Chapter 7 of Let's Do What Works and Call it Capitalism - The Reagan Counter-Revolution Crushes the American Dream
Chapter 7. The Reagan Counter-Revolution Crushes the American Dream
"In this present crisis, government is not the solution to our problem; government is the problem."
- Ronald Reagan, Inaugural Address, 1981
In his book,
Here Comes Trouble,[1] Michael Moore recounted how, in the early 1980s, he posed as a Michigan businessman to attend a conference in Mexico, sponsored by the Reagan Administration, where American corporations were encouraged to move their factories to Mexico to take advantage of low wages, and increase their profits. Not long after that General Motors closed factories in Michigan and moved some of its manufacturing to Mexico.
The Reagan people did not consider what a negative ripple effect the major plant closings would have. The impact of the unemployment of tens of thousands of people, and the loss of their purchasing power, was a disaster to other businesses across Michigan and, eventually, over a much wider area, and many more jobs were lost than just the ones that were moved to Mexico. Moore called this the beginning of the end of the middle class.
The Reagan Republicans believed that an increase in the profits of major corporations would benefit the economy. This was consistent with their “trickle-down” theory of economics, that when the rich get richer, some additional wealth also flows down the economic ladder to the less fortunate. In running unsuccessfully against Reagan for the 1980 Presidential nomination, George H.W. Bush called this idea “Voodoo Economics,” but later embraced it after becoming Reagan's running mate. When, as President, he turned away from the theory, Bush was attacked by his own party and defeated for re-election by a little-known Arkansas Governor, Bill Clinton. But Bush was right. It was Voodoo economics and it cast a powerful evil spell on the Republican Party that continues to do damage to the American economy.
Reagan's Presidency was a counter-revolution against basic progressive concepts that both political parties generally had adopted during and after the Great Depression. The ideals of the New Deal continued to dominate the Democratic Party into the 1970s. Even the two Republican Presidents elected between 1928 and 1980, Dwight Eisenhower and Richard Nixon, shared many of the basic concepts. Neither made any attempt to help the rich get richer. Eisenhower continued the 91% top income tax rate imposed just before World War II. Nixon did not lower taxes from the 71% top rate established by the Kennedy-Johnson Administration in the 1960s.
In addition to progressive political principles, the prevailing philosophy that governed American economic policies was that of John Maynard Keynes, who believed that consumer demand drove economies, and when consumer demand dropped during recessions, governments should employ deficit spending to spur the economy. He also believed in using monetary policy to control inflation by manipulating the money supply and interest rates.
Conservative economist Milton Friedman at the University of Chicago School of Economics led a revolt against Keynesian economics, and his ideas were adopted by conservative Republicans, and, initially, by some Democrats. He argued that supply drove the economy and that the economy could be spurred by increasing the incentives for corporations and the rich to invest in economic expansion. This meant lowering taxes, reducing regulation, and tightly controlling inflation. The “trickle-down” theory was a corollary to these concepts because it was based on the idea that as the economy expanded the benefits of such expansion would be widely shared. This concept had its roots in the Social Darwinist “laissez-faire” philosophy of the 19th Century “Gilded Age,” virtually identical to what William Jennings Bryan described in his “Cross of Gold” speech in 1896.
These arguments over economic principles passed far over the heads of most Americans. They had little to do with Reagan's election and his enormous popularity. It took many years before the real damage of the Reagan economic policies became obvious to many, and still Republicans cling to the concepts.
This radical change in American politics and economic policies came after a decade of political, social and economic turbulence that caused millions of Americans to lose confidence in the progressive New Deal methods of government, and in liberalism in general. Reagan, who was a brilliant politician, exploited the fissures in American society caused by the civil rights movement, high inflation, high unemployment, and inept political leadership. In doing so he drew support from white lower middle class union workers in the North, who became known as “Reagan Democrats,” and completed the mass conversion of whites in the South from the Democratic to the Republican Party that began with the Civil Rights legislation of Lyndon Johnson's Great Society.
