Laboratory Rats.

• Author: Postrel, Virginia

What should state governments do about the new economy"?

Back in 1988, when Democrats and faddish business pundits believed in a "Massachusetts Miracle" created by state economic policy, "reinventing government" guru David Osborne published a book called Laboratories of Democracy. It argued that activist governors were creating a new sort of economic role for government--not "negative," like the Reaganite emphasis on lowering taxes and cutting regulation, but not the musty old bureaucracy of New Deal days either.

This "emerging paradigm" was cool. It was up-to-date, it was pro-business, and it was proactive. Its emphasis on decentralization, information, innovation, and "tripartite business-labor-government boards" was just the thing for the "microelectronic age." Its governor-heroes were Michael Dukakis, Chuck Robb, Richard Thornburgh, Bruce Babbitt, Mario Cuomo (!), and, of course, Bill Clinton.

Although its rhetoric foreshadowed much about the current administration, nobody talks about Laboratories of Democracy these days. How much long-term praise can you expect for a book that made an economic hero out of Mike Dukakis?

More important, the "competitiveness" argument to which Laboratories of Democracy contributed now looks wrong-headed. In the late 1980s, the political intelligentsia was convinced that America's economy desperately needed more government help: more subsidies for important industries, more protection from international competitors, more government guidance. The U.S. economy was too unruly, we were told, too unlike the well-managed Japanese industrial state.

Osborne argued that pragmatic state officials were doing the right thing, while the ideological feds ignored reality: "While the states have concentrated on microeconomic concerns, such as new business formation, regional capital markets, and labor-management relations, the federal government has remained preoccupied with macroeconomic issues: monetary policy, fiscal policy, and tax policy.[ldots]In an economy under siege by foreign competition, macroeconomic adjustments are simply not enough."

Twelve years later, the country is enjoying a stunningly good economy, and the only government policies to which it owes credit are the ones Osborne scoffed at: reasonably sound macroeconomic policies and a hands-off approach to "competitiveness" in the late 1980s and early '90s, which allowed restructuring to improve old industries and entrepreneurship to create new ones. As...