JFK and Steel, Bush and Oil

by Rex Bradford, 2 Sep 2008

With the cost of gasoline passing $4 per gallon at its peak this summer, those campaigning for President debated whether the U.S. Government should suspend the federal gas tax, pegged at a modest 18.4 cents per gallon since 1993. Noting that most of this money goes into the federal highway trust fund, opponents ridiculed the idea. [3] But what was most remarkable, at a time of record oil industry profits, was the near-universal agreement that the federal government simply had no reasonable options to consider. Regardless of one's stance on free markets and economics, it is a breathtaking example of how much this country has changed in the 46 years since John F. Kennedy took on the steel industry and in three days forced them to roll back price increases which, he said, were in defiance of something we hear less and less about: the public interest.

In 1962, the steel industry occupied a position similar in the American economy to that of the oil industry today. The post-war expansion which brought the interstate highway system, suburban living, and the rise of the airline and automaking industries was dependent on steel as its primary ingredient. Steel was so important that when a nationwide strike was threatened during the Korean War in 1952, President Truman attempted to seize the mills. [4] Even Republican President Eisenhower intervened with the industry in 1959 to hold the line on prices as well as labor costs. [5]

The Steel Crisis of 1962

The "steel crisis" emerged when, just 4 days after ten of eleven major steel producers had signed a new contract with their workers, U.S. Steel, the largest of them with about 25% of the market, announced an across-the-board 3.5% increase in prices. The Kennedy administration had just hailed the pact as "non-inflationary," and indeed Labor Secretary Arthur Goldberg had been personally involved in the months-long negotiations and had used his prestige with labor to secure their agreement to no wage increases and only modest increases in fringe benefits.

Though the Kennedy administration had never directly asked the steel industry to hold prices, regarding that as improper, Kennedy and his advisors clearly felt there was a tacit agreement, and that they had been double-crossed. Coming right on the heels of the signed labor contract, the announcement seemed to be a deliberate attempt to tell the Democratic President that he didn't tell American business what to do. The stakes were higher than a simple personal affront; the importance of steel in the economy meant the high likelihood that the price increase would trigger further price jumps across many sectors, and kick off a new round of inflation. Kennedy was furious, telling advisors:

"My father always told me that all businessmen were sons of bitches, but I never believed it until now." [6]

The Steel Crisis, written by Roy Hoopes in 1963 before Kennedy's assassination, offers more than a day-by-day account of the three days in which JFK stared down Big Steel. For modern readers, it is also a reminder of how different America has become since 1962. The importance of labor unions in the American economy and political system is taken for granted, something that might puzzle a younger reader of the book. The president speaks openly of ours being a "mixed economy," a term that has gone out of favor as the free market ideology has crowded out all others. Perhaps most anachronistic are Kennedy's repeated references to the "public interest" as a factor to be weighed in the major economic decisions of the day.

Of course, the business sector didn't like such talk any more in the 1960s than it does today. In the aftermath of the crisis, U.S. News stated that "A planned economy, directed from Washington, is what Mr. Kennedy now has in mind." One steel company executive complained "This is a sustained attack on the free enterprise system. It may be all all-out war." [7]

Kennedy Actions During the Steel Crisis

What exactly did this "attack" consist of, then? The actions taken in response to U.S. Steel's price increase, which had been followed within 48 hours by identical price increases by most of the other steel companies, boiled down to these:

1. The Defense Dept. announced plans to review steel contracts and switch to lower-cost suppliers - significantly, not all steel producers had immediately joined the price increase. Within a couple of days, Secretary McNamara placed a steel order for 3 submarines with Lukens Steel, one of the holdouts; this contract would normally have been split among suppliers including U.S. Steel. [8]

2. The Justice Dept. initiated an investigation as to whether the near-simultaneous price increases were the result of monopoly and thus subject to anti-trust laws. Given the almost lockstep manner in which steel companies adjusted prices in 1962 and earlier, a naive observer could be forgiven for assuming that there was at least de facto price-fixing. Attorney General Robert Kennedy in a statement explicitly included the question of whether U.S. Steel "so dominates the industry that it controls prices and should be broken up." [9]

3. The President went on the air to tell the press and the public why he thought the steel companies' actions were not in the public interest.

