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« Back to The Competition Solution, Part Two main page    Transcript for: The Competition Solution, Part TwoTHINK TANK WITH BEN WATTENBERG#1309 THE COMPETITION SOLUTION, PART TWO FEED DATE: April 7, 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 Two, this week on Think Tank. MR. WATTENBERG: Paul London, let’s continue with episode two about your book The Competition Solution and welcome to Think Tank. MR. LONDON: It’s good to be back. MR. WATTENBERG: Paul, you’ve written this book where you maintain that in the last thirty years since the 1970s, competition – the book is called The Competition Solution – has gone crazy. Just everybody’s competing with everybody - from overseas, within the United States - and you say this is very good for the United States and for the consumers. It keeps prices down, it keeps inflation in check. Who to you, personally, who are the real heroes? My sense is there are a lot of faceless people here who believed this all along, at places that we – Intrastate Commerce Commission, Civil Aeronautics Board, Federal Power Commission, Securities and Exchange Commission, the Congress, the Presidents . . . MR. LONDON: My – my heroes are the presidents who know who they’re appointing to these commissions. When Gerald Ford appointed a man named John Robson to the Civil Aeronautics Board, he knew who he was appointing and the kind of policies he would follow. And John Robson began the process of restoring competition in the airline market. When Jimmy Carter appointed Fred Kahn to the Civil Aeronautics Board... MR. WATTENBERG: Alfred Kahn. MR. LONDON: Alfred Kahn. MR. WATTENBERG: The infamous and famous Alfred E. Kahn. MR. LONDON: When he appointed Alfred Kahn to the Civil Aeronautics Board, he sort of – he certainly knew which direction he would go in. MR. WATTENBERG: Which was deregulation. MR. LONDON: Which was deregulation. And by the... MR. WATTENBERG: That’s why we have all these new airlines now. I mean, Southwest, Jet Blue... MR. LONDON: Absolutely. MR. WATTENBERG: Once that went out of business, but I mean... MR. LONDON: So these people, these presidents took courageous decisions. Look... MR. WATTENBERG: Both parties. MR. LONDON: Both parties. Absolutely. Both parties. And it’s – it’s interesting because - okay, I would just say both parties. There are little interesting wrinkles here, but maybe too much to get into. But it certainly was both parties. These guys know who they’re appointing and what direction they’re going in and they take the political heat. Look, when Alan Greenspan makes a decision, he’s not the one who loses his job if it works out badly; it’s the president who appointed him or kept him in office. So I think it’s the presidents, the political leaders, who take these difficult decisions who we ought to – we ought to recognize. There’s too many people think that politicians... MR. WATTENBERG: So you’re talking about Gerald Ford, Jimmy Carter, Ronald Reagan, Bill Clinton and George W. Bush. MR. LONDON: First Bush made some tough decisions. MR. WATTENBERG: Did I – did I skip him? I’m sorry, I didn’t mean to. MR. LONDON: Yes, I – well, I thought maybe you didn’t like him. MR. WATTENBERG: No. No. No. MR. LONDON: No. No. (Laughing). No, they all made... MR. WATTENBERG: I followed all of them since the 1970’s. MR. LONDON: All of them have made very hard decisions and I think the most important ones that... MR. WATTENBERG: And gave in a little bit but much less than we were lead to believe. MR. LONDON: Much less. And then you know, we think of these – the common, the conventional view is politicians don’t take risks. They take big risks and they take much more risks than a lot of people who we give the credit to. I have stories about a man – Jack Goeken started MCI with his credit card. He wanted to build a couple of microwave towers in Illinois and here was a guy whose energies were released. This was a guy who brought down AT&T. It’s an impossible story anywhere but in the United States where you have Ken Iverson who created Nucor and really a whole new steel industry in the United States. It couldn’t really have happened anywhere but here. And then you have, you know, Sam Walton at Wal-Mart. Wal-Mart was a small company in 1970. It started in the 1960s, now it’s a huge company. This was – this was releasing the energies of the people - the creative energies of the people - and it changed the United States and it made this amazing boom period of the 1990s possible. MR. WATTENBERG: And it’s not just the government, although it has a lot to do with it. It’s other businesses as well. MR. LONDON: It is that our government... MR. WATTENBERG: The law of tooth and fang or claw and fang, whatever it is. MR. LONDON: Well, nature read in tooth and claw... MR. WATTENBERG: Right. MR. LONDON: But what we have, it’s not nature read in – it’s – it’s competition within a set of rules. The government has to set rules. We have rules for political competition; that’s what the Constitution is all about. It’s rules for political competition. And we have to have rules for economic competition, but they have to let these newcomers - the kind of people I’m talking about - the Jack Goekens and the Sam Waltons – you have to be able – these people have to have a chance. In some other countries in the... MR. WATTENBERG: Often these are sort of unsung heroes. MR. LONDON: