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

Posted by PITHOCRATES - September 3rd, 2013

History 101

(Originally published November 20th, 2012)

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.

www.PITHOCRATES.com

Share

Tags: , , , , , , , , , , , , , , , , , , ,

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.

www.PITHOCRATES.com

Share

Tags: , , , , , , , , , , , , , , , , , , ,

FT122: “Japan’s Lost Decade helped the Clinton economy by reducing imports while the global slowdown does nothing for the Obama economy.” -Old Pithy

Posted by PITHOCRATES - June 15th, 2012

Fundamental Truth

The Japanese Government made Money Cheap and Plentiful to Borrow creating a Keynesian Dream but an Austrian Nightmare

Once upon a time Americans feared the Japanese.  Their awesome might.  And their relentless advances.  One by one the Japanese added new properties to their international portfolio.  They appeared unstoppable.  Throughout the Eighties everything was made in Japan.  Government partnered with business and formed Japan Inc.  And they dominated the world economy in the Eighties.  A U.S. Democrat nominee for president held up Japan Inc. as the model to follow.  For they had clearly shown how government can make the free market better.  Or so this candidate said.

But it didn’t last.  Why?  Because in the end the Japanese just interfered too much with market forces.  Businesses invested in each other.  Insulating themselves from the capital markets.  Allowing them to make bad investments to sustain bad business planning.  All facilitated with cheap credit.  Government made money cheap and plentiful to borrow.  And they borrowed.  A Keynesian dream.  But an Austrian nightmare.  Because they used that money to make even more bad investments (or ‘malinvestments’ in the vernacular of the Austrian school of economics).  Creating a real estate bubble.  And a stock market bubble.  Bubbles are never good, though.  Because they can’t last.  They must pop.  And when they do it isn’t pretty.

The U.S. just went through real estate bubble that peaked in 2006.  Money was so cheap to borrow that people were buying $300,000+ McMansions.  Anyone could walk in and get a no-documentation loan with nothing down.  People were buying houses and flipping them.  And people who couldn’t qualify for a mortgage could get a subprime mortgage.  Further pushing house prices higher.  Not because of real demand.  But because of this artificial tweaking of the free market by the government.  Making that money so cheap to borrow.  And when all that cheap credit caused inflation elsewhere in the economy the Fed finally tapped the brakes.  And increased interest rates.  Raising monthly payments on all those subprime mortgages.  Leading to a wave of defaults.  The subprime mortgage crisis.  And the Great Recession.

Japan’s Deflationary Spiral gave American Domestic Manufacturers a Huge Advantage

This is basically what happened in Japan during the Nineties.  The government had juiced the economy so much that they grew great big bubbles.  Ran up asset prices to incredible heights.  But then the bubble burst.  And those prices all fell.  They fell for so long and so far that Japan suffered a deflationary spiral.  Throughout the Nineties (and counting).  The Nineties were a painful economic time.  After a decade or so of inflation the market corrected that with a decade of recession.  And deflation.  A decade of economic activity the Japanese just lost.  The Lost Decade.  But it wasn’t all bad.

At least, in America.  There was still some Reaganomics in the American economy.  Producing real economic growth.  But there was also a bubble.  In the stock market.  The dot-com bubble.  The Internet was brand new and everybody was hoping to be in on the next big thing.  The next Microsoft.  Or the next Apple.  Also, unable (or unwilling) to learn from the mistakes of the Japanese real estate bubble the Clinton administration was making it very uncomfortable for banks to NOT approve mortgage applications for people who were unqualified.  Putting more people into houses who couldn’t afford them.

So while the Clinton administration was trying to change America (during the first 2 years they tried to nationalize health care against the will of the people) the economy did well.  For awhile.  Irrational exuberance was pushing the stock market to new heights as investors poured money into companies that didn’t have a dime of revenue yet.  And never would.  Clinton had to renege on his promise on the middle class tax cut because things were worse than he thought when he promised to make that middle class tax cut.  (Isn’t it always the way that when it comes to tax cuts some politicians can’t keep their promise because they were too stupid to know how bad things really were?)  Added into this mix was Japan’s Lost Decade.  Their deflationary spiral increased the value of the Yen.  And made their exports more expensive.  Giving the American domestic manufacturers a huge advantage.  The economy boomed during the Nineties.  For a mix of reasons.  They even projected a budget surplus thanks to the economic woe of the Japanese.  But then the dot-com bubble burst.  Giving Bill Clinton’s successor a nasty recession.

When a Recession ails you the Best Medicine has been and always will be Reaganomics

The Left always talks about fair trade.  And about the unfair practice of foreign manufacturers giving Americans inexpensive goods that they want to buy.  So their answer to make these unfair trade practices fair is to slap an import tariff on those inexpensive foreign goods.  To protect the domestic manufacturers.  For they believe it’s that simple.  And plug their ears and sing “la la la” when you discuss David Ricardo’s Comparative Advantage.  Ricardo says countries should specialize in the things they’re good at.  And import the things others are better at.  When everyone does this we use our resources most efficiently.  And the overall wealth in the international economy increases.  Making the world a better place.  And increases our standard of living.  But the rent-seekers disagree with this.  They want high tariffs.  And obstacles for foreign imports.  To protect the domestic businesses that can’t sell as inexpensively or at such high levels of quality.

Some would point to Japan’s Lost Decade as proof.  Where their deflationary spiral removed a lot of foreign competition to American manufacturing.  Allowing them to sell at higher prices and lower quality.  All the while protecting American jobs.  And, yes, Japan’s woes did help the American domestic manufacturers during the Nineties.  But it wasn’t because they could raise prices and lower quality in the face of low foreign competition.  It was because there was still enough Reaganomics in the country to produce some vibrant economic activity.  That encouraged entrepreneurs to take chances and bring new things to market.  Which is a huge difference from the current economic picture.

The Eurozone sovereign debt crisis has plunged Europe into a recessionary freefall.  Much like the Japanese suffered in the Nineties.  Yet the American domestic manufacturers aren’t benefiting from this huge decline in foreign competition.  Why?  Because the Obama administration has excised any remaining vestiges of Reaganomics out of the economy.  Everything the rent-seekers could ever hope for they have.  Only without tariffs.  And yet the Obama economy still lingers in recession.  Because irrational exuberance and barriers to free trade don’t create real economic growth.  And an administration hostile to capitalism doesn’t inspire entrepreneurs to take chances.  No.  What encourages them to take chances are low taxes.  And less costly and less punishing regulations.  For programs like Obamacare just scare businesses from hiring any new employees.  Because they have no idea the ultimate costs of those new employees. 

Now contrast that to the low taxation and relaxed regulatory climate of Reaganomics.  That produced solid economic growth.  And this growth was BEFORE Japan’s Lost Decade.  Which just goes to show you how solid that growth was.  And proved David Ricardo’s Comparative Advantage.  For both Japan and the United States did well during the Eighties.  Unlike Clinton’s economy in the Nineties that only did well because Japan did not.  But the good times only lasted until the irrational exuberance of the dot-com bubble brought on an American recession.  Which George W. Bush pulled us out of with a little Reaganomics.  Tax cuts.  Proving yet again that higher taxes and higher regulations don’t create economic activity. Tax cuts do.  And fewer regulations.  In other words, when a recession ails you the best medicine has been and always will be Reaganomics.

www.PITHOCRATES.com

Share

Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,