The 1970s began with Richard Nixon in the White House, the Vietnam War raging, and oil prices heading up. Nixon was an ardent anti-communist, but he was not the classic conservative. His presidency was activist and pragmatic, oriented to getting things done, most successfully in foreign policy. Nixon opened relations with China, negotiated an anti-ballistic missile treaty with the Soviet Union, began joint space program coordination with the Soviets, and expanded the Vietnam War while secretly trying to negotiate a settlement, and American withdrawal, which he accomplished not long before he was forced to resign because of the Watergate scandal.
Only recently, as the LBJ Library has opened more files and released more audio tapes, has it become known that Nixon’s Watergate cover-up was not his first. Towards the end of the 1968 Presidential election, which was very close between Nixon and Hubert Humphrey, individuals who supported Nixon had secret direct contact with the South Vietnam government and told them that they would get a better deal in pending peace talks if Nixon were elected, and that they should delay participating in the peace talks until after the election. Evidence has been released that indicates that President Johnson became aware of the interference by these Republican operatives and talked with Nixon directly. Nixon denied any knowledge of the interference and told Johnson he would never support such action. Johnson did not believe him. He was convinced that the Republican operatives would not have acted without Nixon’s knowledge.[2]
However, Johnson had used the FBI to investigate and wiretap the suspected Republican operatives during a Presidential campaign, an action, if not illegal, certainly would have been a major scandal. He found himself in a position where he could not expose the Republican interference in the peace talks that he considered to be treason without also revealing his use of the FBI to investigate the opponent political party during a campaign. So, nothing was done, and without South Vietnam’s participation, the peace talks failed, and thus did the possible chance to end the war many years earlier than its eventual end.
LBJ’s National Security Advisor Walt Rostow eventually filed the material on the episode at the Brookings Institution. But after the Watergate break-in, and Nixon’s involvement, were revealed, he moved the file to the LBJ Library and wrote a note on it that it should not be opened for 50 years. The Library decided not to honor that restriction.
An audio tape of a conversation between President Nixon and H.R. Haldeman in 1971, before the Watergate break-in, revealed that Nixon was aware that the file was at the Brookings Institution, and he pressed Haldeman to have the operatives who were later caught at the Watergate, do a break-in at Brookings to steal the file. There is no indication that a break-in thee was ever attempted.
Nixon tried to shift some of the Great Society programs to the states, but generally the programs were continued. He created two agencies that are hated by conservatives today: the Environmental Protection Agency and the Occupational Safety and Health Administration (OSHA). He supported the Clean Air Act and the National Environmental Policy Act, which requires many government projects to obtain environmental impact statements. He even proposed a limited form of national health insurance that would have provided health insurance to the poor and required all employers to offer insurance to their employees. He also supported the Equal Rights Amendment, which eventually failed.
Through the late forties, fifties and sixties Americans had taken it for granted that their country was invulnerable and their own prosperity sweeter every year. The ever more outrageous fins on Detroit's gas-guzzlers perfectly expressed the reckless flamboyance of the nation. For the majority who considered themselves middle class, the good times were a fact. Median family income increased annually by 2.7 per cent between 1947 and 1973. It was all downhill from there, especially for the bottom two-thirds of the workforce. Family income fell and kept falling right into the early eighties. And, unthinkably, America ran out of gas.[3]
Oil prices quintupled between 1970 and 1974. Following the Yom Kippur War of 1973, the OPEC nations tried to blackmail their customers – mostly Europe, Japan and the U.S. - into opposing Israel. Japan and the European nations – except for The Netherlands - acquiesced to some degree. The U.S. did not, and for a period of time there were long lines at gasoline stations in the U.S. after Mideast oil supplies were cut off.
In 1970, even though the U.S. imported some oil, it still could meet its needs with domestic suppliers operating at full capacity. By 1973 that no longer was true. U.S. production was declining and the nation had become partially dependent on imported oil.[4] The Islamic countries unsuccessfully tried to force a wedge between the U.S. and Israel. They failed, but their price of oil went from $1.80/barrel in 1970 ($10.00 in today's dollars) to $11.65 in 1974, ($51.00 in today's dollars). During that time it occasionally spiked to levels that in today's dollars would be in the $100/barrel range, a price that has been fairly common recently.
