ArticlesArticlesCreated 2/21/1996
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J. Bradford DeLong
Professor of Economics
University of California at Berkeley
August, 19977
I would like to thank the National Science Foundation and the Alfred P. Sloan Foundation for financial suppport.
Corporate Responsibility?Why not reduce the corporate income tax on companies that met some specified minimum responsibility to their employees and communities, while raising it on those that didn't?
asked President Clinton's first Secretary of Labor, Robert Reich, in early 1996. Robert Reich was searching for some way to evade pressure for the reduction in the size of the social insurance state that had been produced by the aging of America (and the consequent expansion of Social Security and Medicare obligations) and by the increasing slice of federal revenue diverted to pay the interest on the debt run up by the Reagan deficits.
Reich's solution was that if the government had to do less, then private corporations should have to do more. Corporations needed to be given incentives--and obligations--to invest in their workers' skills, to share fat profits with their workers, to invest in their communiites, and to hire and train the poor.
President Clinton's Secretary of the Treasury, Robert Rubin, hated the idea.
As Reich tells the story, Rubin called the phrase "corporate responsibility" "way too inflammatory.... It will get a lot of business executives and Wall Street people very upset for no good reason. It suggests that they haven't been responsible." Robert Reich was quickly squelched: his exclusion from the inner economic policy-making loop was whispered around Washington. His themes were not picked up in presidential speeches. And White House aides whispered to their reporter contacts that Reich had gone off the reservation, and would soon be muzzled.
On the substance of economic policy I was--I am--on Robert Rubin's side. When the Clinton administration took office, investment in America--both private investment by corporations and public investment by the government--was anemic. Low investment means low productivity growth, stagnant real income and wage levels, and adds a mean streak to politics as middle-class voters focus on how they are poorer than they had anticipated that they would be. Only a high investment-led recovery held the possibility of restoring real income growth and breaking out of the downward political-economic spiral. And the shape of the Congress and the politics of the deficit prohibited the Clinton administration from accomplishing any significant boost to public investment.
Hence managing the economy in a way that would produce a boom in private investment was the only road open to the Clinton administration. And producing a boom in private investment was a delicate and complicated task. Financial markets needed confidence that the federal government would soon stop sucking up capital to finance its deficits. They also needed confidence that the Federal Reserve would be allowed to continue its anti-inflationary policies. With confidence, interest rates would fall. And if interest rates fell, private business investment might boom--if private businesses doing the investing also had confidence that the Clinton administration was their friend and not their enemy.
For this reason I was on Robert Rubin's side. The Clinton administration's economic strategy had, through skill and a lot of luck, generated a high investment-led recovery. But the flow of private investment is fickle. Talk of how the Clinton administration was about to impose corporate responsibility mandates on private enterprise seemed to me to run the risk of provoking a collapse in private investment, doing vastly more harm to the overall economic situation than such feeble corporate responsibility mandates as might actually become law would do good.
But the interesting thing was that it soon became clear that nearly everyone else in the administration was on Robert Rubin's side as well. Not only the right wing of the Democratic Party, but the center as well lined up behind Rubin. Reich's calls for "corporate responsibility" and an end to "corporate welfare" had more resonance inside the Republican Party--with figures like Pat Buchanan, John Kasich, and Robert Dole picking up the theme--than they had in the center of the Democratic party.
Thus by the spring of 1996 the governing center of the Democratic Party appeared to have staked out the position that America's corporations were fragile entities that needed to be nurtured and not to be controlled. They were too fragile to bear the burden of taking on additional roles in the provision of social insurance. And this marked a sea-change in American politics. Republicans have always been confident that the business of America is business, and that what is good for the country is good for General Motors--and vice versa. But at least since 1900 the center of the Democratic Party had always seen its role as one of opposing and limiting the growth and power of the modern corporation, not as nurturing and cossetting it.
In the 1910s Democratics like Woodrow Wilson and Louis Brandeis denounced monopolists and financiers as people whose control over economic life was profoundly un-American. In the 1930s FDR could--in some of his moods--state that recovery from the Great Depression could not continue until antitrust policy broke up more monopolies. In the 1970s Jimmy Carter could come close to declaring the "moral equivalent of war" against U.S. oil companies whose profits had soared with the rising price of petroleum produced by the 1973 OPEC oil embargo. Today this strand of thought is almost gone, or at any event greatly weakened. Instead, there appears to be a broad consensus that America's corporations need some tender loving care.
So where did this belief that a Democratic administration ought to nurture, rather than oppose and limit, the modern corporation come from? Why, when I closed my eyes and listened, did the "New Democrats" at the core of the Clinton administration sound so much like Eisenhower Republicans?