Absolutely. MR. WATTENBERG: You don’t hear much about them. MR. LONDON: Even – even Milken. Michael Milken who has – you know, Michael Milken revolutionized finance in the United States and he made finance available to companies that couldn’t get it before. The new NASDAQ. Made financial resources available to companies that couldn’t get it before. That was the genius of – of the American – of the American system. It was there entrepreneurial geniuses liberated in a sense by the political system. MR. WATTENBERG: What did he do, actually? MR. LONDON: He was a student. He was actually an academic and he looked out there and he said you know, there are a lot of companies that would be glad to – let’s say the going interest rate was six percent – there are a lot of companies that want to borrow and they’ll pay you twelve percent. And they’re not that much more risky. You’re – you know, it’s – he looked at what happened with these so-called risky companies, paying the high rate and how much you got from the blue chip companies paying low rate, and he said the risk – you can make more money lending to the high risk companies. So he created a way of doing that. He created the so-called junk bonds so that people could invest more easily in the riskier companies. MR. WATTENBERG: And do you recall, what are some of the companies that financed themselves through these high yield so-called junk bonds? MR. LONDON: MCI, which was challenging AT&T; CNN, which had a whole new, you know, brought sort of ’round the clock news to us. A lot of companies. Those are the ones that come to mind. MR. WATTENBERG: A lot of new technology, a lot of gumption; 'we’ll do it differently' kind of things. Borrowing money through Milken’s so-called junk bond to get the capital to build these exciting new businesses. MR. LONDON: Right. You introduced me a long time ago, I believe, to a man who started the second Telemundo, the second Spanish language TV channel out in Los Angeles and he was an – he borrowed money from Milken. Milken - you know, he went to Milken, he said, 'I got this idea' and Milken said, 'That sounds like a great idea'. And Milken apparently had prepared himself, knew all of the demographics of the Spanish population, and he said, 'I’ll get you the money' and he got it for him. And this guy, you know, set up a – set up this second station, became very successful. MR. WATTENBERG: And then all these new companies financed by these junk bonds were then able to compete again, getting back to our original theme, with the big boys. MR. LONDON: Exactly. So that opening up finance, more competition in finance meant more competition through the whole economy. Because it made – it created a way for – for smaller companies to be challengers to bigger ones. MR. WATTENBERG: And that kept consumer costs down. MR. LONDON: Absolutely. MR. WATTENBERG: That’s the point you made. MR. LONDON: Absolutely. MCI came in and offered businesses; data communications at a lower price than AT&T did. And the – and the big companies were eager, eager to take - to have some competition because they knew it strengthened their hand. MR. WATTENBERG: I mean, the – big boy on the block, really the only boy on the block for what – long distance carriers was AT&T... MR. LONDON: Right. MR. WATTENBERG: American Telephone and Telegraph, right? MR. LONDON: Right. MR. WATTENBERG: What happened to them? MR. LONDON: Well, they – suddenly they were facing - and this really happened in the mid ’70s – suddenly they were facing real competition. And interestingly, you know, we talked about automobiles; when you get big and strong like that you get very arrogant. And AT&T had been very arrogant, even with the big companies that were it’s consumers that it was supplying with phone service. And when the F – when the Federal Communications Commission asked the customers of AT&T if they were happy with the service, they all said 'no; we’re not happy with it'. So that’s what sort of got MCI into this new area of data communication. MR. WATTENBERG: Let me ask you a question and then we’re going to come back to some more of these little genie stories. You say everything worked well in the 1990s. You keep coming back to that '1990s, 1990s'. Here we are in the 2000s. Have a gross national – domestic national product growing at almost four percent, which is very high, I mean, by comparative standards. Is this competition wave that you’ve talked about, is that still going on? MR. LONDON: It’s one of those things where – which requires eternal vigilance. Every – you know there’s always a drive to limit competition. The people who get - you know, Microsoft competes and gets there and then they want to keep other competitors out. You know, people are competitive and then they say 'hey; I’m here now, so I’d like to keep the other guys from coming in'. So I think this is a perpetual thing. This is like per-- you have to be perpetually vigilant against monopoly. And – but I think the economy’s doing pretty well now. But it’s not – you know, now we have four point – 5.4 percent unemployment; in the – at the end of the ’90s we had 3.8, so there’s a big difference and we had more people – a bigger share of the workforce was employed in the 1990s. We’re doing pretty well now, but it’s... MR. WATTENBERG: But then you had a crash. MR. LONDON: Right. And we may, you know, crashes come along and I have said – I talk about that in the book because I think