"United Around High Human Values"

Peter A. Swenson
Yale University

ANALYSIS - March 2, 2012

American politics today is in thrall to crude ideology to an almost unprecedented extent. Ideology blocks compromise, an essential source of progress in a community divided along many lines. To ideologues, even the word "compromise" is distasteful. When they hijack politics, the political process freezes up. Partisan gridlock generates indiscriminate disgust with politicians and unhealthy denigration ... ... of democratic institutions. If some politicians are captivated by ideology, the rest of us are their captives.

Current political discourse surrounding the question of social welfare, the subject of much of my research, has taken on this destructive ideological character. Take the question of guaranteed health care, whose fate is soon to be decided by the Supreme Court. The recently passed Affordable Care Act (ACA) is demonized as "ObamaCare," even though President Obama had largely delegated the shaping of the bill to Congress. “Death panels” are said to be what it has in store for your grandparents—and then you. This is an instance where ideologues have not stopped short of questioning the humanity of their rivals.  What's more, The ACA's "individual mandate" has been singled out and accused of trampling our liberties, even though the idea was borrowed from moderate Republicans and conservative think tanks like the Heritage Foundation and the American Enterprise Institute. This provision was designed to preserve both the private insurance industry and our deeply rooted system of employer-provided health care.  The legislation was also formulated to serve the interests of the pharmaceutical industry, which supported it. Nevertheless, demagogues decry it as  “socialism,” although it is far less socialistic than Medicare, which is only half so.[1]

My comments on the current polarization of American national politics are informed by a historical understanding of the social insurance reforms, like the ACA, and other protections of a mildly, not radically, redistributive nature that are now the subject of hyper-ideologized debate.  The creation of America’s safety net was not the product of ideologues; it was not a victory of one side over the other in “class conflict.” It was by and large the product of what I call “cross-class alliance making.” [2] The various pieces of the safety net were not the result of a party-line vote, as was the case for the ACA.  The Social Security Act and Medicare both passed by large Congressional majorities in 1935 and 1965 respectively.  Before these votes, some Republicans  had held out for more moderate reforms, but they finally joined the majority in recognizing the ultimate reasonableness of the reforms and their likely popularity with most Americans.

The truth—one that does not conform well with most ideology—is that these reforms had considerable business support as well.  This may surprise many readers.  In my years of research into the history and politics of social and economic reform, with a recent focus on health care, I have often noted the role of businessmen in the politics of social and economic reform.  One intriguing finding—a micro-level phenomenon with broad ramifications for politics —is that employers of labor almost never lower their wages, even when times are hard and unemployment is high.  That is to say, employers seem to routinely violate the “law of supply and demand.” They do not exploit an excess supply of labor to bring the price of labor down.  Figuratively and at times even literally, employers turn away workers outside the factory gate who would be willing to work for less than what those inside the gate are earning.  When possible, employers prefer to pay above market clearing wages.[3]

This phenomenon has had intriguing historical consequences.  Major American corporations did not begin to cut their wages until 1932, after the Great Depression was well underway, and even then it was only with worry and reluctance. They were responding more to the stick of disastrously slumping demand than the carrot of cheap labor.  Often they tried to keep their social benefits intact; some even added social benefits. These employers were what historians call “welfare capitalists”—typically large employers who paid above-market wages and provided social benefits that were the envy of other workers. Prominent among them were General Electric, Goodyear, AT&T, Standard Oil, Eastman Kodak, and many, many others.  These "welfare capitalists" were active in civic and philanthropic affairs, and a good many supported the great political reforms of the New Deal: unemployment insurance and guaranteed retirement income (later augmented with survivor and disability benefits). Behind the scenes, a handful of America's most influential corporate businessmen, most notably Gerard Swope of GE, persuaded President Franklin Roosevelt and his advisers that these early pieces of our welfare state would be invaluable contributions to a stable and prosperous economy. Since then, very few ideologically moderate businessmen have called for dismantling such programs.

