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« Back to The Competition Solution, Part One main page    Transcript for: The Competition Solution, Part OneTHINK TANK WITH BEN WATTENBERG#1308 THE COMPETITION SOLUTION, PART ONE FEED DATE: March 31, 2005 Paul London Opening Billboard: Funding for Think Tank is provided by... (Pfizer) At Pfizer, we’re spending over five billion dollars looking for the cures of the future. We have 12,000 scientists and health experts who firmly believe the only thing incurable is our passion. Pfizer, life is our life’s work. Additional funding is provided by the Bernard and Irene Schwartz Foundation, the Smith Richardson Foundation, and the Lynde and Harry Bradley Foundation. Mr. WATTENBERG: Hello, I’m Ben Wattenberg. America’s economy has seen strong growth since the end of World War II, but there have been painful bumps in the road. Economists have struggled for years to figure out what to do to help. We hear about tax policy, trade policy, exchange rates, and the role of the Federal Reserve. Today’s guest says we have witnessed a more important factor: competition. Is competition the answer? To find out, Think Tank is joined by Paul London, a deputy undersecretary of commerce in the Clinton Administration and author of The Competition Solution: The Bipartisan Secret Behind American Prosperity. The topic before the house: America Competing, Part One, this week on Think Tank. MR. WATTENBERG: Paul London, welcome to Think Tank. MR. LONDON: Glad to be here. MR. WATTENBERG: And let me tell our viewers that even for a dummy non- economist like myself, this book The Competition Solution is a really good read and makes economics understandable, which astonished me. Now let me ask you, what is the theme of this book? MR. LONDON: The theme of this book – it was written to talk about why we did so well in the 1990s and what we can learn from it. And there are a lot of people out there saying, “well, the 1990s were so good because Alan Greenspan was a brilliant chairman at the Federal Reserve Bank”. Or my friends would say “the 1990s were so good because Bill Clinton”... MR. WATTENBERG: Your democratic friends. MR. LONDON: My democratic friends. Because Bill Clinton did such a wonderful job of man – bringing down the deficits. And then there are other people who look and they say “boy, we really did well because this new technology; it was just luck, you know, new technology”. And there are some people who say, “Well, we did well because Ronald Reagan cut taxes”. And I looked at – I look at these arguments and I say, “No, we did well because we did something that’s really very ‘specially American.” MR. WATTENBERG: I mean, you’re not saying that those are irrelevant. MR. LONDON: Oh, of... No. MR. WATTENBERG: No. MR. LONDON: Of course not. They’re very relevant. But I think the thing that set us apart from the Europeans, from the Japanese and others, is that competition is much more intense in the United States. And we had made it - in the previous twenty years between the 1970s and the 1990s - we made competition much more intense than it had been before, and it was the competition that kept prices down. I have a quote in the book. I talk about somebody who says, “Wal-Mart did more to fight inflation than the Federal Reserve”. And I think there’s a lot to that - competition from Wal-Mart, from the new car companies in the United States, from these new steel companies, from the new telephone companies, from the new banks, the new financial institutions - that this kind of competition – all of these were new competitors – and these new competitors did more to fight inflation than the Federal Reserve. And we have them in the United States and most other countries can’t make the kind of tough, political decisions that we were able to make here to make this kind of competition happen. MR. WATTENBERG: Now, what was the field of discipline in which you got your PhD? MR. LONDON: It’s very much like this book. It’s in between politics and economics. MR. WATTENBERG: But the official title is... MR. LONDON: Political economy and government. MR. WATTENBERG: Political economy and government. MR. LONDON: Right. MR. WATTENBERG: That’s going to be very important as we develop this conversation. So your degree is in political economy and government, and that’s in some large measure what the book is about. MR. LONDON: Right. MR. WATTENBERG: Okay. When Bill Clinton was elected in 1992 you joined his administration. MR. LONDON: I wanted to go in that administration. I thought a lot of those people and I still do. And I went over to the Commerce Department where we did basically these numbers that you hear in the morning – “The Commerce Department says today that...” MR. WATTENBERG: So your official title was Deputy Undersecretary of Commerce. MR. LONDON: For Economics and Statistics. MR. WATTENBERG: Okay. For Economics and Statistics. MR. LONDON: Right. MR. WATTENBERG: Let me go on to something