Jeff’s Blog #16

Jeff’s Blog, Volume 16

1. Moving on from the Old New Deal
I’m halfway through a few books about the New Deal, and I think Jefferson Cowie’s The Great Exception is the one I would recommend to anyone who wants to think about The New Deal and its legacy at a high level. This isn’t a blow-by-blow of FDR’s legislative efforts and the characters who shaped his administration; for that I’d probably recommend Michael Hiltzik’s The New Deal: A Modern History. Cowie’s project is more unusual: tell the story of American political economy in the 20th century through the lens of the New Deal. Cowie’s argument is simple and bold: the New Deal and the broad economic prosperity in its wake (1935-1970s) were aberrations in American history, the products of unusual circumstances that will probably never coincide again. In some sense the doomed protagonist of the book is really class politics or labor politics, which has thrived exactly once in American history (during this mid-century period). Cowie renames several historical periods to highlight his theme. The Gilded Age was not unique but rather the “Incorporation of America” when law was first settled to support big business against labor. The Reagan Revolution is better seen as a “Reagan Restoration,” undoing the aberrant New Deal and setting the stage for our current return to corporate dominance.

The core of the argument is about why Americans have always been skeptical of class and labor politics, and why those obstacles dissolved for a brief moment in the 1930s. Cowie holds the notion of Jeffersonian individualism in some contempt as the mythos that keeps Americans from appreciating collective action. One especially interesting instantiation of this ideal came during the Free Labor movement in the 19th century. Northerners distrusted collective organization of workers because it resembled slavery. “By contrasting free wage labor in the north with slave labor in the south, the standard for white American working class identity was set low: not enslaved.” See Eric Foner’s Free Soil, Free Labor, Free Men for more on this ideology. Of course, racism is the most important historical obstacle to a class politics. FDR could not have passed his major initiatives without Southern Democrats. The result was systematic exclusion of black people from New Deal programs; e.g. domestic and agricultural workers not included in Social Security. When LBJ passed the Voting Rights Act, Democrats lost the South for well more than a generation. When Reagan won in 1980, segregationist Strom Thurmond marveled that it was the same platform he himself had run on in 1948. “The core, tragic dilemma of American class politics was that to include African Americans meant not to have class politics.”

A second historical obstacle to class politics has been nativism and immigration hysteria. As we know, no wave of immigrants has been immune to violence and abuse. But the middle of the century was a unique moment of relative calm, between the 1924 Johnson-Reed Act (which limited immigration) and the 1965 Immigration Act (which abolished quotas based on national origin). There was thus little controversy about immigrants benefiting from collective bargaining (the Wagner Act) or minimum wage (Fair Labor Standards Act) or Social Security. Another piece of the Great Exception was the absence of religious fundamentalism in the 1930s. Religiously inspired social reform movements reappear throughout American history, but the New Deal landed in between the Social Gospel movement of the early 20th century and the rise of Jerry Falwell, the Moral Majority, and the New Christian Right in the 60s and 70s. Finally, there were the extraordinary circumstances of the Depression and World War II (these aberrations also play a key role in Thomas Piketty’s argument for why wealth inequality shrank in the middle of the century before resuming its upward climb). It’s remarkable how brief a period accounted for all the significant pro-labor policy-making of the 20th century; every key New Deal program passed between 1935 and 1938. As Cowie shows, most labor politics of the subsequent decades was simply a defensive struggle to preserve the Wagner Act.

As you can tell, this book offers a very pessimistic take on American history. Indeed, Cowie’s aim is to disillusion us from believing that we can recreate mid-century equality by replicating New Deal-style programs, universal benefits, and collective bargaining–at least at the national level. It’s a rebuke that says Bernie Sanders is living in the past–but not deep enough past to recognize that our current situation is normal in the scope of our history. If Cowie has any hope it comes from the Progressive Era which at least had “militant voluntarism in the shadow of a state hostile to collective interests.” Unable to pursue national legislation, the Progressives pushed for local initiatives, worked outside the state, and shamed the powerful through muckraking. Local Fights for $15 would fit in this tradition. But based on the little I’ve learned about the Progressive Era recently, I am not optimistic that there is a great lesson for populist politics in there either.

2. Corporations are nexuses of contracts, my friend
Since the financial crisis, sociologists have been at work uncovering the “financialization” of American life.   This is the framework of thinking about companies as financial products, households as investors, and Wall Street as the center of the economy. It includes the shift from managerialism–the notion that managers run companies at their discretion–to the idea that corporations exist only to satisfy shareholder value. In retrospect, financialization began in the 1970s and seems to have continued apace after the road bump of 2008. Jerry Davis’s Managed by the Markets: How Finance Reshaped America is a helpful chronicle of this moment. In a sense this story is a sequel to The Great Exception. At least, it describes a world where the workers who benefited from the New Deal are beside the point. Davis: “My basic argument is that twentieth-century American society was organized around large corporations, particularly manufacturers and their way of doing things. It is now increasingly organized around finance.”

