The Last Gasp of Stakeholder Capitalism: The 1960s (2 of 2)

This long post chronicles the last, albeit significant gasp, of stakeholder capitalism.

Kennedy administration

The CED remained influential during the Kennedy administration, especially in trade and tax policies. Kennedy appointed many business leaders to key positions in his administration. These included Walter Heller, Paul Samuelson, a Nobel prize winner and perhaps the most respected Keynesian economist, and Kermit Gordon.

CED’s first success was enactment of the Trade Expansion Act of 1962. This gave the president significant authority to negotiate lower tariffs. Kennedy appointed Howard Peterson, a CED trustee, as his special trade advisor, to begin drafting new trade legislation. To get the new trade bill passed Kennedy had to agree to impose quotas on foreign textiles and increase subsidies for Southern cotton growers. The bill also included, at Kennedy’s insistence, an adjustment assistance provision that permitted financial compensation to those industries and workers that were directly harmed by import competition. This provision stayed in the bill although opposed by both CED and the ultraconservatives. The provision, however, was never used because of the continued opposition by the conservative coalition.

Assisted by a set of CED recommendations, a lengthy negotiation process led to a 50-nation agreement to decrease by one-third tariffs on industrial goods. This agreement made a major step toward the internationalization of the economy that had been a long-time goal of the moderate business community.

Notwithstanding increases in federal spending the unemployment rate fell from 7.1 percent in 1961 to 5.7 percent in 1963. To spur domestic employment Kennedy wanted to cut taxes. The CED advocated tax cuts for people in the highest brackets and major changes in depreciation allowances. Kennedy instead proposed tax credits for new investment in plants and equipment in the U.S. He also advocated a tax on undistributed corporate profits that were kept in Europe and other tax havens. Congress enacted the investment tax credit but not the undistributed corporate profits tax, which was opposed by all business groups.

Kennedy then discussed the need for tax cuts in the context of tax reform. Overall, the business community favored tax cuts. CED wanted tax cuts that would boost growth. The ultraconservatives supported tax cuts to limit if not prevent future government expenditure increases. The CED recommended a tax cut of $11 billion (about $90 billion in 2018 dollars) phased in over two years. It proposed reducing in the top marginal income tax rates from 90% to 65% along with lowering the corporate tax rate (from 52% to 47% and then to 42%) and the capital gains tax. The CED opposed any tax changes that would increase revenue as a result of tax reform. The Chamber called for larger tax cuts but not those that would stimulate consumer spending.

Congress never seriously discussed tax reform. But did enact a two-year $10.2 billion tax cut that reduced the top rate to 65%, lowered the corporate tax rate to 46%, reduced the capital gains tax, and increased depreciation allowances. These tax cuts for the wealthy and for business foreshadowed the nature of future tax cuts and began an increase in income inequality.

Outside of the economy and foreign affairs Kennedy focused on civil rights (the North Carolina lunch counter sit-ins began in January 1960, freedom rides into the Deep South occurred in the spring of 1961, in 1962 federal marshals assisted in the integration of the University of Mississippi, and in spring 1963 a bombing of a church in Birmingham resulted in the death of four children).

Kennedy’s early 1961 executive order banned discrimination in hiring by federal agencies or by companies that had federal contracts. It also called for affirmative action in future hiring. The order applied to unions and as well as to the companies themselves. Although usually opposed to government regulations, corporations did not oppose the order. Some if not many corporate leaders saw fair and open employment as consonant with their emphasis on the individual freedom of each worker.

Given white resistance to union and neighborhood integration, the Kennedy administration became more interested the inner city. It began discussing with the Ford Foundation the funding of pilot programs for dealing with rising urban tensions. The Ford Foundation had a long history of working with the CED, going back to the early ’50s.

The Foundation’s initiatives paralleled initiatives started in the late 1950s by the CED. In the late ’50s and early ’60s the CED funded much significant research on urban and metropolitan issues, supporting urban renewal, metropolitan-wide planning, and economic development, but also criticizing local governments for not adequately addressing urban problems. CED research led in 1962 to the Manpower Development and Training Act and the Area Redevelopment Act.

