American Challenges: The Blue Model Breaks Down - Walter Russell Mead's Blog

Posted on January 28th, 2010 American Challenges: The Blue Model Breaks Down Posted In: General

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.

FDR 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.

25 Comments »

A fascinating post, Walter. I wonder if I could add some orthogonal thoughts.

I keep returning to Karl Polanyi’s “double movement” in history as I read your posts on the future. I think that what many people (not you) forget when they talk about the steadily accelerating pace of life is to consider the social fabric itself.

Polanyi’s great insight (even though the conclusions of the Great Transformation were off) is that the social fabric will only take so much from creative/destructive market forces before it snaps back and demands protection from them. The “Blue” system you’re talking about here, the paternalistic 20th-century arrangement that America came up with, was the result of one such spasm—where society as a whole, in the wake of the trauma of the Great Depression, said “OK, enough!”

I think that during the recent crisis, the Left thought it saw another Great Depression unfolding, and that resultantly their fortunes would be lifted anew. Turns out, our version of the Depression just wasn’t Great enough to revive the average voter’s desire to renew the “Blue” social contract. But that doesn’t mean that just because Krugman et al. turned out to have been wrong this time, their analysis is wrong overall.

I’d argue—or better put, I worry—that the unraveling of the Blue system won’t lead to a new and exciting arrangement which embraces innovation, mobility, entrepreneurship, competitiveness and excellence. More likely, the ever-increasing demands of the global economy will continue to grind down the average American, swelling the ranks of disaffected and disgruntled people in this country. They’ll ping-pong back and forth between successive Republican and Democratic administrations, becoming more and more disaffected as nothing is achieved. The real danger is that they’ll eventually find their leader—and that their leader will turn out to be more demagogue than politician.

I do think you’re quite right on one very important point: the Blue system is probably not reformable. That said, I think we should try to remember that the Blue system was quite popular while it functioned.* Any future-looking arrangement we design absolutely has to take into account social welfare very explicitly. If it doesn’t, we’ll be blindsided by the double movement again, as the social fabric eventually demands (and gets) protection from the ravages of the markets.

———–
*I’m always reminded of my visit to Russia a few years ago. My host, a grandmother who was renting out the couch in her living room to students, had been a teacher her whole life, most of it clearly under Communism. She spoke warmly of her life experiences, and of Stalin who made so much of it possible—as did many other formerly middle-class Russians I encountered.

Comment by Damir Marusic – January 28, 2010 @ 4:22 pm

Hopefully we can learn a lot in a short time about the pre-blue past. The libertarian approach (but not the party) is the only one nimble enough meet the need.

Comment by Busterdog – January 28, 2010 @ 10:54 pm

You’ve summarized so many relevant points that this deserves to be seen by a wide audience.

One of the best arguments for privatizing government functions that I’ve read.

A most excellent post!

Comment by Mondo Frazier – January 28, 2010 @ 11:40 pm

[...] Walter Russell Mead’s American Challenges: The Blue Model Breaks Down: In the old system, both blue collar and white collar workers hold stable jobs, a professional [...]

Pingback by DBKP FLASH Headline News » Blue Model Governments, Blue Model Companies: A Must Read – January 28, 2010 @ 11:58 pm

This seems to be a similar comparison (with the main difference being that this describes a hierarchically domestic lifestyle shift, where the latter an anarchic international relations shift) to what Robert Kagan talks about in “The return of history, and the end of dreams”.

Ultimately, it seems to boil down to the fact that our hard earned comforts have rendered many lackadaisical, and perhaps overly optimistic about humanity’s propensity to advance itself. And history seems to be delivering a proverbial slap in the crotch to serve as a reminder.

Cheers.

Comment by Igor Dabik – January 29, 2010 @ 2:19 am

[...] American Challenges: The Blue Model Breaks Down – Walter Russell … [...]

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[...] (from American Interest Online) [...]

