Politics and the Corporation, Volume 14 (Research in Political Sociology)

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POLITICS AND THE CORPORATION

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RESEARCH IN POLITICAL SOCIOLOGY Series Editor: Harland Prechel Volumes 1–3: Volume 4:

Richard G. Braungart Richard G. Braungart and Margaret M. Braungart

Volumes 5–8: Volume 9:

Philo C. Wasburn Betty A. Dobratz, Lisa K. Waldner and Timothy Buzzell Volumes 10–11: Betty A. Dobratz, Timothy Buzzell and Lisa K. Waldner Volume 12: Betty A. Dobratz, Lisa K. Waldner and Timothy Buzzell Volume 13:

Lisa K. Waldner, Betty A. Dobratz and Timothy Buzzell

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RESEARCH IN POLITICAL SOCIOLOGY VOLUME 14

POLITICS AND THE CORPORATION EDITED BY

HARLAND PRECHEL Texas A&M University, USA

2005

Amsterdam – Boston – Heidelberg – London – New York – Oxford Paris – San Diego – San Francisco – Singapore – Sydney – Tokyo iii

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r 2005 Elsevier Ltd. All rights reserved. This work is protected under copyright by Elsevier Ltd, and the following terms and conditions apply to its use: Photocopying Single photocopies of single chapters may be made for personal use as allowed by national copyright laws. Permission of the Publisher and payment of a fee is required for all other photocopying, including multiple or systematic copying, copying for advertising or promotional purposes, resale, and all forms of document delivery. Special rates are available for educational institutions that wish to make photocopies for non-proﬁt educational classroom use. Permissions may be sought directly from Elsevier’s Rights Department in Oxford, UK: phone (+44) 1865 843830, fax (+44) 1865 853333, e-mail: [email protected]. Requests may also be completed on-line via the Elsevier homepage (http://www.elsevier.com/locate/permissions). In the USA, users may clear permissions and make payments through the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, USA; phone: (+1) (978) 7508400, fax: (+1) (978) 7504744, and in the UK through the Copyright Licensing Agency Rapid Clearance Service (CLARCS), 90 Tottenham Court Road, London W1P 0LP, UK; phone: (+44) 20 7631 5555; fax: (+44) 20 7631 5500. Other countries may have a local reprographic rights agency for payments. Derivative Works Tables of contents may be reproduced for internal circulation, but permission of the Publisher is required for external resale or distribution of such material. Permission of the Publisher is required for all other derivative works, including compilations and translations. Electronic Storage or Usage Permission of the Publisher is required to store or use electronically any material contained in this work, including any chapter or part of a chapter. Except as outlined above, no part of this work may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior written permission of the Publisher. Address permissions requests to: Elsevier’s Rights Department, at the fax and e-mail addresses noted above. Notice No responsibility is assumed by the Publisher for any injury and/or damage to persons or property as a matter of products liability, negligence or otherwise, or from any use or operation of any methods, products, instructions or ideas contained in the material herein. Because of rapid advances in the medical sciences, in particular, independent veriﬁcation of diagnoses and drug dosages should be made. First edition 2005 British Library Cataloguing in Publication Data A catalogue record is available from the British Library. ISBN: 0-7623-1217-3 ISSN: 0895-9935 (Series)

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CONTENTS LIST OF CONTRIBUTORS

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EDITORIAL BOARD

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SPECIAL REVIEWERS

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PREFACE INTRODUCTION: POLITICS AND THE CORPORATION Harland Prechel

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PART I: CORPORATE POLITICS AND SOCIAL POLICY PRIVATIZATION AND LOW-INCOME HOUSING IN THE UNITED STATES SINCE 1986 Doug Guthrie and Michael McQuarrie

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NO ROOM FOR COMPROMISE: BUSINESS INTERESTS AND THE POLITICS OF HEALTH CARE REFORM Patrick Akard

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PART II: CORPORATE POLITICS AND BUSINESS POLICY PUBLIC AIRWAVES, PRIVATE INTERESTS: COMPETING VISIONS AND IDEOLOGICAL CAPTURE IN THE REGULATION OF U.S. BROADCASTING, 1920–1934 Stephen Lippmann

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BANKS IN CRISIS: PUBLIC POLICY AND BANK MERGERS, 1976–1998 Theresa Morris

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PART III: CORPORATE POLITICS AND LABOR PRACTICES AND POLICIES MAKING CHANGE IN FEMALE SUPERMARKET MANAGERIAL REPRESENTATION: EXAMINING THE ROLE OF LEGAL, INSTITUTIONAL, AND POLITICAL ENVIRONMENTS Sheryl Skaggs

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CORPORATE ACCOUNTABILITY AND THE PRIVATIZATION OF LABOR STANDARDS: STRUGGLES OVER CODES OF CONDUCT IN THE APPAREL INDUSTRY Tim Bartley

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ABOUT THE AUTHORS

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LIST OF CONTRIBUTORS Patrick Akard

Department of Sociology, Anthropology, and Social Work, Kansas State University, KS, USA

Tim Bartley

Department of Sociology, Indiana University-Bloomington, IN, USA

Doug Guthrie

Department of Sociology, New York University, NY, USA

Stephen Lippmann

Department of Sociology and Gerentology, Miami University, Oxford, OH, USA

Michael McQuarrie

Department of Sociology, New York University, NY, USA

Theresa Morris

Department of Sociology, Trinity College, Hartford, CT, USA

Sheryl Skaggs

Department of Sociology and Political Economy and Public Policy, University of Texas at Dallas, Dallas, TX, USA

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EDITORIAL BOARD EDITOR Harland Prechel Texas A&M University

ADVISORY EDITORS Robert Antonio University of Kansas

Clarence Lo University of Missouri

Alessandro Bonanno Sam Houston State University

Paul Luebke University of North Carolina at Greensboro

Val Burris University of Oregon

Scott McNall California State University Chico

Betty Dobratz Iowa State University

Beth Mintz University of Vermont

G. William Domhoff University of California Santa Cruz

Anthony Orum University of Illinois Chicago

Eric Hanley University of Kansas

Jill Quadagno Florida State University

Greg Hooks Washington State University Craig Jenkins Ohio State University

William Roy University of California Los Angeles

Valerie Jenness University of California Irvine

David A. Smith University of California Irvine

Rhonda Levine Colgate College

Linda Stearns Southern Methodist University

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SPECIAL REVIEWERS We would like to thank the following special reviewers who assisted the editorial board in the preparation of Volume 14 of Research in Political Sociology

Patrick Akard Kansas State University

Chris Marquis University of Michigan

Paul Almeida Texas A&M University

Theresa Morris Trinity College

Jill Esbenshade San Diego State University

Robert Perrucci Perdue University

Joe Gorton University of Northern Iowa

Beth Rubin University of North Carolina Greensboro

Kevin Gotham Tulane University

Vicki Smith University of California Davis

John Harms Southwest Missouri State University

Bert Useem University of New Mexico Steve Valocchi Trinity College

Robert Kent Independent Scholar

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PREFACE Since its inception, the primary objective of Research in Political Sociology (RPS) has been to publish original, high-quality manuscripts to increase our understanding of political structures and processes. RPS and the American Sociological Association’s Section on Political Sociology share this goal, and the publication cooperates with the section to achieve sociological understanding of political phenomena. RPS is a resource that can be used by political sociologists to strengthen and develop the unique skills and interests they bring to sociology. The articles in RPS are directed toward identifying, understanding, and explaining the various interrelations that exist within and between social and political phenomena. This includes exploring the underlying social roots or origins of politics and power; the organization, management, and process of political power structure; and the effects of political decision-making and power structures on the surrounding society and culture. The intent of RPS is to share with political sociologists and other interested parties including political scientists, the full array of theoretical, methodological, and substantive interests that exist in the ﬁeld. RPS is open to all theoretical, methodological, and scholarly points of view, irrespective of political content, so long as they advance our sociological understanding of political dynamics and social structures. Richard G. Braungart edited Volumes 1–3 and Richard G. Braungart and Margaret M. Braungart co-editing Volume 4. Philo C. Wasburn edited Volumes 5–8. Betty A. Dobratz was the previous series editor with Timothy Buzzell and Lisa K. Waldner as associate editors of Volumes 9–13. They began their editorship with The Politics of Social Inequality (No. 9) followed by Sociological Views on Political Participation (No. 10), Theoretical Directions in Political Sociology for the 21st Century (No. 11), and Political Sociology for the 21st Century (No. 12). Volumes 10–12 provide a trilogy on the current state of political sociology as we begin the 21st century. Volume 13, edited by Lisa K. Waldner (with Betty A. Dobratz as the series editor and Timothy Buzzell as associate editor), is titled Politics of Change: Sexuality, Gender, and Aging. This volume provided an opportunity to focus on topics that have traditionally received little attention by political xiii

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sociologists. The current Volume 14, titled Politics and the Corporation, is edited by Harland Prechel. This volume examines the historical and dialectical relationship between the corporation and the state. Volume 15 will focus on Politics and Globalization.

INTRODUCTION: POLITICS AND THE CORPORATION Harland Prechel INTRODUCTION: POLITICS AND THE CORPORATION The theme for this volume of Research in Political Sociology focuses on the ways in which corporations exercise political power, and how changes in the political–legal arrangements in which they are embedded affect corporations’ organizational behavior. The articles in this collection further our understanding of political capitalism: ‘‘the utilization of political outlets to attain conditions of stability, predictability, and security – to attain rationalization – in the economy’’ and to preserve the social relations essential to capitalist society (Kolko, 1963, p. 3). The capitalist class and corporate management do not always have a coherent conception of the relationships between their economic goals and the means necessary to achieve those goals. However, they exercise political and economic power to establish public policies that facilitate rationalization of the economy: creating the political, economic, and ideological conditions that advance their capital accumulation agendas.1 Although the historical conditions in the 1920s and 1930s (e.g., Great Depression) in the United States created opportunities for countervailing powers (e.g., the working classes, small business) to place some constraints on large corporations’ capacity to advance their agendas (e.g., New Deal), Politics and the Corporation Research in Political Sociology, Volume 14, 1–11 Copyright r 2005 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN: 0895-9935/doi:10.1016/S0895-9935(05)14001-7

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by the 1990s, many of these regulations were dismantled. The cumulative effect of corporate political behavior in subsequent decades has resulted in institutional arrangements that provide corporations with the ﬂexibility to engage in a wide range of organizational behaviors that were previous prohibited or not viable (Prechel, 2000, 2003). By examining the dynamic and dialectical relationship between the corporation and the state, the articles in this volume provide insights into how the institutional arrangements in capitalists society are deﬁned and redeﬁned. Although these articles employ different theoretical perspectives, they all document how capitalists attempt to transform the external arrangements in which corporations are embedded in ways that reproduce capitalist relations of production and accumulation (Gordon, Edwards, & Reich, 1982). By examining the institutional arrangements in which corporations are embedded in different economic sectors and historical settings, these articles show how historical contingencies affect the capacity of corporate interests to inﬂuence public policies. They identify when capitalist class factions mobilize politically to advance their specific agendas, when the capitalist class uniﬁes politically in order to advance their shared agendas, and when corporate and state managers cooperate to achieve their shared agenda of creating conditions for capitalist development and growth. Some of the articles also demonstrate how redeﬁning the political–legal arrangements in which corporations are embedded create conditions that permit them to engage in organizational behaviors that were previously prohibited or not viable. Others identify contradictions in political capitalism by showing that the rationalization process does not always have the intended effect and, instead, provides opportunities for the working classes to advance their interests.

CORPORATE POLITICS AND SOCIAL POLICY The articles in this section examine two important social policy initiatives in the 1980s and 1990s. Doug Guthrie and Michael McQuarrie show that a little known provision in the Tax Reform Act of 1986 (TRA86) created a new sector of the economy by restructuring funding for public housing. Patrick Akard examines how the political opportunity to restructure the health care system was blocked in the 1990s after business groups uniﬁed and organized politically to defeat this policy initiative. Doug Guthrie and Michael McQuarrie examine the Low-Income Housing Tax Credit (LIHTC) provision in the TRA86. The authors show that this

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legislation redeﬁned the political–legal arrangements in ways that created incentives for corporations to invest in inner city housing. This policy initiative advanced corporations capital accumulation agendas at taxpayers expense. This corporate welfare program, which privatized low-income housing, allowed corporations to use both tax credits and passive tax breaks (e.g., depreciation), while specifically prohibiting individuals from doubledipping into the tax pool. The authors show that there was little discussion of the LIHTC provision of the TRA86 in Congress. However, state managers were clearly aware that the LIHTC would provide special tax breaks for corporations. In fact, Guthrie and McQuarrie point out that one U.S. Senator questioned the Chair of the Senate Finance Committee to clarify that the double-tax deduction was available to corporations. Soon after the passage of the TRA86, a new market for low-income development emerged. Parent companies in the community development industry created subsidiary corporations for the sole purpose of syndicating tax-credit dollars and managing the funds that these tax credits generated. The subsidiaries used this capital to leverage resources from banks and private developers and to form public–private partnerships with nonprofit development organizations.2 Creating this new market included the use of new ﬁnancial instruments (i.e., mortgage-backed securities) that permitted corporations to exchange capital for tax credits. On the one hand, these complex ﬁnancial instruments and organizational structures provided mechanisms to fund low-income housing. On the other, these massive tax breaks contributed to the shift in the tax burden from corporations to individuals. Guthrie and McQuarrie conclude that state autonomy theory and neoinstitutional theory are unable to explain this policy formation process. Drawing on the conception of political capitalism, Guthrie and McQuarrie show how state managers and corporate managers created a social policy that was subsidized by individual taxpayers to advance corporations’ capital accumulation agenda. Patrick Akard employs historical contingency theory of business political behavior to explain the rise and demise of health care reform in the 1990s. The opportunity to restructure the health care system in the United States emerged from a breakdown in the social structure of accumulation (SSA); contradictions in the prevailing institutional arrangements (i.e., political, economic, and ideological) undermined stable capitalist development. This breakdown was manifested as a decline in health care coverage and soaring health care costs that rose at an annual rate of more than 12% from 1980 to 1990. In response to these historical conditions, widespread support for

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health care reform emerged within the general public and among large and powerful corporations (e.g., Fortune 500 companies). Determined to put the United States in line with other advanced industrial nations, President Clinton took advantage of these historical conditions to propose the Health Security Act. However, approximately one year after President Clinton announced his policy initiative, it was defeated without a vote in either the House or the Senate. Akard’s chapter examines the role of business interests in defeating this policy initiative. Although capitalist-class factions (e.g., large corporations and small corporations) agreed that a solution to rising health care was necessary, conﬂicts emerged over which proposal provided the best solution.3 However, the political climate changed when it became clear that cost containment would require a significant expansion of government authority over the private health care industry. Despite capitalists’ dependence on the federal government to reduce health care costs in order to create stable conditions for profitable growth, the degree of state intervention necessary to accomplish this goal was beyond the outer limits of acceptable government intervention. Concerned that expansion of the government would undermine their autonomy, even the most liberal members of the business community opposed this public policy when it became apparent that restructuring the health care system would undermine their autonomy. Akard shows that the business community used two strategies to defeat this public policy. On the one hand, they used the direct strategy of employing massive ﬁnancial resources to mobilize politically. On the other, they used the indirect strategy of controlling investment decisions that gave them structural power over policy options. Akard’s analysis supports fundamental tenets of historical contingency theory, which maintains that capitalists class unity and state autonomy vary historically. It also challenges a central claim of state autonomy theory by showing that the business community is capable of articulating its long-term interests and defeating a public policy initiative even when the policy is supported by powerful state managers.

