Socialism, American-Style

Why American CEOs covet a massive European-style social-welfare state.

In late June, the Business Roundtable enthusiastically endorsed the plan to add a prescription drug benefit to Medicare. Normally, you’d think that the white-hot center of the industrial establishment would oppose the creation of an open-ended entitlement that will cost at least $400 billion over 10 years. After all, big business has historically cried “Socialism!” when Congress enacted safety net programs such as Social Security and Medicaid.

But these days self-interest trumps ideology. Many large employers would love to dump the burden of buying drugs for their retirees onto the federal government. (A study by the Congressional Budget Office determined that about one-third of Medicare recipients who now receive drug benefits from former employers would lose them if the plan were to pass.)

The embrace of the drug benefit reflects a larger shift in American big business. Even as they profess love for free-market capitalism, CEOs are discovering that European-style big government may turn out to be a surprising competitive advantage. For many old-line industrial companies faced with massive pension liabilities and spiraling health care costs, survival may depend on persuading the government to fulfill the financial promises they made to prior generations of employees.

Over the past few decades, large U.S. companies have generally done a great job at restructuring, reinvention, downsizing, and producing more with fewer (and less costly) employees. But even the shrewdest and most agile large manufacturers can’t escape so-called legacy costs—commitments made to unionized employees in flusher times.

There’s no doubt that the drug coverage would be a boon to some very large companies: Goldman Sachs analyst Gary Lapidus estimated that it would save General Motors and Ford $150 million and $50 million per year, respectively.

And drug costs are the least of the legacy costs weighing on large manufacturers. Starting in the 1920s, under what became known as “welfare capitalism,” companies offered benefits to workers that the federal government did not require—notably health insurance and pensions. The bargain between large manufacturers and unions continued through the Cold War, but it has been fraying recently. The downsized GMs and IBMs of the world have to meet promises made to former employees who are living longer and (more expensive) lives. GM today has 2.5 retirees for each active U.S. employee.

GM and other firms have been especially mauled by continually rising health costs. In 2002, GM and Ford combined spent $7.8 billion on health care, even as GM’s total profits were only $1.7 billion and Ford lost $980 million.

Given the inability of private-market mechanisms to contain costs, the Hillary Clinton-Magaziner Rube-Goldberg single-payer plan may no longer look so crazy when viewed from Detroit corner offices. As Danny Hakim put it in the New York Times:

The absence of a national health system in the United States means that the Big Three take on social responsibilities that the governments in Japan and Germany bear. … G.M. alone provides medical coverage to nearly half a percent of the United States population, when dependents are included.

In the same article, Princetoneconomist Uwe Reinhardt referred to the Big Three as ”a social insurance system that sells cars to finance itself.” Like Social Security, this social insurance system can’t be sustained in its present form and may require government aid.

Similarly, old companies with generous pension plans are sinking as pension liabilities keep climbing. Investors are reluctant to inject new cash into capital-starved industries such as steel and airlines if the new dough will only go to shore up shaky pension funds.

The answer, again, is a form of big government: the Pension Benefit Guaranty Corp. This federally chartered independent corporation insures some 32,500 old-fashioned private defined-benefit pension plans covering 44 million workers. When companies file for Chapter 11, they can essentially terminate their pension plans and shift responsibility to the PBGC.

The PBGC covers the costs of administering and shoring up pensions by selling insurance premiums to participants. But it has the makings of a massive obligation for taxpayers. In testimony last spring, PBGC Executive Director Steven Kandarian described how the restructuring in industries like steel, airlines, retailing, and textiles is taking a toll on his agency’s balance sheet. From fiscal 2002 to fiscal 2003, the number of pensioners that the PBGC is directly responsible for will rise from 783,000 to 1 million, with the sum paid out increasing from $1.5 billion to $2.5 billion. The total underfunding in the kind of pensions covered by PBGC exceeds $300 billion. And with these pensions concentrated in what PBGC euphemistically calls “our most mature industries,” it’s likely the PBGC will require some form of public bailout.

The United States may be heading toward a two-tiered economy, one part like Europe, one like China. Older industries will be able to survive only by persuading the federal government to absorb their massive social welfare obligations—just as occurs in Europe. Meanwhile, newer companies with young work forces, few retirees, and 401(K)s instead of pensions (think Dell) will fight to minimize government intervention and stay free. One fundamental conflict in American economic policy has been business united against government. That may change: The divide may soon be between old businesses that love and need government, and new businesses that don’t.