This dramatic increase in oil prices and the Federal Reserve's expansionary monetary policy combined to spur inflation. It was 4.7% when Nixon became President, and through wage and price controls, and other methods, he kept inflation below 6% until 1973 when it was 6.16%. It then jumped to 11% in 1974 a few months after his resignation.[5]
Nixon's charge to the Fed, which did not operate with as much effective autonomy as it does today, was to keep unemployment down even if it meant higher inflation, and while the unemployment rate hit 6.1% twice during his Presidency, he generally was successful in keeping it under control.
Nixon's limited second term presaged the tumult of the rest of the decade. First, his Vice President, Spiro Agnew, was forced to resign, after being accused of accepting bribes while Governor of Maryland. Then Nixon resigned, and Gerald Ford, the Republican Leader in the House of Representatives, who Nixon had appointed to succeed Agnew, became President.
Ford had huge problems both with inflation and with unemployment, which hit 9% in 1975 at the same time when inflation was running between 9 and 10%. This previously unknown phenomenon became known as “stagflation,” something that under the Keynes theories should not have occurred. And that contributed considerably to a loss of faith in Keynesian theories. The unemployment rate didn't get back to 6% again until the second half of 1978.[6]
He faced anger from the left over his pardon of Nixon, and from the right for the ending of American involvement in Vietnam, and South Vietnam's conquest by the North Vietnamese. In his effort to combat inflation, Ford used the phrase “Whip Inflation Now” and “WIN” buttons appeared, but while the buttons were not taken seriously, inflation did decline in his last year in office. Ford did not have wide support in his own party, and was defeated in a very close Presidential election in 1976 by a virtual unknown, former Georgia Gov. Jimmy Carter.
Carter's presidency suffered a number of disasters, some of his own making. He and his staff were more conservative than expected and their relations with the Democratic Party-controlled Congress were soon poisoned. Particularly alienated were its most powerful members, Senators Ted Kennedy (who unsuccessfully ran against Carter for the Democratic Presidential nomination in 1980, which Carter still believes contributed to his defeat by Ronald Reagan) and Russell Long (D-La.), as well as House Speaker Tip O'Neill. Carter and Kennedy clashed over health insurance reform, which resulted in nothing being adopted. Congress refused to approve some of his programs, and he vetoed some bills passed by Congress.
Inflation was 5.2% when Carter took office in January, 1977, and it never was that low again while he was President. It rose nearly every month until March of 1980 when it peaked at 14.8%. The inflation rate of 13.6% for 1980 was the highest annual rate since the 14.65% of 1947. Overall, the decade of the 1970s had higher inflation than any other in American history except the period of World War I.[7]
Even though the average wage more than doubled during the 1970s, inflation of about 170% more than canceled that out. Even worse, because income tax brackets were not adjusted for inflation, the cumulative, and insidious, effect of high inflation on the wage increases during the decade was to move many middle class families into higher tax brackets, from the low 20% range of the 1960s to the mid 30% range by the late 1970s. In real terms, the combination of inflation and higher tax rates reduced the incomes of millions of middle class families. By 1980, the average American middle class family was being taxed at twice the level of the average family of 1950.[8] Popular support for social programs, government spending, and the entire liberal agenda that had existed since the 1930s, declined dramatically. For many, “liberal” was an epithet.
Carter's most significant appointment as President, for which he received little credit, and none of the benefit, may have been Paul Volcker as Chairman of the Fed in 1979. Unlike his predecessor, Volcker imposed a tight money policy and drove interest rates to double digits, eventually to the astronomical level of 20% by 1980. That finally broke the cycle of inflation. Within two years, inflation rates dropped back to historically normal levels, where they have remained ever since.
Carter's successes included the creation of the Departments of Education and Energy. With high oil prices continuing to fuel inflation and disrupt the American economy, he was the first President to try to force energy conservation, even having the thermostats turned down in federal buildings. He also imposed price controls on gasoline.