Additionally, Kennedy administration officials went on a phone-calling spree, in particularly contacting board members of those steel companies who had not yet raised prices. While they didn't specifically demand or ask for any pricing policies, they made the administration's preferences quite clear.

In an episode that inflamed many commentators, FBI agents roused sleeping journalists in the middle of the night, investigating reports that one of U.S. Steel's competitors had said he saw no reason to raise prices, only to turn around and follow U.S. Steel's lead.

These tactics were met with alarm by many business commentators. Kennedy's relationship with big business had been lukewarm from the start, and some saw this as JFK's "true colors" coming out. For his part, Kennedy felt he had been bending over backwards to achieve a sensible economic policy, one which included tax cuts and other policies favored by business.

Big Steel Caves

The court of public opinion, for its part, sided with Kennedy. This included much of the press as well. In part this was because of the ham-handed timing of U.S. Steel's announcement on the heels of the labor contract - the Christian Science Monitor's editorial said that the action "can scarcely be described as anything less dramatic than a throwing down of the gauntlet.....Big Steel has chosen to deliberately antagonize the President." [10]

U.S. Steel's president, Robert Blough, stumbled though a press conference called to respond to Kennedy's outraged press remarks, and hardly rallied opinion to his side. Even steel producers who quickly joined U.S. Steel in raising prices seemed taken aback by the timing.

In typical Kennedy style, the public statements and actions were accompanied by private negotiations. After Labor Secretary Goldberg failed to make headway, JFK selected Clark Clifford to meet personally with Blough. Clifford at one point reminded Blough that "John F. Kennedy might well be in office for several years and that it would be extremely difficult doing business in Washington after such a violent breach with the President." [11] Indeed, some insiders expected Blough to resign as part of any settlement of the crisis.

To the surprise of Kennedy himself, Big Steel caved on April 13, three days after announcing the price increases. In large part this was due to the actions of a few steel producers, most particularly Inland Steel, who publicly decided not to follow along with their own price increases. This was followed by Bethlehem Steel's announcing plans to rescind the price increases they had just announced. That was the last straw. Within hours, U.S. Steel issued a brief statement rescinding its own increase, and gave the following reason: "The price decision was made in the light of the competitive developments today, and all other current circumstances including the removal of a serious obstacle to proper relations between government and business." [12]

It is perhaps one of the great ironies of the crisis that U.S. Steel and its allies, who so vocally denounced government interference in the unfettered workings of the free market, could not sustain the price increase unless all steel producers marched in lockstep.

After the Steel Crisis

The aftermath of the crisis included applause for Kennedy's forceful and successful handling - many steel clients privately approved of JFK's actions. But such praise was accompanied by a fair amount of criticism in the business press for the tactics employed. Lone Star Steel's president said at the subsequent annual meeting: "No company or industry may now raise prices without harboring the fear, and justifiably so, that the Administration may decide to employ the crushing weapons so recently displayed" and decried the "dictatorial powers" Kennedy had assumed. [13] The already-weak 1962 economy had a stock market crash on May 28, which further fueled anti-Kennedy sentiment among big business. In the context of the times, though, Kennedy's actions were viewed by mainstream commentators as a generally appropriate response to the circumstances.

This is what stands out the most from the distant viewpoint of 2008. In an era where the impropriety of government meddling in economic decision-making is almost universally accepted - except perhaps when a large industry needs a bailout - Kennedy's actions are almost unthinkable. Not since Richard Nixon's wage-and-price controls has the United States seen a President willing to buck the free market trend. The only two Democratic president's after Kennedy's successor Lyndon Johnson - Carter and Clinton - were both "centrist" on economic policy.

President Bush's reaction to runaway gas prices has been to repeatedly claim the lack of a "magic wand" cure-all. [14] Certainly it is unclear whether mandating price caps on gas, or other such draconian action, is either appropriate, feasible given a worldwide economy, or sensible. But the range of choices available is certainly wider than the choice between doing nothing and hoping for a fairy godmother with a magic wand to come along. Windfall profits taxes, with revenues used to aid the transition to renewable energy sources, is one of several ideas that in a different era might be discussed in the political center, not just at the fringes.

