue model is clearly passing away in private industry as the conditions that made it possible faded in the past. It’s been a difficult, expensive and uncomfortable process, but our economy is more flexible and innovative than it used to be.  There are a lot of reasons to be nostalgic for the old days (especially for the white males who were, far and away, the biggest beneficiaries of the old system, sigh) but there is no going back.

A Blue Government

The real crisis today is the accelerating collapse of blue government.  It’s a colossal, multi-dimensional meltdown that affects our lives and our politics in many ways.  Today there are three elements of the blue government meltdown in particular worth mentioning.

The first is the government’s role in providing the benefits associated with the blue system.  When we talk about ‘runaway entitlement programs’ today we are talking about commitments by the government to provide retirement and other social benefits that originated as part of the blue system social contract.  Workers could retire as early as 62 with a combination of Social Security, private pensions and, as of the 1960s, Medicare coverage.  These costs are now exploding and it is clear that the government can’t pay them into the future.

The second crisis is that the government is now the last true-blue employer in the country.  Federal, state and local governments are often staffed by lifetime civil servants, whose jobs are protected by law and by some of the last truly powerful unions in the country.  That means it is incredibly expensive for governments to do anything at all, and they are poorly equipped to respond nimbly to the fast-changing conditions of America today.  The cost problem is aggravated because quasi-governmental sectors of the economy (like the health and university industries) are also by and large pretty blue: high wages, stable employment, cumbersome procedures — and powerful unions.  Government is simply too unproductive, too unresponsive and too expensive to do what needs to be done at a reasonable cost.  (Government also still has the anti-consumer mentality of the old blue monopolies: if you don’t like the crappy services government provides — move.) Public schools are increasingly expensive to run, and yet they do not provide improved services to match those exploding costs.

Finally, culturally and intellectually, bureaucrats and politicians often remain blue.  That is, they think instinctively in the old ways, come up with blue solutions to non-blue problems, and often fail to grasp either the constraints or the opportunities of the new era.

As long as the federal government can print money and find lenders to buy its bonds, it can bleed slowly.  It can gradually watch its fiscal position erode, it can gradually become less effective and less popular.  But state and local governments increasingly need vast transfers of cash from the federal government to keep their blue noses above the rising tide.  California and New York are headed over the cliff without federal bailouts, and others follow close behind.  Already, a substantial share of the ’stimulus’ spending is targeted less at New Deal-style infrastructure projects than at simply keeping unsustainable state bureaucracies and systems afloat for a few months or years longer. The stock market declines wiped out huge chunks of the wealth that state pension systems needed to have a hope of paying the pensions promised to government retirees under terms more generous than virtually any private employers now provide.

The Blues Ahead

There are several ugly truths that the country (and especially the states whose governments are bigger and bluer than the rest) will be facing in the next ten years.

First, voters simply will not be taxed to cover the costs of blue government.  Voters with insecure job tenure and, at best, defined-contribution rather than defined-benefit pensions will simply not pay higher taxes so that bureaucrats can enjoy lifetime tenure and secure pensions.

Second, voters will not accept the shoddy services that blue government provides.  Government is going to have to respond to growing ‘consumer’ demand for more user-friendly, customer-oriented approaches.  The arrogant lifetime bureaucrat at the Department of Motor Vehicles is going to have to turn into the Starbucks barista offering service with a smile.

Third, government must reconcile itself to its declining ability to regulate a post-blue economy with regulatory models and instincts rooted in the past.

The collapse of a social model is a complicated, drawn out and often painful affair.  The blue model has been declining for thirty years already, and it is not yet finished with its decline and fall.  But decline and fall it will, and as the remaining supports of the system erode, the slow decline and decay is increasingly likely to bring on a crash.

As I continue blogging about the American future, one of the subjects that will come up again and again will be the blue crack up–we are all going to be singing the blues as the process moves on.

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