It was Carter who actually began the unraveling of the regulatory structure of the New Deal that was to accelerate under his successor, Ronald Reagan. Airlines were deregulated when the Civil Aeronautics Board was abolished. Deregulation of trucking, railroads, communications and the finance industry also began.[9]
In 1979 Chrysler was bailed out when Congress agreed to guarantee private loans that kept it from going bankrupt. While no government money was loaned to Chrysler, it set the precedent for the Obama Administration’s bailouts of Chrysler and General Motors.
Carter's greatest success, which led to him receiving the Nobel Peace Prize in 2002, was the Camp David Peace Accords that brought peace between Israel and Egypt. His greatest failure was the effort to rescue the Americans held hostage by Iranian radicals in 1979 that ended with a helicopter crash in an Iranian desert. The continuing hostage crisis was a major factor in his defeat for re-election by Ronald Reagan in 1980. His support for the turning over of the Panama Canal to Panama also alienated many conservatives. And then in 1979, the Soviets invaded Afghanistan, and Carter's response was to withdraw the U.S. from the 1980 Summer Olympics that took place in Moscow, an extremely unpopular, and completely ineffective, action.
The governmental and economic tumult of the 1970s left the nation disillusioned with its political leadership, as was shown by the failures of Ford and Carter to win re-election. Neither projected command of coherent strategies and both lacked the political skills and clout of their predecessors. Pointing to the ineptness of the national government, as well as high taxes and inflation, Ronald Reagan said, “Government is the problem.” He defeated Carter for re-election in 1980 and became the first conservative Republican to be elected President since 1928.
Ronald Reagan was underestimated by his critics, but has been greatly overestimated by his fans. He was a charismatic, charming, President, a man who knew how to play the role. He had considerable successes in foreign policy, and he helped to restore some of the pride in the country that had diminished during the 1970s. However, Reaganomics was a disaster for the middle class, and its effects continue because Republicans refuse to face the facts of its damage to America. The “trickle-down,” lower tax philosophy has become a religion, with its adherents ignoring reality. It caused the huge disparity in wealth and income we now are experiencing and it has damaged the American economy.
Reaganism turned out to be something new in American politics: a form of state capitalism in which the services of a large federal government were put behind the wealthiest and most powerful private interests in the country. Reagan's income tax cuts proved illusory for all except the rich. In fact, a sharp increase in the regressive Social Security tax in 1983 and higher state and local taxes actually increased the total tax burden on the average family in the conservative eighties.[10]
Reaganomics had mixed results. Inflation was curbed, and it has remained curbed ever since, but government spending actually increased, and the deficit tripled to its highest level in history. After his first major tax cut, Reagan had 11 more tax actions as President and they all involved various types of increases. The greatest beneficiaries of his tax cuts were the wealthy because the top bracket was lowered from 71% to 28%, which essentially eliminated the progressive nature of the tax system. Capital gains tax rates also were lowered. Various tax reforms, including the elimination of many deductions and loopholes actually had the effect of increasing the taxes of the middle class.
The support for big business, and the moving of jobs out of the country, had horrible effects on the American middle class. It has been estimated that between 1980 and 2005, 4.5 million middle class manufacturing jobs were lost in the U.S. and several million more manufacturing and service jobs have been lost since 2005.[11] Some were moved overseas, others were eliminated by automation, and many were lost to foreign competition. Entire industries vanished from the U.S., including much of the textile manufacturing and almost the entire rapidly growing electronics business. Foreign car sales cut deeply into the domestic business of Ford, Chrysler and General Motors.
During Reagan's Presidency, the average weekly wage in the United States declined from $387 to $335.[12] While this was happening, there was a surge in the wealth of the richest Americans for the first time since before World War II.
Since 1979 the disparity in income between the top 1% and everyone else has reached levels not seen since records started being kept early in the 1900s.[13] While middle class incomes stagnated, the rich got much richer and that has continued to the present time.
