If the challenge facing us is to design a system of government that functions without choking off enterprise, then Democrats and Republicans alike are asking all the wrong questions

We must disenthrall ourselves from the past. Otherwise it becomes a barrier to progress.

-- Abraham Lincoln

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The world we are moving away from is one that has its tentacles wrapped firmly around our minds.

-- Jeffrey Eisenach, president, Progress & Freedom Foundation

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Government -- federal and state -- must reinvent economic and regulatory policies and processes to match the realities of an altered world. Not refurbish or refine them; re- invent them.

"Every few hundred years in Western history," Peter F. Drucker wrote in Post-Capitalist Society (HarperBusiness, 1993), "there occurs a sharp transformation. . . . Within a few short decades, society rearranges itself -- its worldview; its basic values; its social and political structure; its arts; its key institutions. Fifty years later, there is a new world. And the people born then cannot even imagine the world in which their grandparents lived and into which their own parents were born. We are currently living through just such a transformation."

Drucker was writing that in 1992, when House Speaker Newt Gingrich was still a bratty congressman from Georgia and Bill Clinton was running for president as the candidate of change. The fact that politics in America has been turned on its head since then is a good indicator that Drucker knew what he was talking about. Another indicator, less grand in scale but just as dramatic because of what it says about the effects of transformation on people's lives, is what's happened to the Staffords and the business they're struggling to run, Kiva Container, in Phoenix. (See "There Are No Simple Businesses Anymore," [Article link].)

Kiva is struggling to accommodate itself to ongoing, pervasive changes that it didn't foresee, doesn't fully understand, and can't accurately predict. Some companies, like Kiva, are doing a pretty good job of responding to, if not always anticipating, those changes as they affect markets, relationships with suppliers and customers, and the technology of their business. They could do a better job if they didn't also have to contend with government policies more appropriate to the end of the last century than to the end of this one.

It's taken a couple of hundred years to invent and build the body of laws, regulations, and institutions that have seen the nation through the industrial age. The challenge facing policy makers -- which includes all of us, since this is still a republic -- is not to ask what new regulation or income-tax rate we need. Such questions assume the need for such things. Neither is the challenge to demagogue for smaller -- or larger -- government. It's not the size of government that matters but how it governs. The challenges are to figure out what we are trying to accomplish and to find the best way to get it done. Among other things, we'll need imagination, open minds, a willingness to discard old assumptions, and an ability to embrace uncertainty.

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Applying Knowledge to Knowledge
In January, just as the new Republican majority was settling into Congress, Jeffrey Eisenach opened a daylong seminar sponsored by the Progress & Freedom Foundation, which he founded and heads, by referring to "the general crisis of industrial society." It was a theme he may have picked up from futurist Alvin Toffler, the day's first speaker, who, in Creating a New Civilization: The Politics of the Third Wave (Progress & Freedom Foundation, 1994), wrote: "It has belatedly begun to dawn on people that industrial civilization is coming to an end."

Hyperbole? Hardly. It's pretty clear to anyone in business today that whatever is happening out there, it's not just more or less of the same. The by-now conventional explanation for what baffles us daily is that we're seeing a shift from a world economy based on industrial production to one based on information.

But what does that mean? Alvin and Heidi Toffler tend to hyperventilate over their own constructs: the "wave theory of conflict," for instance. Their books are good reads, but Drucker's cooler analysis is more pragmatically revealing.

Drucker divides the industrial age into two periods, both the result of a change in the nature of knowledge. Until the early 1700s, craftsmen made things -- shoes, plates, everything -- but how they made them was essentially a mystery, passed from father to son. The industrial age emerged as scholars and what we might today call engineers learned that they could collect and organize information about what people did. "The speed of technical change created demand for capital way beyond anything the craftsman could possibly supply," wrote Drucker. "The new technology also required concentration of production, that is, the shift to the factory. Knowledge could not be applied in tens of thousands of small individual workshops and in the cottage industries of the rural village."