Not many people at the poles of the ideological spectrum are likely to find these claims about business and the building of the American “welfare state” consistent with their views on the hows and whys of reform. Even non-ideologues, inadvertently influenced by the ideological discourse, may find them counterintuitive.  In what follows, I will attempt to explain the historical relationship between business and the welfare state. But first, let me define precisely what I mean by "welfare state."  I refer to an older, broader meaning, not to conservatives' current, often derogatory use of the term to mean tax-financed assistance to the poor in the form of cash assistance, food stamps, housing benefits, Medicaid, and the like.  Historically, the term "welfare state" has been used to include all “social insurance” programs that the poor and non-poor alike can benefit from. These are by far the largest pieces of our country’s safety net, which protects citizens from the hazards of dependence on the labor market, especially when misfortune renders it difficult for them, through no fault of their own, to make a living and take care of their dependents.  Accidents, illness, layoffs, and—worst of all—the death of a breadwinner are the primary hazards faced by a family entirely dependent upon wages or salaries, household savings, and limited borrowing.  But I hasten to add that, ironically, some things we don’t regard as misfortune to be insured against are turned into just that by dependence on the labor market.   Child bearing often makes it enormously difficult for a woman to continue gainful or adequately gainful employment.  Getting old, too, should be regarded as a good thing—who (truly) does not want to get old? But old age often brings poverty by compounding an inability to find work with rising medical bills. That is why “old age insurance” (Social Security) and retiree health insurance (Medicare) are parts of the modern welfare state everywhere in the economically developed world.

The first important piece of the American welfare state was industrial accident insurance, or “workmen’s compensation.”  It was instituted state by state starting in 1909, and by 1920 practically every state had a scheme.  Before industrial accident insurance, workers who lost limbs and organs or suffered from occupational diseases had only one compensatory recourse: a lawsuit. Needless to say, tort law was an inefficient system of social protection.  It only benefitted the lawyers who took employers to court and private insurance companies that sold liability insurance to employers. One estimate suggested that only one-half of employers’ insurance premiums actually reached injured workers and their families; the other half went to lawyers’ contingency fees and insurance companies’ profits and administration (sales, collection, etc.).  Furthermore, compensation was arbitrary and chaotic.  Sometimes the damages collected were huge, but often they were pitifully inadequate—or not offered at all. But  by 1909, after the courts had gradually become more generous to injured workers, employers across the country realized the need for some kind of compulsory, no-fault insurance system that was more just and efficient.  Progressive social and political reformers like the American Association for Labor Legislation (AALL) and the National Civic Federation (NCF) took the lead and recommended laws with an eye to employer and worker welfare.

In the case of workmen’s compensation, reform was the result of what I call a “cross-class alliance”. That is to say, progressive-minded reformers sought to pass legislation based on the aligned, overlapping interests of capital and labor. Business was in fact better represented in both the AALL and the NCF than labor. The first piece of the American welfare state was clearly not the product of socialist ideologues dedicated to destroying economic freedoms, individual responsibility, and capitalist prosperity. Of course, many employers were not on board in the beginning.  Given the frequent arbitrariness and corruption of politics, many companies were understandably fearful of government taxes and regulations.  Ideologues fed—and fed off of—these fears.  But in a short time, all serious opposition vaporized. In Wisconsin, the eminent economist and reformer John R. Commons (of the AALL and the University of Wisconsin), observed that “not until the compensation laws came into effect did the employers, as a whole, become friendly.”