CORPORATE POLITICS AND BUSINESS POLICY This section includes two articles showing that corporations mobilized politically to transform the political–legal arrangements in which they were embedded, and how these changes affected corporations’ subsequent organizational behavior. Theresa Morris examines corporate political mobilization

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in the banking industry in the 1970s and 1980s. She shows how the political– legal arrangements in which banks are embedded were redeﬁned and how deregulation permitted corporate consolidation. Stephen Lippmann examines how capitalists developed strategies of ideological capture in the 1920s and 1930s to pave the way for corporate control of the public airwaves. Lippmann’s analysis begins with the observation that in the mid-1920s nonprofit radio stations controlled 55% of the public airwaves in the United States. However, a decade later, virtually all nonprofit radio stations were eliminated. Initially, there was considerable conﬂict between corporate managers and state managers over the private use of public airwaves. Secretary of Commerce, Herbert Hoover, argued that this public good should remain free of corporate inﬂuence. However, in response to corporate political mobilization, Congress passed legislation that stripped the Department of Commerce of its power. Then, Hoover abandoned his position and aligned himself with corporate interests. Lippmann draws on historical contingency and social movement theories to explain this transition in public policy, which allowed corporations to use a public good to advance their private capital accumulation agenda. Three historical contingencies affected this policy outcome. First, the public broadcasting industry used the courts to win crucial legal battles that weakened the autonomy of the Department of Commerce to control the public airwaves. Second, a prevailing ideology in this era, which was supported by Secretary Hoover and other state managers, promoted associationalism: the collaboration and cooperation among industries and between industry and the government. Third, the government created the National Radio Conference within the Department of Commerce to set regulatory policy in the public broadcasting industry. After this state structure was created, several large corporations (e.g., American Telephone and Telegraph (AT&T), General Electric, Radio Corporation America (RCA), Westinghouse, Zenith) mobilized politically to gain control over it. These corporations developed an ideology that incorporated central ideas of associationalism into frames that appealed to state managers. These frames were used to convince state managers that corporate control over the airwaves would beneﬁt the public. With substantially fewer resources, competing interests (i.e., amateur broadcasters, public education, religious groups) were unable to match the political power of corporate broadcasters in the policy formation process. Lippmann’s theoretical framework elaborates the concept of ideological capture, which entails the ‘use of symbolic and rhetorical frames by corporations to legitimate their authority and to redeﬁne the government’s role

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in regulating industry. Lippmann concludes that these corporations did not use cultural frames as cognitive and normative constraints as neoinstitutional theory argues. Instead, corporations mobilized politically to gain access to this state agency and presented cultural frames to convince state managers that private capital accumulation agendas would advance the interests of the general public. Lippmann’s study shows that this public policy and state structure created the historical conditions that were crucial to the subsequent control of public airwaves by a few large corporations and their subsidiaries. Theresa Morris employs capital dependence theory to explain the political and organizational responses of banks to the increased economic competition that emerged in the 1970s and 1980s. She examines both corporate political mobilization that redeﬁned the political–legal arrangements in which banks are embedded, and the subsequent organization behavior of these corporations. Morris’ analysis of corporate political behavior shows that in response to capital dependence, banks mobilized politically to inﬂuence regulatory policies that constrained their behavior. Her quantitative analysis shows how the embeddedness of corporations in these new political–legal arrangements affected merger behavior. The analysis of corporate political mobilization shows that in response to capital dependence, this class-fraction used its extensive ﬁnancial resources to advocate business policies that resulted in the most profound changes in bank regulatory policy since the 1930s. After the ﬁnancial sector succeeded in eliminating the political–legal arrangements that prohibited certain kinds of mergers, capital-dependent banks merged with other banks to overcome ﬁnancial crises. These historical conditions provided the opportunity for corporations in this crucial economic sector to undergo rapid consolidation. Approximately 8,000 mergers occurred that transferred $2.4 trillion. The quantitative analysis of banks’ organizational behavior examines merger behavior among both acquired and acquiring banks during three distinct policy periods. Controlling for several theoretically important variables, the analysis shows that merger activity increased during the two periods of capital dependence and decreased during the period when banks were not capital dependent. Morris’ chapter shows that these new political–legal arrangements did not result in the kinds of mergers that eliminated weaker banks as free-market advocates claim. By examining both types of mergers (i.e., acquired banks and acquiring banks), Morris shows that previous studies, which narrowly examine the likelihood of a bank being acquired, can result in the false ﬁnding that weaker banks were eliminated. In contrast, her analysis shows

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that ﬁnancially weak larger and older banks were more likely to acquire other banks. That is, although small capital-dependent bankers were acquired, capital-dependent large banks acquired other banks. For these reasons, Morris maintains that age and size should not be conceptualized as measurements of inertia as organizational theorists suggest. Instead, age and size should be conceptualized as measures of power because larger and older corporations have more opportunities to establish networks that can be used to advance their capital accumulation agenda during periods of capital dependence.

CORPORATE POLITICS AND LABOR POLICIES The articles in this section examine the countervailing power of workers to inﬂuence corporate practices in industries that have a high percentage of female employees. Stephen Bartley examines how these political–legal arrangements were constructed in the global apparel industry. Sheryl Skaggs examines the extent to which enforcement structures under different presidential administrations affects workplace sex discrimination in supermarket managerial occupations. Skaggs’ chapter examines the effects of the regulatory environment on the promotion of women to leadership roles in the supermarket industry during three recent political periods: the Reagan era (1983–1988), the Bush era (1989–1992), and the Clinton era (1993–1998). The central argument suggests that the potential beneﬁt from laws and litigation is inﬂuenced by variation in the political climate, which includes legal mandates and the capacity to enforce laws (e.g., budgetary constraints of enforcement agencies). The article draws from several theoretical perspectives to conceptualize the complex relationships among historical variations in the political environment, worker rights protection, and internal corporate labor practices and policies. Using resource dependence theory, Skaggs maintains that corporations are more likely to respond to pressure from the external environment if they are dependent on local markets. She also draws from internal labor market theories to examine how corporate structures affect and perpetuate disparity in employment opportunities. Using this framework, Skaggs maintains that in the absence of external pressure on corporations to change their unequal or discriminatory labor practices, given that inertia tends to stabilize organizational practices, change is unlikely to occur. The quantitative analysis shows that ﬁling sex discrimination lawsuit

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has the greatest effect on supermarkets’ internal labor practices. In contrast, only moderate support exists for monetary losses from lawsuit settlements and awards. Moreover, support for the monetary hypotheses exists only during the Reagan administration. Skaggs suggests that the absence of a statistically significant effect of monetary losses on corporate labor policies during the Bush and Clinton administrations is due to the increase prevalence of large class-action lawsuits in the 1990s. Specifically, corporations respond most to the threat of a large monetary loss that might result from lawsuit ﬁlings and change their internal practices to avoid the risk of expensive litigation and settlement. Skaggs concludes that high proﬁle sex-discrimination lawsuits provide the greatest potential for change in corporate labor practices. However, corporate–state alliances under probusiness regimes are likely to threaten worker protection or, at least, slow the pace of organization changes that protect workers rights. The historical and dialectical relationship between corporations and the state may explain why a uniﬁed business community mobilized politically during the George W. Bush administration to limit the awards from class action lawsuits. If left unchallenged, in an era of weak labor unions, probusiness policies are likely to result in new forms of worker exploitation and inequality. Tim Bartley’s chapter on corporate accountability and the privatization of labor standards addresses another dimension of workers’ rights in an industry with a high percentage of female workers. His research examines how codes of conduct and private compliance in the apparel industry’s supply chains shape the ongoing struggles over corporations’ legal responsibilities. Bartley’s analysis provides partial support for the displacement hypothesis, which suggests that the rise of private regulation undermines the public regulation and legal accountability of corporations. However, he also shows that the privatization of labor regulations is a contested terrain and establishing a system to monitor corporations is more complex than previously understood. Bartley’s examination of the dynamic relationship between private and public regulatory initiatives shows that although corporations have more power than their challengers, challengers sometimes succeed in changing structures designed to beneﬁt corporations by transforming them into sources of corporate vulnerability. The analysis shows that by the mid-1990s, in response to pressure from unions, anti-sweatshop campaigns and government agencies, corporations in the global apparel industry adopted codes of conduct to obtain support for globalization and free-trade initiatives. Corporations engaged in selfregulation as a strategy to avoid government intervention that would give

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regulatory agencies the authority to monitor the industry. However, labor rights activists (e.g., garment workers unions, anti-sweatshop groups, labor and human rights organizations) challenged the authority of the industry’s self-regulating agenda. Using the prevailing political–legal arrangements, they charged that the industry’s practices violated U.S. labor laws and international human rights standards. The industry’s strategy of self-regulation made it vulnerable to these claims of legal liability because it could no longer argue that it lacked knowledge of either the labor laws or the practices in their subcontracted factories. In the end, the working class was able to use existing state structures and laws to increase corporations’ responsibility and liability for labor practices in their supply chains. Bartley concludes that understanding this historical transition requires an examination of the specific historical conditions that deﬁned the direction of political behavior. He suggests that law and society scholars, who tend to focus on law as outcome, underestimate the importance of political power in deﬁning and redeﬁning public policy. The way in which corporate, class, and state power are articulated is affected by a complex historical process where weaker challengers can exercise power by using existing laws and state structures to pursue their political agendas.

CONCLUSION The articles in this collection represent a broadening of theoretical perspectives in political sociology. Like the ﬁeld of sociology as a whole, in the middecades of the 20th century, political sociology shifted away from the broad focus of the classical sociological tradition established by Marx (1852), Weber (1921), and Polanyi (1944) that connected specific issues and events to large social structures and processes. Although C. Wright Mills (1959) argued for a sociological theory that embrace emancipatory political goals and social criticism, political sociology shifted in the opposite direction and developed theories that tended to be technical and normative. This type of theorizing deﬁned the parameters of much research in political sociology in ways that disconnected it from broader social concerns and emancipatory political goals (for exceptions, see Domhoff, 1967; Zeitlin, 1989). Further, it dismissed the pragmatists argument that all normative claims emerged from specific cultural and historical contexts, which reifying historical institutions with a legitimacy that was impervious to critical dialogue (Antonio, 1989). By the early 1990s, researchers began to draw from other subﬁelds in sociology to critique narrow theoretical frameworks in political sociology

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for not acknowledging, for example, historical variation in state autonomy and class unity, and how capitalist class factions used state structures to force state managers to advance their capital accumulation agendas, even when capitalist agendas conﬂicted with the state’s agendas (e.g., Prechel, 1990). Like chapters in previous issues of Research in Political Sociology (see Dobratz, Buzzell, & Walder, 2003), the articles in volume 14 draw from theories in other subﬁelds of sociology to explain the complex relationship between politics and other spheres of society. The authors in this volume draw from theoretical perspectives in complex organizations, labor markets, historical sociology, political economy, and social movements. These articles directly or indirectly provide insights into political capitalism and embrace the emancipatory political goals and social criticism of the classical tradition in sociological theory.

NOTES 1. Rationalization is not equivalent to efﬁciency or rational. Rationalization is a historical process that is characterized by contradictions, irrationalities, disequilibria, and conﬂicts. 2. Another little known provision in the TRA86, which was also passed with little public debate or discussion, made this use of subsidiary corporations viable. This provision eliminated the New Deal tax on capital transfers between parent companies and their subsidiaries. After this corporate tax was eliminated, corporations transformed the central ofﬁce into a parent holding company, divisions were transformed into subsidiaries, and subsidiaries were created to organized new and existing product lines. As a result of these changes, the corporate form was transformed from the multidivisional form to the multilayer-subsidiary form (Prechel, 2000, pp. 209–226, 241–246). 3. Two major health policy initiatives were presented as alternatives to Clinton’s proposal. Conservative proposals assumed that markets are more efﬁcient than the public sector and advocated market-based reforms. This policy initiative assumed that providing consumers with a choice of health care providers would control cost and increase efﬁciency, thereby eliminating the need for government controls. A third set of proposals advocated expanding the existing system of employer-based health insurance to include cost containment provisions.

REFERENCES Antonio, R. (1989). The normative foundations of emancipatory theory: Evolutionary versus pragmatic perspectives. American Journal of Sociology, 94, 721–748.

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Dobratz, B., Buzzell, T., & Walder, L. (2003). Introduction: Political sociology for the 21st century. Research in Political Sociology: Political Sociology for the 21st Century, 12, 1–16. Domhoff, W. G. (1967). Who rules America? Englewood Cliffs, NJ: Prentice-Hall/Spectrum Books. Gordon, D., Edwards, R., & Reich, M. (1982). Segmented work, divided workers: The historical transformation of labor in the United States. Cambridge: Cambridge University Press. Kolko, G. (1963). The triumph of conservatism. Glencoe, IL: The Free Press. Marx, K. (1852) [1978]. The eighteenth Brumaire of Louis Bonaparte. In: R. Tucker (Ed.), The Marx–Engels reader, New York: W. W. Norton & Company, Inc. Mills, C. W. (1959). The sociological imagination. London: Oxford University Press. Polanyi, K. (1944) [2001]. The great transformation: The political and economic origins of our time. Boston, MA: Beacon Press. Prechel, H. (1990). Steel and the state: Industry politics and business policy formation, 1940–1989. American Sociological Review, 55, 648–668. Prechel, H. (2000). Big business and the state: Historical transitions and corporate transformations, 1880–1990s. Albany, NY: State University of New York Press. Prechel, H. (2003). Historical contingency theory, policy paradigm shifts, and corporate malfeasance at the turn to the 21st century. In: B. Deboratz, T. Buzzell & L. Waldner (Eds), Research in political sociology: Political sociology for the 21st century, (Vol. 12, pp. 311–340). Oxford: Elsevier Science. Weber, M. (1921) [1978]. Economy and society. Berkeley, CA: California University Press. Zeitlin, M. (1989). The large corporation and contemporary classes. New Brunswick, NJ: Rutgers University Press.

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PRIVATIZATION AND LOW-INCOME HOUSING IN THE UNITED STATES SINCE 1986 Doug Guthrie and Michael McQuarrie ABSTRACT This chapter examines the process behind the emergence of the LowIncome Housing Tax Credit (LIHTC), a provision of the Tax Reform Act of 1986. While effectively channeling resources into inner city housing development, this policy shift created a windfall for corporations by allowing them a double tax break that individual citizens were explicitly denied. We place emphasis on the ways in which the political process is a murky world in which powerful lobbies can create hidden opportunities, and organizational actors can take advantage of these opportunities to forge new institutions and even, in some cases, new industries. A process of institutional selectivity then works to select systems that favor the powerful players and interest groups that are shaping legislation behind the scenes.

Conﬂicts over institutions lay bare interests and power relations, and their outcomes not only reﬂect but magnify and reinforce the interests of the winners, since broad policy trajectories can follow from institutional choices. —Kathleen Thelen and Sven Steinmo (1992), Structuring Politics

Politics and the Corporation Research in Political Sociology, Volume 14, 15–50 Copyright r 2005 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN: 0895-9935/doi:10.1016/S0895-9935(05)14002-9

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DOUG GUTHRIE AND MICHAEL MCQUARRIE Plato once said: When there is an income tax, the just man will pay more and the unjust man will pay less on the same amount of income. —Senator William Cohen, Congressional Record, 19861

INTRODUCTION In the mid-1980s, a radical transformation took place in the provision of public housing in the United States. With the declining budgets of the Department of Housing and Urban Development and, specifically, the discontinuation of the budget line for Section 8 New Construction Projects, the development of federally subsidized low-income housing in the United States had come to a virtual standstill. Direct federal subsidies were replaced by an institution, which would have radical consequences for the structure of the welfare state, the Low-Income Housing Tax Credit (LIHTC) (United States Congress, 1986b). Yet, when it was originally presented to Congress as part of the Tax Reform Act of 1986, the LIHTC was to target a very small sector of the tax-paying population in exchange for a tax shelter that had become politically dangerous, and many in Congress acknowledged needed to be eliminated. Within a few short years, however, the LIHTC became one of the most significant vehicles for corporate welfare, providing massive tax abatements for corporations at the same time as it facilitated the ﬂow of private resources directly into the inner city areas that needed them most. More than this, the LIHTC helped give rise to an industry of community-based housing developers and intermediary organizations, as it provided them with resources from the corporate sector. In relatively short order, from 1986 to 1989, we see the explosion of an industry that rests on a set of resources and practices that simply did not exist in the years prior to 1986. In this chapter, we examine the transformation of low-income housing to illuminate a shift in power and priorities within the social contract in the United States. This case is about the leveraging of corporate resources for the funding of a public good, however, this system only works with a radical giveback to the corporate community – a giveback that was denied to individuals. Within a few short years in the late 1980s, this new policy – and the industry that emerged around it – would become one of the key features of urban revitalization in the United States, quickly gaining bipartisan support as it beneﬁted multiple constituencies. Thus, this process is not only about corporate welfare and the leveraging of corporate resources in the

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provision of a public good; it is also about emergence of a new logic around which community development would be framed. Empirically, this case is important for several reasons. First, while the LIHTC is held up by constituencies on both ends of the political spectrum as an example of political compromise, the actual political history is more complicated than this. Actors in the ﬁeld regularly cast this policy shift as a moment of rational bipartisan politics, where powerful interest groups and politicians came together to recast the organizations that shape inner city life in America.2 However, this understanding is far from the reality: in fact, the political history of the LIHTC suggests a process of backroom politics, where corporations were able to receive a windfall tax abatement that Congress publicly agreed tax paying citizens could not possibly be allowed. Second, in a related vein, while corporate accountants understand well the corporate welfare beneﬁts of the LIHTC, few in the community development and policy worlds actually understand the specific ways this institution operates as a windfall for corporations. The LIHTC itself is much more than a simple tax credit; it allows corporations a ‘‘double-dip’’ in the tax pool, which individual citizens were explicitly denied. Third, in a more positive light, the LIHTC did accomplish something that many in Congress and in low-income communities across the country had been attempting to accomplish for years prior – it became the catalyst for an industry built around the alliance of big banks, small nonprofit organizations, and social actors with large capital interests – but the creation of this organizational ﬁeld was as much an accident as it was an intended outcome. Prior, legislation like the Community Reinvestment Act of 1977 and the Passive Loss Provision in the Economic Recovery Act of 1981 (United States Congress, 1981) had failed in their attempts to create a system that would move private resources to the development of low-income housing. With each attempt to create such a moment of change, the critical players in the ﬁeld found themselves unable to capitalize on the opportunity to enhance the delivery of low-income housing. Yet, with the LIHTC, the ﬁeld was suddenly transformed. Thus, this case is empirically important because of how little is known about the actual history of the institution and because the consequences of this change catalyzed the creation of an organizational ﬁeld around critical issues of the low-income community. Finally, this case is important because of the general trend of which it is one important example: as one of the most significant of the tax credit and other experiments around the public–private partnerships, the LIHTC is also part of a longstanding trend that has seen corporate taxes decline precipitously since World War II (McIntyre & Nguyen, 2000). As Fig. 1

18

DOUG GUTHRIE AND MICHAEL MCQUARRIE Receipts by Source as Percentage of GDP, 1934-2002 12.0

% Contribution to GDP

10.0

8.0

6.0

4.0

2.0

Fig. 1.