Pingback by The Collapse of the Blue Model for the Economy and Government « Conservative Policy News – January 29, 2010 @ 10:58 am

[...] second post is even more interesting. In it Walter Russell Mead chronicles the breakdown of what he refers to “the Blue Model”: In the old system, both blue collar and white [...]

Pingback by Drag – January 29, 2010 @ 2:06 pm

(Written to my son prior to this article’s publication):

In the wake of:

1) Oregon’s voters’ enacting tax increases on individuals (+2% on incomes over $125k) and businesses (sales tax, disguised as an income tax—yes, taxes regardless of earnings or losses),

2) California’s current crisis ($20B deficit only a few months after “balancing” the budget, due to Calpers’ steady growth in entitlements),

3) Increasingly partisan politics pitting unions (mostly governmental) against business and the wealthy,

4) Endless debate over the role of government in solving society’s needs,

5) Lack of substance as opposed to partisanship in Congress’ and other legislative debates, and

6) No reason to see that this won’t continue to escalate until local, state and federal government is financially (in addition to already morally and intellectually) bankrupt;

I wonder whether there isn’t an opportunity for a free market approach to the entire problem, i.e. government contracting out its functions to the free market, except for the military and perhaps a select few other (i.e. regulatory) functions. While 90% of the jobs to be created by the stimulus were in the private sector, the opposite appears to have been the case (actually true in Oregon). Increasingly, Oregon’s largest employer is the state.

The free market (as opposed to politicians or bureaucrats) would keep competitors honest about whether they were achieving objectives, as well as keep cost disciplines in place, and unions would be allowed to earn their place due to serving their constituencies rather than pander to politicians. This would reduce the incentive to throw increasing amounts of money into political campaigns (Kstreet lobbyists would serve their clients more as part of an open and competitive bidding process than a political process—in fact, it might force unions to work with management to compete for the business). And the kind of politician that gets elected does so more on suitability to the job as opposed to willingness to do his contributors’ bidding.

It would force people employed to government’s ends (by the private sector, as opposed to being bureaucrats) to understand pay for performance and be less inclined to view business and “wealthy” as the enemy. In fact, profit sharing could exist (as it can’t for today’s bureaucrat, so ever increasing and unfundable entitlements are substituted, regardless of performance). It would increase voters’ recognition of the value (financial and psychological) of personal effort and responsibility as opposed to dependence and victimization.

Otherwise, I don’t see a solution other than increasing class warfare, which is what Oregon has just implemented. I agree with the Supreme Court that McCain Finegold is a violation of free speech, but without any other changes, all we are left with is increasingly more money corrupting all sides. The current incentives (not the freedom) to throw money at elections are the problem.

It may be too simplistic, but I sincerely don’t see anyone, anywhere suggesting how we might avoid the eventual problems I mention. The message is a choice between “business/wealthy are evil” or “government/unions are evil”, with more money increasing the volume and frequency of it. I am old enough to appreciate why we are the wealthiest and freest nation in the world (democracy and capitalism), and I have every confidence if capitalism is allowed to do much of what the government does today, we would be much better off in the long run. Otherwise, I see the current path continuing to lead us away from both wealth and freedom.

One of the biggest sources of disagreement between conservatives and liberals is the proper role of government. If the private sector brings competition, efficiency and results to the process, the debate over the role becomes less intense. Entitlement issues will persist, but at least we would benefit from knowing that the money would be spent as efficiently as possible. Think of what we have just been through on healthcare. Virtually no substantive debate occurred on how to lower costs (free market solutions weren’t even on the table to be discussed, much less solicited). Instead, what advanced through the process did so by favoring special constituencies from both the private sector and unions

Comment by Doyle – January 29, 2010 @ 2:25 pm

While I agree with the assessment of the “Blue” economy in decline and its lack of sustainability in the world we have created since 1970, I am astounded by the incessant reflexive insistence that a free market approach will solve all our ills. The unregulated free market almost brought this country to its knees in October 2008. With a gun to our heads, it is the hard working taxpayers who bailed out the mess created by the movers and shakers of your revered free market.
I work in this free market and I see no evidence of the discipline and honest competition you so eloquently espouse. Instead, deals are made based on ego and self-service. People are rewarded for their incompetence because they know how to play the game, not to produce. There is no accountability for failure at the top–only more layoffs in the ranks to offset said failures.