“Average income for a household in the top 1 percent has more than tripled, from $350,000 in 1979 to $1.3 million in 2007, according to data tracked by Lane Kenworthy, a University of Arizona sociologist drawing on numbers crunched by the Congressional Budget Office,” the Christian Science Monitor reported in 2012. “These figures are adjusted for inflation and look at household income after taxes and any transfer payments from the government.
“By comparison during those three decades, households in the middle 60 percent saw average real income go from $44,000 to $57,000. For the bottom 20 percent, this gauge shows average household income rising from $15,500 to $17,500.”[14]
Even under President Obama, the disparity between the wealthiest 1% and everyone else has gotten worse.[15]
There were three major developments during the 1980s that have had an immeasurable impact on the world: the deregulation of telecommunications, the licensing of cellular telephone systems, and the personal computer. MCI successfully challenged AT&T's near monopoly in the telephone business, and the resulting deregulation of telecommunications caused an enormous explosion of competition, many new companies, and the introduction of new technologies such as fiber optics and cellular telephones, as well as new services such as eMail and the Internet.
The personal computer combined with digital communications and the Internet to become the greatest single instrument of change of the modern age, and that revolution continues. Cellular service began in the 1980s but did not take off until lower-cost, higher capacity, digital wireless services were introduced in the mid 1990s. The I-Phone and I-Pad, and their competitors, successfully merged all of these technologies and services.
However, the competition in telecommunications that rapidly produced so many advances had a short life span. Lax enforcement of antitrust laws, and other regulations under Reagan, and every President since, resulted in waves of mergers and acquisitions that reduced the number of national competitors to an oligopoly of four: Verizon, AT&T, Sprint and T-Mobile. Sprint and T-Mobile now are foreign-owned, and Verizon has substantial foreign ownership. The intense competition among service providers that once spurred advances in technologies, imaginative services, and lower service prices, no longer exists. It would have been even worse had government not finally opposed one of the proposed mergers, one between AT&T and T-Mobile.
Because of the communications advances, by the early 1990s it cost no more to call across the country than it cost to call a nearby city. International fiber optic cables made it feasible to operate customer service centers in low-wage countries like India and the Philippines at much lower cost than in the U.S. No longer were just manufacturing jobs being moved overseas. The Internet enabled on-line businesses and lowered communications costs. The combination of computer and telecommunication technologies made international business operations far more practical, enabled greater automation, and supported different, and more efficient, forms of management.
The contraction of competition in the telecommunications industry is but one of many that occurred in all major industries during the past 20 years, resulting in the fourth major development of this period: the growth and dominance of multinational corporations that now dominate most major areas of business.
The corporation was a creation of government to provide a vehicle for economic growth. It was intended to provide a means of pooling capital from investors to develop businesses that would benefit the state by providing jobs and economic benefits. Corporations were more attractive to investors than partnerships because in a corporation the shareholders have no responsibility for the business's debts or other liabilities. Their potential losses are limited to their investment.
Just as the United States today is different from the country of our parents and grandparents, today's corporations are radically different from those of the “Gray Flannel Suit” of the 1950s. Management structures are different. Incentives are different. Career paths are different, if there are any. It is quite uncommon today for people to spend their careers with one company. Major areas of business generally are dominated by a small number of companies, oligopolies, and in the major industries those companies are multinationals.
The Alfred P. Sloan, traditional vertical, or military-style, organization, with many layers of middle management, in use in most major corporations for much of the 20th Century, was abandoned late in the century. It was replaced by horizontal functional organizations requiring fewer layers of management, ultimately eliminating the jobs of many middle managers. The result was significant improvement in productivity, which began to show in the 1990s.
The expansions of the computer and telecommunications industries not only made it more feasible for corporations to move operations overseas, but for a period of time, the jobs created in the U.S. in these new fields masked the impact of the loss of more traditional jobs. But millions of manufacturing and customer services jobs disappeared, either from relocation to foreign countries, or as the result of automation.
During the Reagan, George H.W. Bush and Clinton Administrations, there was another factor at work that had the greatest impact of any on the way corporations were managed.