99

96

93

90

02 20

19

19

19

19

84

81

87 19

19

78

76

73

70

19

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19

67

64

61

Individual Income Taxes

19

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19

55

52

49

46

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40

37

58 19

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34

0.0

Corporation Income Taxes

Decline a Corporate Taxes as Percentages of GDP. Source: US Government Printing Ofﬁce.

shows, individual and corporate income taxes as percentages of the GDP were close at the middle of the century – 8.2 and 7.3%, respectively in 1945. While individual income taxes remained basically constant over the rest of the Century, at 8.3% of GDP in 2002, corporate contributions to the GDP fell to 1.2%, the lowest level since 1942. The LIHTC is one dimension of the institutional arrangements that have contributed to the privatization of the welfare state while, at the same time, allowing corporate contributions to the state to decline. Theoretically, our analysis of this case illuminates important issues about class politics, the power of the corporate lobby, and the shift in institutional arrangements that privatize the welfare state apparatus in the United States. How does it come to pass that the funding of low-income rental housing in the United States today can only be accomplished by ﬁrst allowing corporations to receive a ‘‘double-dip’’ tax break? Through what social and political process does this part of the social contract become linked inextricably to corporate welfare? We argue that, regardless of how this change in the tax code came about, the important point is that once this change was recognized as the windfall it was for the corporate community, interest group politics, and the logic of the changing social contract worked to ﬁx the legislation in place. The corporate lobby fought to keep it, and Congress, which is heavily dependent on the corporate sector for funding, followed

Privatization and Low-Income Housing

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suit. Thus, there was a process of selectivity at work whereby institutions of a certain logic become ‘‘locked in place’’ (Chibber, 2003). Since the 1980s, this institutional selectivity has most often reﬂected the interests of capital and a general market logic. This chapter is organized as follows: ﬁrst, we provide an overview of how the current system of low-income housing provision occurs. We then give an account of how this system came about and how it became institutionalized. Finally, we discuss the theoretical implications this case history has for understanding the political economy of policy formation in the United States.

DATA AND METHODS The data for this chapter come from two sources. We conducted 150 indepth interviews with individuals working in the local development sector in three US cities.3 Qualitative data and background information on the process we describe here come from these interviews. Interviews were semistructured, organized around the issue of the building of low-income housing and public–private partnerships more generally. These interviews gave us insight into the pressures, practices, and views of the advocacy community working with the LIHTC. These interviews were conducted with individuals directly connected to Community Development Corporations (CDCs), intermediaries, and banks, as well as individual working in the government and the larger development community working with the LIHTC. All interviews were recorded and transcribed. We also did historical analysis of the Congressional Record for the 99th–107th Congresses (1985–2002) to track the political debate over LIHTC legislation. To gather these data, we conducted general searches on Lexis Nexis’s Government Documents/Congressional Records section. Lexis Nexis allows for general and Boolean searches for document text. In order to be sure that we captured all records that refer to the LIHTC, we conducted general searches on ‘‘low-income housing tax credit.’’ These words were entered without quotation marks, and as a result allowed us to capture all documents that include the words ‘‘low-income,’’ ‘‘housing,’’ ‘‘tax,’’ and ‘‘credit,’’ and any combinations of these words as they were discussed in the subcommittee and ﬂoor records of both houses. In addition, we conducted searches on relevant issues that have emerged as related to the LIHTC – ‘‘passive loss,’’ ‘‘capital gains,’’ ‘‘real estate development.’’ This yielded over 500 pages of subcommittee and ﬂoor records, which we then pared down to

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DOUG GUTHRIE AND MICHAEL MCQUARRIE

the relevant information for the legislation under scrutiny. In conjunction with the relevant documents that comprise the actual legislation and its amendments, we treat this body of documents as the history of the legislation in Congress.4

THEORETICAL ISSUES The conceptual framework here draws from theories in political sociology and complex organizations to examine the process behind a public policy change. From organization theory, we draw upon scholars that emphasize the ways in which individuals and organizations respond to new policy arrangements present. One important aspect of this perspective is that it focuses attention beyond the legislative process itself to the individuals and organizations that interpret and adopt practices in response to changes in the formal rules of the ﬁeld (Fligstein, 1990, 1997; Dobbin & Sutton, 1998). DiMaggio (1988) has referred to these individuals at ‘‘institutional entrepreneurs,’’ emphasizing the ways in which individuals can seize upon opportunities to take advantage of the changes in institutional arrangements. In moments of institutional change, it is often the case that key individuals innovate based on the political opportunities available to them to come up with new possibilities, new solutions, or new models of action within a given social system. According to this body of research, we would expect that organizational responses to shifts in policy arise from the initiative of individuals to take advantage of new institutional arrangements. From political sociology, we draw from the work of scholars who emphasize the larger political economy in which new policies are formed (Jenkins & Brents, 1991; Pontusson, 1991, 1995; Prechel, 2000). These scholars have argued that the political logic of the capitalist economy has important implications for the ways in which class interests come together to shape political outcomes. Over time, the structure of the capitalist state has come to increasingly favor institutional arrangements that favor business interests. The perspective from this group of scholars is that new policies and new institutional arrangements reﬂect the political economic logic of this system. The policy changes that have reshaped the welfare state in recent decades are one area where these changes have been most apparent. From this perspective, we would expect that new institutional arrangements are products of political struggles between the representatives of business interests and those that represent other political constituencies.

Privatization and Low-Income Housing

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THE CASE: THE TRANSFORMATION OF LOW-INCOME HOUSING DEVELOPMENT Born of deep tensions between developers and growth coalitions on the one hand and those who understood housing to be a central component of social welfare, the Housing Act of 1949 eventually settled on a general vision for housing as providing a ‘‘decent home and suitable living environment’’ for all American families. With dual objectives of providing for low-income families and redeveloping urban areas, legislators and interest groups eventually settled on a path that addressed housing through a combination of private sector subsidy and direct public intervention (Colton, 2003; Marcuse, 1995; Wright, 1981). For the next 30 years, federal allocations would be the primary source of funding for the building of low-income housing. However, with the end of the Section 8 New Construction program, federally funded low-income housing development all but ground to a halt in the mid-1980s. In 1986, a new program emerged to provide funding where federally allocated dollars left off. Fig. 2 illuminates this shift: by 1986, federally funded multi-family units dropped below 20,000 for the ﬁrst time in the history of HUD; by 1988, nearly all low-income multi-family units were being funded, at least in part, by the LIHTC. This shift marks a fundamental moment of change because it represents a transformation of the funding and development of a public good. In the case Federally Subsidized and LIHTC Multi-Family Housing Units, 1970-2000 140,000 120,000 # of Units

100,000 80,000 60,000 40,000 20,000

Fig. 2.

88 19 90 19 92 19 94 19 96 19 98 20 00

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LIHTC Units

Funding of Low-Income Housing. Source: US Census Bureau, Current Housing Reports.

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DOUG GUTHRIE AND MICHAEL MCQUARRIE

we describe here, corporations provide capital in exchange for tax credits, and this capital is then used to leverage resources from banks and private developers (who are often in partnerships with nonprofit development organizations) to build low-income housing. ‘‘Privatization’’ does not capture this process, because that implies a relocation of public expenditures into private hands. What we are describing here is a fundamental transformation of funding generation and governance over housing policy. More importantly, this was one of the early experiments in the trend toward removing the federal government from the process of development and management. In the overall scheme of the federal budget, the LIHTC is a relatively small indirect expenditure. Even if we limit the ﬁeld to housing policy, the largest expenditure on housing is the mortgage interest deduction – indeed this expenditure is several times as large as all other housing expenditures combined (Howard, 1997). The importance of LIHTC, however, does not come from its size. Rather, the importance of this policy is that it is increasingly replacing direct expenditures for low-income housing. Moreover, LIHTC has provided a modular model for replacing public provision of social goods with private provision that is leveraged with public dollars. As we write, this model is increasingly being deployed in public education and commercial development. Lastly, LIHTC legislation has resulted in changing these institutional arrangements in ways that go well beyond the initial policy. Fig. 3 represents the funding process of the pre-1986 welfare state with respect to budget allocations for low-income housing. This ﬁgure shows that banks and corporations remit taxes to the federal government. A portion of these funds are allocated to the Department of Housing and Urban Development, which then contracts with a developer to build housing. Some rents ﬂow back to developers, though some portion of these also ﬂow from the government in the form of Section 8 subsidies. Starting in 1977, small changes began to take place within this system. Namely, with HUD budgets in decline and many cities reaching a level of urban crisis, strong evidence of redlining by banks prompted Congress to pass the Community Reinvestment Act (CRA), which mandated that banks invest resources in the local communities in which they operate. While the intent of the CRA was to channel the ﬂow of resources into the inner cities where banks had operations, the actual effect in the 1970s and early 1980s was small. Banks generally ‘‘invested’’ in these communities through grants and charitable donations to local nonprofit organizations – they changed their behavior enough to get CRA credit and reduce taxable income through tax write-offs – but the legislation did nothing to change the logic of their

Privatization and Low-Income Housing

23 Post 1977 (CRA)

US Government

US Government taxes

taxes

allocation

Coca-Cola

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allocation

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Fig. 3.

rent rent

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Budgetary Allocation under Standard Welfare State Regime.

lending practices. This is a significant point. The CRA legislation was specifically intended to inﬂuence the logic of the way banks conducted their business. Instead, as numerous bankers related in interviews, they conducted their business as before only with a new cost center to support, that of grantmaking. Fig. 4 represents the ﬂow of resources under the LIHTC regime after 1986 and currently in place. We list specific organizations here as examples of the roles that general corporate forms play in the model – Coca-Cola, Bank of America, and Fannie Mae are examples of the roles that large corporations and large commercial banks play respectively.5 The model is considerably different from the one represented in Fig. 3 in terms of the organizational players involved, the ﬂow of resources, the role of the government, and the relationship between the government and other organizational actors. The crucial feature of this system begins with the fact that there is no connection between the corporation and the government in terms of the ﬂow of resources, at least with respect to the portion of a corporation’s taxes that are credited through investments in LIHTC. If a central feature of a welfare state system is that tax dollars are divided up and allocated by the federal government, in this system, corporate dollars ﬂow directly into the housing development system through the purchase of tax credits. Tax credits are allocated to states by the Internal Revenue Service (IRS) as $1.75 per person in the state population.6 The credits are distributed through state housing

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DOUG GUTHRIE AND MICHAEL MCQUARRIE

US Government tax credit allocation

State of Georgia

Fannie Mae mortgagebacked securities capital tax credit Coca-Cola residuals

tax credits

tax credits

NEF/ESIC (syndicate)

tax credits

grants grants loans

Bank of America

LISC ANDP

capital

(intermediary/ developer) grants

loans

Developer

grants

CDC capital

rent

Housing Fig. 4.

Light Regime.

agencies to developers based on a point system that reﬂects the priorities of state government. Corporations provide capital through a syndicator, a type of organization that arose in the 1980s as the ﬁnancial institution that transforms tax credits that originate with the sponsor into capital that comes from the corporate sector.7 In return, corporations receive a dollarfor-dollar write-off against bottom line tax liability. However, additional beneﬁts to corporations also exist. First, corporations are permitted to buy tax credits at a ‘‘market’’ rate. This means they can purchase the credits for approximately 75–85 cents on the dollar (i.e., 80 cents reduces a dollar’s worth of corporate taxes). Second, and most importantly, corporations receive a ‘‘passive-loss’’ write-off against the future depreciating value of the low-income property. In short, corporations receive a double tax break as they receive the tax credit and the write-off against future losses.8 As we will discuss below, it is clear in the Congressional Record that, when Congress considered affording individuals the same beneﬁt, the collective sentiment was that this type of double beneﬁt would be ‘‘doubledipping’’ in tax breaks and could not be allowed. However, it is now a central feature of the ﬂow of resources around low-income housing and a

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central feature of hidden corporate welfare. Corporate resources then ﬂow into development deals, where they are put together with other ﬁnancing sources, namely ﬁnancing from banks, foundations, intermediaries, or public money where it is available. These deals require a sponsor, who initially applies for tax credits from the state housing ﬁnance commissions; these sponsors can be for-profit developers, nonprofit organizations, or a local housing authority. In short, these deals are extremely complex and, as a result, extremely costly in which various sources of public and private funding are stitched together to enable development that is usually initiated by CDCs. Fig. 5 shows the scope of resources ﬂowing through this system from corporations since 1986. Since that time, the LIHTC has become the primary driver behind the ﬂow of resources into inner-city housing project development, accounting for over $5.2 billion in corporate dollars invested in low-income housing and contributing to the building of over 1.3 million units for low-income families.9 A ﬁnal feature of this system – and a site of some of the most interesting institutional developments – has to do with the rise of new ﬁnancial instruments in the 1990s: originally, the philosophy behind the LIHTC was to not only capture resources from the private sector but also to harness its market discipline – private or corporate investors were bound to the deals for 10 years through the recapture provisions of the tax credit, the logic being that economic actors would make more intelligent investment decisions in development projects than the government would, especially if the value of the investment was at stake. However, with the rise of mortgage-backed securities, which ﬁrst emerged in 1991, these ﬁnancial resources are in practice

Value of Tax Credits Used Nationally ($5.2 Billion YTD) $600,000,000 $500,000,000 $400,000,000 $300,000,000 $200,000,000 $100,000,000

Fig. 5.

01

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$0

Corporate Investments Generated from LIHTC. Source: Danter and US Bureau of Census.

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DOUG GUTHRIE AND MICHAEL MCQUARRIE

quite ﬂuid. If a corporation has a large tax liability one year, it can buy large sums of tax credits and then also be eligible for the passive loss deduction; but if, a few years later, the tax liability is low, the same corporation can sell these tax credits on the secondary market to Fannie Mae or other types of similar institutions that deal in tax credits.10 How did this institutional shift occur? What were the political, economic, and social pressures that brought such radical innovation about? And how did it come to be that corporations could receive a beneﬁt of a double tax break, a beneﬁt that individual tax payers were denied when the law was written in 1986? What was the political process behind the transfer of funding for a public good, which also became the single largest instance of corporate welfare in the last quarter century?

A POLITICAL HISTORY OF THE LIHTC In 1986, the US Congress inserted a small provision into the tax code that would have ripple effects throughout corporate and low-income communities, fundamentally altering the construction of low-income housing in the United States and the role that corporations play in this process. With the passage of the Tax Reform Act of 1986 (United States Congress, 1986a), Section 42 of the Internal Revenue Code, the LIHTC, became one of the early experiments in the movement toward the leveraging of private funding for public goods, giving rise to an industry that ultimately helped change the face of many urban settings in America, at least in the area of low-income housing. It is a system that works well; well enough that when it was renewed in 1989 and eventually made permanent in 1993, it had gained strong bipartisan support throughout both the Houses of Congress. As one industry insider described the program’s success: It’s the largest single producer of affordable housing in this country, the low income housing tax credit. And you know the reality that people still I don’t think really understand [it]. . . [w]hat the tax credit for multi-family development did was level out your cost. So it allows you to produce a project that you can make economically feasible for lower rents. It’s a great structure and I think it’s a great way to get corporations to do part of what they ought to be doing to support the economy (Personal Interview, 2002).