The second phase, which didn't begin until early in this century, Drucker calls the productivity revolution, which he credits to Frederick Winslow Taylor. Taylor analyzed and reengineered the work being done in those primitive 19th-century factories. Work, after all, had been around as long as people had, but as a subject of study, it had been beneath the attention of the well-to-do. It was the lot of the less fortunate. Taylor reasoned that if you studied and understood work, then you could teach it.

Taylor's greatest impact, according to Drucker, was felt in training. A hundred years before Taylor, Scottish economist Adam Smith assumed that it would take a region at least 50 years of experience to acquire new industrial skills. But in two world wars, the United States applied Taylor's training techniques to convert farmers and housewives into productive industrial workers in just a few months' time. Drucker argues that most of the economic gains from the Industrial Revolution are due to Taylor's work: "Technologists give the credit to machines, economists to capital investment. Yet both were as plentiful in the first hundred years of the capitalist age, before 1880, as they have been since. . . . But there was absolutely no increase in worker productivity during the first hundred years -- and consequently very little increase in workers' real incomes or any decrease in their working hours. What made the second hundred years so critically different can only be explained as the result of applying knowledge to work."

Today the productivity revolution is over. Forty years ago, Drucker notes, people who made or moved things were still a majority in all developed countries. By 1990 they had shrunk to one-fifth of the work force. By 2010 they will form no more than one-tenth. Increasing the productivity of manual workers in manufacturing, farming, mining, and transportation will no longer create much wealth. "The Productivity Revolution," says Drucker, "has become a victim of its own success. From now on, what matters is the productivity of nonmanual workers. And that requires applying knowledge to knowledge."

So when Drucker refers to an emerging post-capitalist society, he means one in which knowledge is replacing capital and labor as the critical economic resource. Implications? Or as an impatient friend of mine frequently asks, "So what does that mean to me?"

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Staying Smart Is the Greatest Challenge
Clearly, it means that the current disruption to the lifestyle of the American middle class -- those folks who rode the productivity revolution to a standard of living their parents and grandparents could barely imagine -- isn't going to be fixed by a few tax cuts and some budget reductions. The new American middle class, by and large, will be made up of those people who participate in the coming productivity gains in knowledge-based work. They'll be the people who, as William Bridges puts it in "A Nation of Owners" (page 27950891), come to think of themselves as You & Co. -- independent microbusinesses, companies of one. And by the same token, businesses -- that is, the companies and entrepreneurs who start them -- will grow and profit to the extent that they learn how to apply knowledge to work.

Many American companies are sorting through the new realities and reshaping themselves from the inside out for new and still evolving modes of competition. Nicholas Imparato and Oren Harari in Jumping the Curve (Jossey-Bass, 1994) wrote that companies are learning "to shift their priorities from stabilizing to innovating."

The first people to popularize a conceptual framework around what had been a trial-and-error approach to the new managerial efforts were James Champy and Michael Hammer, co-authors of Reengineering the Corporation (HarperBusiness, 1993). Reengineering as they defined it -- "the fundamental rethinking and radical redesign of business processes to achieve dramatic improvements in . . . performance" -- wasn't the whole answer to how to do business in Drucker's post-capitalist age, but it was a good stab at creating a methodology for reinventing the way organizations get work done. Taylorism focused on the task and its execution: for example, what's the most efficient way of filing invoices? Reengineering looks at the larger process -- at materials acquisition, for instance -- and asks whether invoices are even needed. Reengineering requires organizations to toss out their old assumptions and redesign themselves, starting with a clean slate and open mind: Here's the job. Now how can we get it done?

But there is more to the transformation from capitalist to post-capitalist society than the reengineering of work processes, important as that is. Every notion we hold about the organizations that we call companies -- how they're organized, how they're managed, what they do -- is changing. A little more than a hundred years ago the idea of the modern corporation -- a legal entity independent of the place in which it was located and even of the people who owned it -- was as unknown and unimaginable as the transistor. So how can we know what companies of the future -- assuming there are companies -- will look like? Of course, we can't, but we can see the direction they're taking.