In 1977, Alfred D. Chandler, Jr., a Professor at the Harvard Business School, was awarded the Pulitzer and Bancroft Prizes for the previously cited The Visible Hand; The Managerial Revolution in American Business. The title comes from Adam Smith's use of the term “the invisible hand” which he said was the “market” guiding business decisions. Chandler's thesis, backed by a comprehensive study of the growth of American business from the start of the Republic to the second half of the 20th Century, was that once modern corporations appeared in the 1850s – the railroads and the telegraph companies – the “invisible hand” was replaced by professional managers.
Over time, those professional managers became such a force in the governance and direction of American corporations that their interests, including those of other employees, were served even more than those of the shareholders, despite the fact that the legal responsibility of corporations was to shareholders. No state law imposed a fiduciary responsibility on a corporation to its employees, or to the communities where it operated.
The presence and power of this class of professional manager was a major factor in long life spans for successful companies, lifetime employment for many employees, and generous, but not outrageous, compensation and benefits. Steady stock growth was important, but quarter-to quarter performance was not the prime focus of management. Stock options and other performance-based forms of compensation were not as significant as they are today. Most companies had their own pension programs, which further encouraged lifetime employment.
Chandler's book was but one of several factors that influenced investors in the 1980s to become more demanding. Corporations came under greater pressure to maximize shareholder returns by improving stock performance, especially quarter-to-quarter performance.
The development of 401-K plans in the 1980s, which greatly expanded investment in mutual funds, contributed to increasing attention paid to the stock performance of companies. As 401-K plans have become ubiquitous, so has the demand for stock performance.[16]
The growth of 401-K plans may also have had an unintended consequence. The 401-K plans had enormous appeal to employers as replacements for the pension plans they had to fund. With 401-K plans they contributed a certain percentage of their stock to the employee's account, and then had no further obligation. Unions also liked them because they gave employees a greater share of company ownership. As an individual's 401-K grew, the great percentage of it usually was invested in mutual funds. The company's stock contributed to the plan could be exchanged for mutual funds as well. The 401-K plans as replacements for pension funds not only lessened the ties between employees and their employers; they also created a huge pool of mutual fund investment that forced changes in corporate management.
For the first time more than 50% of the stock of public companies was held by mutual and pension funds, rather than by individuals. Unlike many traditional individual investors, institutional investors have little emotional attachment to the companies in which they invest. Their only interest is in buying stocks that will increase in value, and, in many cases, the increases are expected in the near term. If companies do not perform as expected, or better, their stocks are dumped, and their stock prices decline, sometimes substantially.
This increased emphasis on short-term stock performance put enormous pressure on CEOs to improve their bottom lines and keep their stock prices rising, on a quarter-to-quarter basis. Corporations thinned out their management ranks, and looked for other ways to improve profits, such as shifting operations to less expensive foreign countries.
In 1992, the Securities and Exchange Commission promulgated regulations that had dramatic effects on corporate governance and strategies. Public companies had to disclose how the compensation of their CEOs related to the performance of their stocks. Any compensation of executives in excess of $1 million a year was not tax deductible unless it was tied to performance.
Maximizing shareholder short-term returns became the primary duty of corporate senior managements, at the expense of all other stakeholders, and sometimes the longer-term interests of the company. It is impossible to overestimate the impact of these misguided regulations on the governance of corporations, and their negative effect on American competitiveness. Quarter-to-quarter stock performance became the most important measure of success. It provided a justification for massive increases in CEO, and senior executive, compensation keyed to stock performance.
With such a short-term focus, there is little incentive for companies to take chances on higher risk ventures, technologies, or innovations that require years to produce results. More patient foreign companies, with longer horizons, have gained great advantage. For example, many Japanese companies typically operate on a 20-year business plan. American companies operate on much shorter plans, usually not longer than five years, and almost never longer than ten. The investment community, which provides the capital for start-ups and expansion, usually has even shorter horizons for obtaining returns on its investments. This made it very difficult for an American company to raise capital to develop advanced technologies that might take five to ten years, or longer, to produce profits.