This conﬁdence in the program’s efﬁcacy is echoed in Congress, as well, where the program has thrived under bipartisan support for more than 15 years. As Senator Sasser (D-TN) put it at the time of the Credit’s renewal in 1989:

Privatization and Low-Income Housing

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In housing today, the participation of the private sector is more important than ever before. The low-income housing tax credit is an excellent incentive for private developers to build projects that provide affordable housing to low-income individuals. . . I have long supported the low-income housing tax credit. It helps guarantee that a steady supply of new housing will remain available to our poor. While this tax credit cannot be expected to eliminate all of our housing shortages, it is a key element in encouraging the private sector to build multi-family housing for lower income families. . . (US Congressional Record, 1989a).

At ﬁrst blush, it seems clear that those in government constructed and passed a piece of legislation that is a clear, rational answer to challenges facing the development of low-income housing in the 1970s. Yet, this institution did not arise from a transparent political process. Instead, it emerged from a process in which some of the most important decisions appear nowhere in the debate recorded within the Congressional Record. In fact, much of the debate within Congress in 1986 surrounding the LIHTC focuses on the use of the legislation by individuals and in only one obscure place in the Record is it mentioned that corporations stand to receive a potential windfall from this legislation. Yet, when the legislation was passed, a group of entrepreneurial community developers took advantage of this legislation to create a system that transformed the industry surrounding the development of low-income housing in the United States.

Background Conditions and Institutions The conditions for this moment of change reach back well over a decade before the LIHTC came to life, setting the stage for an eventual moment of dramatic and rapid institutional change. The story begins with the housing crisis of the 1970s, a time in which many cities in the United States were suffering the long-term consequences of decaying housing projects and the immediate consequences of the budget crises of the 1970s. As one industry insider from Cleveland, Ohio recalls the evolution of these background conditions, You have to look at the broader environment. I think starts with an observation that [at that time] the city of Cleveland. . . was a dying city. It’s population had plummeted from 900,000 to 500,000, massive out-migration of the middle class, lots of de-segregation, everything. The river catching ﬁre. So early in the 1980s, City Hall adopted a policy of supporting, as a primary way to bring neighborhoods back, supporting the growth of CDCs [Community Development Corporations]. And they have had an unwavering commitment for 20 years now (Personal Interview, 2002).

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DOUG GUTHRIE AND MICHAEL MCQUARRIE

Another industry insider pointed to the early attempts at institutional change that set the stage for the rapid changes in the mid-1980s: It really started around 1973. There was a national conference in Chicago where people came together for the ﬁrst time to talk about this problem of lending discrimination and fair housing issues. It was, the organization that grew out of that was national, National People’s Action, Gail Cincotta who recently, some people call here the mother of CRA. . . [Then] the community activists went to Congress in 1975 to get the Housing Mortgage Disclosure Act passed, so that banks would have to disclose what they’re doing. Then with the information that was generated for two years by that, they went back to Congress in 1977 and said, ok, now we have some data that shows these banks are not making loans in inner-city neighborhoods. And they got Congress to pass the CRA. So those two laws are still viewed in tandem because without the HMDA, even today, you wouldn’t have the data to ﬁnd out what’s really going on. It’s sort of the teeth behind the CRA, I think. So there were a whole number of CDCs that got started in either 1979 to 1981. And this is a group of CDCs that were almost all started in response to, well, now there’s a tool. Now there’s the CRA and there’s money that’s going to be available for development. And almost all of these organizations were started by grassroots community organizations that had done the organizing around redlining (Personal Interview, 2002).

In both of these statements, we ﬁnd common elements that are echoed throughout the oral history of the community development industry today: urban crises and specifically housing crises in the 1970s; the emergence of a neighborhood-based activist community to begin to deal with these issues; new institutions such as the CRA, the Housing Mortgage Disclosure Act, and federal legislation attempting to force banks to change their business relationships with low-income communities. The mid-1980s marked a crucial shift in the structure of the welfare state. With a conservative in the White House and, for 2 years, a Republicancontrolled Senate, the Democrat-controlled House was, for much of the 1980s on the defensive. The Tax Reform Act of 1981 marked a period of dramatic cutbacks that affected many programs, including those that funded the construction of low-income housing. Many in Congress blamed the Reagan administration directly for this shift (though HUD budgets had actually been in decline in the late 1970s as well): as Senator Kerry (D-MA) put it in 1986, The crisis we feel today has been brought about in part as a result of the Reagan Administration’s rejection of the federal government’s historic role in stimulating the production of multifamily housing directly through federal spending programs. Since 1981, budget authority for housing has declined by 60 percent. . . (US Congressional Record, 1986d).

Privatization and Low-Income Housing

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One of the items of that 1981 tax bill, however, the ‘‘passive loss’’ provision, was set up to create incentives for wealthy individuals to invest in low-income housing. The main idea behind the passive loss provision is that individuals could receive write-offs against the depreciating value of property. By the mid-1980s, many in Congress recognized the host of problems that were associated with this provision, problems that would be addressed in the Tax Reform Act of 1986. For one thing, many wealthy individuals were ﬁnding ways to avoid taxes entirely, simply through investments in cheap property. Even more significantly, the passive loss provision was actually contributing to urban blight: because the provision hinged on depreciating value, the incentives were for individuals to intentionally allow property to become rundown. As a result, the Tax Reform Act, which was the second major overhaul of the tax code under Reagan sought to close this loophole for individuals. As Senator Packwood (R-OR), then Chair of the Senate Finance Committee, testiﬁed in introducing the bill, On the individual tax, the principal thing we did was severely limit the beneﬁt of socalled tax shelters. . . What very wealthy individuals would do is invest in properties, usually real estate but not always, that generated paper losses. They would offset the paper losses against their regular income. This would reduce their regular income, their taxable income, down to zero. They paid no taxes. Everyone in this Chamber has gone home and had this question put to them—these are people making $15 or $16,000 a year. ‘‘Senator, I don’t mind paying my fair share, but why don’t they pay something?’’. . . Every year, the story is printed in the papers – and I paraphrase – 844 Americans last year made over $1 million and paid no taxes. That, justiﬁably, galls the average taxpayer who is making $15,000 a year and paying $1,000 in taxes. This bill closes those loopholes (US Congressional Record, 1986b).11

Senator Cohen (R-ME) expressed the widespread support for dealing with the passive loss tax shelter problem, saying, Mr. President, I want to express my support for the tax reform bill that is now being considered by the Senate. . . For too long, our Federal income tax system has been too complex and ﬁlled with esoteric provisions beneﬁting special interests. Over and over I have heard my constituents say that the tax system is unfair, that the wealthy are not paying taxes. . . While they dutifully pay their fair share of taxes, others use exotic writeoffs, creative tax shelters, and investment schemes, the vast majority of which are legal, to reduce their tax liabilities. . . (US Congressional Record, 1986a).

The Emergence of the LIHTC The passive loss provision would be replaced by a new ﬁnancial mechanism, the LIHTC. According to the ofﬁcial debate that took place in Congress at

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the time, the LIHTC was originally intended for individual investors – the same wealthy individuals who had beneﬁted from the passive loss provision tax incentives to invest in low-income housing. Thus, the ofﬁcial proposal that emerged in the 99th Congress (1985–1986) was to take away the passive loss provision and replace it with a tax credit. Congress clearly acknowledged at that time that creating such an incentive required they close the passive loss loophole; the Congressional record is clear on this point – that investors should not have both the credit and the passive loss. Such a scenario was referred to as ‘‘double-dipping’’ (US Congressional Record, 1986a). At the time, there was an animated debate in both houses of Congress over removing the passive loss provision, as some members argued that it was unfair to the individuals who had invested in the tax shelters with the understanding of ongoing depreciation beneﬁts. For example, as Senator Mitchell (D-ME) argued: As I believe Senator Packwood is aware, low-income housing is different from other real estate. Low-income housing does not provide cash-ﬂow from rents, or the promise of appreciation on sale. Investors are attracted instead by the return they can receive by offsetting their tax liabilities from other income. This was the understanding they had when they undertook, the investment. Many thousands of investors throughout the country are now in the position of having entered into commitments to provide equity payments in limited partnerships for low income housing on which they will not be able to take their anticipated losses under the committee amendment (US Congressional Record, 1986a).

Senator Cranston (D-CA) echoed this sentiment, linking the issue to conﬁdence in Congressional legislation: In 1981 the tax laws were changed to require the use of 15-year depreciation schedules for real estate. Investors responded to that incentive and bought land, erected buildings, and provided housing and jobs. They created low-income apartments, small shopping centers, ofﬁce buildings and factories. In calculating the return on their investments, they counted on receiving the allowance of depreciation contained in the law at the time. The Senate Finance Committee bill will eliminate a substantial part of those depreciation beneﬁts – wiping out deductions that were pivotal to the economic beneﬁt of the investment. . . Can we get meaningful tax reform without breaking promises made by Congress earlier? (US Congressional Record, 1986b).

In the end, however, the arguments against allowing for both a tax credit and the passive loss provision prevailed, with the clear understanding that it would be simply too much of a giveback to the wealthy. If there was already grumbling among constituents about tax shelters, allowing for the doubledip tax break could become a political bombshell.

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Before further discussion of this moment of institutional innovation, it is important to reiterate a crucial point here: when the Tax Reform Act of 1986 was passed, the LIHTC was, at least according to the debate in the Congressional Record, intended for individuals. In the record of the 99th Congress (1985–1986), the entire passive loss debate centered solely around how to move wealthy individuals from investments that rely on depreciation to those that would use the tax credit. And in our interviews with individuals who were working in the community development industry in the mid1980s, the general consensus was that this legislation was set up to provide incentives for individual investors. As one of our interviewees who was working in the industry at the time put it, ‘‘Nobody thought about corporations [for the LIHTC]’’ (Personal Interview, 2002). Actually, despite this perception among community developers, it is not quite accurate that nobody was thinking about potential beneﬁts for corporations; at least one individual in Congress was thinking about such issues. There is an oddly out-of-place entry into the Congressional Record of the 99th Congress: one of the very last entries into the Record is a statement by Democratic Senator Bennett Johnston (D-LA) that raises some very interesting issues, especially given that nothing is ever mentioned about the corporations buying tax credits under the LIHTC regime in the hundreds of hours of ﬂoor debate recorded before. As if to simply put on public record what no one else in the entire debate over the LIHTC seemed to be willing to say, Senator Johnston begins: Mr. President, I wish to conﬁrm my understanding of the application of the new socalled passive activity loss and credit rule that is embodied in section 501(a) of the conference report to accompany H.R. 3838, the Tax Reform Act of 1986. As I understand the conference agreement: First, rental activity is per se classiﬁed as passive activity; second, income derived from the investment of working capital is characterized as portfolio income; third, C corporations may offset losses from passive activities against income from an active trade or business but not against portfolio income; and fourth, losses from an active trade or business may be offset against income derived from the investment of working capital and vice versa. To assure that my interpretation is correct, I would like to ask the distinguished chairman of the Finance Committee to conﬁrm the accuracy of a number of examples of this rule (US Congressional Record, 1986e, emphasis in original).

The discussion goes on in this fashion for several pages of the Congressional Record, ﬁnally ending with Senator Johnston saying ‘‘I thank the distinguished chairman for his assurances.’’12 There are a couple of things that are noteworthy in this exchange. First, in the debate over whether individuals could receive both tax credits and the passive losses, which took place in June of 1986, corporations are never mentioned. And the perception taken from

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this debate, as noted above, is that the legislation was only intended for individuals. However, it is clear that at least one Senator was willing to go on record explicitly reminding the public that, while passive losses had been eliminated for individuals, corporations would continue to be allowed these beneﬁts under the new provisions.13 Given that this was a recording of a ﬂoor presentation that was entered into the Record, we can safely assume that many others in the Senate understood this as well. Second, although the Democratic Senator does not mention the LIHTC, the repeated references to real estate indicate that this exchange is obviously lodged to register a statement about the so-called ‘‘double-dip’’ tax break that was eliminated for individuals. Third, the repeated questions of scenario after scenario yield a dialogue that appears, at least on paper seem to register his distaste for the fact that ‘‘C-corporations’’ stand to beneﬁt dramatically from this particular shift in the tax code. It is crucial that Johnston’s testimony emphasizes ‘‘C-corporations’’ (with the record placing emphasis on this term). C-corporations are large-scale corporations that can have an unlimited number of shareholders (as opposed to S-corporations, which have a limit of 75 shareholders) and have no limits on passive loss income. Thus, it is clear from Johnston’s testimony that he is addressing an issue that is quite different from the animated passive loss-LIHTC debate that took place in Congress earlier in 1986.

Interest Groups Given the debate and subsequent decision in Congress to eliminate the passive loss provision and replace it with the LIHTC, how was it that corporations would come to beneﬁt from the same double-dip tax break that Congress debated and decided to eliminate? How did a small provision in the tax code established to close one loophole facilitate the ﬂow of billions of dollars into the development of low-income housing across the country? The answer lies, in part, in the fact that a few key interest groups working within the emerging ﬁeld of community development saw the opportunity for corporations that was hidden within the legislation. By capitalizing on the opportunity before them, these institutional entrepreneurs stumbled upon a system that would provide an astounding set of resources for social change. In the years prior to the Tax Reform Act of 1986, an organizational ﬁeld had begun to take shape around the issues of community development and, specifically, low-income housing. In 1979, the Ford Foundation set aside $10 million to fund a nonprofit organization that would have as its mission

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the development of communities through the development of low-income housing. Specifically, this created the LISC, which would work with local nonprofit organizations in a variety of targeted cities in order to develop a network of local CDCs. These organizations, in turn, would serve as the initiator of local development projects with technical training, project, and operating support from LISC in addition to their usual sources of funding: other foundations grants, occasionally dues, fees of various kinds. LISC’s role was to serve as an intermediary between these CDCs and various funders – a role that would become much more important with the enactment of the LIHTC because the amount of dollars under consideration would multiply several times with its enactment. LISC grew quickly in its scope and mission, working as an intermediary between the corporate community, and the CDCs representing local neighborhoods and communities. Today, though largely hidden from public view, LISC is the largest community building nonprofit organization in the United States. In 1982, a similar organization was founded by developer Jim Rouse, The Enterprise Foundation, which also had at its core mission the economic development of local communities. Slightly smaller than LISC and slightly broader in mission – community development through housing and workforce development as opposed to only housing – Enterprise was the other major player working with local CDCs in cities across America. These two organizations and the local development organizations they worked with were very much attuned to the legislative changes coming about (they were lobbying for it), as they sought ways to take advantage of changes in the tax code to develop in inner city communities. When the time was ripe, they would also spawn two new organizations – National Equity Fund (NEF) and Enterprise Social Investment Corporation (ESIC) – which would become the ‘‘syndicators,’’ the clearing houses for processing the massive amounts of resources that would eventually ﬂow from the LIHTC. As a result of these and other organizations like them, there was an organizational ﬁeld in place that was prepared to consume any new political opportunities for the development of low-income housing that emerged from the Tax Reform Act of 1986. But the shift that occurred in 1986 would also require a few key individuals who would take the new legislation that came out of this shift in the tax code and innovate within this new political context. It is clear from the Congressional Record that both Rouse and LISC president, Mitchell Sviridoff, had lobbied Congress in an effort to get this legislation passed.14 Clearly, Rouse and Sviridoff represented an important interest group in the area of community development (i.e., those community development

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organizations that had deep ties to both the nonprofit and the corporate community), and Rouse, especially, having been an immensely successful real estate mogul before turning to philanthropy and community development certainly had significant ties to the corporate community. With an emerging ﬁeld of organizational actors that were increasingly focused on community development through the development of low-income housing, there were a number of players, who were actively seeking out opportunities to shift resources into low-income housing development. The LIHTC was a piece of legislation these individuals were interested in. However, at the time, the appropriate institutions that were necessary for the complex process that would channel corporate dollars into the low-income housing (see Fig. 4) did not exist. Even if corporate accountants were aware of the opportunity the LIHTC presented in terms of a double tax break, corporations were not about to get into the business of low-income housing development and management, which was a necessary part of the process of capturing these tax credits.15 As such, following its inception in 1986, community developers like Rouse, Sviridoff, and others, working with CDCs, turned to individuals to raise money for the LIHTC. However, raising money by convincing individuals to buy tax credits proved very difﬁcult, and it looked like the legislation that was the LIHTC would go nowhere. For one thing, according to individuals working in the community development arena at the time, many were angry with Congress for changing the rules after they had made the investments to take advantage of the passive loss provision. As one industry insider recounted the early years of the legislation, I remember everybody was very, very skeptical. Mainly because most of the [wealthy people] had just gotten burned. . . As part of the ‘86 act, they changed things so you couldn’t take advantage of [passive losses] anymore. So now, what happened is a lot of these people had made investments. . . that would never make money, but they could take tax losses on them. And now they couldn’t take tax losses anymore. So they’re sitting there with this piece of shit building that doesn’t yield any money, and they just threw away 100,000 bucks. . . They were the ones who bought into these limited partnerships—mostly doctors, dentists, CFOs, CEOs. And they’re telling me, ‘‘Bullshit. You’re telling me to invest again? And I’m going to get burned again by the changes in the law by Congress?’’. . . I mean I had one guy that just was so ticked off, he says, ‘‘I got burned, and I’m not doing it again. . .’’ (Personal Interview, 2002).

