On this day in economic and business history...
Is the prestige really worth a place on the Dow Jones Industrial Average (DJINDICES:^DJI)? Let's ask Pfizer (NYSE:PFE), Verizon (NYSE:VZ), and American International Group (NYSE:AIG), which all joined the Dow on April 8, 2004. AIG shareholders are lucky to even have the chance to ask, as the insurance giant received the lion's share of the 2008 and 2009 government bailouts during the financial crisis. That knowledge should prepare you for the sobering results of these companies' Dow performance:
- Dow nine-year return (2004 to 2013): 39%
- Pfizer nine-year total return: 19%
- Verizon nine-year total return: 130%
- AIG total membership return (company was removed in September 2008): -93%
It was only after the Dow swapped AIG out in 2008 that Verizon began to outperform. Up until AIG's removal, the index and the telecom company were neck and neck with respective gains of 5% and 8%. However, the swap was not a total loss. Kodak, one of the removed components, would go bankrupt in early 2012. Still, it doesn't speak well for the Dow's track record of new additions in the last several decades. One has only to look back at one horrendously bad swap at the height of the dot-com bubble to see the wisdom in standing pat.
Pfizer, the "respectable" underperformer of the group, failed to impress the market despite three megamergers since the turn of the 21st century. However, the most recent merger -- with fellow pharmaceutical giant Wyeth in 2009 -- turned Pfizer's fortunes around. Since that merger was announced, Pfizer's return has trounced the Dow's, 95% to 60%. Perhaps what the index needs is more time to prove the value of its choices over the companies that were replaced.
FDR's grand plan
President Franklin D. Roosevelt signed the Emergency Relief Appropriation Act into law on April 8, 1935. The cornerstone of this legislation was the ambitious Works Progress Administration, which superseded the Civil Works Administration that had done so much to build and rebuild the national infrastructure since its formation in late 1933. For its first year, the WPA was allocated nearly $5 billion, which at the time was almost 7% of GDP. Over the course of its existence, the WPA spent more than $13 billion. Wired's Tony Long writes on the opposition to, and outcome of, this massive project:
Roosevelt's detractors, who spoke of "New Dealers" and "socialists" in the same breath, liked to characterize the WPA as a politically corrupt pork barrel where legions of layabouts leaned on their shovels while getting paid for it. But the project not only got about 8.5 million people off the dole, it yielded tangible results. During an eight-year run, WPA workers built or repaired 124,000 bridges, 650,000 miles of highway, 125,000 public buildings, 8,000 parks and 850 airfields.
More than $4 billion went to road improvement projects. More than $1 billion each went toward upgrading public utilities, constructing or improving public buildings, and providing welfare projects (much of which went to women, who made up 15% of the total WPA payrolls). Despite its huge amount of aid to the nation's distressed workers, the WPA did not succeed in returning the United States to full employment -- but that was never its goal. This ambition did not emerge as a national political goal until the U.S. was well into World War II, long past the point when Roosevelt had significantly (but only temporarily) undermined the WPA's efforts with an attempt to balance the budget in 1937. However, if nothing else, the dramatic growth of American infrastructure built by the WPA would prove invaluable in the years following World War II as the country's middle class exploded in a great suburban sprawl.
What could the U.S. do today if it made a similar commitment to its aging, overworked infrastructure?
FDR's not-so-grand plan to fight inflation
FDR signed another notable act into law on April 8: Executive Order 9328, enacted on April 8, 1943, in the heat of World War II, aimed to do no less than bring prices and wages under government control. Roosevelt says as much in the signing statement accompanying the order:
The Executive Order I have signed today is a hold-the-line Order.
To hold the line we cannot tolerate further increases in prices affecting the cost of living or further increases in general wage or salary rates except where clearly necessary to correct substandard living conditions. The only way to hold the line 'is to stop trying to find justifications for not holding it here or not holding it there.
No one straw may break a camel's back, but there is always a last straw. We cannot afford to take further chances in relaxing the line. We already have taken too many. ...