Greenspan saw this coming and he should have talked more about it. But that would have been politically tough for him. I mean, a lot of people would have criticized him. But I think we all saw this coming and – a lot of people saw it coming. MR. WATTENBERG: Let’s talk further about deregulation of some specific industries with some specific people involved. What happened to the airlines? MR. LONDON: Well the airlines – there started to be papers written about the inefficiency of the – the weak competition in the airlines in the late ’60s. And... MR. WATTENBERG: Again, prices were set. You had one price from Phoenix to New York, period. MR. LONDON: Right. And one airline that could offer service and if you wanted to offer a competing service you had to get permission and the other airline would say 'it’s not necessary'. And so you would have a whole... MR. WATTENBERG: Get permission from the... MR. LONDON: You had to get perm—- from the... MR. WATTENBERG: CAB, the Civil Aeronautics Board. MR. LONDON: Civil Aeronautics Board. You had to get permission to compete and the Civil Aeronautics Board had not let a new line – airline into the business since 1938 and this was 19 – in the 1970s. So, airlines – and so Ford started to do this and Jimmy – to open up this industry to competition and Jimmy Carter followed and in 1978 we passed a legislation which basically opened up the airline industry to competition. And as we all know, we all go on the internet now or we have our children go on the internet and they find us cheap tickets. Everybody is looking for cheap tickets. There’s some complaints, but airline service is a lot better. It’s been very painful because these old airlines with the old bad habits have a – which they carried over from the time of monopoly and fixed prices, have had a very hard time adjusting. But we all know that it’s been better for us. MR. WATTENBERG: Slight detour. We’re talking about competition. Competition in some ways is about as American an idea as you can get. Is that – you buy that? MR. LONDON: I believe it is the most American idea. It is the idea – checks and balances is really about competition between different parts of the government. MR. WATTENBERG: We think of it normally as political but it’s economic as well. MR. LONDON: It’s economic as well. And the founders, Hamilton and others, understood that economics had to be this way, otherwise power gets too concentrated. So they were opposed to concentrated power so they wanted competition in the government and they wanted competition in the economy. One of the first battles in the United States on economic issue was about what they called 'the monopoly bank', the bank of the United States. Was that a monopoly? Americans hate monopoly and with good reason. MR. WATTENBERG: You say that the two big industries in America that have not really come to grips with competition are education and healthcare. And that they are basically local monopolies. Let’s do education first. What’s been tried; what should we do, etcetera? MR. LONDON: Education is really the hardest because it is dominated at the elementary and secondary level by thirty thousand local school boards and it’s very hard for Washington to do much with these local school boards. But the school boards and the teachers and the, you know, usually work together and so it is very hard to get change and choice and – and pro – and a school system that recognizes that different students need different kinds of arrangements to learn. And I think if you had more competition in the school area, you would be able to recognize that, you know, boys read more slowly than girls and girls do this better. We need to be able to make adjustments for that and I think if you had a variety of different schools that you would be able to do this and – and – people would be able to make these adjustments and we would have a better outcome. MR. WATTENBERG: Okay. Now your other item for the future is medical care. Why don’t you give me your take on what you think the problem with medical care in the United States is and what we can do about it? MR. LONDON: Well, I’ll make this very personal. I went to the doctor a couple of months ago and he thought I ought to see two specialists. And he had to telephone them and he asked me a lot of questions which he wrote down. Then he telephoned these specialists. I don’t know what he said to them. I went over and I had a couple of tests here, and a couple of tests there. They were not able really to coordinate what they were doing. They’re not computerized basically. They’re sending little scribbled notes back and forth or talking on the telephone. That’s very expensive when you get two or three doctors talking on the telephone and no common record. So I think we need to computerize healthcare so that doctors – I think that will lower costs by it’s... MR. WATTENBERG: I mean, that’s your mantra; computers. MR. LONDON: Yes. But for – not just because it is so obviously more efficient in this case. It’s also because it will allow us to compare doctors and compare treatments so that a doctor says this is how – it’s on the computerized record – this is how I treat diabetes and some – and here’s how much it costs to treat diabetes my way. And the other doctor says, 'I do it in a different way and here’s how much it costs', and then patients can shop back and forth. Then you get the benefits not only of, you know, what