John R. Commons was a forward-looking, cross-class alliance maker par excellence, and he figured centrally in the piecemeal building of the American welfare state.   Under his influence, Wisconsin became the first state to pass an unemployment insurance law in 1928. A small number of welfare capitalists, wishing to support the workers they had laid off so that they could rehire them during an upswing, had set up their own unemployment insurance schemes. On the whole, most employers, even those with their own schemes, had doubts about a government scheme. But initial opponents, such as executive secretary of the Wisconsin Manufacturers’ Association George Kull and Frederick Clausen of the J.I. Case Company (agricultural machinery), later served happily on an employers' advisory board to help implement and administer the new legislation. They also became active propagandists for Wisconsin-style legislation as the movement for reform spread to Washington.  Like Clausen and Kull, H. W. Story, an executive of agricultural machinery manufacturer Allis Chalmers, initially attacked the unemployment insurance plan as visionary and impractical, only to appear as its advocate in the 1934 Senate hearings on the Social Security bill.

Wisconsin experts, most notably Edwin Witte, Common's protégé, figured prominently in the deliberation and drafting process for the Social Security Act (SSA).  But it was not only public officials and independent experts drafting the bill. They were joined by some of the nation’s most prominent and successful capitalists, including Swope of GE, Walter Teagle of Standard Oil of New Jersey, and Marion Folsom of Eastman Kodak.  Additionally, almost the entire top-shelf staff of the Industrial Relations Counselors (IRC) made themselves available to assist with the deliberation and drafting of the SSA. The IRC was a personnel management consulting firm that offered advice on company pensions and other benefits, as well as ways to improve labor relations and productivity.  But it was only half-supported by service revenue and retainers from major corporations.  In 1933, more than half of the IRC’s resources were contributions from oil magnate and philanthropist John D. Rockefeller, Jr., who stood behind the politically engaged group of welfare capitalists that historians variously call “corporate liberals,” “corporate progressives” or “corporate moderates.”  Rockefeller’s money, as his attorney and close adviser gladly reported to him, had enabled the IRC to assist in “shaping and administering legislation” in Minnesota as well as Wisconsin. The IRC was also making efforts at the time to influence reform legislation in two other states and even in Canada.

The Social Security Act passed in 1935 and included unemployment insurance (UI) and a uniform old age insurance system (OAI) for the entire country, should states wish to take advantage of the federal funding.  The motives these progressive capitalists had for supporting the Social Security Act call to mind to the wage and benefit policies of “welfare capitalists” mentioned above.  The Great Depression, exacerbated by a severe financial crisis, bank panics, and credit crunch (there was no rescue of Wall Street that time), had generated disastrous levels of unemployment for workers and a severe slump in demand.  Many large employers, who offered relatively high wages and generous benefits, were being undercut by low-standard competitors who took advantage of unemployment to cut wages and lower their prices.  One option was grim: to take the low road and keep cutting wages and benefits in a race to the bottom. Another option, the one offered by reformers, was to support government action that leveled the playing field. The payroll taxes imposed for OAI and UI would do just that. Moreover, the reformers incorporated “experience-rated” premiums into UI features, which  would incentivize employers to minimize layoffs and thus stabilize employment and the economy. In other words, many of these progressive capitalists were happy to let the government impose costs and humanitarian incentives on what they called their “chiseling” competitors. Here humanitarianism worked hand in hand with profit making.

Of course, New Deal liberals led the effort; the right-wing ideologues get this part of the story right.  But as amateur historians, they refuse to scratch below the surface, and so they remain confident that the growing government role in society came at the expense of capitalism, capitalists, freedom, self-reliance, general economic prosperity, etc.  Ideologues tend to ignore the fact that New Deal legislation did not stop Americans from enjoying their heyday of post-war prosperity. There is ready evidence that the New Deal was a true broad-based, cross-class alliance that included people whose life’s purpose was economic prosperity through entrepreneurial enterprise. A 1935 survey of trade association journals, conducted by the National Publisher’s Association, found the editors of National Petroleum News¸ Iron Age, Chemical and Metallurgical Engineering, Paper Mill and Wood Pulp News, Factory Management and Maintenance, and Textile World to all be in favor of the SSA.  Cautiously open-minded and often downright favorable comments came from the American Gear and Manufacturers’ Association, the California Metal and Mineral Producers’ Association, the National Supply and Machinery Distributors’ Association, the National Electrical Contractors’ Association, the American Transit Association, the National Retail Dry Goods Association, and the New York Building Congress. The latter was a cross-class organization in itself that included both contractors and unions.  It is probable that each of these associations was dominated by larger employers facing the prospect of ferocious low-standard competition brought on by the Depression.