Following the earlier pattern of consumer electronics, many fast growing areas of high tech and precision technology became the specialties of countries more willing to wait for longer term payoffs, including Japan, South Korea, Germany, Canada, Finland, Sweden, and, more recently, China. Most personal computers, cell phones, and wireless transmission equipment, are manufactured outside the U.S., including the sensationally successful Apple I-Phone and I-Pad.
The demand for quarterly performance also meant that if the stock price of a company with solid assets and good cash flow stopped increasing at the pace expected by Wall Street the company could become a target for a takeover. Such takeovers often resulted in a break-up of a company's assets, and the laying off of most, if not all, of its employees. Such takeovers usually bring a premium on the current stock price and are justified by company management as the only way to maximize shareholder value.
With fiduciary duties of the corporate management entirely to shareholders, no consideration is required to the communities where companies operate for the benefits the communities may have provided to the corporations, nor to the dependencies and loyalties of employees.
In recent years there has been a movement to change this state of affairs. Approximately thirty states have adopted “Constituent statutes” that permit corporate managements to consider factors other than shareholder returns when making major decisions. In 2010 Maryland adopted a new form of corporation, the “Benefit” corporation, also known, slightly incorrectly, as the “B Corporation.” Many other states and the District of Columbia have since adopted similar legislation. This form of corporation is a hybrid between a for profit and a non-profit corporation. The corporate commits to providing a “public service” and the fiduciary responsibility of the management is extended beyond shareholders to other stakeholders, including employees, communities, and the public in general. Actions can be brought against the management of these companies to enforce this broader range of responsibility.
These changes have been heralded as injecting a new sense, and a new opportunity, in business for social responsibility. These changes, if universally adopted, hold the promise of ending the period of almost mindless commitments of companies to short term profits, and may slow down corporate mergers and acquisitions. However, it remains to be seen if these changes in fiduciary responsibilities have a chilling effect on capital sources. All companies need capital, and some need a great deal. Some types of investors, particularly mutual funds, may not find this type of corporation particularly attractive.
As a result of the laissez-faire practices of Reagan and his successors, consolidation within industries accelerated. The Federal Communications Commission eliminated many of the regulations of broadcasting, including equal time and fairness doctrine rules that required broadcasters to make time available for different points of view. The FCC also eliminated most restrictions on ownership, which permitted massive consolidation of ownership of broadcast stations and networks, greatly reducing competition and access to the media by all points of view.
The lack of enforcement of antitrust laws accelerated the formation of giant multinational corporations that now own most of the major brand names. And because of the rapid expansion of economies around the world since the end of the Cold War, many multinational corporations no longer rely on the American market for the majority of their revenues, or profits, and, as a result, have less loyalty to America, if they have any. Resources are focused where they are likely to produce the greatest profits, and recently, that has not been in the United States.
There are only 27 countries with GDPs higher than the gross revenues of the three largest corporations, Royal Dutch Shell, Exxon-Mobil, and Walmart. Most of the world's countries have lower GDPs than the 25 corporations that have revenues greater than $142 billion. Those 25 corporations include 11 oil and gas companies (3 U.S.), four auto manufacturers (1 U.S.), two diversified manufacturers (1 U.S.), two national public utility companies, one commodities dealer, one insurance company, one retailer (U.S.), one financial institution, one national postal service and one conglomerate (U.S.). Only the two public utility firms (China and Italy) and Japan's postal service are not “multinational,” operating in many countries. The one conglomerate, Warren Buffet's Berkshire Hathaway, primarily is an investment company, and its largest investments are in American companies.[17]
The existence today of multinational corporations so huge that their incomes are larger than most countries is one of the most significant business developments in modern history that has yet to be fully understood and evaluated. Many of these corporations operate almost entirely independent of any nation's laws, and essentially are virtual countries, without the restrictions and limitations that real ones have. Some, like Exxon-Mobil, have their own armed forces.
