------------ EH.NET BOOK REVIEW --------------  
Published by EH.NET (September 2005)  
  
Paul A. London, _The Competition Solution: The Bipartisan Secret   
behind American Prosperity_. Washington: American Enterprise   
Institute Press, 2005. vii + 227 pp. $25 (cloth), ISBN: 0-8447-4204-X.  
  
Reviewed for EH.NET by Richard K. Vedder, Department of Economics,   
Ohio University.  
  
  
Paul London, a Deputy Undersecretary of Commerce in the Clinton   
Administration and later a visiting fellow at the American Enterprise   
Institute, argues in _The Competition Solution_ that rising   
competition and the end to stultifying monopolistic practices was the   
key factor in the rise in American prosperity between the 1970s and   
1990s. His account is highly readable and sometimes incisive.   
Unfortunately, it suffers from two major flaws that detract somewhat   
from it becoming a major, enduring work.  
  
London argues that the 1970s was a generally unsuccessful decade   
economically in America, suffering from high unemployment, high   
inflation, and sluggish economic growth. By contrast, the 1990s were   
a period of moderate inflation, falling unemployment, and higher   
economic growth. What caused the change? Rejecting the notion that   
monetary or fiscal policy was the leading determinant, London   
concludes that the commanding heights of the American economy became   
invigorated, largely because of a bipartisan political effort to end   
competitive restraints. The true heroes in London's account are   
politicians of all political stripes, ranging from Ronald Reagan to   
Ted Kennedy.  
  
More specifically, London singles out the automobile, steel,   
transportation, communications, financial services and retail trade   
industries for attention. In London's view, in 1970 the American   
steel and auto industries were relatively inefficient oligopolies   
that were slow to innovate, to reduce costs, and meet customer wants.   
Given their importance in the economy, this dragged down growth and   
job creation, also aggravating inflation. Similarly, AT & T had an   
inefficient regulated telephone monopoly, while airlines and   
railroads were stifled from competing by government regulations   
imposed by agencies like the Civil Aeronautics Board and the   
Interstate Commerce Commission. Limits on branch banking, interest   
rates, and entry into new fields stifled financial services. Various   
laws, often imposed by the states, restrained price competition in   
retail trade.  
  
I suspect most scholars agree that the deregulation of these   
industries positively impacted on the economy, probably materially.   
The assertion, however, that this is the dominant explanation of   
rising prosperity is more dubious. The author provides little hard   
evidence about the positive effects of increased competition in these   
industries, nor does he critically analyze in any detailed way   
alternative explanations for improved economic performance, such as   
more moderate inflation and increased monetary stability, a lowering   
in marginal tax rates, or even New Growth theory notions about   
increasing returns to scale, the cumulative effects of technological   
changes, etc.  
  
First, to the evidence: We can use the misery index (inflation rate   
plus unemployment rate) as an indicator, and augment it by   
subtracting the annual rate of real GDP growth. Doing that for the   
1970s yields a misery index of 13.62, and an augmented index of   
10.39. The figures for the 1990s are 8.68 and 5.58, clearly much   
lower, supporting London's point.  
  
Yet the observed improvement is entirely due to a Phillips Curve   
shift to the left, which many economists believe reflects a dampening   
in inflationary expectations, which suggests that monetary and fiscal   
policies probably played an important role. Moreover, the oligopolies   
that London castigates (Big Steel, AT&T, New York banks, etc.),   
existed in the 1960s as well, when the misery index was lower than in   
the 1990s (7.33), and the augmented misery index was an   
extraordinarily low 2.90. In the bad old days of oligopoly in the   
mainline industries, we sometimes had economic performance comparing   
well with today. Thus a fuller look at modern macroeconomic history   
makes one somewhat skeptical that the enhanced competition in a   
handful of sectors alone explains most of the macroeconomic success   
of the 1990s.  
  
Indeed, the rise in the growth in the money stock (M2) from a 7.05   
percent average annual rate in the 1960s to a 9.67 percent rate in   
the 1970s is usually considered to be at least a significant factor   
in rising inflation in that decade, a period when, if anything, the   
monopoly power in the regulated industries actually declined   
slightly. Similarly, a fall in monetary creation in the 1980s (to   
7.84 percent) and again in the 1990s (3.85 percent) most certainly   
largely explains falling inflation rates, and with that dampening   
inflationary expectations, and a better Phillips curve and misery   
index.  
  
Another explanation for a robust 1990s could well be the reverse   
crowding out of private sector spending during the Clinton   
Administration. In 1992, the federal government spent (on a national   
income accounts basis) the equivalent of 22.79 percent of GDP; eight   
years later, that had fallen to 18.99 percent. The 3.8 percentage   
point shift in resources from a relatively less efficient public   
sector to a more efficient, market disciplined private sector could   
well be a major key to explaining the success of the 1990s.  
  
The point I am making is that that there are multiple explanations of   
the improving economy over time, and London goes overboard in   
asserting that increased competition in some regulated industries was   
of paramount importance. He does not seriously evaluate alternative   
explanations. To be sure, London is no doubt correct in asserting   
that greater competition in these industries was important, and by   
emphasizing that and providing some details of the move to greater   
competition his book does provide a service.  
  
Errors of omission are compounded by errors of commission, namely a   
number of factual misstatements. Three examples will suffice.   
Speaking of the 1990s, London says "unemployment fell to record lows,   
and no inflation appeared." (p. 36). Actually, unemployment rates   
averaged higher than in several other decades (e.g., 1920s, 1940s,   
1950's, 1960s). The same in true with inflation -- consumer prices   
increased every single year; it may have been low, but it did exist.   
Or, "Inflation did not becoming a significant problem during the   
Eisenhower years, but it was in the Kennedy-Johnson era" (p. 21). In   
fact, the annual rate of inflation during the three Kennedy years as   
president never reached two percent, and was lower on average than in   
the second Eisenhower term. Referring to Alan Greenspan, he said "In   
1988 and 1989 ... he tightened the money supply and raised interest   
rates from around 6 percent to over 9 percent" (p. 167). Interest   
rates on long term government bonds had not been as low as six   
percent in two decades, and the average rate in 1989 was only 14   
basis points higher than in 1987 (and below 9 percent). Moreover,   
money supply growth actually rose in 1988. If he had said "there was   
a tightening of the money supply in 1989," he would have been   
factually correct.  
  
In the last chapter, London looks to the future, suggesting that   
competition could be extended further to promote growth, particularly   
in the fields of education and health care. While I happen to agree   
with him, I think as long as third party (governmental) payments are   
a dominant factor, it will be hard to fashion a competitive   
environment with true market discipline. Nonetheless, London   
correctly points out that 20 percent or so of the American economy   
operates in an inefficient, less than perfectly competitive   
environment.  
  
London makes a valuable contribution in pinpointing the increased   
efficiency arising from increased domestic and international   
competition in a variety of important industries. He overstates his   
case, sometimes asserting things rather than marshaling evidence.   
Nonetheless, his book is a positive contribution to our understanding   
of contemporary American economic history.  
  
  
Richard Vedder is Distinguished Professor of Economics at Ohio   
University. His most recent book is _Going Broke by Degree: Why   
College Costs Too Much_ (Washington, AEI Press, 2004).  
  
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