During the Kennedy administration the CED achieved its long-time basic goals of trade expansion and tax cuts. It embraced a moderate Keynesian macroeconomic policy along with its rejection of annually balanced budgets that were the hallmark of the Chamber and NAM. It moved to new issues by supporting civil rights initiatives and efforts to respond to inner city problems. It also supported federal aid to schools in low-income states and federal actions for retraining workers and aiding depressed areas. On the other hand, the Chamber opposed all the education, urban, and farm support programs that were enacted during this time. However, as will be discussed in future posts, the corporate community was able to win often on labor issues.

Johnson administration

President Johnson strongly reached out to the business community by reassuring business that his administration would keep its budget below $100 billion (about $800 billion in 2018 dollars). Johnson gained some support from the business community, especially the moderates, in addressing the civil rights challenges and the escalation of the Vietnam War.

The CED quietly supported the Civil Rights Act of 1964 and became engaged with the administration in Johnson’s “War on Poverty.” The poverty war launched on a much larger scale a large variety of programs that were implemented on a trial or interim basis. However, this poverty war concerned many key players in these programs who thought the experimental or pilot programs were too quickly brought to a much larger scale. Perhaps the most well-known of these programs included the Legal Services program, the Community Action Program, and Head Start.

Overall, these programs were underfunded given the large number of programs located in many areas that were part of the poverty war. The community action programs with their slogan of “maximum feasible participation” of community residents caused a good deal of angst among local elected officials and private real estate and development interests. Congress quickly reined in this program.

Johnson’s landslide 1964 election and strong revenue projections notwithstanding, the president pledged to minimize government spending but further committed to avoid significant cuts in federal education, vocational training, or retraining programs – all CED-supported.

In 1965 Congress enacted the Medicare and Medicaid programs. Federal health insurance programs had been debated since at least the 1930s, but the Chamber and the American Medical Association always opposed these efforts. However by the early ’60s most Medicare opponents knew that some health legislation was bound to be enacted. The American Hospital Association realized that its members needed federal financial support due to increases in healthcare costs and the elderly population.

Republicans submitted a health care plan devised by Aetna Insurance that consisted of what came to be known as Medicare A (hospital and nursing home), Medicare B (physicians), and an expanded eldercare (Medicaid). Nonetheless, many Republicans still opposed this bill as did the Chamber and the AMA. A compromise made private insurance companies intermediaries in Part B and gave them the ability to provide hospital insurance for Part A. The AMA continued to resist until they won a provision that allowed physicians and others to submit their bills directly to insurance companies rather than hospitals.

One can suggest that the corporate and medical community forced compromises that benefitted the medical-industrial complex and eliminated strong backing for national health insurance. The costs of this program consequently soon ballooned to twice the administration’s original estimate. Both hospital and physician charges more than doubled in the first year of the program. The health insurance industry dramatically increased their profits and became a powerful lobby. The salaries of senior hospital executives grew rapidly. And more for-profit hospitals entered the market, buying out or buying up or closing many public and nonprofit hospitals, thereby earning huge profits.

Medicine generally became an organized business sector with strong incentives to overcharge patients and the government due to taxpayer subsidies. As a result, health spending as a percent of gross national product became at least twice as high as in most other developed countries although millions of people remained uninsured. After 1968 no new health insurance programs were enacted until after the turn of the century.

In 1968 the CED developed a series of recommendations that moved the corporate community off the track it had been on for decades. It recommended a temporary tax increase in response to Johnson’s request to increase taxes and restraint in the growth of the money supply. It also argued for a reduction in the rate of growth of federal expenditures by cutting agricultural subsidies, highway construction, improvements in rivers and dams, and the space program.

It abandoned its previous efforts to reduce social spending. The CED pointed out that notwithstanding increased expenditures for new programs related to health, manpower training, welfare, education, housing and community development – expenditures going from $5.9 billion in 1960 (about $50 billion in 2018 dollars) to $7.5 billion in 1965 (about $60 billion in 2018 dollars) to an estimated $20.1 billion for 1969 (about $160 billion in 2018 dollars) – these expenditures amounted to only 1/7th of total federal spending. The CED added that most of the money that would be available once the war ended should address the problems of poverty and racial tension and not be used for reducing taxes. The report was the first of several CED reports that supported strengthening the federal government’s social insurance efforts as championed by the Democratic Party.

In 1968 CED recommended changing federal campaign financing by supporting improved disclosure laws for major donors, tax credits for small donors, and partial funding of candidates. These clearly were recommendations out of the corporate mainstream. Additionally, CED published in 1968 a report advocated increased spending for education.