There were some examples of attempts by ﬁnancial institutions to raise capital through individual funds, but, without exception, all of these experiments failed.16 In early 1987, a group of individuals working in the community development industry in Cleveland began to examine this legislation and realized

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that corporations would be much better suited for investment in this type of tax credit than individuals for a variety of reasons. First, corporate tax liability is much greater than individual liability so the pool of potential resources that could be channeled into low-income housing was much greater. Second, and more importantly, while Congress closed the passive loss loophole for individuals, it did not do the same for corporations, which meant that corporations could receive a double tax break, with the ﬁrst part coming through the buying of tax credits (a one-for-one write-off) and the second, by virtue of this ‘‘investment,’’ coming from the passive loss tax break against the future depreciation of the low-income property. One industry insider recalled this moment of realization, saying, Well, that’s the beauty [of what we did], because if I’m an individual and I buy credits, I only can take the credits. I can’t take the losses. And they were thinking that the market for this were individuals. And then when the corporations started taking it, they had this added other beneﬁt, of taking these losses. Because as a corporation you’re able to take the passive losses associated with the development (Personal Interview, 2002). As Joe Hagan, now President of the NEF, who brokered the ﬁrst tax credit deal, explained: So the ‘86 act was passed, everyone said this tax credit program is something to look at, but most people were convinced that it wasn’t going to go that far. And it was very, very complicated. We do it now like it’s nothing, but at that point in time it was really hard to structure deals. It was Cleveland Tomorrow17 that said, let’s put together a Cleveland equity fund, and let’s ﬁgure out how to get some of our corporations to invest in tax credit deals. And, so, I’m at the state housing ﬁnance agency, and I work closely with Enterprise [Jim Rouse’s organization]. And Enterprise kept telling us, ‘‘listen, the credits come in over 10 years. If there’s a way for us to structure a payment, or structure the payment from the investors over 10 years, we’d get them a better return. But what we need is a bridge loan. We need somebody that’s willing to provide us the money up front, and take corporate investor, take the investor notes and ﬁnance those. . .’’ So we had access to this huge pot of money. And so, I went to our counsel and said, ‘‘listen, can we use this?’’ and they’re saying, ‘‘well, we don’t see why you can’t.’’ So, what I did is I contacted Enterprise [Foundation], worked with them, and developed a bridge loan program, called the Corporate Local Development Loan Program. And we were able to charge an interest rate that was 1/2 of prime. It could actually go down to 0%, but for the most part it was 1/2 of prime. And we would lend the money in, up front; we would take as collateral the investor notes from major corporations. And that really got the ﬁrst couple of investors interested in doing this type of deal (Personal Interview, 2002).

With large tax liabilities, the tax credit made sense for corporations, but on its own, it is basically an even tradeoff with paying taxes to the government (a dollar-for-dollar write-off of tax liabilities). However, by combining

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the credits with book value depreciation of the property meant that corporations could receive the double-dip Congress had explicitly argued against individual receiving: with the passive loss provision still in place for corporations, the opportunity existed to take the tax liability and turn it into an investment for corporations. Over a 10-year period beyond, the credit corporations could yield an additional graduated write-off against future taxes. Hagan estimated that many of the early deals he put together yielded an additional 15% return for corporations in unpaid taxes over the next decade. In other words, rather than simply paying taxes, corporations could basically take that tax liability, ‘‘invest’’ it in low-income housing, and generate something in the order of a 15% return over the next decade. The deal that Hagan describes above is the ﬁrst LIHTC deal that channeled corporate dollars into the development of low-income housing. It is important to note that the institutions that would eventually become central to development of corporate LIHTC deals largely did not exist in 1987. As Hagan points out above, because the credits are graduated in over a 10-year period, in order to make the deals happen, the money must be guaranteed up front by some type of ‘‘bridge loan’’ (as Hagan puts it) or syndication by some type of intermediary organization. In the case of the ﬁrst deal, Hagan and Rouse ﬁgure out a way to use unclaimed money from Ohio Capital (which was underwritten by Standard Oil’s Corporate Foundation). However, once Hagan and Rouse ﬁgured out a way to syndicate the credits to capture corporate dollars, the credits became very enticing for large corporations. In sum, the social actors who were a part of lobbying for the legislation also played a key role in pointing the way toward a new logic around which the organizational ﬁeld would be constituted. Joe Hagan of Ohio Capital and Jim Rouse of Enterprise, among others, ﬁgured out how to build the intermediary institutions that would allow corporations to receive a windfall tax abatement that was explicitly denied individuals when the legislation was passed. In that sense, these individuals played a central role in building the institutions that allow the LIHTC to deliver resources for the building of low-income housing while at the same time providing a windfall for corporations. Hagan and Rouse had feet in both communities: Hagan was working for Ohio Capital at the time of the development of affordable housing but shortly thereafter went on to Bank One to head the bank’s community development division; Rouse was a real estate mogul who had made a huge amount of money in development.18 While these individuals represented interests on both sides of the process, other forces were necessary for the solidiﬁcation of this new innovation. We turn now to the issue

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of institutional selectivity and the ways that innovations that favor powerful corporate actors become locked in place within the political system.

Selectivity and the LIHTC The ﬁrst tax credit deal was brokered by Ohio Capital in 1987, with corporate purchases by Exxon, Bank One and Standard Oil, and backing from Standard Oil’s Corporate Foundation. Out of this innovation sprang an industry. Similar models were successfully set in place by the Enterprise Foundation, LISC, and Fannie Mae, and as the resources began to ﬂow, the CDC movement became the other major beneﬁciary of this provision in the tax code. By the time the then-temporary Credit was up for renewal in 1989, the emerging industry had significant momentum, and powerful interestgroups – from corporations to nonprofit community developers – arose to protect it. Legislators seemed eager to claim that this model of innovation was what they had in mind all along. Indeed, some seemed to go out of their way to state that current practices matched their original intent. As Senator Heinz stated on the Senate ﬂoor in the Fall of 1987: Mr. President, on September 28, the National Temple Nonprofit Corporation of Philadelphia held a ribbon-cutting and ground-breaking ceremony to mark the completion of construction of 20 units of housing for low-income families in north Philadelphia and the beginning of rehabilitation on 12 additional units. This project was ﬁnanced by Fannie Mae, which invested $570,000 in the housing, and by the Enterprise Social Investment Corporation, CIGNA, Mellon Bank, the Ford Foundation, the William Penn Foundation, and the National Trust for Historic Preservation, as well as the City of Philadelphia. This project utilized provisions of the 1986 Tax Reform Act and it is precisely the kind of low-income housing initiative the Congress contemplated in enacting these tax provisions. . . At a time when federal housing funds are particularly limited and our nation faces a continuing erosion of its low-income housing stock, it is important for corporations to step up and use those tools Congress has provided (U.S. Congressional Record, 1987, emphasis added).

The legislative discussion at this point quickly became a model of bipartisan support. This happened for a variety of reasons many of which have been pointed out by Christopher Howard (1997) in his analysis of the ‘‘hidden welfare state.’’19 First, conservatives in Congress who had been pushing to all for the double tax break for wealthy individuals found that they had appeased a much wealthier and much more powerful constituency – the corporate community. At this point, the debate over passive losses quickly fell away, as Republicans realized they had gotten even more than they were originally asking for in their desire to reinstate the passive loss provision.

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But Democrats in Congress also realized that, in an era of declining budgets to HUD, this legislation, which was bringing about a ﬂow of resources into inner city housing projects for, was perhaps the best they could hope for. As Representative Rangel (D-NY) put in 1989, I have for years said that I would rather see direct federal spending to subsidize mortgages and rents for low-income housing since they are more efﬁcient than tax incentives, but since the last administration chose to cut those direct subsidies by 80 percent over the last 8 years I have been compelled to seek support for housing for low-income tenants in the tax code. . . The credit had a slow start after enactment in 1986. However, as the rules became clear and developers and investors began to understand how to use credits production picked up. By 1988 more than two thirds of the credit allocated to the states was used and in 1990 the amount used is expected to be higher. The credits issued so far will assist the development of over 150,000 housing units. With its extension it is likely that the credit will even produce more housing at a greater pace over the next several years (U.S. Congressional Record, 1989b).

Subsequent changes in the industry and in the legislation came quickly. On the community development side, the LIHTC became one of the key resources that allowed intermediaries like LISC and Enterprise to situate themselves at the center of local development deals, providing them an institutional power they never before had. In the mid-1980s, both of these organizations founded new subsidiaries, NEF and ESIC, which would quickly step into the role of syndicating tax credit dollars and managing the funds that these credits would provide.20 In addition, with extra sources of funding injected into the industry, LISC and Enterprise began to work very aggressively with banks as well as corporations in structuring deals. For corporations, the ﬁnancial beneﬁts attached to buying the credits made participation in this program a relatively simple calculus. For banks, however, there was another incentive attached to it, though there were different risks as well. Since 1977, as a way of combating redlining, banks had been under pressure to direct their business to the inner cities in which they had operations. However, they could also receive CRA credit through philanthropic activity in these areas. Most banks worked through these channels, as the conventional wisdom of the banking industry was still that lending in underdeveloped inner city areas was a high-risk proposition. However, with corporate dollars providing free capital and with careful attention by the intermediaries, who now more than ever wanted to protect the investments they courted, banks quickly came around to lending in the inner city. Changes occurred on the legislative side as well. Once the tax credit occupied its position of bipartisan support – conservatives protecting it for the source of corporate welfare it had become, liberals protecting it as the

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primary engine behind the building of low-income housing – agreement and compromise quickly followed in appeasing all constituencies involved. First, through a series of amendments in 1989, the process was quickly deregulated, so that investors (corporations), intermediaries (LISC, Enterprise), and syndicators (NEF, ESIC) could treat the market for tax credits as a true market. This meant that corporations and the syndicators were free to skim off whatever amount of the tax credit the market would bear. In other words, if corporations wanted to negotiate to pay $80 on the dollar per credit, that would perfectly legal; similarly, if a syndicate could structure a deal in which it could skim some amount of the tax credit in fees, that was legal as well. Fig. 6 shows the real value purchase price of tax credits over the life of the LIHTC. This margin is a large source of the revenue for syndicators but also, in many deals, provides extra incentives for corporate investment. Second, two ﬁnancial instruments, one old and one new, became critical to the system that was emerging, as they allowed the corporate investors to reduce any risk exposure they might have had in investing in LIHTC products. The main risk that remained attached to the LIHTC for corporate investors was a rule that mandated that corporations receive the beneﬁt of the credits and depreciation value (passive loss) over a 10-year period. The logic behind this provision was that there would be economic incentives on the side of the investor to ensure that the property would be a viable low-income property at least as long as the ﬁnancial beneﬁts for the corporation were still outstanding. However, this piece of the legislation became a sticking

Real Dollars

Purchase Price of Tax Credits Over the Life of LIHTC 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 1987

Fig. 6.

1989

1993

1997

2000

2001

Selling Tax Credits at a Market Rate. Source: LIHCH Effectiveness and Efﬁciency Report.

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point for corporate investors: what corporation has the personal resources or expertise to manage and oversee investments in low-income properties. As NEF and ESIC emerged to step into the role of syndicators, they also served the purpose, together with their parent organizations, of property assessment, while the CDCs and local developers serve the role of property management. At this point, these organizations began to model their property control after Real Estate Investment Trusts (REITS). The ability to do this was another direct consequence of the Tax Reform Act of 1986, as changes in the tax code allowed REITS to manage their properties directly. Further, because corporations were now technically investing in trusts of low-income property, the relative risk of not receiving the credits or future depreciation write-offs was very low (in other words, the funds allow corporations to spread risk across a portfolio of low-income properties). A second ﬁnancial mechanism has had a shorter lifespan than REITS, but it is no less important in reducing the relative risk for corporations in purchasing LIHTCs. Mortgage-backed securities essentially allow corporations to remain free from long-term commitments to the market, as Fannie Mae, Ginnie Mae, and Freddie Mac are always willing to purchase tax credits from corporations that would like to shift their portfolio of tax liability. A third and ﬁnal issue that touched the legislative realm had to do with capital gains. In 1989, President Bush threatened to veto the renewal of the LIHTC unless Congress agreed to his agenda to end the capital gains tax. Democrats were now in a considerable bind: vehemently opposed to ending the capital gains tax, they were also deeply committed to keeping the LIHTC alive as a program. The compromise that ensued, which was partially brokered by the corporate lobby would deal with the issue of capital gains in a much narrower way: instead of agreeing to eliminate capital gains completely, the compromise reached was that the corporate ‘‘investors’’ in LIHTCs would be exempt from capital gains tax liabilities when they cashed out of the property after 10 years. With this, the corporate lobby had helped mold this legislation into a largely risk-free ﬁnancial mechanism.

DISCUSSION In this section, we draw out the implications of the case described above for the theoretical positions different camps have taken on the issue of policy formation and institutional change. To summarize what we have argued thus far with respect to the case: (1) The passage of the LIHTC in 1986 created a dramatic shift in the way resources were pulled together to build

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low-income housing; the new model of low-income housing development gave rise to an industry built on public–private partnerships leveraging corporate dollars that pass through intermediary organizations (syndicates), which not only guarantee the funding up front but also manage the ﬁnancing of the properties. Corporations, for their part, receive a double tax break that was explicitly denied to individuals in the passage of the legislation. The system effectively channels resources into the development of low-income housing to replace federal funding of Section 8 New Construction programs. However, it is also a (gratuitous) windfall for corporations. (2) In addressing the question of how it came to be that corporations were able to receive the ‘‘double-dip’’ tax break that individuals were denied, we relied on two sources of evidence to understand the emergence of this institution. First, we relied on the Congressional Record to map out the terms of the debate around this legislation; second, we relied on in-depth interviews with individuals who played key roles in putting the legislation to use in the early stages. (3) The Congressional Record is very clear about the decision to not allow individual investors and developers the possibility of receiving both the tax credit and the write-off against depreciation values of the property – the passive loss. (4) However, one part of the Congressional Record, though not part of the debate over the LIHTC/passive loss tradeoff, does make clear that individuals in Congress were aware that if corporations ﬁgured out a way to buy the credit, they would be in a position to take advantage of the ‘‘double-dip.’’ (5) Individuals who were part of the lobbying interest group on the community development side (i.e., Rouse and Hagan) were aware of the possibilities for corporations but still had to overcome the hurdle of creating the intermediary institutions that would underwrite the credits. (6) Once it becomes clear that corporations could indeed beneﬁt from the double-dip, bipartisan support for the system falls into place and there is no further debate about the issue. What does this case reveal about political processes in the era of the declining welfare state? What does it tell us about corporate power in the passage of certain pieces of legislation? Many scholars have examined the question of how state structure and interest group politics inﬂuence the emergence of various policies. Building upon the view that the autonomous state and political institutions are independent causal factors in political outcomes, some political sociologists have focused on demonstrating how particularities of the US political structure play a central explanatory role in policy outcomes (Skocpol, 1985, 1992; Skocpol & Amenta, 1986; Amenta & Yvonne, 1991; Amenta & Poulsen, 1996; Amenta, 1998; Kingdon, 1984; see Clemens & James, 1999 for review) . Taking a more managerial approach to

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policy outcomes, neoinstitutionalists have argued that interest groups and states engage in an iterative process from which new ‘‘conceptions of control’’ and new ‘‘institutional logics’’ emerge (Fligstein, 1990; Dobbin & Sutton, 1998; Clemens, 1997; Guthrie & Roth, 1999; see also Bourdieu, 1990, 1996, 1998 for discussion of institutional logics of emerging ﬁelds). One of the problems with these literatures is that they are often dealing with explicit, high-proﬁle policies for which there are clearly deﬁned debates. Howard (1997) points out that many more obscure policies – such as those in the realm of taxation – are subject to much more covert backroom dealings, if only because they require more specialist knowledge. However, a deeper problem is that both of these literatures ignore critical issues that have been central to the study of political economy, namely class interests and the logic of accumulation. Jenkins and Brents (1991), for example, have argued that state-centric theorists ignore the larger political economy and, specifically, the central inﬂuence of class conﬂict on major social reforms. Pontusson (1991) discusses the ways that organized interests participate in the formation of governmental policy and the ways that governmental policies in capitalist economies increasingly serves business interests (particularly, according to Pontusson’s argument, in regimes where labor is weak). As the role of corporate interests have become more institutionalized as part of the political process in advanced capitalist economies, the corporate class’ inﬂuence over policy formation becomes more and more an endemic part of the political process. Prechel’s (2000, p. 277) theory of political capitalism also argues that, over the course of the 20th century, the institutional arrangement of the capitalist state have grown to be increasingly supportive of business activity. Prechel identiﬁes three core dimensions of political capitalism. First, the business class has the capacity to develop ‘‘a coherent conception of the relationships between their economic goals and the policies necessary to achieve those goals.’’ Second, the capitalist class has the ability to agree on these goals and thus behave like a class. And, third, the capitalist class has the capacity to exercise control over the state in implementing these goals in the form of policy. Essentially, this theory argues that, while it is important to think about the organization of the state and the relative autonomy of the state at different points in time, the state has become far less autonomous from the capitalist class than it has been in the past. According to Prechel (2000, p. 277), ‘‘political capitalism has produced an elaborate state structure that is engaged in more spheres of economic activity to promote capitalists’ agenda.’’

