B005HFI0X2 EBOK (42 page)

Mid-twentieth-century Americans were more educated than previous generations had been. Before 1910, the average white American had only an elementary school education. As a result of the establishment of high schools, which occurred along with the prohibition of child labor, by 1950, both native-born and second-generation white men who were twenty-five or older had an identical 9.8 years of education, while blacks had 6.4 years.
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Medical advances in combating polio, influenza, typhoid fever, and tuberculosis led to reductions in mortality. In 1950, black life expectancy was eight years less than that of whites.
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What came to be known as “the Pill” was the new medical technology with the greatest impact on society. Fertility was affected both by reductions in child mortality and by access to contraception and abortion. The combination of falling fertility and restricted immigration produced a slowdown in population growth from a level of 2 percent a year in 1905–1910 to a low of 0.7 percent in the 1930s.
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The baby boom that followed World War II was a temporary blip in the long decline of native fertility, which fell below replacement levels among native-born whites in the United States, as in Europe.

THE CIVIL RIGHTS REVOLUTION

By the 1950s, the United States was no longer a nation of immigrants, but rather a largely closed economy with relatively little trade or immigration and whose population was overwhelmingly native born. The reduction in European immigration caused by World War I, and then by legal restrictions in 1921 and 1924, reduced the average annual rate of immigration to the United States between 1915 and 1950 to only one-fifth of its earlier rate.
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The foreign-born declined as a percentage of the US population from 13.4 percent in 1900 to only 6.7 percent in 1950.
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In the sixth edition of his famous
Economics
textbook, Paul Samuelson wrote: “After World War I, laws were passed severely limiting immigration. Only a trickle of immigrants has been admitted since then. . . . By keeping labor supply down, immigration policy tends to keep wages high.”
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It is doubtful that organized labor could have enjoyed as much success in the mid-twentieth century without the low levels of immigration that existed following the restriction of European immigration in the 1920s.
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In 1950 the nonwhite population, at 10 percent, was lower than in 1900, when it had been 11.6 percent, and was overwhelmingly made up of black Americans, with only 0.5 percent of the population composed of members of the “other” category—chiefly Chinese, Japanese, and American Indians.
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The fact that the new, postethnic white population felt secure in its majority may have contributed to the acceptance by most white Americans of the dismantling of America’s version of white supremacy.

Led by Martin Luther King Jr. and his allies, the civil rights movement reached completion with the passage of the Civil Rights Act of 1964, the Voting Rights Act of 1965, the antiracist immigration reform of 1965, and the Fair Housing Act of 1968. During the civil rights era, Latinos as well as blacks struggled for economic rights. The battlefields were literal fields. Cesar Chavez, the leader of the United Farm Workers, used nonviolent protest tactics and boycotts like those of black civil rights champions to pressure California into outlawing
el cortito
, or
el brazo Diablo
, “the devil’s arm,” a short-handled hoe that inflicted pain on farmworkers and symbolized their oppression. In the thirty-five years after the short-handled hoe was banned, back injuries among California’s farmworkers declined by 34 percent, according to the California Rural Legal Assistance program (CRL).
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Another target of reform in the civil rights era was the exploitative Bracero (“arm worker”) program. Begun in 1942 to supply US farmers with migrant Mexican workers during the wartime labor shortage, the program had turned into a system of indentured servitude, permitting American agribusiness to use foreign nationals in serflike conditions rather than to hire Americans and legal immigrants to work in decent conditions for decent wages. At the time of the Bracero program’s creation, a Texas farmer said: “We used to own slaves, but now we rent them from the government.”
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Lee G. Williams, a Labor Department officer who supervised it, described the Bracero program as “legalized slavery.”
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Chavez explained: “The jobs belonged to local workers. . . . Braceros didn’t make any money, and they were exploited viciously, forced to work under conditions the local people would not tolerate.”
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Chavez and Dolores Huerta, the cofounder of the United Farm Workers, joined with labor and liberals to persuade Congress to abolish this form of indentured servitude in 1964. In testimony against other agricultural guest-worker programs before the US Senate on April 16, 1969, Chavez observed: “In abolishing the bracero program, Congress has but scotched the snake, not killed it. The program lives on in the annual parade of illegal and green carders across the United States-Mexico border to work in the fields.”
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THE WAR ON POVERTY