philosophical, if I might. President Woodrow Wilson once said that competition is, and I quote, “releasing the energies of the people”, end quote. Did he mean that in an economic sense or...? MR. LONDON: I think he absolutely meant it in an economic sense. He was a great believer in competition, and he promoted smaller businesses as opposed to the large corporations. And he wrote – he spoke about it, people were very in touch with this idea back in 1912 when he was president, and he spoke about it at length in his campaign for the presidency in 1912. And it was about breaking up the trusts and the big companies. Something similar to what Teddy Roosevelt had done... MR. WATTENBERG: Who was the trustbuster... MR. LONDON: Who was called the trustbuster, but I would argue that in many ways Wilson was more of a trustbuster. Roosevelt believed there were good trusts and bad trusts. Wilson didn’t believe that. He thought there were only bad trusts. Even if he agreed with you, he didn’t want you to have that kind of power. MR. WATTENBERG: You say that in the 19 – I guess it’s the ‘80s or the ‘90s, that businesses can’t raise prices. What does that mean? MR. LONDON: In the seven – ‘60s and ‘70s it was well understood that businesses could raise prices; that they had control to some degree over the prices. Automobiles and steel could raise prices, and Eisenhower argued with them; Truman argued with them; Kennedy argued with them. It was well understood. Then that power was lost and somewhere between the ‘70s and the ‘90s... MR. WATTENBERG: Now, which power was lost? MR. LONDON: The power to set prices. And... MR. WATTENBERG: By businesses. MR. LONDON: By businesses. MR. WATTENBERG: I remember growing up as a kid there was something called – you’d see it on a label – the Field Crawford Act. What – do you know what I’m talking about? MR. LONDON: No, I don’t. That’s not one I know. MR. WATTENBERG: I think that stipulated that a retailer couldn’t sell his goods at below the marked price. So that’s the sort of stuff that was going on – I mean, that kind of thing. MR. LONDON: Yes, and in retailing you had various price-fixing arrangements. Manufacturers could tell a retailer what he could sell things at. And those have basically... MR. WATTENBERG: And that was legal? MR. LONDON: And it was legal. It was even encouraged especial... MR. WATTENBERG: By... MR. LONDON: By the government. Especially during the depression. And when that – and that really has broken down... MR. WATTENBERG: A lot of these regulations that we’re going to be talking about come out of the depression and the war, is that right? MR. LONDON: Yes, because it – the depression - people thought that it was caused by too much competition. So there was a big effort in 1935... MR. WATTENBERG: Undercutting prices. MR. LONDON: Undercutting prices. And people didn’t – businesses wanted pri – the government to set prices so that they wouldn’t, you know, there wouldn’t be this constant downward pressure, and the labor people wanted it because they didn’t want to keep being laid off. So business and labor said let’s have some sort of arrangement. MR. WATTENBERG: Unlikely allies, but there they were. MR. LONDON: Unlikely allies, but very often allies, even now. And so here you had the National Recovery Act which was going to have price-fixing in four or five hundred industries, and that was overturned by the Supreme Court in 1935. But then a bunch of individual industries were controlled in other ways - the Communications Act and things like... which allowed price-fixing in certain industries. MR. WATTENBERG: I want to get into some specific stories of what went on. In television, at least in our firm, we call them little genie stories – little stories that are just sort of capsules that give an example. Let’s start with what used to be called, at least, America’s most important industry, which was automobiles. General Motors, Ford, Chrysler – I guess Chrysler is now owned by a German firm, is that right? MR. LONDON: Right. MR. WATTENBERG: But they were the Big Three and sort of regarded as unassailable. MR. LONDON: Right. MR. WATTENBERG: What happened? MR. LONDON: The Big Three were very powerful at the end of the war. Remember there was no European industry to speak of at the end of World War II in 1945; there was no Japanese industry to speak of. So we had three powerful American car companies, and they were very confident. They owned a big piece of – whatever industry there was, there was a Ford in Europe or in England, another one in Germany, so Ford was... MR. WATTENBERG: But a different plate on the... MR. LONDON: No, Ford always called itself Ford. General Motors has different nameplates. MR. WATTENBERG: They call them Opel, or something. MR. LONDON: Opel, Vaux – Vauxhall, which was the British make and so the American companies... MR. WATTENBERG: But they were GM cars designed to fit the smaller roads and everything... MR. LONDON: Absolutely. And what happened was