seems to me obvious, you know, computerized records so that they don’t have to talk on the phone all - but you also get real competition. Let’s say one guy says I can do this diabetes - I’m Kaiser Permanente over here. And I have a – I can show you that here’s how I deal with diabetes and I want to take business away from the hospital next door. And Kaiser says, here’s what I do and here’s how I offer it. And I think people would go to the ones who get the best outcome. MR. WATTENBERG: But they’re not paying for it. Typically their insurance company’s paying for it: so-called third party payer. MR. LONDON: Well, their intermediaries play an important role in a lot of industries. In some ways Wal-Mart is an intermediary for consumers. They buy the stuff cheap in Japan - in China so that they can sell it cheap to the consumer. Now, insurance companies can play that same role in healthcare. They don’t always, but that would be the - you know, this is the big argument that goes on in drugs, can the government be an intermediary and buy drugs for the people in Medicare? That’s competition. And these – the purchaser operates as a kind of a surrogate for the – for the patient. MR. WATTENBERG: There has been – there was an article in the New York Times I guess quoting the Journal of the American Medical Association, where they said that computerization is really a false God and it’s not going to save very much money. What do you think about that? MR. LONDON: I think it’s wrong. Everything is individual, separated, there’s no communications; it’s a very, very old system. It looks like department stores and little shops in the 1930s. That’s what it looks like. MR. WATTENBERG: Well, but you’re dealing with individual people with individual case histories. This is not Wal-Mart. You got a problem, he has a problem, I have a problem. They’re all different problems. MR. LONDON: Yes, they are and if everybody had – had a computerized record, all the doctors who look at it could see what the problem is or what the other doctor thinks the problem is. Everybody is different. Every customer at Wal-Mart is different. But we usually are able to serve them better than we do in healthcare. MR. WATTENBERG: Alright, Paul, let me wrap this up with a couple of questions which we haven’t really touched on, and they deal with pain. I’m not talking about medical pain that we just talked about, but economic pain, particularly one aspect of it being globalization, which we haven’t really talked about. But you’re asking American workers to compete with China and India and Mexico and Sri Lanka and places where workers’ wages are very, very low so they’re either forced to take pay cuts or they lose their jobs entirely because of imports. I mean, is there pain involved in this? MR. LONDON: Absolutely. And there always... MR. WATTENBERG: Competition also equals pain. MR. LONDON: Competition equals pain but so does - if you don’t have competition you have to hold back and suppress in some ways these – the energies of the people. That’s painful, too. When you stop people from competing you’re – you’re suppressing the – these natural things in people. I think, you know, if you want to talk about the trade deficit, about half of the trade deficit is not with low wage countries like China. Automobiles don’t come from low wage countries like China. They come from Germany and Japan where they, you know, really have high wages. A lot of these – a lot of the electronics that we import, these don’t come from low wage countries; they come from high wage countries. So I don’t think this is – I think it’s very – it’s kind of a cheap shot to turn this into a low wage issue. It really is not. MR. WATTENBERG: One of America’s most famous economics from Harvard, Joseph Schumpeter, I think is the way you pronounce it, called capitalism, quotes, 'creative destruction'. MR. LONDON: Exactly. MR. WATTENBERG: Is that what competition is? MR. LONDON: It is. What – what that means... MR. WATTENBERG: Is that sort of an oxymoron? MR. LONDON: Well, it is but what it means is if you have an old factory and it still works, you want to – you – it’s still good for you to change to a new factory and scrap the old one because you get out – you get – it’s cheaper to produce, you do more for consumers by getting rid of the old ones. In the socialist countries they sort of kept all these old steel mills until they fell apart. They were polluting; they were – they were thirty, forty, fifty years old. That’s what we did with these old power plants in the United States when there wasn’t competition. We kept these old power plants and they were – they were a burden to the economy. So creative destruction means you got to write some things off... MR. WATTENBERG: Eat your broccoli. MR. LONDON: Yes. You got to do it and we all know that we come out ahead. And the most important thing is to have low unemployment. Low unemployment which we were able to get in the 1990s and which we – we’re getting there now. Low unemployment means that when you lose the job over here you can go to another job. That’s really important. MR. WATTENBERG: That’s the creative part. MR. LONDON: That’s the creative part. 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, remember to send us your comments via e-mail. We think it makes our show 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... 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