The High Tide of the Social Insurance StatePart of the answer is that Robert Reich's call for "corporate responsibility" was a sign not of strength but of weakness: in a sense he was playing out the final cards of a losing hand. A strong social insurance state--one that has a strong sense of the economic rights of its citizens and of the benefits and investments in people that it wishes to provide--does not beg corporations for charity, exhort them to take care of their stakeholders, or provide marginal incentives for the private provision of social welfare.
A strong social insurance state taxes and spends. And the American social insurance state has passed the peak of its strength.
This does not mean that federal spending on social insurance and social welfare will fall, even as a percentage of national product. For a long time to come federal social insurance spending will grow, as the aging of America and rising health care costs interact with promises made in the 1970s and 1980s to boost Social Security and Medicare spending. The Congressional Budget Office projects that Social Security, Medicare, and Medicaid--costing six percent of Gross Domestic Product in 1980 and nine percent of GDP today--will amount to seventeen percent of GDP by 2030.
But the number of missions undertaken by the social insurance system will decline. In the 1950s Eisenhower--under enormous budgetary pressure from the Cold War--could nevertheless find the resources to launch the interstate highway system, a program of public investment in America that has literally changed the face of this country. In the 1960s Johnson could launch Medicare and Medicaid, and find additional resources to fund a substantial Office of Economic Opportunity. In the late 1970s Carter could earmark federal funds for substantial (albeit wasted) public investments in energy technologies, and in employment and training. All these--save Medicare and Medicaid--are now gone. They will not be replaced.
Moreover, the social insurance programs that continued to exist tended to shrink in size relative to the overall economy. Aid to Families with Dependent Children [AFDC]--the core "welfare" program--in the early 1990s provided approximately one-third lower benefits than it had in the early 1970s. As welfare reform takes hold the federal government's commitment to whatever replaces AFDC is sure to shrink. Senators will ask why they are levying taxes, giving the money to governors with no strings attached to fund state-level welfare programs, watching the governors cut ribbons and receive good publicity, and then facing electoral challenges from governors who want to become senators. They will soon come up with a--for them--better solution: cut back on the welfare-reform block grants so that governors who might someday become electoral challengers will have to raise the money they wish to spend.
In this context someone who--like Robert Reich--wishes to see the government's social insurance role expanded to include substantial expenditures on education and training has no chance of maneuvering proposals through the budget. The budgetary process today eats away at the old missions of the social insurance state. It does not add new ones. Hence the appeal to the social responsibility of the corporation as a second-best--something you do because you cannot tax and spend to accomplish your economic and social policy ends.
Ronald ReaganGrant that part of the reason for the lack of enthusiasm for "corporate responsibility" came from the recognition that the overall hand was weak: that budgetary and political pressures in the 1990s were such as to reduce the missions of the social insurance state, and that the call for corporate responsibility was an attempt to avoid these pressures--that as Reich wrote, "if the federal government is to do less... the private sector will have to do more." Still, why was the overall hand so weak? Where did the confidence in the ever-expanding welfare state go?
One source of downward pressure on the missions of the social insurance state came from the slowdown in productivity growth that began in the mid-1970s. According to official statistics (and there is an issue here: official statistics may understate economic growth both before and after 1973 by about one percent per year), the average wage earned in the job held by that year's median male worker grew by 2.3% per year in the two decades before 1973, and by only 0.2% per year in the two decades after 1973. By 1993 those holding jobs in the middle of America's wage distribution could look at their earnings, think back to what they had--twenty years ago--thought that they would be earning by now, and feel an enormous gap of at least one-quarter between how rich they turned out to be and how rich they had thought then that they would be now. Only those who in the 1990s occupy slots in the upper tenth of the American income distribution have escaped the slowdown in productivity growth: for them their incomes and wealth today meet or exceed what they would have predicted two decades ago.
The consequences for social insurance, understood as a program of redistribution from the top and the middle of the income distribution to the bottom in order to create a better society, were straightforward. People tend to give of their surplus, not of their substance. An expanding tax burden is not seen as a problem when incomes are growing rapidly, and one's standard of living is exceeding previous expectations. But the period of near-stagnation in real incomes that followed 1973 helped fuel what Robert Kuttner termed "the revolt of the haves."
A second source of downward pressure came from Reaganomics. It is hard to look at federal spending over the 1980s and 1990s and reach any conclusion other than that Reaganomics--understood as a strategy to shrink the federal government's budget as a share of the economy--was a failure. Federal spending (including offsetting receipts) amounted to 22.8% of GDP in 1980 when Jimmy Carter left office and to 22.8% of GDP in 1993 when Bill Clinton entered office. But even stasis in the federal budget as a share of GDP put enormous downward pressure on the missions of the social insurance state. Defense spending and interest on the accumulated debt rose. And something else--the missions of the social insurance state--had to fall.