these companies got very fat and happy. MR. WATTENBERG: I – about a hundred years ago I edited a magazine in the maritime field called “What are Transport Economics”, believe it or not. I didn’t understand a damn thing I was writing about. But even then General Motors was regarded as sort of a stodgy placeholder kind of company. MR. LONDON: Yes, I think General Motors – I can say some good things about General Motors but because it did not try to avoid competition with the Japanese when the Ford and Chrysler did. But the Big Three companies could not imagine that the Europeans or the Japanese would ever be serious competition. MR. WATTENBERG: And our law did not prevent them from importing or did not set a sufficiently high tariff to keep them out. MR. LONDON: No, we were an open market. We were so confident that nobody could compete with us because of this postwar power of our economy. MR. WATTENBERG: And business and labor both were free traders at that point. MR. LONDON: Both. Absolutely. But what happened was... MR. WATTENBERG: No more. MR. LONDON: No more. MR. WATTENBERG: Right. Okay. MR. LONDON: No more. But what happened was then the Japanese came in in a big way. And in the mid ‘70s the unions and the companies got frightened, and as I said, Ford and Chrysler both became in favor of protection against the Japanese, and the union was very much in favor of it. So they became protectionists, and they tried to get protection from the American Pres... MR. WATTENBERG: Now, remember we’re talking to a lot of people like me, who are not economists. When you say protection, what does that mean? MR. LONDON: They tried to have a strict limit put on the number of cars that could come in from Japan and... MR. WATTENBERG: This was the so-called quota arrangement. MR. LONDON: A quota arrangement. MR. WATTENBERG: But didn’t they have on top of that you had to pay a duty, a tariff? MR. LONDON: Yes, but our duties were already quite low. I don’t know what they were – two, five, six percent. But they tried to get a quota arrangement, and they – Jimmy Carter turned them down basically. Ronald Reagan then gave... MR. WATTENBERG: A quota arrangement would say to the Japanese you can export to the U.S. – pick a number – one million cars, but not one more. MR. LONDON: Right. MR. WATTENBERG: Okay. MR. LONDON: Something like... MR. WATTENBERG: And they would, quote, “voluntarily” sign that. MR. LONDON: They would – this was call – they were called voluntary restraint agreements, things like that. Not so voluntary. We twisted their arm and they were going to do it. And Reagan decided – he had made some promises in Michigan during the election - he decided to give them a quota arrangement. But the quota was always so high that it didn’t really bite. And so I talk about it; I – I say, you know, it was a token quota. Reagan really kept markets open just as Carter had done, and the result was that the American car companies saw the handwriting on the wall. They knew they had to compete. MR. WATTENBERG: That’s a theme that recurs in this book... that the Congress and the president and whoever passes laws - and everybody says “oh, we’ve set up a quota arrangement” - almost invariably, as you describe it, they are – have less of an impact than people thought. Is that right? MR. LONDON: I – that’s exactly my view. Steel always had very strict – there were a lot of quotas on steel; it started in the late ‘60s. But it didn’t stop a whole new America – first of all it didn’t completely stop imports and we also built a whole new American industry. MR. WATTENBERG: Alright. Hold it. Let me interrupt. You’re a big – you called him many times in the book - you’re a big Adam Smith fan. MR. LONDON: Adam Smith was all about competition. MR. WATTENBERG: And what year was he writing? MR. LONDON: He wrote almost exactly the time the American Revolution – 1775. And his view was... MR. WATTENBERG: The book is called The Wealth of Nations. MR. LONDON: The Wealth of Nations and it was very – it was revolutionary at the time, because he said that people got rich by competing, by all these new things. It wasn’t just taking money from one person and giving it to somebody else, it was the creativity that came out of competition. So he wanted governments to – governments at that time gave monopolies; that was what they did. They got money by giving monopolies, and Adam Smith said this kills the wealth of nations. MR. WATTENBERG: Okay. Let’s move on from automobiles to their component parts, which is steel, and there was one big company. MR. LONDON: Well, there was U.S. Steel and there were a lot of – there were a bunch of others – four or five others. But U.S. Steel stood for the steel industry. MR. WATTENBERG: Right. MR. LONDON: And what happened here – this is a part – automobile competition. Competition in automobiles. I have a story in the book; in March, 1982, the automobile companies said to the steel companies, “we have so much competition now from