The most successful of today's large companies look hardly anything like the mass-production behemoths that my parents grew up with. Those were built like the Eiffel Tower -- rigid, vertical affairs bolted tightly together. They had a top, a bottom, and a lot of pieces in between; and one's job was defined by one's place in the structure. Command-and-control systems worked like the tower's elevator: up and down. There was simply no sideways motion. The man at the top -- it was almost always a man -- had the best view, so he got to make -- indeed, was expected to make -- the decisions.

By now we all know how those hierarchies worked and that 10 to 20 years ago they began to encounter trouble. The Japanese were outperforming them and so were upstart entrepreneurs. And the history of their response is familiar, too. They first looked for strategic fixes: maybe they weren't in the right businesses, so they swapped stars, dogs, and cash cows, and then looked for core competencies. They're still looking. In the March/April 1995 issue of the Harvard Business Review, three British consultants propose the "parenting advantage" model of corporate strategy, which posits that large diversified corporations should own only those businesses to which they are uniquely capable of adding more value than other corporate parents could. Interesting, but not the stuff of revolution.

What gets closer to illuminating the revolution that has begun in corporate America is a book by two CSCIndex consultants, Michael Treacy and Fred Wiersema. In The Discipline of Market Leaders (Addison-Wesley, 1995), they describe companies that are beginning to do what Drucker says they should do: apply knowledge to knowledge.

Treacy and Wiersema show that it's not the company with the best product that's going to win -- or in other markets, the company with the lowest costs or the one with the best total solution to a customer's problem. Whatever a company does to create customer value, it's not how well it performs today that matters in the long run but how good it is at learning to do it better. For instance, Treacy and Wiersema cite Cott Corp., a beverage company that doesn't make, bottle, or distribute soft drinks. Cott is what Treacy and Wiersema call a customer-intimate company, because it strives to provide ever more comprehensive solutions to its customers' needs. Cott, they write, "uses its knowledge of soft drinks to design and implement sophisticated private-label branding strategies for customers like Wal-Mart and Safeway." Cott consists largely of a bunch of smart people who know how to create and deliver profitable branded retail products, which are what its customers are looking for.

To beat back rivals, customer-?intimate companies like Cott are always having to adapt their expertise to new clients and to the changes in existing clients' basic problems. "Staying smart," write Treacy and Wiersema -- and this is the punch line -- "is their greatest challenge."

And it's the same with the other two kinds of market leaders -- operational-excellence companies that discipline themselves to deliver lowest total cost and product leaders that customers count on to have the latest and best. It's not the company with the lowest costs that wins but the one that's best at continually lowering its costs and finding more convenient ways of getting products and services to customers. Likewise with product leaders, the successful company isn't the one with the hot product but the company with the best model for continually delivering product (or service) innovation.

Treacy and Wiersema's contribution to our understanding of how companies are changing is their observation that post-industrial business competition will center less on how good companies are at "doing" and more on how good they are at improving. The winners will be the companies that can obsolete their own performance the fastest. That's just as true for small companies as it is for big ones. What the two authors don't say much about is how companies get smarter and better at what they do. Clearly, companies built on the Eiffel Tower model can't.

Some companies are reinventing themselves to deliver continual improvement -- improving not just how they get their work done, which is the professional focus of reengineers, but how they're structured, how they're managed, and how the vital juices move around inside them. "Indeed," argues James Collins in "Building Companies to Last" ( [Article link]), "the ability to create organizational innovations is more important in building a great company than the ability to create product, technology, and market innovations."