We are witnessing the rise of the Roman empire all over again and praying to Bacchus all the while!

Comment by Janet Hazeski – January 29, 2010 @ 8:26 pm

I must respectfully disagree with you, Janet. It was not the free market which created CRA which encouraged banks to give loans to people who could not afford them. Nor was it the free market which expanded CRA under Clinton to allow the bank regulators to punish banks with bad CRA numbers. Nor was it the free market which created Fannie Mae and Freddy Mac which bought up and packaged dubious loans under the assumption that bad debts would be bailed out.

In a free market, there are no organizations “too big to fail.” The Federal government gave the financial markets the understanding that all of them would be bailed out by the government. This created an atmosphere of License, not freedom. It encouraged risk taking on the belief that other people would bear the risk. Then add in that the Federal Reserve System was expanding the money like crazy since 2001. That phony fiat money had to go somewhere, so it went into bad loans.

None of this boondoggle looks like a free market to me. But, I’m no Keynesian economist or in anyway associated with the financial markets.

I’m just an old engineer who believes that everything in life has trade-offs, draw-backs and limitations. In short, there is no magic and reality reasserts itself. Murphy’s law will screw you up as soon as possible. And that the markets will correct as soon as you stop screwing with them.

Bad days lie ahead, because the Obama administration will not stop meddling. It cannot stop meddling because all its political capital depends on making promises. All the plausible promises have been made and failed, so Obama has embarked on the impossible dream.

Comment by Louis Wheeler – January 30, 2010 @ 5:09 am

[...] different mindset to make them happen. The current bill is a classic example of steady state, blue social model thinking: it is more interested in keeping the status quo going by pumping more money into it than [...]

Pingback by Time To Change Course on Health Care Reform - Walter Russell Mead's Blog - The American Interest – February 4, 2010 @ 5:21 am

[...] before the global warming mess blew up, I wrote a post about the breakup of the ‘blue social model‘. Not to regurgitate the whole post, but the mid-twentieth century saw the US (like most [...]

Pingback by Feeding the Blue Beast - Walter Russell Mead's Blog - The American Interest – February 12, 2010 @ 8:28 am

I would make the distinction between culturally loyal blue-mindedness and what Eric Vogelin called the ‘rebelling elite’ which is an elite that has as its basic agenda the destruction of established order in favor of an entirely new form of civilization. Although there are some remnants of the loyal type in the Democratic party, the majority is of the rebelling type.

What is the significance of this distinction? While the rebelling elite (and Obama is in this group if ever anyone was) do defend entrenched interests, they have something much larger and grander in mind and they use the promise of that vision to justify the use of force. I point to all of the totalitarian regimes, past and present, as a model in this regard. With sufficient ruthlessness, an outmoded regime can keep itself in business for a very long time after its outmoded condition has become obvious to all.

I hope and believe that you are right in your prediction of a crash because I think that the alternative is a steady steam of increasingly arbitrary laws and regulations leading to a totalitarian state. Of course the totalitarian state would face its own crash but I’d prefer to skip that stage of this progression and go straight for the cure.

Comment by Steve – February 13, 2010 @ 12:38 pm

Mead’s analysis rings depressingly true for this retired California civil servant. I’m hanging on to my savings and seriously thinking of moving to the South, where I was raised. At least then I could escape California’s state income tax on my pension. But I fully expect that pension to be cut drastically in the years ahead. It’s hard to see how the state can avoid taking such steps. Current state employees don’t believe it when you tell them that the taxpayers will not tolerate crumbling infrastructure and failing schools just so folks like me can enjoy 70+% of our salary forever.