Although federal spending from 1965 to 1968 substantially increased, more of the government’s effort and money were focused on the Vietnam War. The business group primarily concerned with the war was the Council on Foreign Relations.The business community largely created CFR in 1921. In the ’60s overlap existed between CED and CFR, especially regarding major defense corporations. The CFR supported the war. Although some of its members had growing doubts about the war as it continued, the CFR generally supported Johnson’s decision in 1965 to escalate the war by sending troops and again in 1967 by assuring Johnson that his war policy was correct. But by early 1968, the CFR began to support de-escalation, negotiation, eventual withdrawal. This change in position resulted both from a sense that tensions between China and Vietnam made communist coordination unlikely and, especially, that winning the war seemed unlikely and the country was becoming increasingly divided over the war.

Nixon administration

Nixon appointed several economic advisors who had worked for or were members of the CED. These included Donald Taylor as treasury secretary and Charls Walker as deputy treasurer; Murray Weidenbaum as an assistant secretary of the treasury; and to the Council of Economic Advisors Paul McCracken as chairman and Herbert Stein; and George Schultz, first as labor secretary and then as head of the newly created Office of Management and Budget. These advisors held a position a bit different from mainstream CED officials in that they believed interest rates were more important than fiscal policy. While Milton Friedman’s monetary theory influenced them, they rejected Friedman’s singular focus on money supply as the best way to control inflation.

With inflation at what was then considered a high 4%, Nixon’s advisors recommended a gradual increase in interest rates, realizing this would raise the unemployment rate. But the inflation rate rose in 1970 because banks found a way to go around higher interest rates and still supply the strong demand for loans. They borrowed heavy in the Eurodollar market, sold commercial paper through affiliated holding companies, and sold assets under repurchase agreements. Consequently, interest rates rose to their highest levels since the Civil War, government spending was cut, and revenues continued to grow due to the surcharge on incomes and higher taxes on business. Unemployment grew to 6.1% by the end of 1970 and wages continued to climb.

The increasing costs of construction workers, whose compensation increased by 10% between mid-1968 and mid-1972, hit hard corporations who wanted to build buildings and expand capacity. In some, perhaps many, cases, corporations shared the blame because they put pressure on construction workers to complete work even though this required overtime payments. This also hit housing costs because construction compensation in the housing sector was based on industry costs.

The CED made several recommendations in late 1970 to combat inflation. Interestingly, the CED said that lower interest rates and higher federal expenditures were needed to deal with urban problems, education, poverty, welfare, healthcare, and the environment. It said that tax increases would be necessary to pay for these programs if cuts could not be made in agricultural subsidies, defense, and space exploration. CED cautioned that fighting inflation through unemployment would put unemployment at levels higher than Americans would tolerate.

CED recommended that unemployment benefits be more generous and last longer. These clearly moderate recommendations outside of the conservative business community were coupled with several recommendations closer to the conservative position. Some of these recommendations included programs to upgrade worker skills and promote worker mobility and strategies to limit union power by eliminating the ability of strikers to apply for unemployment benefits. It also advocated increasing the larger collective bargaining units in the contracting trades with contracts ending at about the same time.

Comment

The moderate business community became increasingly more active in stakeholder capitalism in the 1960s than at any time since the end of WWII. Influential segments of the business community advocated increased government-funded health care, increased taxes, along with initiatives in education, infrastructure, and full employment. They became involved in poverty, civil rights, and racial discrimination issues. They believed government was the best way to address these problems. They saw working with both political parties and developing compromises that benefitted both business, labor, and the poor as a means of strengthening the country.

It may surprise many people today to realize that in 1966 the CEOs of 22 businesses, including Ford, General Electric, and Chase Manhattan Bank, supported Johnson’s demonstration cities program that provided federal grants for urban renewal, transportation, and housing in inner cities. Or that many CEOs, such as those from AT&T, Caterpillar, DuPont, Exxon, GM, and IBM, supported an employer mandate for health insurance.

Of course, while significant these business efforts were not universal. For example, the ultraconservative National Association of Manufacturers often struggled internally with representatives who thought NAM was not conservative enough. Some of these far-right leaders, such as the chairman of Kimberly-Clark, Cola Parker, and the industrialist Fred Koch (the father of Charles and David Koch), broke off in the late ’50s to create the John Birch Society. Clearly, strong and visible hints existed that stakeholder capitalism could not last. The 1970s witnessed the transition to another, different form of capitalism that exists through today.