In an article in the May/June 1995 issue of the Harvard Business Review, management professors Christopher Bartlett (Harvard Business School) and Sumantra Ghoshal (London Business School) crack open a window on that change by describing the new roles that the top managers of a few large diversified corporations are taking. Bartlett and Ghoshal say those senior executives are moving beyond the three S's -- strategy, structure, and systems -- to embrace three P's -- purpose, process, and people. Moving beyond strategy to purpose means that the CEOs of companies like ABB Asea Brown Boveri, a $30-billion-plus electrical-engineering company with businesses around the globe, understand they are too far removed from individual business units to dictate business strategies, which should be left to the people running the businesses. Moving beyond structure to process means they recognize that the organization is more than its skeleton -- that it has a physiology and psychology as well. How well the company performs depends partly on the organization chart (structure) but also on the internal processes by which it continually renews its knowledge and its spirit. Finally, by observing that top management is moving beyond systems to people, Bartlett and Ghoshal suggest that financial reporting and control systems are not the only way to influence and track organizational behavior. Senior management can also work and talk directly with people -- mentoring them, influencing them, and learning from them.

Small-business owners who may be inclined to see the obvious in this conclusion would do well to remember that most big companies were once small and that many companies ossify well short of reaching the Fortune 500. There's something useful to be learned here -- even by the Staffords at Kiva Container, who are struggling every bit as hard as their counterparts at, say, GE and AT&T to adapt their companies to new kinds of competition and competitors that a generation ago they couldn't have imagined. It would be helpful to them, and to all of us, if government -- with its responsibility for shaping markets, regulating economic behavior, enforcing laws, and extracting taxes -- were likewise to reinvent itself for the post-capitalist, post-industrial, third-wave information age.

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Government Should Be Easy to Do Business With
Susan Eckerly used to compile regulatory horror stories for the Heritage Foundation, a Washington, D.C., think tank, which often published them for their shock value. Here's one:

"John McCurdy, owner of a very small herring smokehouse, recently had a run-in with the Food and Drug Administration (FDA). Despite [McCurdy's] producing over 54 million fillets over 20 years without a single reported case of food poisoning, the FDA told McCurdy he would have to change his methods. Unfortunately, that would require $75,000 in new equipment. Facing the hopeless choice between installing equipment he could not afford or fighting a legal battle with the FDA, Mr. McCurdy chose the only other alternative -- he closed his business and laid off his 22 employees."

Eckerly displays government regulation and the regulatory bureaucracy in the worst possible light. She cites estimates that put the total annual cost of regulation at $615 billion; she reports that small companies spend $100 billion annually just filling out government forms; she points out that one county government found that it would be cheaper to buy and distribute bottled water to its residents than to comply with federal water-testing requirements.

But we already know that government regulations are awful, and people in Washington (or state capitals) who only rail against regulation and champion its dismantling miss the larger essential point. So, too, do people like Vice-?President Gore, who in a recent speech to a Rhode Island environmental group defended the kind of nonsense that's left Kiva with a mound of "contaminated" dirt in its backyard. "Now is the time to fight back and fight back hard," Gore told his audience, "because all of the nation's environmental regulations are under an unprecedented assault." And so they are. But demonizing absurd regulation on the one hand and defending it on the other are not what the government policy debate should be all about.

Railing against regulation in government is like railing against bureaucracy in business. If you don't like government regulation and the tax code, try living without them. Chaos will result. The way to eliminate nightmarish regulation is to find other ways to achieve the same ends -- and that's where the GOP's Contract with America, for instance, falls short. It was a promise to act (or at least to vote) but not a framework for action. Tick off the items on the list. Line-item veto? Yup. Unfunded mandates? Covered them, too. But now what?

Likewise with taxes. Middle-class tax cut? Did it. But the most lethal effect of taxes on American companies' ability to adapt and compete comes not from the tax rates but from the tax system. The secret truth that every politician knows and few will utter is that corporate income taxes are economically absurd. At the Maryland meeting in preparation for the June 1995 White House Conference on Small Business, one man asked why it made sense for the government to tax the earnings his company could have invested in growth and then create Small Business Administration programs to lend it back to him. Good question.

The question I've put to a great many people since last fall is, What does business, and small business in particular, need from government? The best answer came from James Champy, coauthor of Reengineering the Corporation. "Government," Champy told me, "should be easy to do business with."

