The slow death of welfare capitalism.

Commentary about business and finance.
Sept. 23 2004 4:37 PM

Goodbye, Pension. Goodbye, Health Insurance. Goodbye, Vacations.

Welfare capitalism is dying. We're going to miss it.

For some employees near the end of their careers, the golden years may be looking a little more like lead. Both United Airlines and US Airways are making noises about terminating their pension plans. Lucent recently said it would slash retiree health benefits yet again. The inability or refusal of companies to live up to promises and commitments made to workers seems to be largely a cyclical phenomenon, a symptom of temporarily sick industries (airlines) or of a company plagued by poor bets and bad management (Lucent). But it is also a sign of the troubling collapse of welfare capitalism.

Welfare capitalism is a term used by historians and economists to define the distinctive style of capitalism that emerged in the 20th century. Until the turn of the 20th century, fringe benefits, insurance, retirement plans, and health benefits—the perks we have come to define as essential to employment—simply didn't exist. Employers had compensated employees solely with wages.

But that changed with the onset of industrial capitalism. In Europe, governments responded to industrialism by developing state-run systems of unemployment insurance, health care, and pensions. But—in yet another example for American exceptionalism—the private sector took the lead in the United States. After the age of the robber barons and various bitter strikes, forward-looking companies began to take action on their own. They were influenced by a range of factors: noblesse oblige, paternalism, and the emerging fields of industrial psychology and human resource management.

Henry Ford led the way. In January 1914, Ford Motor Co. instituted the $5 day. Over the next several years, Ford took steps to ensure that its employees remained healthy, loyal, and above all, efficient. It opened an infirmary and established the "Sociological Department" to both keep tabs on and look after the welfare of its workers. In 1922, Ford cut the work week from six days to five.

In the roaring 1920s, when other highly profitable companies began to emulate Ford, welfare capitalism began in earnest. Companies built cafeterias and health clinics, sponsored baseball and bowling leagues, and granted days off for the opening of deer season. Corning Glass Works began providing health insurance in 1923. The same year, U.S. Steel slashed its workday from 12 hours to eight. In 1927, International Harvester began offering two-week paid vacations. All this was all done without government mandates and largely without the influence of unions.

Welfare capitalism proved a phenomenal success—socially, economically, and politically. America's industrial complex was ultimately unionized, but with relatively little upheaval. Even with the rise of the welfare state in the '30s, corporations continued to assume responsibility for the well-being of their employees. It was part of a grand bargain between labor, capital, and government that allowed for remarkable growth, innovation, and rising standards of living for decades. It also served as a bulwark against socialism. By endowing labor with dignity, welfare capitalists made industrial work a ticket to the middle class.

But just as the New Deal Coalition started to fray in the 1960s, so too did welfare capitalism. American businesses—and workers—increasingly began to face competition from all over. They began to have difficulty competing with companies from countries where more robust welfare states bore the burden of providing pensions and health insurance (like Germany and Japan). They began to have difficulty competing with low-wage competitors in countries where welfare capitalism had yet to take hold, like Mexico, China, and India. And they began to face competition from newer domestic companies that never bought into the ideas of welfare capitalism.

In the 1920s, competitive pressures led companies to become more paternalistic to unskilled workers. But now, the pressure is all in the other direction. With each passing year, more and more retailers have to compete with Wal-Mart, and more and more manufacturers have to compete with China. Even enlightened employers like Starbucks can't ever hope to offer the sort of programs that International Harvester and Ford did back in the 1920s. And so welfare capitalism is slipping away. Health care insurance has increasingly become decoupled from work. According to this Kaiser Family Foundation study, 61 percent of workers are covered by employers' health insurance, down from 65 percent in 2001. And pension plans, which guaranteed a retirement income to employees, are being replaced by 401(Ks), which offer no such certainties.

Most free marketeers would argue that this is simply the price of progress. Now that we're competing in global markets, welfare capitalism as practiced in the mid-20th century is simply untenable. And companies that aren't burdened with expensive benefit programs can be more agile and thus more profitable. But it isn't just the workers of Lucent and US Airways who are going to pay for the long goodbye of welfare capitalism. We all will.

When companies decide they no longer want to—or can't—meet the promises they made to employees, they push them wherever possible onto the federal government. The Pension Benefit Guaranty Corp. has been remarkably busy taking over the pensions of bankrupt textile, steel, and other manufacturers. The PBGC closed last year in its worst shape ever, with an $11.2 billion deficit, and will doubtless require a large taxpayer bailout. The establishment of the new drug program entitlement for Medicare will similarly relieve many older companies of meeting the obligations they made—and impose massive costs on the rest of us. And as companies providing health care become the minority, the Fords and General Motors of the world may increasingly agitate for a larger federal role in health insurance.

The more welfare capitalism declines, the more the federal government will have to fill the gap, and the more America will look like Europe.

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