Ronald Reagan quipped that Lyndon Johnson declared war on poverty and poverty won. Conservatives succeeded in portraying the War on Poverty as a dismal failure. But the evidence indicates otherwise. Between the presidencies of Lyndon Johnson and George W. Bush, black poverty declined from a little more than 40 percent to 22 to 24 percent. More than half of that reduction came between 1966 and 1969 alone, when black poverty plummeted from 40.9 percent to 30.9 percent. Poverty among non-Hispanic whites dropped from 14.7 percent in 1962 to 6.1 percent in 2006.
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The overall poverty rate would have been even lower in the early twenty-first century if not for the mass immigration that followed the 1965 immigration reforms. Because US immigration was dominated by poor people from Mexico and Latin America, Latinos accounted for all the growth in poverty after 1990.
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In 1978, the economist Martin Anderson, who became a leading adviser in the Reagan administration, conceded that, despite problems with fraud and inefficiency, welfare programs had eliminated most poverty in the United States: “The ‘dismal failure’ of welfare is a myth. . . . But if we step back and judge the vast array of welfare programs, on which we spend billions of dollars every year, by two basic criteria—the completeness of coverage for those who really need help, and the adequacy of help they do receive—the picture changes dramatically. Judged by these standards our welfare system has been a brilliant success. The war on poverty is over for all practical purposes.”
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Like his mentor Roosevelt, LBJ preferred work to welfare and sought to combat poverty by means of training programs and jobs programs like the Job Corps and Volunteers in Service to America (VISTA). Describing the Economic Opportunity Act of 1964, which promoted jobs and training for the poor, Johnson said: “This is not in any sense a cynical proposal to exploit the poor with a promise of a handout or a dole. We know—we learned long ago—that answer is no answer. . . . We are not content to accept the endless growth of relief rolls or welfare rolls.” When the bill was being drafted, Johnson ordered one aide, Lester Thurow, to remove any cash-support programs and told another aide, Bill Moyers, “You tell [Sargent] Shriver, no doles.”
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UTILITY CAPITALISM AND THE MASS MIDDLE CLASS

On November 8, 1954, in a letter to his brother Edgar, President Dwight Eisenhower reacted angrily to the criticism that his administration was continuing the policies of his immediate predecessors Franklin Roosevelt and Harry Truman: “Now it is true that I believe this country is following a dangerous trend when it permits too great a degree of centralization of governmental functions. I oppose this—in some instances the fight is a rather desperate one. But to attain any success it is quite clear that the Federal government cannot avoid or escape responsibilities which the mass of the people firmly believe should be undertaken by it. . . . Should any political party attempt to abolish social security, unemployment insurance, and eliminate labor laws and farm programs, you would not hear of that party again in our political history. There is a tiny splinter group, of course, that believes you can do these things. Among them are H. L. Hunt (you possibly know his background), a few other Texas oil millionaires, and an occasional politician or business man from other areas. Their number is negligible and they are stupid.”
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At the beginning of the Depression, the federal government played almost no role in protecting Americans from economic hardship; by the 1950s, the federal program of Social Security and the federal-state unemployment and welfare programs had created a modern safety net for an urban, industrial society. Before the Depression, corporations had all but extinguished unionization in the United States; in the mid-1950s, following the New Deal, one in three American workers was unionized. When the stock market crashed in 1929, many American companies were controlled by powerful investment banks; following World War II, managers were powerful and the once-powerful financial sector was reduced to the status of a tightly regulated utility. The “class market” for automobiles, radios, refrigerators, and other inventions of the second industrial revolution became the mass market of the Eisenhower era.

The New Deal liberal system of trickle-up, demand-side economics succeeded in creating a mass middle class that was also a mass market for the products of American factories and farms. Thanks to the New Deal, working Americans were guaranteed a minimum income by minimum-wage laws and unemployment insurance, while retirees were guaranteed a minimum income in old age by Social Security. Union membership added an additional wage premium for Americans in organized industries. These income guarantees benefited American businesses in two ways. By removing the possibility that competitors would use starvation wages to their advantage, they permitted all businesses to compete on the basis of price and quality rather than success in exploiting labor. And they solved the pre–New Deal problem of the maldistribution of income and underconsumption by enabling sufficient levels of mass consumption by adequately paid workers and retirees.