What has changed in 46 years since the Steel Crisis is not the range of choices available but the extent to which the government and press have become cheerleaders for an unfettered free market economy, one which is global in scope. This trend, accelerated under the Reagan presidency, had as one of its most revered modern advocates a man named Milton Friedman. Friedman, leader of the "Chicago School" of economic thought, was among the prime theorists of pure capitalism as a force for good, in contrast to the earlier Keynesian consensus that capitalism needed a "mixed economy" to temper its excesses.

It is interesting then to find that Friedman, whose landmark "Capitalism and Freedom" was published in 1962, was outspoken during the Steel Crisis of that year, stating that it "brings home dramatically how much power for a police state resides in Washington." [15]

This is an ironic choice of words. Friedman went on to provide advice to General Augusto Pinochet, whose brutal reign of terror against Chile's Left was accompanied simultaneously by a radical restructuring of the economy. In her book "The Shock Doctrine," Naomi Klein argues that the policies were two sides of the same coin - that the economic "shock policy" advocated by Friedman and his disciples simply required accompanying state terror, to silence those who would otherwise stand against the dismantling of the state economy. [16]

Klein also shows in detail how the brutality of the regimes which took over in the 1970s in Chile [17], Argentina, and elsewhere was neatly divorced in rhetoric, but not reality, from the severe economic makeovers inflicted simultaneously. The United States, where the removal of constraints on the free market has proceeded more gradually, has nonetheless seen a steady growth in income inequality, and the squeezing of the middle class.

We have come a long way from 1962, when changing from a 40-hour work week to 35 was a goal of organized labor, and a President had the temerity to say:

"This is a free economy. These matters [prices and wages] are reached by the process of competition and collective bargaining. What we are attempting to do is to try to have them consider the public interest which, after all, is their interest, the problems involving price stability, national security, and all the rest. They are much interrelated." [emphasis added] [18]

The public interest in 2008, certainly, would be served by all due haste in developing and deploying solutions which move us past the Age of Oil. The country, and indeed the world, needs particularly to move beyond reliance on Middle East oil, for reasons which are obvious despite repeated claims that the Iraq war and other conflicts there have "nothing to do with oil." [19] Beyond that difficult enough goal, there is a clear need to transition away from this finite resource and to fully engage the process of deploying replacements which reduce rather than increase greenhouse gases.

Magic wands, no. What is needed is leadership in the name of the public interest.

NOTES

[1] White House Press Conference of 29 Apr 2008.

[2] Televised press conference of 11 Apr 1962.

[3] Democrats Divided Over Gas Tax Break, John M. Broder, New York Times, 29 Apr 2008.

[4] Truman's Attempt to Seize the Steel Industry, by Robert Higgs.

[5] Eisenhower invoked the Taft-Hartley Act to send striking steelworkers back to work. But Vice-President Nixon met privately with steelmakers and urged them to accept a settlement which included automatic cost-of-living adjustments, or face possible hearings in Congress. See Steel Strike of 1959 on wikipedia.

[6] The Steel Crisis, by Roy Hoopes, The John Day Co., 1963, p.23.

[7] IBID, p.229.

[8] IBID, p.166.

[9], IBID, p.140.

[10], IBID, p.107.

[11], IBID, p.161.

[12] IBID, p. 165.

[13] IBID, p.224.

[14] Bush used this allusion on at least these occasions: 5 Apr 2005 speech to U.S. Hispanic Chamber of Conference conference, 16 May 2005 talk on Biodiesel and alternative fuel sources, and a 29 Apr 2008 press conference. Energy Secretary Samuel Bodman has also used the expression on multiple occasions.

[15] "The Steel Crisis", p.209.

[16] "The Shock Doctrine: The Rise of Disaster Capitalism", by Noami Klein, Metropolitan Books, 2007.

[17] The overthrow of the elected leader of Chile, Salvador Allende, was an explicit goal of the administration of Richard Nixon, who famously vowed to make Chile's "economy scream" in order to prevent Allende's succession. When this failed, the CIA under Nixon and Kissinger's direction participated in the assassination of General Rene Schneider, who stood in the way of Allende's removal. General Pinochet was then free to lead the coup that inaugurated Chile's reign of terror. See Peter Kornbluh's "The Pinochet File", The New Press, 2003.

[18] "The Steel Crisis", p.197-98.

[19] Secretary of Defense Donald Rumself on 14 Nov 2002 on the looming Iraq conflict: "It has nothing to do with oil, literally nothing to do with oil."