Corporate WeaknessAnother source of Democratic Party concern to nurture rather than limit and oppose the modern corporation was a sudden awareness of corporate weakness. In the 1960s American corporations bestrode the world and challenged the older businesses of Europe to modernize or disappear. In the 1960s American corporations like General Motors used sophisticated psychological techniques of advertising to induce consumers to buy cars that were unsafe at any speed. Socialists like Michael Harrington could see a steady reduction in the number of college students seeking corporate careers as a very hopeful sign: it never crossed his mind that the profitability of America's corporations and the liberal spending initiatives he sought to promote were siamese twins: continued political support for liberal initiatives would last only as long as corporate America continued to deliver rising living standards.
But it turned out that America's corporations were more fragile than anyone in the 1960s or early 1970s would have imagined. In the late 1970s Chrysler threatened to collapse. In the early 1980s General Motors came surprisingly close to vanishing--and might have vanished had the Reagan administration not wandered far from its free-trade ideological roots to negotiate stringent "voluntary" restrictions on the imports of Japanese cars. One side-effect of Reaganomics was the high interest rates of the mid-1980s that led international currency speculators to try to place their money in the U.S. and so bid up the value of the dollar. A high value for the dollar is wonderful if you are a consumer of imported goods, or are vacationing abroad. But not if you are a midwestern manufacturing firm.
The examples of large American corporations that drift to the edge of bankruptcy or fundamental restructuring continue to grow. In the early 1990s we had the near-collapse of IBM. Today we have the extremely perilous state of Apple Computer.
The inevitable conclusion from the recurrent appearance of large-American-corporation-in-trouble on the front pages and on the network news was that the market system had real teeth. It seemed to take only a small reduction in the efficiency of a modern corporation considered as a productive enterprise to destroy it as a profit-making enterprise. And corporations that do not make profits do not long survive. Hence everyone became aware of the possibility that very large corporations might vanish, nearly overnight.
We can see this shift in mental attitude toward the American corporation by looking at the transformed image of General Motors on the American left. In the 1960s General Motors is bad because it exploits workers and consumers: it collects obscenely large profits, makes unsafe cars, and deploys private detectives to try to dig up some dirt to discredit Ralph Nader. But by the end of the 1980s the leading critic of General Motors is no longer Ralph Nader, but is instead Michael Moore with his film "Roger and Me." General Motors' principal crime is no longer that it makes billions of dollars a year in profits, but that it loses billions of dollars a year--and so shuts down all of its plants in Flint, Michigan in an attempt to concentrate production in places where it can cover its costs.
But if the corporate bad guys are bad guys because they destroy people's jobs under pressure from mammoth losses, doesn't the government have a corresponding obligation? Shouldn't the government make sure corporations do not come under pressure from mammoth losses? This is not a question that Michael Moore--not the most theoretically sophisticated of political-economic analysts--wants to try to answer.
But any milieu in which the principal image of corporate evil is Flint, Michigan, devastated because General Motors no longer employs people there, will have a very different attitude toward corporations than one in which the principal image is the unsafe Corvair.
East AsiaThe 1980s saw one other big change. The location of Utopia shifted for many Americans. At the beginning of the 1980s, Utopia for those on the political left was located somewhere near Sweden. By the end of the 1980s, Utopia was located somewhere near Japan.
The decline of the Swedish model as an image of what a good future for America would look like came when Sweden in the 1980s was no more able to achieve low inflation, low unemployment, and rapid economic growth than any other European country. The rise of Japan came about in large part because of the extraordinarily rapid economic growth of East Asia in the 1980s, coupled with its governments' deliberate denial that their economic policies were based on laissez-faire.
The rise of the Japanese model cannot be understood without recognizing that it took place while the governments of both Ronald Reagan and Margaret Thatcher were claiming that the cause of slow growth in America and in Britain was too great a role for government. It was necessary, Reagan and Thatcher argued, to return to capitalism red in tooth and claw because a more laissez-faire economy would deliver more rapid economic growth. In this context a look across the Pacific provided an obvious rebuttal. Confronted with right-wing claims that social democracy strangled incentives and that laissez-faire was best, elements of the left looked to the tightly integrated governments and firms of East Asia to argue that the fastest growth occurred where governments did play a powerful role. The Japanese economy grew very fast indeed, and yet its government sought nothing like laissez-faire conditions: its government pursued an explicit and interventionist "industrial policy."
Hence the temptation on the left to say that the problem with the U.S. and the British economies was that they had not too much but too little a role for government in the economy, and that they would achieve faster growth if they adopted some industrial policies analogous to Japan's
But if you had to sum up Japanese industrial policy in a phrase, it would be: "have the government do nice things for large industrial corporations."
ConclusionIn 1933 Franklin D. Roosevelt could open his presidency with rhetoric that would now be seen as more than a declaration of class war:
The money changers have fled from their high seats in the temple of our civilization. We may now restore that temple to the ancient truths. The measure of the restoration lies in the extent to which we apply social values more noble than mere monetary profit.
