Monday, April 5, 2010

Own the Fed, Part XVI: Steps Back and Forward

Matters seemed to have calmed down as the sixties ended. All in all, things had probably never been better. No one had ever heard of AIDS, and Arabs were somewhere on the fringe of global society, providing the world with cheap oil following the humiliation of the Islamic world in the brief 1967 war with Israel. As for terrorism, the most the Provisional IRA had accomplished was to blow up Lord Nelson's column in Dublin on March 7, 1966. The feat didn't do anything for a united Ireland, but it earned them a comic song written by Tommy Makem and premiered by him and the Clancy Brothers in a special concert held in Dublin on the 50th anniversary of the Easter Rebellion of 1916.

From the point of view of economic justice, to say nothing of common sense and reality, however, the situation was unstable at best, and could only become more so. At the very beginning of the decade, on August 15, 1971, President Richard Nixon announced wage and price controls in an attempt to control the demand-pull inflation caused by the increased spending to implement the Great Society and carry on the war in Vietnam at the same time.

Whether as a result of having offended the laws of economics laid down by Mammon and Pluto as well as common sense, or simply because it was Nixon, almost immediately a series of events occurred that caused a wave of cost-push inflation. Authorities blamed the failure of the Peruvian anchovy fisheries in 1972 as the first major event in what has been called an "economic shock wave." Peruvian anchovies in the form of fishmeal were and remain a major source of animal fodder, and an important export.

The next blow is the one that for many people symbolizes the 1970s the way that Woodstock exemplifies the 1960s. This was the "Oil Crisis" that began in 1973. The Organization of Petroleum Exporting Countries — "OPEC" — began to restrict the supply of oil throughout the world.

Both the natural Peruvian anchovy shortage and the engineered OPEC oil shortage had near-catastrophic results. This was principally on the availability of raw materials, making them actually (in the former case) or relatively (in the latter case) scarce, and driving up the cost of inputs to production in two critical sectors, industry and agriculture, across the board. Added to this was a general overall energy shortage throughout the decade. Because of the wage and price controls, many consumer goods were in short supply — long lines appeared at gas stations, and industrial costs increased rapidly, narrowing and, in some cases, completely wiping out profit margins.

The stage was set for "stagflation." Stagflation is a combination of unemployment and inflation caused by State interference in the economy. The condition is considered impossible under Keynesian assumptions. Stagflation is, however, perfectly understandable, given an analytical framework provided by binary economics, or even the basic tenets of the Banking School.

Specifically, stagflation is when both inflation and unemployment are high. Ordinarily, Keynesian economics posits a tradeoff between these two presumably mutually exclusive conditions. Because the Keynesian framework does not allow for stagflation, there are no methods of dealing with it within that paradigm. Consequently it is extremely difficult to stop once it gets started. It is therefore extremely costly in both human terms as well as in the scale of budget deficits it engenders.

There are believed to be two major causes of stagflation, both of which were present in the 1970s. One, there is a "unfavorable supply shock." This results in raising prices at the same time that the rising costs of inputs makes production less profitable. In the 1970s there were at least two major "supply shocks" that affected industry and agriculture: the failure of the Peruvian anchovy fisheries, and the manipulation of the oil supply by the OPEC cartel.

Two, the combination of stagnation and inflation can result when the State implements inappropriate macroeconomic policies, that is, attempts to control the economy to go in a direction in which the economy doesn't want to go. Nixon managed to combine two policies that contained inherent contradictions, 1) massive money creation by the Federal Reserve to finance both the Vietnam War and the Great Society, both inherited from previous administrations, and 2) imposing wage and price controls or other interference with the market mechanism. In this category we have to include trade barriers, raising the minimum wage, and so on.

The latter policy can, in fact, be blamed on Nixon — but not the disastrous results. Evil as he is presumed to have been by many people, "Tricky Dick" could not have predicted either the failure of the Peruvian fisheries or the enormous increase in oil prices that triggered the stagflation. Yes, the attempted interference with the semi-free market in the United States made the situation infinitely worse than it otherwise would have been, but there was no way that could have been foreseen. Nixon, despite his famed declaration to the effect that "now we are all Keynesians," is also not truly responsible for attempting to apply the presumably effective Keynesian corrective in the form of a massive infusion of stimulus money to counteract the recession that resulted — and which caused a wage-price spiral.