The American economy between the 1940s and the 1970s was a version of the associationalist economy envisioned by the progressives of the 1900s, and embodied successively in the economic mobilization agencies of World War I, the voluntary associationalism promoted by Herbert Hoover as commerce secretary in the 1920s, and Franklin Roosevelt’s NIRA and the little NIRAs that re-created it piecemeal. The historians Jonathan Hughes and Louis P. Cain emphasize the extent to which the New Deal re-created the institutions of World War I: “The WIB would reappear in 1933 as the National Recovery Administration (NRA). The United States Grain Corporation would resurface in the 1930s as the Commodity Credit Corporation. The planning activities of the Food Administration would reappear in the two Agricultural Adjustment Acts. The Emergency Fleet Corporation came back as the National Maritime Administration. The Federal Housing Administration of the 1930s had been born first as the wartime United States Housing Corporation. The Fuel Administration under the Lever Act reemerged in the 1930s as the Bituminous Coal Division in the Interior Department.”
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Thus there is a direct line of descent from the economic mobilization of World War I to the NIRA and beyond to the highly regulated and cartelized economy of the United States in the mid-twentieth-century Golden Age of American capitalism.
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In the
Schechter
case of 1935 in which the Supreme Court struck down the NIRA, the “sick chicken” killed the Blue Eagle. But the Blue Eagle was reborn from the ashes like a phoenix. Before the deregulation efforts of Jimmy Carter and the union-busting campaign of Reagan in the 1970s and 1980s, the United States was governed by a virtual NIRA system characterized by oligopoly and unionization in major mass-production industries and regulated cartels in major energy, transportation, and utility industries. The vision of Fordism was realized, as high wages for workers translated into high aggregate demand for the products of American factories in a national economy little affected by foreign trade or investment. The New Deal turned a number of major industries including finance into regulated utilities.

Beginning in the 1990s, neoliberal Democrats and Republicans reversed this process. Correlation does not prove causation, but the historical record is suggestive. The American middle class enjoyed its zenith under a system of highly regulated, partly cartelized capitalism, and suffered under the less regulated capitalism that preceded it and followed it.

In the present crisis, government is not the solution to our problem; government is the problem.

—Ronald Reagan, 1981
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O
n June 3, 2003, the Treasury Department’s James Gilleran brought a chainsaw to a photo op. While speaking to reporters, he promised to cut up piles of paper representing regulations of the financial sector. Joining him were representatives of four other US regulatory agencies in charge of overseeing finance, armed with less formidable (but still sharp) gardening shears. The message was clear: The Bush administration was tearing down the final pieces of the New Deal regulatory wall.
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With the financial panics and stock manias of previous decades in mind, the architects of the New Deal created a regulated financial system in the United States that established a firewall between investment bankers on the one hand and savings banks and savings and loans on the other. For five decades, the United States was free from the bank panics that had plagued the economy before the New Deal. By the 1970s, however, the lessons of the 1920s had been forgotten. Influenced by contributions from the financial industry, the US Congress under Democratic and Republican presidents alike dismantled the system the New Deal had built to stabilize American finance. The result was predictable—larceny and losses on a colossal scale. The savings and loan meltdown in the 1980s was followed by the subprime mortgage crisis of the 2000s, another result of excessive financial deregulation.

The destruction of the New Deal order was not limited to the financial sector. Managerial capitalism gave way to a new financial-market capitalism. Corporate raiders successfully challenged the autonomy of American corporate managers, whose personal interests were increasingly aligned with the short-term interests of investors by means of the stock options that played an ever increasing role in their compensation. At the insistence of Wall Street investors, vertically integrated industrial corporations were dismantled into pieces. Former brand-name corporations became mere “brands,” slapped onto products assembled in East Asia and other regions that nurtured rather than neglected their manufacturers. Squeezed by foreign competition, companies sought to raise their profit margins by ending the postwar truce with organized labor and smashing unions. By 2000, private-sector union membership in the United States had fallen to the lows of the early 1900s. A flood of unskilled immigration, legal and illegal, put additional downward pressure on the wages of the nonunionized workforce. A new category unique to the United States among industrial nations was discovered—the “working poor,” millions of full-time workers who could not subsist on a minimum wage that the federal government had allowed inflation to turn into a starvation wage.

The dismantling of the big corporations brought with it the dismantling of the always-inadequate employer-based benefit system that complemented government insurance programs like Social Security and Medicare. Some companies could not afford to pay their pensions, while others shifted the risks of retirement investment to employees by replacing defined-benefit with defined-contribution pension plans.

Utility regulations, too, were dismantled. In the areas of transportation and trucking, deregulation caused a return of the ills that had prompted regulation in the first place, like chronic industry-wide bankruptcies in the airline industry and volatile prices for electricity. The Golden Age of infrastructure spending between the 1930s and the 1960s gave way to an era of crumbling bridges and barge-canal locks and traffic and freight congestion, as spending on infrastructure declined.