Champy's answer sets a dynamic standard for government performance that's far more ambitious than anything in the GOP's Contract or any reform President Clinton has proposed. As a performance goal, "easy to do business with" doesn't specify what government should do, but it says volumes about how government should do it.

If the government were easy to do business with, Ruth Stafford of Kiva Container wouldn't spend 20% of her time dealing with, as she puts it, "that junk" -- the red tape associated with the Occupational Safety and Health Administration (OSHA), the Environmental Protection Agency, and other regulatory agencies; Kiva would spend far less than the $600,000 a year it now spends on accountants and lawyers; the company could get speedy court resolution of contract and tort issues instead of waiting years to get no decision at all; and it wouldn't have a $100,000 mound of dirt rising in its backyard -- if the government were easy to do business with.

Whatever its other goals, government can't be a drag on the private sector's efforts to adapt to the radically changing economic environment. Among other things, "easy to do business with" implies the following:

* The time and dollar costs to business (or anyone) dealing with government should move toward zero. Paying taxes should be as simple as paying a credit-card bill. Civil disputes should move quickly and smoothly through an efficient adjudication process -- public or private. The answer to most questions citizens have of government should be a toll-free phone call away.

* Companies should be able to make business decisions for business reasons. Developers should build office buildings according to the demand for office space, not congressional whim with regard to depreciation periods. Manufacturers should replace or not replace equipment as competition demands, not as Congress fiddles with the investment tax credit. One major goal of tax policy should be to have as little distorting effect on economic decisions as possible.

* If a government policy intensifies or expands competition, it's probably a good thing; if not, it probably isn't. A story in the Boston Globe reported that an employee-leasing company had fraudulently pocketed the $65,000 in premiums it had collected for workers' compensation insurance, and the story also carried this response: "Concern that a few bad apples will make the whole industry stink has prompted the leasing industry's primary trade group to draft legislation requiring every leasing firm to pay a hefty licensing fee, undergo a background check, and provide audited financial statements. The National Association of Professional Employer Organizations plans to introduce it or similar legislation in Massachusetts and several other states this year." Oh, please. If I think I can pocket tens or hundreds of thousands of dollars by committing fraud and getting away with it, I'll pay the hefty licensing fee and find a way to fake the background check. The only protection such business-inspired regulation offers is to existing companies that don't want trouble from entrepreneurs who might -- egads! -- try to compete.

* Work on root causes. Harvard professor Michael Porter makes the case in "The Rise of the Urban Entrepreneur" ( [Article link]) that the way to face up to poverty in the inner city is to find and fix its causes, not dab at its symptoms. In his book Bionomics (Henry Holt, 1990), Michael Rothschild argues that the economy is more complex than the mechanical metaphors we usually use to describe it suggest. In the real economy, every action does not have an equal and opposite reaction. Better, Rothschild says, to think of the economy as a rain forest, a complex ecosystem in which you can never predict all the effects an action might precipitate. The closer you work to the cause of a problem, suggest both Rothschild and Porter, the smaller the required fix and the fewer the unexpected consequences.

* Government works better when it steers than when it rows. The steer-row metaphor comes from Reinventing Government (Addison-Wesley, 1992), by David Osborne and Ted Gaebler. They mean that as a general rule government should not focus -- or get bogged down in -- operations. "Steering," they say, "requires people who see the entire universe of issues and possibilities and can balance competing demands for resources. Rowing requires people who focus intently on one mission and perform it well. Steering organizations need to find the best methods to achieve their goals. Rowing organizations tend to defend 'their' method at all costs." Private-sector rowers that defend outmoded and inefficient methods at all costs usually go out of business, which frees up the resources they were using to work someplace else. Obsolete public-sector rowers, in contrast, just keep wasting the public's money.

* Markets work better than bureaucrats (or legislators) at allocating resources, promoting innovation, and influencing behavior. Markets are not the answer to every human need, but they'll resolve many more problems a lot faster than rule makers can. Would the Interstate Commerce Commission have invented United Parcel Service, or the Federal Communications Commission, the Internet? Markets put thousands or millions of creative minds to work on a problem, whereas regulations reflect the imagination of only the regulator. Markets create incentives for people to profit by doing the right thing; regulations create incentives to beat the system.