From any perspective, the solution to stagflation is 1) either to find new sources for the materials in short supply or develop substitutes, and 2) "adjust monetary policies," which in English means calling a halt to inflationary money creation to finance government deficits or consumer spending, restricting new money creation to financing new capital formation. The latter is easier said than done. Most governments since the 1930s have become, in effect, "money addicts," relying on perverting the commercial and central banking systems to provide the massive transfers of purchasing power to fund government spending, and are willing to let taxpayers and consumers bear the costs, both hidden and direct.

Consequently, it was not until the early 1980s that stagflation began to ease, helped in no small measure by improvements in the efficient use of energy and increases in global oil production. There were also cutbacks in government spending and moderate changes in monetary policies that contributed to the end of stagflation and led to what turned out to be the illusory prosperity of the 1990s.

One result of the stagflation of the 1970s was a renewed insistence that the State could solve all of our problems if only it had enough power and tried hard enough. There was another push to implement the provisions of the Full Employment Bill of 1946 that had been emasculated into law as the Employment Act of 1946. In 1978 the Humphrey-Hawkins Full Employment and Balanced Growth Act amended the Employment Act of 1946. There was, to all intents and purposes, no difference between the Humphrey-Hawkins Act and Murray's Full Employment Bill of 1945. Both sought to put total responsibility for economic stability on the State, both tried to provide an absolute guarantee of full employment and to vest the State with the economic means to achieve this end.

Despite Hubert Humphrey's reputation and status as "the Happy Warrior," the Full Employment and Balanced Growth Act was no more successful than the Employment Act of 1946. Believing in absolute State power to achieve any goal is no substitute for truth or empowerment of ordinary people, despite Keynes's claim that the State has the power to change reality by "re-editing the dictionary."

The one real advance in the 1970s is one that has received little recognition, even from those who have benefited most from it. There has been virtually no appreciation of the revolutionary nature of the passage of the original enabling legislation for the Employee Stock Ownership Plan ("ESOP") signed into law on January 1, 1974. Nevertheless, the passage of the first ESOP law — although to date more of a promise of things to come than an actual revolution — signaled the possibility of a change in the direction of the whole of society so profound as to undermine what has been accepted as absolute truth for more than four centuries (not four-thousand, as Keynes asserted), and to deliver real hope to the majority of the human race who have been kept in a condition of dependency as a result of lack of access to the means of acquiring and possessing private property in the means of production.

After that buildup, some people might see the story itself as almost a letdown (too bad for them) — but it helps demonstrate the power that even a few people can have to effect changes in the social order if organized and properly motivated, and if they base their actions on universal moral values and sound economic principles, especially as found in binary economics.

The meeting on November 27, 1973 between "ESOP inventor" Louis Kelso and Senator Russell Long in the Montpelier Room of the Madison Hotel was a watershed event in the effort to reorient the economy and the financial system to return to its sound Banking School roots and the American tradition of widespread ownership of the means of production — to say nothing of restoring money power to the people.

In the early 1970s, Kelso and Norman Kurland (now president of the Center for Economic and Social Justice, "CESJ") began focusing on Capitol Hill. Senator Fred Harris of Oklahoma became interested in Kelso's ideas. He had a number of Kelso's articles as well as responses to Samuelson's attack on Kelso read into the Congressional Record.

In 1972 representatives of the National Maritime Union (NMU) hired Kelso and Kurland to advise them on a plan to save passenger vessel industry after the government cut off operating and construction subsidies, throwing 5,000 NMU members out of work. NMU president Joe Curran testified before the Senate Maritime Affairs Subcommittee, saying that his union was prepared to cut labor costs by 50% if the Congress would cooperate in helping them adopt the Kelso plan to save the industry. The committee studied the matter. Ironically, the committee chairman, Senator Russell Long of Louisiana, rejected the idea, remarking that it "sounds like one of my daddy's programs, 'make every man a king.'"

Through the combined efforts of George and Charlie Pillsbury — father and son at different ends of the political spectrum (Charlie was Gary Trudeau's roommate at Yale and provided the model for Trudeau's "Doonesbury" character) — a door was opened to Senator Paul Fannin of Arizona some months later. Kurland met with Fannin, who immediately saw the political significance of Kelso's ideas — especially the aspect that citizens who own no corporate equity would be extremely hostile to corporate profits. Fannin easily understood Kelso's "pure credit" financing method, i.e., credit extended for productive purposes by commercial banks without using existing accumulations of savings and rediscounted at the Federal Reserve.