There was also considerable support within the United States Chamber of Commerce.  The Chamber was internally divided, to be sure, and its position on the Social Security Act switched late in the game from support to opposition. But the evidence indicates that there was no majority of vehement opponents.  At the time, Business Week claimed that the Chamber’s switch "came from a single maneuver engineered by that body's way-right wingers" and that “a small group of strong men had gradually obtained the upper hand,” something that “often happens in all sorts of organizations.” The Chamber’s newly elected president promised to adhere to the resolutions passed, but claimed curiously that “the difficulty, of course, in a large hall like that, is that people didn’t really know what they were voting on.” After passage of the law in 1935, yet another leader was elected, and the Chamber of Commerce swung right back into a position favorable to the New Deal.

Like other politicians well-informed about the complexities of business interests and opinions, Franklin Roosevelt believed that the official position of a business organization was often not truly representative. Businessmen, he thought, could be demagogically manipulated just like anyone else. So defying vocal business opposition was not an act of reckless disregard for business interests on the whole or evidence of a contempt for capitalism.  The president and other progressive reformers knew that business opinion would often swing in favor of a reform after the dust had cleared and the ideologues’ cries of impending doom were quieted.  The reformers anticipated a cementing of cross-class support after the passage of the New Deal reforms, and that is indeed what happened shortly after 1935. The cross-class alliance brokers would not have been surprised by a 1942 Chamber of Commerce survey that found resounding nationwide support for practically all the specific details of the Social Security Act.

The building of the American welfare state continued with various extensions of the Social Security Act that have ensured income maintenance for surviving dependents and coverage for people disabled before retirement age. The biggest expansion came in 1965 with the passage of Medicare and Medicaid. Both passed by a large majority in Congress and had the support of a great number of Republicans.  Of course, there have also been expansions of cash assistance and food stamps, but these are tiny parts of the safety net compared to Social Security and Medicare. Indications suggest that in the mid-1960s, big employers were happy to have the state take over the medical insurance of their growing numbers of retirees. In any event, there was no groundswell of opposition from the business community before passage of Medicare, nor were there cries of woe and doom afterward.[4]

Recently, both Bill Clinton and Obama have tried to extend guaranteed health coverage beyond retirees to all Americans.  Both seem to have understood the lessons of the origin of the welfare state, and both have gone to considerable lengths to build business interests into their coalition of supporters. Clinton attempted to appeal to business interests by building his plan around “managed competition,” a thoroughly non-socialist system for the private delivery of health care by competing profit-driven enterprises.[5] Even George W. Bush should be included in this company.  His extension of drug coverage in the Medicare Modernization Act was about the largest expansion of the welfare state since 1965.  It guaranteed greater business for the drug industry and offered to relieve employers of the costs of retiree drug benefits.   It should be remembered that Obama, for better or for worse, sought and gained support from the drug industry, and the private insurance industry was brought on board with the “individual mandate,” a primarily Republican and corporate idea.  Insurers only swung over to the opposition after Congress reduced the penalty that the industry wanted imposed for failing to buy insurance.