* If it doesn't work any more, don't do it. See above under steering and rowing.

The amazing thing about those ideas is that there's nothing amazing about them. Would anyone seriously argue with the notion that it shouldn't cost a lot of time or money to get a decision from a government agency or from the judicial system? Is it radical to suggest that government should stop doing what doesn't work? Yet when you apply those not very amazing notions to the making of government policy, you get really radical results.

Take taxes. Say your objective is to invent a process of raising money to defer the cost of government. Short of extortion, the worse process you could possibly think of would be today's individual and corporate income-tax system. It violates practically every criterion of "easy to do business with." Taxing business income punishes value-creating enterprise and rewards tax-avoidance duplicity. It distorts business decision making by inducing companies to take actions for tax purposes instead of for competitive reasons. The corporate income tax decimates businesses' principal source of investment capital. And to add insult to injury, the income tax is an astonishingly inefficient device for generating revenues. (See table, page 8, "Our Costly Income-Tax System.")

A better tax system would be simple, require little or no paperwork, and have minimal effect on companies' (or individuals') economic decisions. Applying the easy-to-do-business-with criterion to the problem might lead creative policy makers to invent something like a national retail sales tax. With such a system, thousands of accountants and lawyers could find real work creating real economic value. Kiva could invest its earnings in growth instead of waiting for months to borrow from the bank.

Or take workplace safety and environmental protection, both of which the government now approaches through command-and-control-type regulation. Policies that rely on market devices -- such as an auction market for permits to emit particular air pollutants or discharge certain water contaminants -- would accomplish the same goals, probably better and certainly cheaper. If employees had the organizational means and a personal financial incentive to help make their workplaces safer, most OSHA regulations could be tossed out the window and fewer workers would get hurt.

Take the judicial system, at least the civil part. In a sense it's a service that government provides -- the adjudication of disagreements between and among private parties. If the system doesn't deliver its service in a timely fashion and at an affordable cost, it's no service at all. Worse, a badly run civil-justice system rewards unscrupulous behavior and victimizes people who try to play fair.

Of course, it's hard to imagine that judges and lawyers, whose self-interest this travesty serves, would be interested in reengineering the judicial process. But as Osborne and Gaebler say in Reinventing Government, government's responsibility is to see that services are provided, not necessarily to provide them itself. So why not think of a way the market could provide competing, for-profit, conflict-resolution companies that might coincidentally set new performance benchmarks for the public system?

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Small companies have lots of legitimate complaints about government, and they've been airing them along with proposed solutions for most of the past year in preparation for the June 1995 White House Conference on Small Business. But the conference probably won't attract the attention it should. That's not because it's not important. And not because the people participating haven't worked hard. The conference process almost assures that delegate recommendations will sound superficial and obtuse.

At the preliminary statewide meetings, people who have never met before are given an hour to create a list of problems and suggested solutions to those problems. The procedure invites lots of input but little thought, so the man who wants the SBA to guarantee more small-business loans gets his point across while there's no time to delve into whether or why small-company borrowers need the government's backing.

What does small business really need from the government? The same thing big business and society in general need -- fundamental reform. Government has a role to play in the transformation the industrial world is going through, but government itself cannot remain unchanged. "Within a few short decades," Drucker wrote, "society rearranges itself -- its worldview; its basic values; its social and political structure."

You don't get that kind of rearranging by tinkering with the number and value of small-business set-asides, by hiking the amount of capital investment businesses can expense each year, or by speeding up the processing of SBA loans. What's needed is a fundamental rethinking of government purposes and processes.

There is no lack of ideas to draw from. Libraries, bookstores, newsstands, and the Internet are jammed with them. Private-sector organizations -- companies large and small -- have already set useful examples in the ways they are going about reinventing themselves.