Fannin arranged for Kelso to make a presentation to a number of conservative members of the Senate Finance Committee. Long, the chairman, did not attend, but the "Accelerated Capital Formation Act" went through under Fannin's sponsorship. This was a success, even though the bill did not get very far, for it brought the ideas to the attention of members of both parties. With the Fannin legislation Kelso and Kurland went to work building broad-based support to get around Long and Congressman Wilbur Mills, head of the House Ways and Means Committee, as attempts to meet with both men had been unavailing.

In February 1973 Kelso and Kurland testified on legislation to save the Penn Central Railroad, at that time in a state of near financial collapse. The only choices seemed to be either to nationalize, or provide government subsidies to benefit existing shareholders and the unions — the former unacceptable, the latter politically untenable. Kelso and Kurland gave the Congress a Just Third Way: convert the Penn Central to a 100% worker-owned railroad using an ESOP, restructuring the labor agreement as a prototype for Justice-Based Management ("JBM"). In addition to regular wages, workers would share ownership and profits. The plan was adapted from the proposal developed for the National Maritime Union.

When Kelso and Kurland testified on February 28, 1973, Senator Vance Hartke of Indiana, who chaired the committee, told Kelso, "You know, these ideas are really interesting, they're provocative, they're positive. It isn't often that we hear good ideas. But you'll never sell this idea to the Congress." Kelso and Kurland continued working to persuade committee staff, but with limited success.

Then in August Senator Mark Hatfield of Oregon wrote a Washington Post article, "Six New Directions for America," with the Kelso ideas of basing economic and stability on expanded capital ownership — evidently some of the seeds dropped by Kelso and Kurland over the previous months had taken root, and someone had carried the ideas to Hatfield.

Kurland visited Hatfield's office and convinced Hatfield to sponsor a proposal to convert Conrail into a 100% worker-owned company. With Hatfield's agreement to sponsor the legislation, Kurland began rounding up support from both sides of the political spectrum — Senators Curtis, Hansen, Metcalf and Humphrey, all of which agreed to be co-sponsors. The Senators were all very important and in critical positions . . . except that none of them was on the right committee. Progress stalled.

Meanwhile, however, an important constituent in Louisiana had made contact with Wayne Thevenot, Long's executive assistant. The constituent had read Two-Factor Theory (op. cit.) and became convinced that Kelso's ideas had the potential to solve major problems. He met with Thevenot, and persuaded him to try and convince Long that Kelso's proposals were, contrary to his previous statement, the right thing to do for the country. As the story was related to Kurland later, Long opened up a copy of The Capitalist Manifesto, flipped through the pages, and stated, "I want to meet these people."

On November 26, 1973, Kurland picked Kelso up at the airport for a meeting the next day with Long. On the way back from the airport they were listening to the radio, and heard Eric Severeid ask, "Casey Jones, where are you?" Based on materials Kurland had sent him, Severeid delivered an editorial supporting the Kelso proposal for the Conrail system. Severeid didn't mention Kelso or Kurland, but named Senator Hatfield. The next day, Kelso and Kurland met Long coming out of a debate, and the senator invited them along with Thevenot to dinner at the Montpelier Room at the Madison Hotel in Washington, D.C. This was at a time when even the most important lobbyists were lucky to get five minutes. Kelso and Kurland spent four hours with Long — and Long picked up the check.

Kelso spent about three quarters of an hour explaining his general theory, political theory, and the logic of binary economics. Long then compared Kelso's ideas with those of his father's "Share Our Wealth" program. Long's father, Huey Long, senator and former governor of Louisiana, was an extremely charismatic populist — at one time he was voted "the most attractive man in America" after Edgar Rice Burrough's fictional character Tarzan of the Apes. Huey Long, the "Kingfish," was murdered at a time when his criticism's of FDR's New Deal had become extremely pointed and vocal.

Russell Long then discoursed for two hours on his own philosophy, making it clear that he differed from his father by not being a "Robin Hood populist." Long, however, liked the idea of every person being a capital owner, although he insisted on using the vague term, "capitalist." At the end of his talk, Long asked Kelso who opposed Kelso's ideas.

Kelso answered that traditional economists opposed his economic theories — that his ideas challenged their paradigms. Kelso mentioned Milton Friedman and Paul Samuelson by name. Kurland remembered Senator Long's response: "One of my basic principles that I had from the time I first entered politics is that I don't care who's right, I care what's right. This is right."

Then Long turned from Kelso to ask, "What are you people doing about it?" Until then, Thevenot and Kurland had remained silent, letting the dialogue flow between Long and Kelso.