Collectively, multinationals control trillions of dollars and much of international trade, banking and commerce. They have the power today to destroy the economies of countries, if they choose to do so, or to exercise such influence that they virtually own countries. Walmart has been implicated in a massive national bribery scandal in Mexico.[18]
Almost from the beginning of the nation, it was considered a social good to have successful businesses providing employment, and tax revenues. Through a series of early Supreme Court decisions corporations received many of the same Constitutional protections as individuals, including property and contract rights. As a creation of the state, corporations have duties to the state. They are subject to its laws, regulations and taxes. However, contrary to some beliefs, the Supreme Court never has ruled that a corporation is a person. A chief justice in the 1880s said in dicta in a decision that they were, under the 14th Amendment, but that simply was his opinion, and it never has been validated by a decision.
In recent years, however, the Court has expanded the rights of corporations to include some previously only held by individuals, including the right to free speech. The Supreme Court's recent decision in Citizens United[19] that permits corporations to make unlimited contributions in political campaigns expanded earlier decisions of the Court by ruling that there can be no limits on the amounts of money corporations contribute to political action groups because money is equivalent to speech, and speech cannot be limited. While rights of corporations have been expanded, their duties and responsibilities have not been. They are not subject to the restrictions imposed on governments in the Bill of Rights of the Constitution.
The Citizens United decision has been quite controversial, and has been subject to considerable criticism. A movement is underway to amend the Constitution to limit the definition of corporations so that they do not have all the rights of individuals. Until that, or some other change occurs, the decision has given corporations more potential legal influence on politics and government than ever before.
With the ability to spend enormous amounts of money on behalf of political candidates, the huge multinational corporations that have little loyalty to the U.S., as well as extremely wealthy individuals, are positioned to exercise much greater influence on American governmental decisions at both the federal and state levels. Those decisions range from lowering taxes and regulation to giving private enterprises greater control over government functions through privatization. There is an enormous risk that far more activities of government will wind up being performed by profit-seeking businesses that do not face the same kind of public scrutiny and political control that government agencies do. Major industries also may obtain far greater control over natural resources and may be able to exploit them with less regulation, particularly environmental regulation.
The implications of the growing power of multinational corporations, and the continuing failure of governments to control them, still are not fully appreciated. This concentration of power is one of the worst legacies of the Reagan era, but one now shared with his successors.
[1] Moore, Michael. Here Comes Trouble: Stories from My Life. New York: Grand Central Publishing, 2011.
[2] The most detailed account of these events can be found in:. Parry, Robert. America’s Stolen Narrative. New York: The Media Consortium, 2012. The audio tapes of LBJ’s conversations now can be heard. They are available on-line from the LBJ Library at http://www.lbjlib.utexas.edu/...
[3] Evans, p. 604.
[4] Yergin, Daniel. The Prize: The Epic Quest for Oil, Money & Power. New York: Simon & Schuster, 1991. pp. 588-592
[5] Bureau of Labor Statistics historical data.
[6] Ibid.
[7] Ibid.
[8] Evans. p. 620.
[9] "How Reaganism actually started with Carter". Salon.com. http://www.salon.com/...
[10] Evans, p. 623.
[11] Atkins, Priscilla, et. al. “Manufacturing Job Loss: What Can Economic Development Policy Do?” Washington, DC: The Brookings Institution, June, 2011 http://www.brookings.edu/...
[12] Rifkin, p. 168.
[13] Saez.
[14] “America's big wealth gap: Is it good, bad, or irrelevant?” The Christian Science Monitor. Feb. 12, 2012.
[15] Saez.
[16] See Gelter, Martn. “The Pension System and the Rise of Shareholder Primacy” June 7, 2012. http://papers.ssrn.com/... in which the author argues that the development of the 401-K is a prime cause of the conversion of “managerial capitalism” to “shareholder capitalism,” the changes of the focus of corporate management from its own interests to an almost exclusive focus on the interests of shareholders.
[17] “The Global 500,” Fortune, 2012. http://money.cnn.com/.... Ranking of GDPs: The World Factbook https://www..gov/...
[18] http://www.reuters.com/...
[19] Citizens United v. Federal Election Commission 558 U. S. __ (2010)