Laboratory Rats.

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 that noted right-winger Bill Bradley explained in a recent TV interview, "The thing that caused [the economic boom] is not government[ldots]but really the dynamism of our private sector." The job of government, he said, is to "get the big things right in terms of a prudent fiscal policy, open markets, the free flow of capital, the lowest possible tax rate for the greatest number of Americans, and investment in education and research."

Of course, Bradley didn't push that line very hard in his failed presidential campaign, and it still has too few adherents within government. Activist governors are still trying to attract press kudos by injecting themselves in the middle of the "new economy." In late February, the National Governors' Association met in Washington, contemplated state government's role in a post-industrial world, and released a big report called "Governance in the New Economy."

The report starts with a governors' daydream that updates Osborne. In an imagined future, federal economic development funds come pouring into state government, which must "design and implement a plan that will achieve measurable results." Then comes the vague consultant babble: "State and local leaders will be able to comprehensively and strategically plan for revitalized local economies."

Those plans are straight out of 1988, imagining no functioning capital markets, no variety among state economies, and no unexpected economic paths: An economic development "grant will provide funds to retool outdated manufacturing facilities to accommodate new, high-technology business as well as to train workers to prepare for the new high-technology jobs." We know the one best future, and it is "high-tech." Every wide place in the road will be the next Silicon Valley. All we need is that comprehensively and strategically planned push.

The governors' subsidize-and-plan approach captured the imagination of reporters covering the conference. An Associated Press story cited Illinois Gov. George Ryan's plans for $1.9 billion in spending on education, "government services," and venture capital, California Gov. Gray Davis' proposal to give state universities another $75 million for research on new technologies, and New Jersey Gov. Christie Todd Whitman's proposed $165 million for technology initiatives. "You can't just let it happen," said Whitman. "You've got to be driving it." So much for the dynamism of the private sector.

As for getting the "big things right" at the state level, the governors' report has good points, bad points, and mainly a lot of confusion. It says that states should "reshape the economic environment to facilitate business expansion and eliminate market distortions caused by outmoded taxes and regulations," even as it implies new market distortions in favor of information industries. It says, "It will no longer be practical or advisable to have a system replete with exceptions to general rules" but also repeatedly supports "flexible" government--both worthy-sounding ideas, but not necessarily compatible ones.

All this business babble fails to distinguish between two distinct roles of state governments: that of rule maker and that of service provider. As rule makers, states need to provide simplicity and certainty, so that private actors can make and execute their own plans without tripping over unpredictable and potentially arbitrary state regulations. "Flexible" rules sound good, because they take into account special circumstances, but in practice they tend to be unpredictable and subject to political manipulation.

The goal instead should be "simple rules for a complex world," rather than complex regulations designed to make the world simple. Keeping the rules simple and predictable, but not so restrictive that they prohibit private innovation, can be difficult for state governments. It means living with surprises and diversity, and it definitely implies tolerating results that may not fit a comprehensively and strategically planned vision for local economies. Who planned for Starbucks? For nail salons? And, let's be honest, who planned for dot.coms and the warehouses and shipping infrastructure that serve them?

Simple rules don't give favorable tax treatment to some businesses and punish others. They don't prescribe detailed categories for land use--retail stores, but no restaurants, "beverage houses" but no health clubs or storefront churches--as many localities do. They don't declare that the one best future must be a row of antique stores, or an enclave of computer companies, regardless of what entrepreneurs and their customers might prefer.

Simple rules for a complex world are all the more important in the Internet age, when states face competition that challenges the legitimacy of their regulations. Consumers can now leap borders at almost no cost, and businesses are eager to serve them. The governors' report admits that companies usually prefer uniform standards to a patchwork of different regulations, which may imply a federal standard, preempting state prerogatives. But the report does not fully acknowledge that consumers themselves may deliberately bypass the laws supposedly designed for their protection.

"The diminishment of borders makes the cost and capacity to protect consumers more problematic," states the report. "A criminal or fraudulent business in one state can victimize consumers in a different state. The sale of prescription drugs, pornography to minors, and cigarettes and alcohol over the Internet illustrates how information technology is breeding new federal-state regulatory issues and tensions that challenge existing regulatory regimes."

Of course, the Internet consumers who buy Viagra or Chardonnay across borders do not feel like victims of criminal businesses. They think their states' "protective" laws stink. And their actions challenge the laws' legitimacy. They force states' regulatory monopolies to face competition.

Competition is what "laboratories of democracy" are about. In a federal system, smaller units of government can try different approaches. That allows both diversity--people in one state may not have the same values or preferences as people in another--and discovery. States can experiment, and good ideas can spread.

This process is most valuable when states are functioning as service providers. Contrary to Osborne's industrial-policy emphasis, the real state-level innovation of the past decade have been in such area as welfare reform--in services, not regulations. States have also learned how to tap the competitive discovery process within the private marketplace, by contracting out functions and, in some rare cases, simply giving citizens vouchers with which to purchase services.

But both state roles, as rule maker and as service provider, also raise a fundamental question: Is this a proper task for government at all? The governors never ask, "What business are we in?" What are we supposed to be delivering? Liberty, order and justice? Or any good, service, or restriction that sounds attractive and has an effective lobby?

This is the question that determined "pragmatists" like Osborne consistently dodge. As leftist political writer Harold Meyerson correctly observed of the 1996 Reform Party convention, Perot-style technocrats imagine that there are no substantive disagreements between the followers of socialist Michael Harrington and the followers of libertarian Friedrich Hayek. It's simply a matter of getting the "best experts" in a room, stamping out corruption, and finding efficient techniques. The governors' report takes a similar attitude.

The inevitable result is a mandate to do just about anything, and to focus more on the states' powers and prerogatives than on the freedoms of the citizens they serve. The report asserts, for instance, that state and federal policy makers must not let their turf battles deter them from "jointly shouldering the responsibility to shape the future and frame the questions that must be answered."

That line may be federalist boilerplate. But it says a lot about what the nation's governors really think about innovation, decentralization, and all the other characteristics of the "new economy." They're great, as long as they're under government control. We wouldn't want the future to take a surprising shape.

Editor-at-Large Virginia Postrel (vpostrel@ reason.com) is the author of The Future and Its Enemies: The Growing Conflict Over Creativity, Enterprise, and Progress, recently published in paperback by Touchstone.