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The policy formation and process of institutionalization of the LIHTC supports this view well. In the era of the receding welfare state, the state has experimented with many different models for leveraging private funding to deliver public goods (see, e.g., Spitzer & Scull, 1977; Hasenfeld, 1985; DeSeve, 1986). As early as the mid-1970s, the state had an agenda in place of cutting back the federal funding for new development of affordable housing and developing incentives for investment from the private sector, and in 1981, there was an explicit effort to put in place the incentives for individuals to become investors in low-income housing. But as the problems of this system became apparent in the mid-1980s, a new approach was put on the table. One of the interesting things about the debate over this new policy was the explicit nature of the discussion over the impossibility of allowing tax-paying citizens to receive both a tax credit and a write-off against passive losses their ‘‘investment’’ might incur. Yet, while the possibility was removed for individuals, the same was not done for corporations. The absence of the discussion of corporations with respect to the LIHTC in June of 1986 might lead one to believe that members of Congress had simply not thought about the possibility of corporations being the investors in low-income housing credits. Indeed, the institutions that would eventually emerge to syndicate tax credits did not yet even exist, and corporations were not likely to get into the business of property development and management. However, in September of 1986, it becomes clear that members of Congress are aware of this potential and that they would thus stand to beneﬁt in exactly the ways that individuals were denied. The more likely scenario is that this process reﬂects the dimensions of political capitalism described above – that corporations had a clear conception of their goals and that they were able to inﬂuence the policy outcomes to achieve those goals. In this case, the goals related to the issues of accounting and taxation and the specific political opportunity was the passage of the Tax Reform Act of 1986. The absence of the discussion of the corporate angle from the political debate suggests the possibility of a backroom political deal that would leave this issue out of the discussion in the debate in June of 1986. In either case, the logic of favoring business’ interests certainly came into play in the aftermath: once individuals like Rouse and Hagan ﬁgured out how to put the ﬁrst corporate–LIHTC deals together, the issue of the ‘‘double-dip’’ tax advantage is never mentioned again with respect to the LIHTC. At this point, the market logic, which favors capitalists’ interests allows the policy to become ‘‘locked in place’’ (Chibber, 2003).

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CONCLUSIONS Today the LIHTC is an institution that is untouchable by either end of the political spectrum, and it has become the model for the leveraging of private funds for public goods.21 It is also supported by a healthy community development industry that has radically transformed the ways that low-income housing is funded and built in urban areas throughout the country. When legislators today discuss the LIHTC, they depict an institution that was forged through close bipartisan negotiation in the pursuit of a solution to the housing crises of the 1970s and 1980s. In 1990, Senator Moynihan recalled the process in the following way: In the 1980s we did begin a low income housing tax credit. As I recall, I offered this as part of the Senate version of what became the Tax Reform Act of 1986. On the House side, my dear friend, Representative Charles Rangel, enriched and enlivened the proposal. In the end we obtained a tax expenditure of $1 billion a year, with an extra helping for New York. The credit was extended in the Omnibus Budget Reconciliation Act of 1989 and continues through the remainder of this ﬁscal year. A lot of money, a billion dollars – per year. An investor in low-income housing receives the credit of a 10-year period, getting a credit equal to 9 percent of his investment each year. This works out to a 70-percent credit, in present value, over 10 years (U.S. Congressional Record, 1990).

Indeed, according to many in Congress, this legislation is often depicted as a transparently crafted piece of bipartisan legislation that came out of a time of acrimonious politics when the Republican-controlled Senate and White House often worked at cross purposes with the Democrat-controlled House. This account, however, is only half of the truth. Congress was very explicit about the need to close the passive loss loophole for individuals, especially given the replacement of this institution by the LIHTC. The double-dip could not be allowed. However, within a year corporations began receiving the very beneﬁt of a double tax break from the purchase of these credits. Was it a mistake as the entrepreneurs watching from the sidelines suggested? Apparently not. The ﬁnal entry into the Congressional Record of the 99th Congress suggests that individuals in Congress knew what was happening, and at least one Democrat was willing to go on record stating such. Congress knew what they were doing – they were providing another brick in the wall toward the privatization of the welfare state, but this time they were also creating the opportunity for an unprecedented windfall for the corporate community. But the formal policy formation was only the beginning; the policy had also to be enacted by organizational actors in society. In 1986, the murky world of politics saw a small provision in the tax code that would

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fundamentally change the ﬂow of resources in community development and constituting it as a new organizational ﬁeld. It would also be a windfall for the corporate community, allowing corporations a beneﬁt that individual citizens were denied. When individuals working in the community development ﬁeld saw the opportunity open before them, they seized upon this opening to produce a new model of resource allocation in support of a much-needed public good. In doing so, they helped to reshape goals of the actors in this ﬁeld. The constituencies that beneﬁted from this new model truly were a bipartisan set of constituencies, and through this support, the institution quickly gained bipartisan support in Congress. In this sense, the implementation of the policy was as important as the backroom politics that produced it.

NOTES 1. 99th Cong. 2nd Sess., 132 Cong Rec S 8132, Vol. 132(86), addressing the issues raised by a new piece of legislation, the LIHTC, a small provision in the Tax Reform Act of 1986. 2. This account comes from two sources – the in-depth interviews we conducted over the course of this research (discussed below) and the Congressional Record on discussions of the LIHTC (see, e.g., ‘‘Remarks by Jack Kemp,’’ Congressional Record – House, 7/11/89, 101st Cong. 1st Sess., 132 Cong Rec H 357, Vol. 135(91)). 3. The qualitative data upon which this chapter is based is part of a larger study on corporate social investment in local metropolitan areas. At the core of the larger study is a national survey of 2,776 corporations with targeted oversamples in Seattle, Cleveland, and Atlanta. The qualitative data gathered were based on interviews conducted with community developers and nonprofit leaders in these cities to develop a deeper understanding of the institutional arrangements in which the corporations we surveyed are operating. 4. We should emphasize here that the case we describe below, comes directly from the data we gained from a combination of the interviews with actors in the ﬁeld and from the Congressional Record. Thus, our data are reﬂected not only in the quotations from interviewees and the Congressional Record but also, more broadly, in the details of the case we describe. 5. While these examples are meant to represent general cases, they are concrete empirical examples that come directly from our ﬁeld research. 6. The program began as a $1.25 per capita allocation. In 2000, that ﬁgure changed to $1.75, and beginning in 2002, increases were pegged to inﬂation rates. 7. NEF and the ESIC, which are the syndicate arms of the LISC and the Enterprise Foundation, respectively, were the earliest models of these types of organizations. 8. To some extent this reﬂects the risk of the investment. The credits are collected incrementally over a 10 year span and the capital is put up in the ﬁrst couple of years.

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Moreover, there is some risk of recapture though no one that we interviewed has heard of a case of complete recapture. Lastly, it seems that models of risk assessment do not really do a good job of assessing the security of the investment because of a lack of understanding of many of the institutions that are key for the investment – such as community development corporations. 9. It is important to note here that the ﬁgure of $5 billion only scratches the surface of what the LIHTC actually means in terms of the ﬂow of resources. In the past, Section 8 New Construction Projects were built almost fully on government direct allocations. The LIHTC acts as initial ﬁnancing that then leverages other sources – usually comprising somewhere between 15 and 30% of the total ﬁnancing of a low-income housing development project – in order to make the ﬁnancing by commercial institutions more attractive. As a result, the resources here provide ﬁnancing that attracts ﬁnanciers that heretofore had little to do with low-income development projects. 10. Many institutions deal in tax credits, though currently Fannie Mae is the single largest holder of LIHTC notes in the United States. Freddie Mac and Fannie Mae were not big players in developing or playing a significant role in the syndication process. However, these two GSEsad became major players with respect to the LIHTC in another way: with the emergence of mortgage-backed securities in the early 1990s (commercial mortgage-backed securities for multi-family homes were ﬁrst issued in August of 1991), Fannie Mae and, to a lesser extent, Freddie Mac began purchasing LIHTCs on the secondary markets as mortgage-backed securities. This is an important innovation, because it makes the market liquid, which, in turn, reduces the risk for corporations who are the holders of LIHTCs. One of the features of the LIHTC is that deals are typically structured so the beneﬁts are graduated in over a 10-year period. The logic here was that ‘‘investors’’ would have incentives to maintain the property, an incentive that did not exist with the passive loss provision. When the market becomes liquid through the securitization of LIHTCs, investors begin buying and selling tax credits on the market. Over the course of the 1990s, Fannie Mae became the largest holder of LIHTCs in the country. 11. Legislative day of Wednesday, September 24, 1986, 99th, Cong. 2nd Sess., 132 Cong Rec S 13782, Vol. 132(129), though submitted to the Senate Congressional Record on 9/26/1986 (U.S. Congressional Record, 1986c). 12. Senator Johnston then goes on for several pages of testimony giving example after example of corporate beneﬁts from the LIHTC (though, notably, without ever mentioning the provision itself), after each statement eliciting a response of afﬁrmation from Senator Packwood: Senator Johnston: First, do I understand that if a closely held C-corporation has $400 in losses from passive activities – such as equipment leasing and/or real estate transactions, $500 in income from an active trade or business – which is not a passive activity – and $100 of portfolio income, the company may offset the $400 in passive losses against the $500 of active trade or business income, leaving taxable income of $200, $100 or which is attributable to the active trade or business, and $100 of which is attributable to working capital – portfolio income. Senator Packwood: The Senator from Louisiana’s understanding is correct. Senator Johnston: If a closely held C-corporation had $400 in losses from passive activities, $500 in losses from an active trade or business, and $100 in portfolio income, its $100 in portfolio income can partially offset the $500 in losses from

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an active trade or business, leaving a $400 loss carry forward from the active trade or business and a $400 passive loss carry forward. Senator Packwood: The Senator is correct (US Congressional Record, 1986e). 13. Corporations have long beneﬁted from passive losses, as it is critical to corporate calculations of depreciation values of operating equipment. When the passive loss provision was set up in 1981, the notion was (1) that real estate would then be eligible for passive loss write-offs, and (2) that individuals would be able to take passive loss write-offs the way corporations could. What changed in 1986 was that this possibility was eliminated for individuals but not for corporations. It is also important to note here that the Senator’s reference to ‘‘C-Corporations’’ is singling out the opportunity that exists here for large-scale corporations. 14. For reference to Rouse and his lobbying efforts, see, e.g., 99th Cong. 2nd Sess., 132 Cong Rec S 8132, Vol. 132(86). For reference to Sviridoff, see ‘‘Comprehensive Tax Reform: Hearings Before the Commission of Ways and Means House of Representatives,’’ 99th Cong. 99–45. pt. 5 of 9, 3769 (Statement of Mitchell Sviridoff, President of LISC). 15. One of the key features of the LIHTC is that the credits graduate in over a 10-year period. The legislation was passed in this way to tie the ‘‘investors’’ (i.e., the holders of the credits) to the property. This was a direct response to the perverse incentives that had emerged when individual invested in low-income property to take advantage of the passive loss provision. It was also based on the logic that the property would stay available for low-income households (60/40 or 50/30 – i.e., 40% of units restricted to tenants with 60% of median income or 30% at 50% of median income). The problem for corporations is that, in order to receive the credits, they would need to be in the business of development and monitoring of the property. 16. The highest proﬁle case of this was a fund that was set up by Boston Capital. This attempt, as with others like it, was abandoned before it got off the ground due to difﬁculties raising funds. 17. Cleveland Tomorrow is a membership organization of the most important local corporations. Participation is limited as much as possible to CEOs. The result of this format is an extremely effective local business organization. When they decide to create an equity fund for housing it happens quickly and is well-funded. The organization has spun off further housing funds as well as organizations that address industrial retention and downtown development and planning. 18. Though Sviridoff was lobbying and operating alongside these two, he was, to some extent, further removed from the corporate community than Hagan and Rouse. A former president of Connecticut’s American Federation of Labor and Congress of Industrial Organizations (AFL-CIO) and professor of social policy at the New School for Social Research, Sviridoff came to the ﬁeld with fewer ties and fewer interests in the corporate community. However, Sviridoff was a former ofﬁcer of the Ford Foundation and was the ﬁrst president of LISC, which was largely established to be an intermediary between the corporate and nonprofit communities. 19. As Howard (1997) argues, the hidden welfare state is composed of indirect tax expenditures. These expenditures total up to fully half the total value of direct social policy expenditures. Rather than growth being dependent upon activist electoral coalitions and well-organized interest groups that are attuned to the United States

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political structure, the hidden welfare state operates under the radar of many politicians and interest groups. The politicians that consistently block direct social expenditures often support indirect tax expenditures, and the appeal of these expenditures often crosses the aisle. Republicans see it as minimizing the role of government and working with markets to achieve other goals, Democrats see the policy result as worthwhile. As a result, indirect expenditures can grow even in periods without ‘‘reform-oriented regimes’’ (Amenta, 1998). These expenditures are often attached to revenue bills and, therefore, often become law with minimal discussion. The discussion that happens takes place in one committee each in the Senate and the House (Finance, and Ways and Means). Further, these expenditures are rarely advocated for by powerful interest groups, but they tend to generate an interest group composed of the third-party providers that are responsible for social provision in the system. Therefore, once these policies are enacted they can become progressively more difﬁcult to reduce or eliminate. In a related vein, indirect expenditures tend to take on a life of their own. They are able to grow despite consistent opposition from the relevant bureaucracy: the Treasury. Aside from the Treasury, criticism is often weak because the expenditures are poorly understood. 20. 20. NEF was founded in 1987; ESIC was actually founded in 1984, but its syndication work began in 1987. ESIC and NEF would emerge as the primary syndicate organizations of LIHTC deals for the next decade. 21. The New Markets Tax Credit (NMTC), which was passed in 2000 as part of the Community Renewal Tax Relief Act (United States Congress, 2000), is a more general form of the LIHTC and was successful in Congress largely because of the extent to which the LIHTC is coveted by partisans on both ends of the political spectrum. The NMTC is for commercial not residential properties. Developers like them because they can be combined in the same project with LIHTC. So if you have an area that has a zoning requirement for ground-level commercial space you can use New Market credits for the commercial space and combine them with LIHTC credits for the residential. In the absence of this developers would have a significant portion of the deal without the beneﬁts of credit, making it more difﬁcult to raise capital.

ACKNOWLEDGMENTS Research for this paper was funded through a grant from the Ford Foundation, with additional support provided by the Social Science Research Council. We thank Philippe Darbouze and Ellen Chan for research support. We also thank Woody Powell, Neil Fligstein, members of the European Group on Organizational Studies (EGOS) track on organizations and institutions, and members of New York University (NYU’s) Power, Politics, and Protest workshop with special thanks to Miriam Ryvicker, Mildred Schwartz, Jeff Goodwin, Aaron Panofsky, Neil Brenner, and Annette Lareau.