the Japanese that we are not just going to pay your list price anymore; we’re going to bargain with you. So if you want to sell steel to General Motors, you have to cut your price”. Now a friend of mine said to me... MR. WATTENBERG: This is – this is American automobile companies talking to an American steel company? MR. LONDON: Absolutely. MR. WATTENBERG: Saying... MR. LONDON: And he said... MR. WATTENBERG: ... cut these prices or else. MR. LONDON: Cut these prices or we’re going to go to one of your competitors here in the United States. The automobile companies did not buy steel overseas. The construction industry bought a lot of steel overseas but the automobile companies buy it in America and they said, “You American companies have to compete for our business. We’re not going to take care of you anymore.” MR. WATTENBERG: You mentioned in that chapter mini-mills. What are they and who ran them and what do they all – how – what part do they play in this story? MR. LONDON: Mini-mills play a big role. MR. WATTENBERG: M-i-n-i, hypen, m-i-l-l-s. MR. LONDON: Right, they’re not so mini. When you go to them they’re pretty big. But they, like a lot of the new automobile plants, started in the south, mostly in the south. The story I tell is of Ken Iverson who started Nucor, which is a very well known mini-mill company. MR. WATTENBERG: N-u-c-o-r. MR. LONDON: N-u-c-o-r. A really wonderful –- and he was – had been in the construction business. And he thought the steel companies were giving them a very bad deal – the American companies. And he said, “I could import”, which is what he did. But he said “I think I can sell – make steel in the United States and sell it for less than the imports.” And so he built a company – built a plant – a new plant in South Carolina, then he built them all over the country. Any other mini-mills came along; they have a different process than the old steel company... MR. WATTENBERG: Did each mini-mill specialize in one product, or they were across-the-board mills? MR. LONDON: They – most of them specialized in product – different products for the construction industry: steel beams. They don’t make quite the high quality steel that the big steel companies were capable – or the – they’re moving in that direction. But they use – it’s because they use scrap. They take all this scrap steel – it’s a big environmental industry - they take all this scrap steel, they melt it down and they make it into beams and reinforcing rods and things like that. And they now produce more than half the steel in the United States. And that’s a new industry, since the 1970s. It’s a completely new industry. MR. WATTENBERG: That’s your starting point to this whole process, roughly speaking: the 1970s. MR. LONDON: Right. The 1970s – at the end of the ‘60s, the postwar economy really sort of came to an end. There’s a period of American dominance in some sense, came to an end. There was the oil crisis; there were the Japanese car imports; there were changes in the steel. A lot of things happened right about 1970. And we had a lot of inflation and a lot of problems with rising – with higher prices in a lot of industries. And that started a big change. That’s when we opened up this economy to competition and that’s what we profited from so much in the ‘90s. MR. WATTENBERG: So the big companies, U.S. Steel - the case in point that you use - suddenly finds itself challenged by both American mini-mills and by foreign imports as well. Is that right? MR. LONDON: Right. And by their customers who are saying – so they’re – the foreign imports - there are these mini-mills and there are customers like General Motors who are saying, “we’ve got to have cheaper steel from you”. So they came to me at one point, that is, some of the steel industry... MR. WATTENBERG: You in which capacity? MR. LONDON: I was working as a consultant. And they came to me and they said, “you know, we want our electric supplies to compete and sell us electricity because we’re having to supply steel for less to General Motors. So now we have to find ways to lower our own costs, so we want to get lower electric prices”. So this process of competition kind of worked its way through the economy. MR. WATTENBERG: Did we put quotas on foreign imports of steel? MR. LONDON: Yes. MR. WATTENBERG: Were they for real or were there loopholes in them? MR. LONDON: Well, they were more for real than the quotas on automobiles, but there were still loopholes. MR. WATTENBERG: So we were – so U.S. Steel was getting hit from all sides? MR. LONDON: They were getting hit from all sides. The government – maybe these – this – these quotas slowed up some of the hits, but they were getting hit internally as well as externally. MR. WATTENBERG: What happened during this period that you talk about with the New York Stock Exchange and with NASDAQ? They deregulated brokerage commissions for one, didn’t they? MR. LONDON: That was an important thing – the deregulation of the – that you