Roosevelt, Wage and Price Controls, Fringe Benefits, Health Insurance, Pensions, Unions, Bankruptcy and Bethlehem Steel

Posted by PITHOCRATES - November 20th, 2012

History 101

The Roosevelt Administration fought Inflation by Passing a Law to Cap Employee Wages

Most times when those in government try to fix things they end up making things worse.  Giving us the unintended consequences of their best intentions.  And the government had some good intentions during World War II.  They were printing money to pay for a surge in government spending to pay for war production.  As well as a host of New Deal programs.  Which sparked off some inflation.  Inflation is bad.  Enter their best intentions.

One of the biggest drivers of inflation is wages.  Higher wages increase a company’s costs.  Which they must recover in their selling prices.  So higher wages lead to higher prices.  Higher prices increase the cost of living.  Making it more difficult for workers to get by without a pay raise.  Which puts pressure on employers to raise wages.  If they do they pass on these higher costs to their customers via higher prices.  It’s a vicious cycle.  And one all governments want to avoid.  Because higher costs reduce economic activity.  And that’s how governments get their money.  Taxing economic activity.

Enter wage and price controls.  The Roosevelt administration thought the way to solve the problem of inflation was simply passing a law to cap employee wages.  To halt the vicious cycle of escalating prices and wages.  Something employers didn’t like.  For that’s how they got the best people to work for them.  By offering them higher wages.  With that no longer an option what did these employers do to get the best people to work for them?  They started offering fringe benefits.  Which became a killer of business.

As People lived longer in Retirement Retiree Pension and Health Care Expenses Soared

Employers began offering health insurance and pensions as fringe benefits for the first time.  To get around the wage and price controls of the Roosevelt administration.  Which they had to pass on to their customers via higher prices.  So the wage and price controls failed to do what they were supposed to do.  Keep a company’s costs down.  Worse, these benefits made promises many of these businesses just couldn’t keep.

Roosevelt also empowered unions.   Who would negotiate ever more generous contracts.  By demanding generous pay and benefits for current workers.  And pensions and health care for retired workers.  But it didn’t end there.  The unions also expanded their membership as much as possible.  So in those contracts they also got very costly workplace rules.  If a lamp burnt out at a workstation the worker had to call an electrician to replace the lamp.  They could not screw in a new lamp themselves.  The unions defined every work activity in a workplace and created a job classification for it.  And only a worker in that job classification could do that work.  Which swelled the labor rolls at unionized plants.  Who all were receiving generous pay and benefits.  As were a growing number of retired workers.  Greatly increasing labor costs.

For awhile businesses could absorb these costs.  Business was growing.  As was the population.  There were more younger workers entering the factories than there were older workers retiring from them.  But things started changing in the Sixties.  The population growth rate flattened out thanks to birth control and abortion.  So as the population grew slower the domestic demand for manufactured goods fell.  While in the Seventies foreign competition increased.  So you had falling demand and a rising supply.  Making it harder to pass on those high labor costs anymore.  Which proved to be a great problem as their market share fell.  For as they laid off employees fewer and fewer workers were paying the pensions and health care costs for an ever growing number of retirees.  Pensions were chronically underfunded.  Worse, people began to live longer in retirement thanks to advances in medicine.  Increasing retiree pension and health care expenses for these businesses.  Bleeding some of them dry.

Bethlehem Steel filed Bankruptcy when they had 11,500 Active Workers and 120,000 Retirees and Dependents

Bethlehem Steel helped build America.  And win World War II.  It made the steel for the Golden Gate Bridge.  And the bridges between New York and New Jersey.  Many of the skyscrapers you see on Manhattan are made with Bethlehem steel.  Little Steel.  Second only to Big Steel.  U.S. Steel.  Big Steel and Little Steel dominated the US steel industry.  Until, that is, foreign competition entered their market.  And the steel minimills arrived on the scene.  Neither of which had unionized workforces.  Or those legacy costs (retiree pension and health care expenses).  Which spelled the doom of the sprawling Bethlehem Steel.  From 1954 to 2003 hot-rolled steel sheet prices rose 220%.  While wages soared over 900%.  And it got worse.

Employment peaked in 1957 at 167,000 workers.  By the mid Eighties that fell to 35,000.  With some 70,000 retirees and dependents.  That is, Bethlehem’s retiree costs were about twice their active labor costs.  As business continued to fall employment fell to 11,500.  While their retirees and dependents rose to 120,000.  Just over 10 retirees for each active worker.  Unfunded pension obligations soared to $4.3 billion.  Just impossible numbers to recover from.  Which is why Bethlehem Steel is no longer with us today.  The company was dissolved in 2001.  With International Steel Group (ISG) buying some of their remaining assets.  Then, in 2005, a foreign steel company, Mittal Steel, merged with ISG.  Leaving no remnants of Bethlehem Steel in American hands.

ISG got the steelworkers union to reduce the number of job classifications in the Bethlehem plants they took over from 32 to 5.  Greatly shrinking the labor rolls.  And increasing efficiency.  Helping these remaining assets to move forward.  The pension fund was taken over.  With retirees losing only about $700 million, giving retirees a pension of up to $44,386.  But retirees lost their health care.  Some $3.1 billion in spending obligations that the company couldn’t pay.  And didn’t.  A sad ending for an American great.  A failure the Roosevelt administration was responsible for.  As their good intentions resulted in unintended consequences.  Setting businesses up to fail with costly fringe benefits.  Adding yet another demand to the union’s list of demands.  Spending obligations these businesses couldn’t pay once domestic demand fell while steel supplies rose.  Leading to the inevitable.  Bankruptcy of large unionized companies.

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