The era between the 1970s and the bubble economy that followed the end of the Cold War has yet to find a name. The most appropriate is the Great Dismantling.

THE MANAGERIAL ELITE: FROM ENGINEERS TO FINANCIAL OFFICERS

The prosperity of the US economy following World War II disguised a hidden rot in the culture of American management. While other industrial nations relentlessly developed their capacity to catch up with and challenge America’s industrial leadership, as the United States had done in its race to catch up with industrial Britain in the nineteenth century, the nature of management in America’s major corporations changed for the worse.

As we saw in the last chapter, following the breakdown of the NIRA experiment in business-government collaboration, in the late 1930s, Roosevelt sided with liberals in the Brandeisian antitrust tradition who were hostile to corporate concentration. This led to a flurry of antitrust suits in the late 1930s and again in the late 1940s, interrupted only by the war. In 1950, Congress passed the Celler-Kefauver Act, also known as the Anti-Merger Act. Intended to close loopholes in the Clayton Antitrust Act, the Celler-Kefauver Act made it more difficult for corporations to buy their rivals or suppliers in the same industry. However, it was relatively easy for corporations in different industries to merge.

What followed, in the late 1950s and 1960s, was one of the oddest episodes in the history of the American economy: the conglomerate movement. Just as the outlawing of cartels but not mergers prompted the great merger wave of the 1900s and 1920s, so the Celler-Kefauver Act had a surprising and harmful effect on US industrial organization that was not anticipated by its backers. Forbidden to grow by absorbing firms in their own fields, many American corporations expanded by annexing companies in completely unrelated lines of business. Unlike the merger waves of the 1890s to the 1900s and the 1920s, which concentrated ownership in particular fields, the merger wave of the 1950s and 1960s produced conglomerates made up of units in entirely different lines of business. Between 1950 and 1978, Beatrice Foods made 290 acquisitions, W. R. Grace 186, and International Telephone and Telegraph (IT&T) 163.
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W. R. Grace, which began as a chemical company, went into western wear, banking, lumber and timber, fire extinguishers, Mexican restaurants, chemicals and sports teams, battlefield radar, and, last but not least, Hostess Twinkies snack cakes.
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Not since Supreme Court decisions in the late nineteenth century inadvertently set off the great merger wave, by outlawing industry-wide cartels while tolerating industry-dominating mergers, had legal factors inadvertently altered the very structure of American industry on such a dramatic scale.

The share of all corporate assets owned by the 200 largest manufacturing companies increased from 47 percent in 1947 to 59 percent in 1967. Between 1948 and 1955 only 10 percent of acquired assets resulted from cross-industry conglomeration; by 1972–1979 that figure had risen to 46 percent. Among the 148 corporations that made the list of the top 200 leading corporations in both 1950 and 1975, the mean number of lines of business controlled by the corporation grew from 5.2 to 9.7.
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The architects of the conglomerates unwittingly blazed the trail for later “takeover artists.” By taking over a company with a low price-earnings ratio, a conglomerate could get a one-time boost in its reported earnings. Conglomerate-building corporations financed their takeovers first with cash, then with stock, and then, by the 1970s, increasingly with debt. The debt-to-equity ratio in manufacturing rose from 0.48 to 0.72 between 1965 and 1970.
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The harm done by the conglomerate movement in the wake of Celler-Kefauver was compounded by the change in corporate culture that it produced. Many of the CEOs of the great industrial corporations of the mid-twentieth century, like Alfred Sloan and Charles Wilson, had engineering degrees. In the new conglomerates, corporate leadership increasingly passed to chief financial officers (CFOs) and CEOs with backgrounds in finance who did not know anything about any particular product or industry. “Companies do not make money,” the influential management theorist Peter Drucker insisted. “Companies make shoes.” That might have been the motto of the triumphal managerial capitalism of the middle decades of the twentieth century. But in the second half of the century, more and more managers as well as investors disagreed. It did not necessarily matter what a company made as long as it made money.

Even as Japan, South Korea, Taiwan, Germany, and other industrial countries focused on developing world-class manufacturing, the leaders of many American manufacturing companies neglected the making of superior products in order to pursue short-term gains from mergers and financial manipulation. Beginning in the 1970s, these trend lines would converge and the American economy would pay a heavy price.

