Governors like Michael Dukakis are tinkering with the `institutional plumbing' through which investment and spending flow. States evolve new economics for high-tech age, writer says

When the Reagan administration came to Washington, it declared government the ``enemy.'' But experiment and innovation did not disappear. They went underground - back to the states, where change in American government generally starts.

And while Massachusetts Gov. Michael Dukakis may not seem exciting, he represents a new approach to economics that sooner or later will emerge nationally.

These are the views of David Osborne, author of a new book called ``Laboratories of Democracy.'' The title for his book comes from Supreme Court Justice Louis D. Brandeis's famous observation about the states. Justice Brandeis, who served on the court 1916-39, was a champion of Progressive-era state measures, such as pure food and drug laws, which eventually became models for federal legislation. In like manner, Mr. Osborne says, states today are evolving a new economics for the high-tech age.

In its gritty details, this new economics is unexciting. It doesn't raise truly fundamental questions, such as whether more consumption means a ``higher standard of living,'' as economists generally assume.

Still, within the framework of conventional economics, the new economics really is different.

Since World War II, economic policy has consisted primarily of ``macroeconomics,'' the kind favored by academics. ``Macro'' deals with broad categories such as consumer spending and capital investment, instead of specifics. In this view, the role of Washington policymakers is to adjust the tax levels, the money supply, and the like to get the right ``policy mix.''

By contrast, the new economics deals with the institutional plumbing through which investment and spending flow. Over the last decade, Osborne writes, states have established more than 100 investment funds to make capital available for new or expanding businesses. At least 40 states have programs to encourage innovation. Michigan established a Manufacturing Modernization Service to encourage new technology in industry much as the Agricultural Extension Service has done for farms.

``Ronald Reagan owed his election to the deepening economic crisis'' of the late '70s, Osborne writes, ``but his solution was to reach back to the free-market myths of the pre-industrial era. ... Most governors have not had that luxury. When unemployment approached 13 percent in Massachusetts, or 15 percent in Pennsylvania, or 18 percent in Michigan, governors had to respond.''

None of this innovation fits the conventional liberal/conservative mold. It is activist yet pro-enterprise. It doesn't seek primarily to regulate or restrain business, in conventional liberal fashion. But neither does it say, with conservatives, that whatever business does is for the best.

This is why the new economics had to evolve in the states, where government is more practical than ideological. ``They are being forced by the same circumstances to deal with problems in new ways,'' Osborne says of the nation's more farsighted governors. (Another reason is that governors don't have macro tools such as the money supply to work with.)

David Osborne has been observing the changing ideological winds since his days as a community organizer in San Francisco. He was there when the tax revolt hit California in 1978. Yet moving east a few months later, he found that few in New York City or Washington grasped the magnitude of what had occurred. ``It was a watershed event, the end of the Roosevelt era,'' he says.

He spent the next few years free-lancing for such publications as The Atlantic and Mother Jones. An article on outstanding state and local officials gave him a whiff of the new trend. Then came the Walter Mondale debacle in 1984. What intrigued Osborne was that, despite the slaughter in the presidential election, Democrats still held 34 of the 50 governorships.

``I thought that those governors must know something that Democrats at the federal level ought to know,'' he recalls.

His early research for the book, he says, confirmed this view. ``The first few months were so refreshing and exciting. There was a hotbed right in the midst of the Reagan era....''

Osborne says the new economics isn't about ``planning'' or ``picking winners'' as right-wing critics charge. Rather, it's about a new playing field for the new economic game. ``Government shapes the market. It always has,'' he says.

In the last century, for example, the federal government subsidized railroads, while the states evolved the corporate form of business, which enabled entrepreneurs to mobilize vast amounts of capital.

After the war, the federal government opened home ownership to the masses through subsidized and guaranteed mortgages. ``Just as the federal government changed the housing market, the states have changed the capital markets for business.''

This is a far cry from the old-style ``smokestack chasing,'' Osborne says, in which states tried to bribe companies to locate plants, through tax breaks and the like. Now they are growing their industry from within.

While state-level Republicans have also moved toward the new economics, Democrats have embraced it with enthusiasm. They have been groping for a growth agenda of their own since Republican supply-siders captivated voters in 1980 with their poetics of prosperity. The new economics provides a practical rationale for traditional Democratic concerns, such as education and the environment. ``The quality of life is now seen as a component of growth, Osborne notes.

By far the best chapter in his book is on former Arizona Gov. Bruce Babbitt. In his tenure, technocracy took a back seat to old-fashioned, high stakes leadership. But Osborne's book is not always easygoing. At times, CEDAC, CODAMA, AHCCCS, and HHAP blur into a kind of technocratic alphabet soup. Which leads inevitably to Mr. Dukakis.

Osborne generally gives the Massachusetts governor high marks. He was a leader in the new economics back in the 1970s; and with a dizzying array of Community Development Corporations, investment funds, and the like, Massachusetts today ``has the rudiments of a first-rate economic development system.''

But the task has been easier there than in, say, Michigan, where Gov. James Blanchard faced an auto industry in decline. By and large, Osborne says, Dukakis has been in the happy position of channeling the growth that was coming anyway, rather than having to stir up that growth from scratch.

Because of his state's prosperity, ``Dukakis didn't have to do more than the technical side of things,'' Osborne says. But the nation ``won't embrace the new economic strategy unless there's some one who can inspire us, make us understand what it's all about.''

``It will take a crisis at the federal level. In that situation, Dukakis will have to be more than a technician. Otherwise, he'll get swallowed up like Carter.''

The governor who best translates the new economics into campaign themes, he says, is Arkansas' Bill Clinton. ``He can talk about this stuff in the vernacular,'' Osborne says. Mario Cuomo, for all his eloquence, is still rooted in the New Deal traditions of his upbringing, he adds.

It is not yet clear how Dukakis would reconcile the new economics with the old-line macro thinking that still reigns in Washington. Nor is it clear what form the new economics would take. The federal government could encourage more states to undertake the kind of planning that Michigan, Massachusetts, and Pennsylvania have begun. It could shift part of the federal research budget from the Pentagon (which now has 70 percent) and into civilian technologies.

Osborne is more certain on what the federal government should not do: a Great Society-type effort that tries to orchestrate local growth from Washington.

In prosperous states like Massachusetts and California, the task is shifting from promoting growth to controlling it. ``Managing growth is coming to the fore,'' he says. ``But for the nation as a whole, economic growth is issue No. 1.''