I found that this book succeeded more as intellectual history, chronicling the evolution of corporate law, than as a political or business history of the rise of finance. The book proceeds as a reflection on a 1932 classic, The Modern Corporation and Private Property, which introduced the theme of the separation of ownership from control. While that book bemoaned how much power managers have, Davis shows how the tables have turned and now shareholders rule. A key moment was the introduction of the notion of a “market for corporate control” (Manne 1965), namely that the lower the stock price, the more attractive a takeover becomes to those who think they could do better. This sets a limit on how much managers can ignore stock prices. And managers are not the only ones beholden to the markets: governments are too. The idea of a “market for corporate charters” suggests that states will compete to offer laws most favorable to shareholders–a competition which Delaware has won. It was interesting to learn about states attempting to stand up to shareholders, like when Pennsylvania sought to keep Hershey from changing ownership out of fear it would harm workers and the namesake town which relies on the company. But the dominant law and economics perspective hardly believes there is such thing as a company. In this view, companies are just a collection of contracts between the owners of labor and capital and customers (Jensen & Meckling 1976). I find this approach extremely dangerous as it has no regard for the obvious (to anyone outside academia) reality that companies are social institutions embedded in communities.

Managed by the Markets also includes plenty of history of the fall of commercial banking, the rise of investment banking, the finance-driven merger movement, the shift in household wealth from bank deposits to mutual funds, and the evolution of houses into leveraged financial assets. There was a shockingly blunt quote from the CEO of Wells Fargo in the 90s: “The [commercial] banking industry is dead, and we ought to just bury it.” After a series of big bank mergers, seven of the ten largest U.S. cities lack a major local commercial bank. Another important development was when the major investment banks abandoned the traditional partnership model and went public. Compensation for bankers became more closely tied to short-term results rather than long-term customer service. Thence scandals like that of Henry Blodget at Merrill, who “conceded that his Internet research group had never issued a “Sell” recommendation, even on companies referred to in internal e-mails as “dogs” and “crap.” For all these interesting facts about the rise of finance, I came away from the book lacking a strong intuition for why this happened. At several points Davis says information technology made it easier to trade complicated securities, but this felt insufficient. I think closer attention to lobbying and public policy toward finance would be helpful. Act of Congress about the passage of Dodd-Frank is great for insight into finance’s lobbying power. I think Greta Krippner’s Capitalizing on Crisis: The Political Origins of the Rise of Finance is probably the right book for the political history. Krippner argues that as post-war growth slowed in the 1970s, the state deregulated finance to supply the credit necessary to maintain the entitlements and standard of living people had come to expect. A lot of stuff comes back to the Great Exception and how to go on in its absence…

3. Bubbles, and not the molecular gastronomy kind
Thrillist has a three part series critiquing the American restaurant business. Part one explores how small cities across the country developed identical hip restaurant scenes, all parroting Portland circa 2007. Part two discusses a shortage of cooks driven by too many restaurants and not enough immigration. And part three argues that the restaurant business (at least the full-service segment) is in a bubble. In 2016, the number of independent restaurants declined 3%. The author cites “rising labor costs, rent increases, a pandemic of similar restaurants, demanding customers unwilling to come to terms with higher prices.” From these reasons you notice an economic story and a cultural one. The cultural story is what makes the piece fun to read, but it’s not clear whether self-parodying excess of foodie culture is really what’s driving restaurants out of business. We hear about hyper-seasonal menus that change five times a season, chefs who refuse to buy someone else’s bread or charcuterie, and customers who expect world-class entrees under $30. But it seems like nothing is more important than rising healthcare costs, especially as the Obamacare employer mandate defines full-time work as 30 hours per week. The restaurant featured throughout the story paid $14,400 for health insurance in 2012, but $86,400 in 2015. The increase alone represents a third of profit in their best year ever. Food delivery apps are also reportedly a problem, since they drive a growing share of business to skimp on tips and alcohol. The author predicts that we will stop eating in sit-down restaurants as much as we have in the past few years, and that fast casual will continue to gobble up market share. Consumers will adapt. The real losers, he suggests, are the current generation of chefs who have poured their savings into new restaurants as the bubble inflated.

4. Maybe Carrier should do this…
There was some pretty amazing timing on two stories about China last week. Shot: this NYT report on the massive suite of incentives and perks the government of Zhengzhou gave Foxconn to locate its iPhone assembly factory there. Chaser: Foxconn “plans to replace almost every human worker with robots.” Now, it’s not as if the government worked so hard to lure Foxconn exclusively for the purpose of creating jobs. But that sure seems like a big part of it. The government spent $1 billion to create dormitories for workers; helps recruit and train the workers and pays a subsidy for new hires; and eliminated corporate taxes and value-added taxes for several years (so it’s not as if they’re making up their investment in tax receipts!). Perhaps the government was aware of Foxconn’s rough plans, which have included some major automation component for several years now. But this must rankle someone. Especially, as the NYT notes, since China’s national development goals have shifted slightly away from manufacturing for export and toward domestic consumption and services. If you’re interested in domestic consumption, the last thing you want is a company throwing hundreds of thousands of people out of work–right after you paid them a few billion dollars to create the jobs. Something I often talk about in the U.S. context is how corporations should serve other ends beyond profit. It would not surprise me if China is much more successful at limiting antisocial business practices (e.g. automation, if deemed as such) than we are. Whether it is ultimately a good thing for a government to coerce prosocial behavior is a question for another day.

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