THE 1970S: DECADE OF CRISIS

The Golden Age of postwar capitalism ended in the 1970s. The decade was a time of geopolitical and economic disasters that shook the faith of Americans in the New Deal order constructed by Roosevelt and Truman, ratified by Eisenhower, and expanded by Kennedy and Johnson. The United States abandoned its allies in Indochina and withdrew from Vietnam and the global market experienced oil shocks following the Arab-Israeli War of 1973 and the Iranian Revolution of 1979.

The postwar settlement in the world and at home was clearly falling apart. In the United States and other Western democracies, the post-1945 truce between labor, business, and government was threatened by inflation. The rate of economic growth in every industrial democracy slowed abruptly in the 1970s, reviving only in the late 1990s. At the same time, the demands of organized labor for higher wages added “wage-push inflation” to the causes of inflation. Inflation reached a peak of 18 percent in the last years of the Carter administration.

Assuming that high levels of economic growth would continue forever, Americans in the 1960s were entranced by technological optimism when thinking about the future, envisioning futuristic cities and colonies on the moon and Mars in the near future. But America’s temporary monopoly of world trade came to an end, with the revival of Japan and Western Europe. From 1973 to 1996, American economic growth fell dramatically, compared to the previous two decades. All the industrial economies suffered a productivity slowdown around the same time, perhaps as a result of the maturity of second-industrial-revolution technologies like electricity and automobiles. Whatever the reason, the result was stagflation—a toxic combination of declining corporate profit margins and spiraling wage-price inflation.

AMERICA’S EMBATTLED MANUFACTURERS

The prosperity of postwar America rested on foundations that grew weaker over time. One was the assumption that free trade was unproblematic. The unchallenged supremacy of the US economy in the world could last only until America’s industrial rivals recovered from the devastation of World War II—in large part because of generous American help.

Recognizing that the policy of import-substitution protectionism was no longer necessary, now that the US was the dominant global economy, Congress passed and President Roosevelt signed the Reciprocal Trade Agreements Act (RTAP) in 1934. While Roosevelt did not share the utopian belief in peace through free trade, he favored an integrated global trading system that would ensure all nations access to markets and raw materials without the need for war or colonialism. During World War II, the United States led the way in creating the World Bank, the International Monetary Fund (IMF), and other institutions of what came to be known as the Bretton Woods system, after the hotel in New Hampshire where many of the negotiations took place. To get the shattered economies of Europe going again, the United States provided Europe with financial aid under the Marshall Plan.

The postwar global trading system, however, never functioned as designed. With the outbreak of the Cold War, the Soviet Union and its satellites formed their own economic bloc. During the Cold War and after it, the United States subordinated its preference for a liberal global trading system to the imperatives of keeping its European and Asian allies within the American-led alliance, even if that meant sacrificing the interests of particular American industries.

The United States made one-way trade concessions in order to secure the cooperation of other countries needed as allies, first in the struggle against the Axis powers and then against the Soviet bloc during the Cold War. Between 1939 and 1943, the United States offered unbalanced trade concessions to Iceland, a number of Latin American countries, and Turkey, in order to lure them away from Nazi Germany and its allies.
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Following World War II, the United States provided $33 billion in nonmilitary aid between 1946 and 1953.
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Because of the limits to foreign aid imposed by American public opinion, American foreign-policy makers suggested what the historian Alfred E. Eckes calls a policy of “trade, not aid.”
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In an unpublished page for his memoirs, President Harry Truman wrote: “American labor now produces so much more than low-priced foreign labor in a given day’s work that our workingmen need no longer feel, as they were justified in feeling in the past, the competition of foreign forces.”
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In December 1946, the State Department instructed its officials to help the countries in which they were stationed to export to the United States: “In general, a Foreign Service officer should give the same attention to serving United States importers as he would give to United States exporters.”
¹¹
A commission on trade headed by Daniel W. Bell, the former budget director of the Roosevelt administration, proposed to increase exports of manufactured goods even if that led to unemployment for an estimated sixty thousand to ninety thousand American workers: “In cases where choice must be made between injury to the national interest and hardship to an industry, the industry [should] be helped to make adjustments by means other than excluding imports—such as through extension of unemployment insurance, assistance in retraining workers, diversification of production, and conversion to other lines.”
¹²
President Eisenhower argued that measures “which tend to drive away an ally as dependable as Great Britain . . . do much more harm in the long run to our security than would be done by permitting a US industry to suffer from British competition.”
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