Even restructuring pensions and cutting back on current employees won’t completely save the bluest states. It will take a long period of strong economic growth as well. But where will that come from?

Comment by fred gill – February 13, 2010 @ 7:25 pm

[...] of work that explains the current political situation. In his first piece, he writes about the “Blue Model,” the American Social Contract that governed America from the end of World War II until the [...]

Pingback by Republicans United. » Can Big Red Deal With Big Blue? – February 14, 2010 @ 12:39 am

[...] that simply don’t work today. They are organized around what I’ve been calling the blue social model, built by rules that don’t work anymore, and oriented to a set of ideas that are well past [...]

Pingback by The Holy Crap Must Go - Walter Russell Mead's Blog - The American Interest – February 14, 2010 @ 8:29 am

Pingback by DENNIS SANDERS OP-ED: Can Big Red Deal With Big Blue? - Hip Hop Republican – February 14, 2010 @ 3:28 pm

[...] there’s another issue. In the now-failing blue social model I’ve been blogging about here and here, increasing the powers of the federal government wasn’t just a necessary evil that [...]

Pingback by The Mead List: Democracy Edition - Walter Russell Mead's Blog - The American Interest – February 16, 2010 @ 12:38 pm

“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.”

WRONG. Mexico, Japan, and China protect their markets using both options, with great success:

http://www.economyincrisis.org/content/free-trade

http://www.naomiklein.org/shock-doctrine/the-book

Comment by DriveByLutheran – February 16, 2010 @ 1:42 pm

[...] of God. I’ve written about this model before — what the Blue model is and why it is breaking down, why the breakdown has impaled contemporary liberal politics on the horns of an impossible dilemma, [...]

Pingback by Sunday Jeremiad: Petty Prophets of the Blue Beast - Walter Russell Mead's Blog - The American Interest – February 21, 2010 @ 11:20 am

You state “(t)he 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.” The assumption that they were ever going to work was wrong. They only seemed to work because they were financed mortgaging the future of the nation in order to run Ponzi schemes such as Social Security.

This latter assertion is not my origination, it is that of one of FDR’s principal architects of Social Security, J. Douglas Brown, a Princeton economist. Professor Brown gave an interview to the Washingon Post which was published in a Sunday of that paper less than a month before he died. He expressly admitted that all the members of the committee, including chairman Frances Perkins, knew that the system would eventually be bankrupt. He asserted that “the only mistake we made was in underestimating the rate of change of life expectancy,”* one of the more egregious examples self-serving simulated apology in modern history. He also stated that they were not particularly worried about that outcome, because their estimates indicated that the expected bankruptcy would not occur until the mid-21st century, and “we would all be dead”# by that time. If any of you think it worked you are engaging in self-deception, if not worse.

Pax et bonum,
Keith Töpfer
______________________

* and # The quoted comments may not be precisely exact, they are the best I can remember them at this remove from the 1980s. The exact quotations should be available from the press “morgue” of the Washington Post, and they do accurately capture both the denotation and connotation of Mr. Brown’s comments.

Comment by Martial Artist – February 23, 2010 @ 3:07 pm

[...] holds them together is their love of the Blue Beast; good government progressives are the heirs of the old Puritan vision of the state as the moral arm [...]

Pingback by The Democratic Crisis? - Walter Russell Mead's Blog - The American Interest – February 27, 2010 @ 5:03 am

Look, this is a fine philosophical argument. But you are missing the real point. An economy whose expansion is based on the availability of easy credit to every moron alive, regardless of age, is an economy that will eventually collapse into itself. CREDIT CARDS for everyone is the problem, people. Spare us the argument of BIG vs. LITTLE government and face the real problem. We are one generation into the “easy credit” world and it looks to me like the first will be the last.

Comment by Captain Obvious – March 3, 2010 @ 9:27 pm

[...] Russell Mead sul suo blog regala uno splendido post sull’insostenibilità finanziaria dei settori del pubblico impiego americano e sulla fine del [...]

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