All items affecting the cost of living are to be brought under control. No further price increases are to be sanctioned unless imperatively required by law. ... any further inducements to maintain or increase production must not be allowed to disturb the present price levels; such further inducements, whether they take the form of support prices or subsidies, must not be allowed to increase prices to consumers. ...
There are to be no further increases in wage rates or salary scales beyond the Little Steel formula, except where clearly necessary to correct substandards of living. Reclassifications and promotions must not be permitted to affect the general level of production costs or to justify price increases or to forestall price reductions.
There was very little outcry over this sweeping use of executive power, arriving when the nation was fully committed to the defeat of fascism abroad. Such an act would never pass muster today unless it were enacted in the midst of a crisis near the magnitude posed by the Axis assault on Europe and Asia. The order was finally revoked in 1946, well after the end of war -- but by this point President Harry Truman was already on his way to another sweeping use of executive power on private industry. This one would not be so easily enacted.
The steel grip of the executive branch
The U.S. was growing rapidly by 1952. The Marshall Plan had aided a shattered Europe in its rebuilding, creating a great need for America's prodigious industrial output. Industry leaders were more than happy to oblige, but some leaders pushed their workers too far, too fast. The postwar years saw some transformative labor actions, and few were so important to the U.S. -- particularly from a legal perspective -- as the proposed United Steelworkers of America strike in early 1952. So important was the steel industry to America's economic well-being that President Harry Truman would not allow it to be disrupted. On April 8, 1952, hours before the strike was to begin, Truman issued Executive Order 10340, nationalizing the steel industry with the stroke of a pen.
Truman went on radio and television on the evening of April 8 to make his case to the American people:
Tonight, our country faces a grave danger. We are faced by the possibility that at midnight tonight the steel industry will be shut down. This must not happen. Steel is our key industry. It is vital to the defense effort. It is vital to peace. ...
Our national security and our chances for peace depend on our defense production. Our defense production depends on steel. ... I have no doubt that if our defense program fails, the danger of war, the possibility of hostile attack, grows that much greater. I would not be faithful to my responsibilities as President if I did not use every effort to keep this from happening.
The steelworkers have had no adjustment in their wages since December 1, 1950. Since that time the cost of living has risen, and workers in such industries as automobiles, rubber, electrical equipment, and meatpacking have received increases ranging from 13 to 17 cents an hour. ...
Steel industry profits are now running at the rate of about $2.5 billion a year. The steel companies are now making a profit of about $19.50 on every ton of steel they produce. On top of that, they can get a price increase of close to $3 a ton under the Capehart amendment to the price control law. They don't need this, but we are going to have to give it to them, because the Capehart amendment requires it. Now add this to the $19.50 a ton they are already making and you have profits of better than $22 a ton. ...
In other words, if the steel companies absorbed every penny of the [proposed] wage increase, they would still be making profits of $17 or $18 a ton on every ton of steel they made.
The reactions were swift and strident. Steelworkers, who were to be granted wage increases with the seizure, were understandably pleased with their new federal overlords. Steelmakers, led by industry giant U.S. Steel (NYSE:X), were outraged, and many newspapers echoed the anger of conservative members of Congress who denounced the "fascist" and his overreach of executive power. The steelmakers went to court immediately, and within days a district court overturned Truman's seizure order. Now the steelworkers went on strike, and the case worked its way through the courts. The District of Columbia Court of Appeals sided with Truman, and the case went to the Supreme Court. In May 1952, the Supreme Court ruled against Truman in a 6-3 decision, holding that the president had no authority under the Constitution to seize private property for the purpose of national security.
The steel industry was reprivatized, and the steelworkers, who had returned to work after the appeals court overruling, again went on strike. This time they remained on strike until well after Independence Day, causing a grinding slowdown in American industrial output that took about $4 billion out of the economy and added about 1.5 million people to the unemployment rolls. By late July, Truman would endure no more failed bargaining, and he ordered the steelmakers and the union to settle the issue in the White House. Ultimately, the union gained what it had been offered at the outset of the strike -- a meager victory, but a victory nonetheless.