In the May/June 1995 issue of the Harvard Business Review, Bartlett and Ghoshal say: "Today's top managers recognize that the diversity of human skills and the unpredictability of the human spirit make possible initiative, creativity, and entrepreneurship." The same principle applies to reshaping our government, and the people with the diversity of human skills and unpredictable spirit -- the people with the ideas -- are all of us: you, me, and them. The best we can all do is to keep asking two questions of ourselves, our businesses, and our government: What are we doing, and what's the best way to get it done?


If there is any validity to the idea that people's views are shaped by their experiences, this year's House of Representatives should be more sympathetic to the needs of business than any House over the past 40 years: 163 out of 435 members list their prior occupations as business or banking. The number of former lawyers in the House, 170, is the lowest it's been over the same period. In the Senate, on the other hand, the legal profession still commands a majority, 54%.

Prior Occupations of Representatives and Senators

Lawyers Banking Other
House of Representatives
1955 56% 29% 15%
1975 51% 32% 17%
1994 39% 37% 24%
1955 60% 28% 12%
1975 67% 22% 11%
1994 54% 24% 22%

Source: "Vital Statistics on Congress, 1993Ñ1994," Congressional Quarterly, Washington, D.C., 1994.


In the last couple of decades, the United States has deregulated much of its economy -- everything from broker rates to interest rates to utility rates, from trucking to airlines to taxi fleets. So if there's been so much deregulation, why are businesses still complaining about the regulatory burden?

The reason is that while economic regulation has gone out of fashion, social regulation has not. Governments -- federal, state, and local -- use their regulatory power to achieve all kinds of ends deemed socially desirable, from environmental protection to improved access for the handicapped, from workplace safety to pension improvement. The social regulations are what businesses are complaining about.

But the means may be creating the problems, not the ends. If you want a clean environment, for instance, there is more than one way to get it. In fact, Michael Kellogg, a Washington, D.C., lawyer, explains in the Cato Institute's quarterly magazine, Regulation (1994, No. 1), that there are three different approaches to managing environmental regulations: (1) the command-and-control approach, in which regulators write and enforce rules and standards; (2) the market-based incentive approach, in which government shapes policy but uses market incentives to implement it; and (3) the free-market approach, in which market forces act through a body of property rights and tort laws to prevent environmental degradation without government intervention. In remarkably plain English, Kellogg illuminates all three approaches before endorsing the second.

Command-and-control regulation, which by and large describes most government regulations today, is (1) slow, because it relies on a single bureaucracy to learn and understand everything there is to know about a problem and prescribe the solution, (2) adversarial, because regulations don't change the underlying incentive for companies to pollute, (3) inefficient and expensive, because it imposes the same rules and standards everywhere and offers companies no incentive to fix a problem better or cheaper, (4) deceptive, because it buries the cost of regulation in the price of the product or service produced, and (5) politicized, because of the vast amounts of money at stake.

The free-market approach, Kellogg's third category, won't work for two reasons, he says. First, the transaction costs are too high. If I don't like the quality of the air over my house, I could sue the polluter. But sue whom? The local utility? The drivers of the 800 cars that drove by today? What are their respective shares of responsibility? The free-market approach also fails Kellogg's test because it leaves all decisions up to the market. If someone wants to buy Yosemite National Park and put up condos because the condo purchasers will pay more to own condos than hikers will to hike, then, Kellogg writes, condos there will be. What the free-market approach can't conceive of is, says Kellogg, that some things "are, or should be, sacred."

Kellogg opts for choice two: market-based incentives . "The idea, in short," he says, "is to let government steer and the market row." Market-based incentives can be one of two types. Government could place a tax on pollution, and companies could pollute as much as they want to, consistent with their abilities to pay the tax. Government could reduce the amount of pollution simply by raising the tax rate. Alternatively, government could fix the total amount of pollution permissible and let polluters bid on pollution permits. The principal shortcoming of market-based incentives, according to Kellogg, is that there is still no way of knowing what the "right" amount of protection is and no way of deciding, except through the political process, where our priorities ought to be.