had competition now between brokers which had been blocked really for two hundred years. But you also had... MR. WATTENBERG: But blocked by whom? MR. LONDON: Blocked by an agreement between the brokers that had never been challenged. And all of a sudden somebody brings... MR. WATTENBERG: And the Securities and Exchange Commission did not... MR. LONDON: The Securities and Exchange Commission had let it ride. But then the antitrust authorities came in and they – they said this is – this is an antitrust violation. So after all those years they brought a court case. Lawyers do some good things in the United States, you know? The lawyers brought this case and there you go. All of a sudden these brokers have to compete and that had important implication. But there were other people who did this. The – there had been an over – there had been a lot of small stocks pushed off the stock market because they were too risky. And the SEC - the Securities and Exchange Commission - was concerned that these markets, these informal markets for these stocks, were subject to corruption. And so they said let’s form a market, a NASDAQ, which became a new stock market for small... MR. WATTENBERG: That stands for... MR. LONDON: National Association of Security Dealers Automated Quotes. MR. WATTENBERG: And this led to, among other things, not only competition on the price of making a trade among these big brokerage houses, but it brought about the online trading where you can sell stocks for six dollars or twelve dollars. I mean, probably one-twentieth or one-fiftieth depending on what you’re talking about, or one- one hundredth of what you used to pay. MR. LONDON: Yes, the cost of trading stock has come down. But I think the most important thing here, Ben, is that new companies now have many different sources of finance that didn’t exist before. The impli—- what happened with this when you change... MR. WATTENBERG: When you say – when you say “new sources of finance”, finance in essence means the ability to raise money. MR. LONDON: The ability to borrow money in one form or another; to go to a stock market, to sell bonds, to get a bank loan. All of these things have become easier in the last twenty or thirty years because these kind of co— - rich people could always borrow money. You never had any trouble if you were U.S. Steel borrowing money; you could borrow money, you were a blue chip. It was the other people who couldn’t raise money. And now it’s much easier because we have in a sense, we call it “deregulated” that market. MR. WATTENBERG: It’s very interesting. In my experience at the American Enterprise Institute over twenty-five years or so, when you talk to a lot of these CEO people, they are strong Adam Smith, free enterprise, free market guys. . . except for their business. And they feel, with some merit, I guess, that they have a duty to do whatever they can that is lawful to enhance the value of their shareholders. MR. LONDON: Everybody wants to get as much control over prices to be able to set prices to reduce competition. That’s normal and Adam Smith understood that. The role of the government is to make sure that it doesn’t happen; that there are other competitors out there who can challenge and test. And it’s good for the country because the problem is that when somebody’s sitting on something and gets very comfortable, it’s usually an inefficient industry. MR. WATTENBERG: Okay, on that note, Paul London, author of The Competition Solution, we thank you for joining us on Think Tank. MR. LONDON: Thank you very much, Ben, I’ve enjoyed every minute. MR. WATTENBERG: And thank you. Please, join us for part two of our discussion with Paul London in a future episode. And remember to send us your comments via e-mails, we think it makes our program better. For Think Tank, I’m Ben Wattenberg. ANNOUNCER: We at Think Tank depend on your views to make our show better. Please send your questions and comments to New River Media, 4455 Connecticut Ave NW, Suite C-100, Washington, DC 20008 or email us at thinktank@pbs.org. To learn more about Think Tank, visit PBS online at pbs.org and please let us know where you watch Think Tank. Funding for Think Tank is provided by... (Pfizer) At Pfizer, we’re spending over five billion dollars looking for the cures of the future. We have 12,000 scientists and health experts who firmly believe the only thing incurable is our passion. Pfizer, life is our life’s work. Additional funding is provided by the Bernard and Irene Schwartz Foundation, the Smith Richardson Foundation, and the Lynde and Harry Bradley Foundation. Back to top  Think Tank is made possible by generous support from the Smith Richardson Foundation, the Bernard and Irene Schwartz Foundation, the Lynde and Harry Bradley Foundation, the John M. Olin Foundation, the Donner Canadian Foundation, the Dodge Jones Foundation, and Pfizer, Inc. ©Copyright Think Tank. All rights reserved. 
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