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NO ROOM FOR COMPROMISE: BUSINESS INTERESTS AND THE POLITICS OF HEALTH CARE REFORM Patrick Akard ABSTRACT This study examines the role of business coalitions in the rise – and demise – of health care reform in the early 1990s. Rising costs motivated major business purchasers of health care to support significant changes. Political coalitions reflected intra-class tensions among sectors of business, insurers, and health care providers over the issue of reform. Fragmentation of the old anti-reform coalition created opportunities for new legislation, culminating in Clinton’s proposed Health Security Act. However, a striking feature of health care politics from 1992 to 1994 was the rapid shift in the political alignments of the business community. From intra-class conflict and significant business support, the situation changed to one of near unity among business groups in opposition to reform. I examine four factors that shaped the changing trajectory of business interests on health care reform in this period: (1) the ambivalence of corporate supporters of reform toward an expanded government role; (2) the promotion of ‘‘managed competition’’ as an ideological framework for attracting business support; (3) the effect of the Clinton proposal in raising business Politics and the Corporation Research in Political Sociology, Volume 14, 51–105 Copyright r 2005 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN: 0895-9935/doi:10.1016/S0895-9935(05)14003-0

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fears of state expansion; and (4) intensive lobbying by the hard opposition of small insurer and business groups. In the end, most ‘‘big business’’ organizations joined the opposition, and business unity was restored around an old enemy: fear of ‘‘big government.’’ This case study demonstrates several mechanisms of business influence on the policy process, the historically contingent character of business interests and business unity on a particular policy issue, and the limited tolerance for government expansion by even ‘‘moderate’’ business groups in the U.S. by the 1990s.

INTRODUCTION On September 22, 1993, President Clinton unveiled his proposal for national health care reform in a televised address before a joint session of Congress. The Health Security Act sought to guarantee health insurance to every citizen through a major reorganization of the system. It was an audacious proposal. Though universal health insurance was provided by every other advanced industrial nation, efforts to establish such a system in the U.S. had failed repeatedly. Moreover, Clinton’s proposal would entail a significant expansion of government after more than a decade of conservative retrenchment. It would also be a massive endeavor, affecting 1/7 of the U.S. economy – and many powerful economic interests. History suggested that the odds for success were slim. However, by the early 1990s, conditions seemed to favor a major change in direction. Soaring health care costs, declining coverage, and the anxieties created by recession and economic restructuring fostered widespread public sympathy for reform. Public opinion, which had consistently favored government-backed health care reform, grew even more favorably disposed (Brodie & Blendon, 1995, pp. 403–404; Jacobs & Shapiro, 1995). More significant, the formidable coalition of insurers, medical providers, and business interests that had opposed major reform in the past was fragmenting under the pressures of rising costs and rapid changes in the ‘‘medical industrial complex’’ (Peterson, 1993). Most encouraging for advocates of reform was the growing demand for action by major sectors of the business community. Any discussion of health care in the U.S. had to consider the role of business, given its unique system of private, employment-based health insurance. For the majority of the nonpoor population under 65, health insurance is obtained through work.

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‘‘Business’’ – from the largest corporations to small local ﬁrms – is intimately involved in both the purchase and provision of health care. And business was worried about health care by the early 1990s. Large corporations had been fretting overescalating costs since the 1970s. Many had already taken action by tightening coverage and extending greater oversight over their own health plans. But these measures seemed to have little effect, as health care costs rose at an annual rate of over 12 percent from 1980 to 1990, twice the rate of inﬂation (Verespej, 1992). A 1991 survey of Fortune 500 executives found that 80 percent favored ‘‘fundamental changes’’ in the health care system. A majority felt that the government would have to take a more active role, and one third of the respondents even favored a public health insurance system (Martin, 1993, p. 369; Cantor, Barrand, Desonia, Cohen, & Merrill, 1991). Nor was this an exclusive concern of ‘‘big business.’’ A significant percentage of small businesses also insured their workers, and their premiums averaged 30 percent more than those in the corporate sector (Judis, 1995). By early 1992, small business owners overwhelmingly cited soaring health care costs as their number one problem, according to separate surveys by the National Federation of Independent Business (NFIB) and the National Association of Manufacturers (Miller, 1992). By the election year of 1992, major health care reform appeared increasingly likely. After the election, it seemed all but certain. Health care was a central campaign issue for Bill Clinton, and he would be working with a Democratic Congress. Major business organizations endorsed the effort. Even significant segments of the health care industry were supportive. And public support for government-sponsored health care reform had never been higher. Two years after the election, and almost exactly one year after Clinton’s widely praised speech, health care reform died in Congress without a vote being taken on the ﬂoor of either Chamber. By that time, a majority of business groups had united to oppose reform, as in the past. A few months later, Republicans would take control of both Houses of Congress for the ﬁrst time since the 1940s in an historic mid-term election landslide. There have been few more dramatic reversals in the history of U.S. politics. Analysts have provided numerous explanations for the failure of Clinton’s health care initiative. With hindsight, it is easy to conclude that the outcome was ‘‘overdetermined’’ by a number of political, ideological, and institutional factors.1 Several of these will be noted below. But this study will focus on the role of business interests in this process. More specifically, I situate both the emergence of the reform effort, and its ultimate defeat, in the changing political alignments among business groups from

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1992 to 1994. Business support was crucial for the success of health care reform. At the outset, intra-class conﬂicts among business groups created opportunities for major policy innovation, where they had not previously existed. However, the alignment of political forces shifted during the course of the 2-year debate. From a condition of intra-class conﬂict and significant business support for reform, the situation changed to one of unity among business groups in opposition to the reform effort. I examine three major factors that account for the changing trajectory of business preferences in this period. The ﬁrst was the emergence of ‘‘managed competition’’ as an orienting framework that attracted corporate support for reform in the early 1990s. Given their general animus toward government, what pro-reform business groups sought was a relatively painless solution to the health care crisis that would contain costs with minimal expansion of state control. In the early stages of the debate, such an ideal was provided by a group of ‘‘policy entrepreneurs’’ associated with the Jackson Hole Group. This organization of health policy experts, large insurers, health providers, and big business representatives championed a model of ‘‘managed competition’’ that utilized market forces to rationalize health care provision as an alternative to increased government regulation. The promise of a ‘‘market’’ solution helped draw ambivalent corporate interests into the reform effort. The second factor shaping the business position on health care reform was the introduction of Clinton’s proposal in late 1993. In developing its approach to reform, the Clinton administration also appropriated the language of ‘‘managed competition.’’ But Clinton’s complex proposal actually called for a mixed system that combined elements of the Jackson Hole approach with a greatly expanded role for government. Once the Clinton plan was introduced it became the center of debate, determining the political environment in which feasible alternatives were deﬁned. Its call for mandatory health insurance coverage by all employers, and its expanded regulation of health care provision, generated ﬁerce resistance by organized opponents with an interest in the status quo. But the administration proposal also triggered a shift in the position of business groups that originally supported reform. Major business organizations began to back away as the Clinton plan was gradually unveiled, and ‘‘acceptable’’ compromise appeared increasingly unlikely. The administration proposal was eventually deﬁned as a threat to corporate autonomy, locking corporate employers into new economic responsibilities while shifting control to state or quasi-state institutions. The rejection of Clinton’s health care proposal by ‘‘big business’’ was the key turning point in the debate.

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This assessment of the Clinton proposal reﬂected the general skepticism toward government held by most corporate leaders that had intensiﬁed in an era of ‘‘neoliberal’’ politics. It was also reinforced by the third factor emphasized below: the political mobilization by the ‘‘hard opposition,’’ particularly by lobbying groups representing smaller business and insurers. This well-organized opposition significantly shaped the debate at each stage of the policy process, inﬂuencing public opinion, the perceptions of Congress, and the positions of the major ‘‘pro-reform’’ business organizations. Ultimately, fears of the regulatory elements of the administration proposal united business groups against an old common enemy – ‘‘big government’’ – overriding their intra-class conﬂicts of interest over health care provision. The outcome demonstrates the narrow limits of state-sponsored social provision in the contemporary U.S., even when a policy has strong popular support.

BUSINESS, POLITICS, AND HEALTH POLICY IN AN ERA OF RETRENCHMENT Conditions that threaten the perceived interests of business are likely to call forth a political response by organizations with the resources to respond (Akard, 1992). Some actions are internal to particular ﬁrms, such as changes in investment strategy, the organization of production, or labor relations. But other efforts are undertaken to alleviate pressures in the organizational ‘‘environment’’ – including those directed toward state policies (Prechel, 1990, 2000). The general inﬂuence of business over the political process in the U.S. has been well documented at a number of levels. Large corporate interests often have superior economic and organizational resources for direct inﬂuence on the policy process in comparison to other ‘‘interest groups’’ (Domhoff, 1990, 2002; Vogel, 1989; Akard, 1992; Clawson, Neustadtl, & Weller, 1998). In addition, the indirect ‘‘structural’’ power of capital often shapes and constrains policy options. This refers to the relative prominence of business interests due to private control of investment decisions in a capitalist economy. Individuals, communities, and governments depend on these decisions for jobs, economic growth, and votes. Lawmakers tend to avoid policies that threaten to call forth an ‘‘investment strike’’ by shaking ‘‘business conﬁdence’’ (Lindbloom, 1977; Offe, 1984; Block, 1987; Jessop, 1990). This ‘‘veto power’’ is enhanced by the particular fragmented and

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decentralized institutional structure of the U.S. state, and a legacy of ‘‘market’’-oriented policy and ideology. But it is always necessary to go beyond such general observations on corporate power when considering specific cases of policy formation. The ‘‘power of business’’ over the policy process is dependent on the political, economic, and ideological conditions that exist at a particular historical conjuncture. Political struggles must always be analyzed in historical context. In this regard, the struggle over health care policy in the early 1990s should be understood in the larger context of political and economic restructuring in the U.S. from the 1970s. The trajectory of public policy over the previous 15 years favored the reduction of state capacities to intervene in market outcomes. Most corporate interests had supported this ‘‘neoliberal’’ project. In the late 1970s and early 1980s, major sectors of capital, ‘‘big’’ and ‘‘small’’ business, came together to support a major restructuring of the economy, part of which included the reduction of taxes, regulatory power, and other state capacities that interfered with business autonomy or ‘‘ﬂexibility.’’ ‘‘Business unity’’ over economic policy in the early 1980s would collapse soon after over specific policy disputes between sectors of capital. But the overall trajectory of U.S. economic and social policy was one of steady reduction of state capacities in favor of ‘‘market’’-driven outcomes. However, the ‘‘interests of capital’’ in relation to state policy are not constant, but vary with changes in the political or economic environment and the particular issue in question. Business groups often favor minimal government interference with ‘‘market’’ processes. But some conditions generate demands for an expanded government role to protect the interests of particular ﬁrms or industries, or to stabilize the overall political or economic environment (Prechel, 1990, 2000; Glasberg & Skidmore, 1997). While most business leaders in the U.S. are ideologically opposed to ‘‘government intervention’’ (Vogel, 1978), they are not adverse to using government to protect their particular economic interests, e.g. through favorable tax preferences, federal subsidies or bailouts, trade protection, or even the limited regulation of particular industries. Further, changing economic conditions often undermine existing institutional arrangements, fostering new policy preferences and political coalitions. The global economic restructuring that began in the 1970s may be seen as a breakdown in the postwar ‘‘social structure of accumulation’’: the ensemble of political, social, and cultural institutions that allow for periods of relatively stable growth (Gordon, Edwards, & Reich, 1982).2 From this perspective, the contradictions of the ‘‘Keynesian Welfare State’’ and the postwar capital–labor accord in core industries represented the decay of the old postwar order under

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pressure of a rapidly changing global economy. Periods of economic change and instability generate ‘‘exploration’’ – a search for new strategies, policies, and organizational forms that will recreate conditions for profitable accumulation (Gordon et al., 1982, p. 11; see also Prechel, 2000, p. 14). Under such conditions of uncertainty, there are often crucial moments of historical contingency when the ‘‘objective interests’’ of political actors are unclear, and different paths are possible. Such situations call forth the political and ideological mobilization of competing groups to define the ‘‘interests’’ of major actors. In this broader context of political and economic transition, debates on the health care crisis emerged. For most people, health insurance was linked to employment. The rapidly changing nature of work, and relations between labor and capital, created anxieties about the future of health insurance coverage. For business, rising costs and economic uncertainties generated competing efforts to construct the ‘‘big business’’ position on health care policy in the early 1990s (Martin, 1993; Mintz, 1995, 1998; Wilson, 1996).

Intra-Class Conflicts and Political Realignment in the Health Care Field The degree to which various sectors of business are unified in their policy preferences is also an historically contingent variable (Vogel, 1989; Prechel, 1990; Akard, 1992). In a market economy there are always conﬂicts of interest between particular ﬁrms, industries, or even economic sectors over a variety of issues. Whether these intra-class conﬂicts will be transcended by a ‘‘class-wide’’ political orientation depends on the extent to which class-based conﬂicts of interest predominate, and mechanisms for uniting various business interests exist, in a particular historical conjuncture (see for example, Useem, 1984; Vogel, 1989). ‘‘Business unity’’ is a significant issue in policy formation. The political advantages of business are reinforced under conditions that foster intra-class cohesion among sectors of capital. Conversely, the fragmentation of corporate interests can create opportunities for policy change that would not be possible in the face of a uniﬁed business opposition. By the early 1990s, rapid changes in the overall economy as well as the structure of health care provision undermined previously existing patterns of interest among business sectors. These changes led various groups to redeﬁne the problem of health care for business, and build new political coalitions to inﬂuence the policy process. In the early stages, political efforts focused on the state level (see Immershein, Rond, & Mathis, 1992), but by

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the late 1980s corporate political coalitions began to target national health policy as well (Bergthold, 1990; Martin, 1993). Business interests in health care reform were not uniform in this period. A crucial feature of the changing political landscape were the intra-class conﬂicts that fragmented the traditional anti-reform lobby, realigning political coalitions over health care. This situation contrasted with the relative unity of business groups over economic and regulatory policy in the early 1980s. Earlier uniﬁed political action by business contributed to the reduction of state power over private economic decisions (Useem, 1984; Vogel, 1989; Akard, 1992). But in this case, intra-class conﬂicts among segments of capital were seen by many reform advocates as an opportunity to expand state capacities for health care provision. For this reason, the conditions of the late 1980s and early 1990s created contradictory interests for business purchasers of health care, which was reﬂected in their ambivalence about solutions to the problem. This ambivalence resulted from their strong interest in containing health care costs on the one hand, and their fears of increased state intervention on the other. To a great extent, the problems of the health care system reﬂected the failure of the ‘‘market’’ in health care and the limitations of private responses (even by the largest corporations). Contrary to the general trajectory of U.S. policy, significant health care reform would likely require the expansion of government. But any major restructuring that increased government control or reduced business ‘‘ﬂexibility’’ was also a potential threat. Business support for health care reform was conﬂicted as a result. In addition, while most corporate advocates of reform acknowledged the need for an expanded state role, various business coalitions disagreed on the extent of government control required to address the problem. This reﬂected the different structural positions – and ideological orientations – represented in the various business organizations favoring reform. The ambivalence of corporate reform advocates contrasted with the unambiguous position of the ‘‘hard opposition’’: those groups actively opposed to significant reform. This included coalitions of small business organizations, small- and medium-sized insurers, many health care providers, and ideological conservatives. Major corporations with holdings in the hotel or restaurant industries or other service sectors were also strongly opposed to the reform effort. These groups saw the reform proposals of the early 1990s as threatening their economic interests and, in some cases, their very existence. Unrestrained by the ambivalence of the corporate advocates of reform, this organized opposition would exert considerable pressure on public opinion, on Congress, and on ‘‘big business’’ itself, in the period

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under examination here. They could also build on the established trajectory of neoliberal retrenchment that dominated public discourse and had become institutionalized in U.S. policy. Reform advocates, on the other hand – including those in the business community – would be bucking this political and ideological tide.