The free-market approach to regulation won't work, says Kellogg, and command-and-control regulation is "a relic of an earlier age (the 1960s and 1970s) when primitive information technologies seemed to require large bureaucracies to deal with complex problems. Today market-based solutions to our environmental problems seem clearly preferable."


Fifteen years ago at the first White House Conference on Small Business (WHCSB), nearly 1,700 official delegates voted and said they wanted lower taxes, better access to capital, less expensive and less intrusive regulation, and government that was easier to do business with. Nine years ago at the second WHCSB, more than 1,800 delegates made very similar demands. This year, given the results of the state meetings already held, conference delegates will probably ask for lower taxes, better access to capital. ..

The problems the delegates see haven't changed much since 1980, and the solutions they've put forward haven't advanced much either. Fifteen years ago they voted, for instance, to support the Regulatory Flexibility Act, requiring federal agencies to review proposed regulations for their impact on small companies. This year they'll probably support a proposal that would allow small companies to sue agencies that don't perform the required review. Delegates aren't encouraged to color outside the lines.

Are the conferences a waste? Paul Barr, a Dairy Queen franchisor in Chester County, Penn., thinks so. He came home discouraged from the 1986 conference. "The amount of time we spent there," he says, "it was all for what? I expected too much."

But it's not the immediately measurable effects that are necessarily the most important. At the 1980 conference, with no precedent for such a gathering, few delegates had any expectations at all. Sixteen hundred and eighty-two official delegates arrived in Washington and were each astonished to discover that other people -- 1,681 of them -- shared their fears, insecurities, frustrations, and aspirations about small-company ownership. That first Washington meeting was a small-business Woodstock without the mud, a Stonewall without the cops.

A hugely charismatic chief counsel for advocacy at the SBA then, Milton Stewart, seemed to be everywhere at once, goading and cheerleading. "The significance of 1980 was that different segments of small business recognized that they had much more in common than they realized," says Ann Eskesen, president of Innovation Development Institute in Swampscott, Mass., and a delegate to the conference. "The impact was extraordinary."

The lasting effect of that meeting was to sharpen the political focus of the small-business community. The delegates created a follow-up organization that was short-lived, but it lit a fire under the professionals. "They don't need a new lobby," complained a lobbyist with the National Federation of Independent Business after the January 1980 event. "We've got the power to get their needs taken care of."

"Then why haven't you done it already?" sniped a Mississippi delegate.

Memo to this year's conferees: "Do your homework, understand the issues, and raise the profile of what you're doing," recommends two-time delegate Bill Nourse of Nashville, Tenn. Nourse knows it's easy to get seduced in Washington because those in the know there say what visitors want to hear. Be bold and bear in mind who's supposed to be listening to whom.


Every time Washington collects a dollar in tax revenues, taxpayers shell out that dollar plus another 65 cents. Why is that? It's not that the IRS is inefficient.

That agency's expenses eat up less than a penny of each dollar it raises. The 65 cents is what it costs taxpayers -- businesses and individuals -- to pony up each dollar. Compliance costs, which come to 24 cents, include the expense of keeping records, staying current with the tax code, and filling out the forms. Enforcement costs, close to 2 cents, include tax-?payers' expense for audits and litigation. We spend 3 cents on tax evasion and avoidance. However, the biggest expense item, at 33 cents, is economic disincentive. "By taking away the fruits of labor and capital," says political economist James L. Payne in his book Costly Returns, "the tax system works to discourage working and investing." So the next time Washington announces a, say, $10-billion program, remember that the real cost is that plus 65 cents per dollar -- or $6.5 billion more.

Costs of the Federal Tax System to Taxpayers for Every Dollar of Revenues Collected

Compliance costs 24¢
Enforcement costs
Disincentive to production 33¢
Disincentive cost of tax uncertainty
Evasion and avoidance cost
Government cost
Total 65¢

Source: Costly Returns, by James L. Payne (ICS Press, San Francisco, 1993).