Kurland said, "Senator, we have a bill before Congress dealing with the railroads. Senator Hatfield is the principal sponsor, and we have Senator Humphrey and Senator Metcalf from the Democrats, and Senators Curtis and Hansen from the Republicans, who are co-sponsors. But the bill is not going to go anywhere. We know that. We've talked to the staff and haven't got anywhere. We know that anyone can introduce a bill, but we know that it's going to take more than that to get it passed. We need the right person who's a member of the Commerce Committee, somebody with the courage and the power to take our proposal and convert it into law."

Long then asked Kurland to bring him something the next morning. The next day, Long took the package to a meeting of the Commerce Committee and announced that he had an answer to the railroad problem. A number of the senators responded enthusiastically when Senator Warren Magnuson of Washington, the chairman of the committee, reminded Long that the meeting had not yet been called to order. Long responded, "Well, I'm really busy. I've got another meeting down the hall, and . . . this is the answer!"

Lynn Sutcliffe, staff director of the Surface Transportation Subcommittee, objected: "You know, Senator, I've been hearing these ideas from Kelso and Kurland and really, there are a lot of problems."

Kelso and Kurland had, in fact, been speaking to the unions involved with the railroads. The sixteen unions had invited Kurland to speak before them at the AFL-CIO meetings in Miami Beach. Kelso and Kurland had one of the unions, the Brotherhood of Railway and Airline Clerks, supporting the idea but the other fifteen unions — the Teamsters, Transportation Workers, etc. — had worked out their own deal with the railway executives, both sides collaborating to take the money from the taxpayers in the form of government subsidies. Organized labor was not yet ready to support Kelso, and had conveyed their opposition to Sutcliffe.

Long cut Sutcliffe short, responding, "You're telling me about problems. Problems. That's all I deal with every day. Don't tell me about problems. This is the solution!" Sutcliffe had nothing else to say.

It wasn't until December that the ESOP legislation was introduced into the Senate. Long had to fight for it. Senator Javits, who didn't like the ESOP or Kelso's ideas, was ready to oppose the legislation. Before Javits could voice this on the floor of the Senate, however, Long walked over to him (Kurland observed the action from the gallery) and put his hand on Senator Javits's shoulder and spoke to him in a low voice, telling him that if he, Javits, opposed the proposal, he, Long, would denounce him on the floor of the Senate as an enemy of the American worker. Javits, not wanting to be viewed as an enemy of worker ownership, took the hint and remained silent.

Long managed to get a watered-down piece of legislation into law. It didn't call for 100% employee ownership. It merely called for a study to determine the extent to which the employees should be owners. Kelso and Kurland wrote the criteria for the study, figuring that the only conclusion any objective group could possibly have was that there should be 100% ownership by the workers. In December the legislation calling for an ESOP study was passed. President Nixon signed the measure into law on January 1, 1974.

While Kelso and Kurland succeeded in establishing a beachhead for the ESOP, the powerful forces of the status quo fought back. The Department of Transportation awarded the ESOP study to the investment banking firm E.F. Hutton; a leading firm on executive compensation, Towers, Perrin, Foster and Crosby; and a labor economist, Saul Gellerman. This team wrote a report concluding that nothing positive would result from the use of an employee stock ownership plan for the railroads. Kelso and Kurland later had an opportunity to provide a point-by-point rebuttal that was included in testimony before the Joint Economic Committee in 1976, when Senator Hubert Humphrey held two days of hearings on ESOPs.

The rest is history. Because of Long's championing of the ESOP and the ideas of Louis Kelso, there are more than twenty U.S. laws promoting ESOPs including the cornerstone Employee Retirement Income Security Act of 1974 (ERISA). Today there are over 10,000 ESOP companies with over 11 million worker-owners.

The meeting between Senator Russell Long and Louis Kelso, the events leading up to the meeting, and the events that followed, demonstrate that "prime mover" support is crucial for an idea that is as revolutionary as Kelso's. This is especially true for an idea that still lacks credibility among academics, particularly academic economists.

To move systemic change forward with any degree of speed takes authentic leaders — people with power, people with courage, people with principle and vision. Such leaders must first be willing and able to challenge the forces of the status quo, to do what is morally right, to go over the heads of the opposition and communicate on moral grounds directly to the public. Russell Long became the prime mover behind the Kelso revolution.

Today, prime movers like Russell Long are needed more than ever to realize the full potential of Louis Kelso's remarkable vision to achieve economic empowerment for all through broad-based direct capital ownership.

(The portion of this posting dealing with Kelso and Kurland's efforts to promote the ESOP is taken from "Dinner at the Madison" by Norman G. Kurland, an eyewitness to the events described.)

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