No one in the American political mainstream today would say such words: instead they would speak about the importance of maintaining business confidence, and the value and productivity of America's corporations. Thus Robert Reich's calls for a politics of corporate responsibility provoked enthusiasm on the left of the Democratic Party, where he was heard to preah the old-time religion. But silence came not just from the right wing but from the center of the Democratic Party as well.
I believe that the shift in America's attitude towards its corporations has a number of roots. Part of it springs from a general unwillingness to add new missions to those that the social insurance state has already undertaken. When support for extensions of government is low, it is likely to remain low even when the social insurance is to be provided not directly by the government but indirectly, through corporations mandated, exhorted, and induced to provide social insurance benefits. And the general unwillingness to support new missions for the social insurance state itself has two sources: the somewhat more pessimistic tone that American politics has taken on in the aftermath of the productivity slowdown, and the rise in other claims on the government budget as America's population ages and as Reaganomics added to the burden of the debt an dthe deficit.
Another source of the changed attitude towards American corporations has been driven by the surprise recognition that many corporations are relatively fragile. They are subject to attack from Wall Street's takeover artists. They can shrink and--perhaps--vanish remarkably quickly, in less than half a decade, either under the pressure of surprise foreign competition or in response to domestic missteps. I do not think that anyone again will view GM the way that Ralph Nader viewed GM in the 1960s--as an unchallengable near-monopoly extorting vast profits from its customers and workers. Instead, GM today is a large producer of automobiles in a world market in which there are many producers of automobiles, some of which are unlikely to survive the next two decades.
But to the extent that the discipline of the marketplace has teeth, it is no longer clear that the proper role of government is to limit and oppose corporate power. For by limiting and opposing corporate power the government may--if the market turns unfavorable--destroy the jobs of those who work for the corporation.
A third and last source of the shift in America's attitude towards the corporation has been a growing belief over the past two decades that we have things to learn from the rapid growth of East Asia. Since one of the principal features of East Asian economies is a more "corporatist" organization of economic life--a more explicit partnership between governments and corporations--the search for lessons from East Asia has tended to reinforce the belief that a good government is one that makes life easy for its large industrial corporations.
These different sources are all largely independent. The productivity slowdown that has undermined support for further welfare state expansion remains, itself, somewhat of a mystery--but it has nothing to do with the rise of East Asia. The turmoil in financial markets and the crises of many American industrial corporations in the 1980s also have surprisingly little to do with the political consequences of the productivity slowdown. (But note that Japanese competition played a role in the crises of Chrysler and General Motors.)
But even though these forces are largely independent, they have nevertheless converged. And in converging they have carried at least the cores of America's political parties to a remarkable degree of agreement: that the business of America is business, that the main role of an economic policy is to keep business happy and confident, and that America's businesses are relatively fragile entities that need to be nurtured, encouraged, and subsidized--not constrained, limited, and opposed.
And at some level this alarms me--even though I also think that Robert Rubin was more right than wrong in his argument with Robert Reich, and that a shift in the direction that Reich wished for would have done no good (for no laws inducing more socially-productive behavior by corporations would have been passed) and might have done considerable harm (if "corporate responsibility" rhetoric led to any fall-off in investment).
Why does this alarm me? Because, as Dean Acheson wrote in the mid-1950s, the Republican Party has always represented the interests of inherited and corporate wealth. The Democratic Party has always been there to represent all the other interests and voices that are part of America. And the fact that Reich's side of the Democratic Party was overwhelmed so easily makes me wonder if the Democratic Party might not be in the process of forgetting its role in American politics.
We have long had one Republican Party--do we really need a second?
References
Dean Acheson, A Democrat Looks at His Party (New York: Harper, 1955).Congressional Budget Office, Economic and Budget Outlook, 1997-2001 (Washington: GPO, 1997).
Michael Harrington, Toward a Democratic Left (New York: Penguin, 1968).
Chalmers Johnson, MITI and the Japanese Miracle: The Growth of Industrial Policy, 1925-1975 (Palo Alto: Stanford University Press, 1982).
Michael Moore, "Roger and Me" (Burbank: Warner Home Video, 1990; VHS).
Ralph Nader, Unsafe at Any Speed: The Designed-in Dangers of the American Automobile (New York: Grossman, 1965).
Robert Reich, Locked in the Cabinet (New York: Knopf, 1997).
Robert Reich and Jack Donahue, New Deals: The Chrysler Revival and the American System (New York: Times Books, 1985).
William Safire, ed., Lend Me Your Ears: Great Speeches in History (New York: Norton, 1992).
Jean Jacques Servan-Schreiber, Le Defi Americain (Paris: Denoel, 1967)
ArticlesCreated 2/21/1996
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