These historical facts about ideology and interests in the formation of welfare states are not unique to the United States. Research I have done on the formation of Germany’s health care system clearly indicates that there was a cross-class alignment of interests in the design that emerged shortly before Hitler seized power and was reassembled along very similar lines after World War II.[6] I have done even more research on Sweden, the country that liberals consider the mostly advanced and successful welfare state.  Space here does not permit me to elucidate how the welfare state in Sweden, like that in the United States, was the product of reformers seeking a cross-class alliance of interests behind an extensive system of social insurance. It was not the product of a powerful labor movement rolling over defenseless capitalists. To give just one example: the creation of Sweden’s very cost-effective health care system, which leaves no citizen worrying about medical bills or at the mercy of emergency rooms, was something that the Swedish Employers’ Confederation strongly favored. Collectively, employers wanted to get out of the business of providing health care to workers, and they saw in a national health service a more efficient and fairer option. If Swedes, acting in consensus, chose what the ideologues call a “nanny state,” it is because they resolutely rejected the “nanny employer” as a relatively costly and incomplete way of providing social protection and a source of inefficient labor market rigidities.[7]

To hear the ideological attacks against the improvement of social insurance—pundits crying “socialism,” and even “fascism"—one would think that we are flirting with moral calamity or even the end of freedom, not extending an American tradition with several generations of precedent.  But many of our politicians are teaching ideology and mobilizing it for their purposes.  This is not healthy for our democracy, nor is it the way of humanitarian progress.  If the truth be told, the American business community is not on board the ideological train. But nor, unfortunately, is it willing to stand up and question the ideologues. We can be fairly sure that very few executives would call for a dismantling of the American welfare state; there was no resounding surge of business support for the idea of “privatizing” Social Security.  Our recent financial crisis, which revealed the precariousness of private retirement investments, will solidify the sensible consensus that both private savings and social insurance are needed to take care of the aged. Many in the business world are fully aware of the failure of the private insurance market to simultaneously provide guaranteed coverage and cost-effective medical care for the insured population. It seems both possible and necessary to find a way to align both business and popular interests in a cross-class alliance for quality, economy, and equality in health care.  But that would be to pursue an admirable American tradition of reform, which is exactly what the ideologues wish to obstruct.

 

 


[1] Remember that providers of Medicare-reimbursed services are, by and large, private, for-profit enterprises. As regards hospitals, that is increasingly true. Medicare is socialist to the extent a government agency is a “single-payer” that reimburses private services. The Affordable Care Act did not even provide for a “public option” as one among other competing payers.

[2] Most of the following discussion draws on my book, Capitalists against Markets: The Making of Labor Markets and Welfare States in the United States and Sweden (New York: Oxford University Press, 2002).

[3] My Yale colleague, economist Truman Bewley wrote extensively about this in his Why Wages Don’t Fall During a Recession (Cambridge: Harvard University Press, 1999). The downside of this phenomenon is that employers tend to choose layoffs over wage cuts in order to sustain profitability, thus increasing unemployment. Though they act in their own interest here, there is no reason to believe they do it simply out of cold indifference toward former employees. The “downward stickiness” of wages played an important role in John Maynard Keynes’s analysis of business cycles and the importance of macroeconomic policy measures to push a depressed economy back toward higher employment. “Keynesian” stimulation policies almost always enjoy non-ideological, cross-class support. My analysis, below, extends the analysis of wage stickiness to its importance for consensual social insurance policy.

[4] For more on this, see my “B is for Byrnes, and Business: An Untold Story about Medicare,” Clio: Newsletter of Politics and History 16:2 (Spring/Summer 2006).

[5] I wrote on the Clinton Plan in “Foul Weather Friends: Big Business and Health Care Reform in the 1990s in Historical Perspective,” Journal of Health Politics Policy and Law 27:4 (August 2002).

[6] I wrote about this in “Good Distribution, Bad Delivery, and Ugly Politics: The Traumatic Beginnings of Germany’s Health Care System,” in Ian Shapiro, et al., Divide and Deal: The Politics of Distribution in Democracies (New York: New York University Press, 2008).

[7] For a short comparative discussion of Sweden and the United States, see my “Varieties of Capitalist Interests: Power, Institutions, and the Regulatory Welfare State in the United States and Sweden,” Studies in American Political Development 18 (Spring 2004).

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