BUSINESS COALITIONS AND HEALTH CARE REFORM: 1990–1992 Intra-Class Conflicts of Interest The structure of health care provision in the U.S., combined with changing economic conditions from the 1970s, created increasing strains in the system. But these pressures were not the same for all sectors of business. A significant effect of these changes was the intensiﬁcation of intra-class conﬂicts of interest among segments of business over the issue of health care. This occurred along several dimensions. One of the most basic conﬂicts was that between business purchasers of health care and health insurers or providers. In the postwar period of high growth and stable profits, this structural conﬂict of interest was muted. As business conditions grew more competitive and less stable from the 1970s, rapid cost increases became increasingly burdensome for businesses that provided health beneﬁts. This moved many major corporations to act. Internally, this involved taking a more active role in the oversight and management of their health care plans. Outside the ﬁrm, corporations began to organize politically in an effort to shape health policy at the state and, eventually, the federal levels. In the words of Willis Goldbeck, president of the Washington Business Group on Health (WBGH), the initial step in the development of corporate political consciousness on health care was to ‘‘break business away from the providers’’ (Bergthold, 1990, p. 43) – i.e. acknowledge and act on this intra-class conﬂict of interest. This wedge between corporate purchasers and providers of health care created an opening for reform efforts by the early 1990s. The corporate share of overall health care costs had been rising steadily since the 1970s. By 1989, spending on health care by employers averaged 8.3 percent of wages, up from 2.2 percent in 1965. By 1991, businesses were spending an average of $3,573 per worker on health insurance – an increase of 13 percent from the previous year (Martin, 1993, p. 368; Levit, Lazenby,

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Letsch, & Cowan, 1991). Significantly, these health care costs were not distributed equally. Rising costs hit hardest those ﬁrms that provided generous beneﬁts to their employees. This was most likely in large manufacturing sectors, transportation, and utilities (Pear, 1993b). Not only were these ﬁrms hit directly by medical inﬂation; they were victims of cost shifting as well. Those providing insurance paid higher premiums to cover the medical costs of the uninsured, uninsured family members of employees, or underfunded recipients of Medicare or Medicaid beneﬁts. Cost shifting was the major reason many large corporations began to favor an employer mandate – a requirement that all ﬁrms provide health insurance for their employees. They felt that such a requirement would spread the costs of health care more equitably and force ﬁrms not currently covering their workforce to take responsibility for them. Cost-shifting created a significant intra-class conﬂict of interest within the business community between ﬁrms, industries, and sectors that provided health beneﬁts and those that did not. Because the majority of uninsured workers were located in small businesses, this tension was often portrayed as a rift between ‘‘big business’’ and smaller ﬁrms. This generalization is not entirely accurate, however. Many small businesses provided health insurance and were paying exorbitant rates. And some of the largest corporations owned restaurant chains (PepsiCo), hotels (Marriott), or retail outlets (Sears) that did not provide insurance for all their employees. Further fragmentation of elite interests was occurring among health insurers and providers. In the past, the political strength of insurers and provider organizations like the American Medical Association (AMA) or the American Hospital Association (AHA), and their common interest in resisting government expansion into the health care realm, had kept the antireform coalition relatively solid. However, by the early 1990s, rapid changes in the health care market had fragmented provider interests as well.3 The emergence of managed care and other changes in the structure of insurance and delivery had created a rift between physicians and private insurers. Further, the health insurance industry itself was beginning to split into factions. The largest companies had begun to move into managed care in the 1980s. Recognizing that change was inevitable, they utilized their capital and expertise to invest in, or create, new mechanisms for health care delivery such as ‘‘health maintenance organizations’’ (HMOs). This put them at odds with the majority of smaller insurers, who lacked the capacity to move in this direction and had an interest in maintaining the existing system of profitable ‘‘cherry-picking’’ (Hacker, 1997, pp. 59–60; Stone, 1994). This growing schism would eventually lead the ﬁve largest health

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insurers – CIGNA, Aetna, Metropolitan Life, Travelers, and Prudential – to leave the Health Insurance Association of America (HIAA), the major industry lobbying group, and form their own organization, the Alliance for Managed Competition (Kosterlitz, 1993; Stone, 1994). The possibility that at least some sectors of the medical profession, some of the largest insurers, and (especially) ‘‘big business’’ were more open to major change fostered hope for many proponents of health care reform (Peterson, 1993; Martin, 1993).

Early Corporate Activism: The Washington Business Group on Health In response to the rising burden of health care costs, a number of business organizations began to address the problems of the health care system. One of the earliest and most prominent corporate health care associations was the WBGH. The WBGH had started in 1973 as a health task force created by the Business Roundtable. It soon became an independent organization (though with close ties to the Roundtable) under the direction of Willis Goldbeck. The WBGH fostered a more active corporate role in managing health care costs at the ﬁrm level, and it sought to develop an institutional base for corporate political input into health care policy at the national level. As noted, Goldbeck felt this required that corporate purchasers of health care acknowledge their divergent interests from providers (though providers were also represented in the Group). Representatives to the WBGH were primarily beneﬁts managers of major corporations, who were especially attuned to the growing contradictions of health care provision (Bergthold, 1990). The organization pushed corporate members to become more active and informed purchasers of health care rather than simply passive buyers of services. As part of this more aggressive approach in the 1980s, large corporate employers ‘‘self-insured, raised deductibles and copayments, adopted utilization review, altered beneﬁt design, and switched to managed care plans’’ (Hacker, 1997, p. 54). As the leading big business organization on health care, the WBGH would play an active role in the debates of the early 1990s. In February 1991, Mary Jane England, a former Vice President at Prudential, replaced Goldbeck as President of the WBGH. Under England, its emphasis would be on employer-controlled managed care to improve efﬁciency, combined with other measures such a malpractice and insurance market reforms and centralized information systems. England noted ‘‘what employers are doing to solve the health care problem is unknown in

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Washington,’’ and these innovations needed to be announced to policymakers. She also stated ‘‘Reform that will minimize the level of government control is not incompatible with a national reform strategy’’ (Woolsey, 1991). This reﬂected a shift of emphasis from the organization’s support for regulatory measures in the 1980s under Goldbeck.4 The WBGH represented one ‘‘big business’’ approach to reform: corporate-led innovation in health care delivery, with government providing the legal prerequisites (e.g. insurance market or malpractice reforms) but little direct regulation.

The National Leadership Coalition for Health Care Reform A more interventionist response was proposed by the National Leadership Coalition for Health Care Reform (NLC), which included representatives of major corporations, along with labor and other interest groups. The NLC originated in 1986 as the National Leadership Commission on Health Care Reform, a blue-ribbon panel of business leaders, representatives of organized labor, and health policy experts funded by the Pew Foundation. In 1989, the Commission issued an inﬂuential report, For the Health of a Nation (NLC, 1989), in which it supported a version of the play-or-pay plan circulating around Washington policy circles.5 Rather than disband after issuing its ﬁndings, the Commission was transformed into a permanent organization, the National Leadership Coalition, under the direction of Henry Simmons. Early participants included Bethlehem Steel, Ford, Chrysler, Southern California Edison, Dayton Hudson, Georgia Pacific, International Paper, the Merideth Corporation, Northern Telecom, Southwestern Bell, Pacific Gas and Electric, Safeway, Time-Warner, Westinghouse, Xerox, and Lockheed, along with a number of unions. Even former presidents Gerald Ford and Jimmy Carter added their bipartisan support to the NLC (Martin, 1993, p. 378; Garland, 1991b; Rich & Swaboda, 1991). The NLC presented a detailed plan for national health care reform in the fall of 1991, which favored a play-or-pay approach that mandated employers to provide insurance for their workers or pay a payroll tax into a fund for public insurance. It also recommended a federal board that would set an annual ceiling for national health spending and set physician and hospital reimbursement rates (Garland, 1991b; Rich & Swaboda, 1991; Martin, 1993).6 The NLC would be an important catalyst for health care reform in the early 1990s and the most consistent corporate supporter of Clinton’s plan. It was the business coalition most open to interventionist measures by the

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government. But it would be unable to expand its scope much beyond its early membership, and in fact it would lose members over its interventionist stance. It was especially unsuccessful in soliciting small business participation, mainly due to its support of mandatory participation by employers (Martin, 1993, p. 380).

The Chamber of Commerce and Health Care Reform The U.S. Chamber of Commerce was a large umbrella organization that included Fortune 500 corporations as well as many small ﬁrms. While the national organization was often seen to be dominated by its ‘‘big business’’ members, the Chamber was also very dependent on the support of its state and local chapters, which were much more attuned to the needs of their small business constituents. Given its very diverse membership, it was often difﬁcult for the Chamber to formulate detailed policy proposals ‘‘at the top.’’ On the other hand, its broad-based state and local membership gave it considerable political clout in its capacity to mobilize targeted ‘‘grassroots’’ support or opposition on a particular issue. In spite of the organizational obstacles, the Chamber of Commerce began to formulate its own position on health care reform by the early 1990s. The Chamber had long been known for taking knee-jerk, anti-government positions on any policy issue, and it had been an important member of earlier coalitions opposing national health insurance. But at this time, it began to moderate its stance in an attempt to increase its inﬂuence in Washington. In 1991, Chamber President Richard Lesher named William Archey as its top lobbyist. Archey was known as a pragmatist who was less driven by antigovernment ideology than past ofﬁcers. Around the same time, the Chamber formed a subcommittee to investigate escalating health care costs, headed by Robert Patricelli, CEO of Value Health, Inc. Two-thirds of the Chamber membership provided health insurance for their employees. These ﬁrms were being squeezed by escalating premiums, and also by their competitors who did not provide insurance. Patricelli’s committee was composed primarily of health care purchasers rather than representatives of insurance or pharmaceutical companies (Judis, 1995, p. 66). Patricelli’s committee reached the conclusion that there was only one way to control costs while maintaining a system of private, employment-based health insurance (there were few supporters of a Canadian-style single-payer approach in the Chamber). A universal system of coverage was necessary to reduce cost shifting, which in turn required an employer mandate.

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The committee recommended a mandate for all ﬁrms to provide insurance for their employees and pay 50 percent of the cost. By early 1993, as the new Clinton administration was taking ofﬁce, the Chamber’s board of directors voted unanimously to support the subcommittee’s proposal (Judis, 1995; see also Thompson, 1993). It appeared that an important segment of the business community would support universal health insurance through mandatory workplace coverage of all employees.7

Organizing Resistance: The NFIB and the Formation of HEAL The building momentum toward some type of health care reform, and the specific proposals for increased government intervention by the NLC and other business organizations, generated a countermovement by interest groups representing small business and health care providers. One organization that grew increasingly concerned over the direction of health policy discourse in the early 1990s was National Federation of Independent Business (NFIB). Unlike the Chamber of Commerce, the NFIB membership did not include public corporations. Its 600,000 members were typically smaller and much less likely to insure their employees than members of the Chamber. For the NFIB, an employer mandate requiring all ﬁrms to provide health insurance for their employees was seen as particularly threatening. Many large corporations favored a mandate to reduce cost shifting. Many small businesses, on the other hand, saw a mandate as a threat to their (much narrower) profit margins, and perhaps to their very existence. In the fall of 1991, in part as a response to the proposals of the NLC, a coalition of small business groups joined with an association of big insurers and health care providers to form the Healthcare Equity Action League (HEAL), a coalition organized ‘‘to ﬁght the trend toward national reform’’ (Martin, 1993, p. 381; also Rich, 1991; Borger, 1992). HEAL was formed by the merger of two broad groups with fairly different interests. One faction consisted of small business organizations – including the NFIB, the National Association of Wholesale Distributors, the Food Marketing Institute, and the National Restaurant Association. The other was represented by yet another coalition – the Health Care Leadership Council – an organization of large insurers, pharmaceutical ﬁrms, and for-profit hospitals ‘‘dedicated to keeping government interference in the health care system to a minimum’’ (Kosterlitz, 1993, p. 2123). What brought them together was their common interest in blocking government expansion into health care.

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THE JACKSON HOLE GROUP AND THE EMERGENCE OF ‘‘MANAGED COMPETITION’’ Conservative and liberal critics alike agreed that health care in the U.S. came nowhere near operating according to the laws of the ‘‘market.’’8 But they disagreed sharply on the needed policy response. Market conservatives called for a more consistent application of market principles and economic ‘‘efﬁciency’’ criteria. Progressive critics acknowledged that increased competition among providers might reduce the effects of oligopoly by the ‘‘medical cartel.’’ But they rejected the overall logic of the ‘‘market’’ – particularly the logic of profit and effective demand – when applied to public goods like basic health care. They tended to apply ‘‘equity’’ or ‘‘usevalue’’ criteria when evaluating social policy. From the 1970s, however, the logic of neoclassical economics would dominate health policy discourse (Hacker, 1997). In this context, one innovative response to the ‘‘market failures’’ of the health care system was a new model for health care delivery, the HMO. Pioneered by physician Paul Ellwood in the early 1970s, the HMO was based on a different rationale than traditional fee-for-service medicine. Here ‘‘patients pay in advance for the delivery of comprehensive care through an integrated network of providers’’ (Hacker, 1997, p. 46). Theoretically, in such a system of ‘‘managed care,’’ the interests of patients, insurers, and health care providers would converge on preventing illness – ‘‘health maintenance.’’ When combined with the idea of competition between such plans, this model would become the basis for ‘‘managed competition.’’ Beginning in the 1970s, a group of health policy experts led by Ellwood and Stanford economist Alain Enthoven reﬁned the concepts of managed care and managed competition. They began holding regular conferences at Ellwood’s residence in Jackson Hole, Wyoming. Eventually, this network of policy experts, health insurance executives, and big business representatives would come to be known as the Jackson Hole Group (Hacker, 1997; see also Cohn, 1992; Toner, 1993). As the Jackson Hole model evolved, several features emerged that would inﬂuence later debates. One key element was an employer mandate. Like the NLC, the Chamber of Commerce, and other reformers seeking to preserve private insurance, the Jackson Hole theorists concluded that the only way to control costs while preserving our employment-based system was to provide universal coverage, which required universal participation by employers. Another innovative proposal called for the creation of health insurance purchasing cooperatives (HIPCs) that would pool smaller businesses

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together to spread risks and improve their bargaining power to purchase health insurance at more competitive prices. Workers in small ﬁrms would be covered through these purchasing alliances, or HIPCs (see Abramowitz, 1992). The key to controlling costs for the Jackson Hole analysts was competition between health care plans offered by insurers and providers. Different plans would compete for customers by offering up-front prices for a uniform package of beneﬁts. Competition would encourage more efﬁcient forms of health care delivery such as HMOs and other forms of managed care. The policy experts in the Group also favored limiting tax deductions for employer-provided health insurance beneﬁts as a means of controlling costs. The caps would be based on the cost of the lowest priced health plans in a particular region, reducing incentives for individuals to utilize plans that were ‘‘excessive’’ or unnecessarily costly (Skocpol, 1996, p. 42). The mechanism of prepaid managed care and competition between plans was seen as crucial in breaking the hold of the ‘‘medical cartel’’ and reducing market distortions in the existing system of fee-for-service medicine (Hacker, 1997; for a useful description and endorsement see Garland, 1991a). While the Jackson Hole Group was greatly concerned with spiraling health care costs, it was just as fearful of increased government regulation. In their appeals to health care providers, insurers, and business groups, they promoted their version of managed competition as the best hope for avoiding direct government regulation of health insurance premiums or provider fees. A common refrain of Ellwood and his colleagues was that health care reform was coming, and without a coherent and comprehensive ‘‘marketbased’’ plan, the expansion of government in the regulation of health care was inevitable (Hacker, 1997, pp. 52–53). Ellwood was especially interested in bringing large corporations into the health care reform coalition. Big business had become increasingly alarmed about rising health costs through the 1980s, and the Jackson Hole advocates saw this sector as an important potential ally. In 1991, he contacted Dr. Mary Jane England, the new president of the WBGH. England and the WBGH were interested in extending the emerging managed care model to public health policy, and they became active participants in the Jackson Hole Group. As noted, the health insurance industry was beginning to split into factions by the early 1990s. The largest insurance companies had begun to move into managed care during the previous decade. Unlike smaller insurance companies, they were in a position to beneﬁt from the expansion of managed care networks. The big ﬁve insurers had a vested interest in the

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Jackson Hole reform model and were well represented in the group. Big business, the pharmaceutical industry, and medical professionals were prominent in the group as well.9 The appeal of the approach to each of these groups was its promise to rationalize health care through market reforms, led by private-sector organizations, rather than through government regulation. Managed competition provided a ‘‘market’’ ﬁx – and it was marketed as such by the political entrepreneurs of the Jackson Hole Group. It would be an example of what Lawrence Brown referred to as ‘‘the eternal promise that some optimal, competitive, market-based scheme can be invented to discipline the system without surrendering to the regulatory intrusions business activity instinctively deplores’’ (Brown, 1993, p. 349).

Conservative Democrats and ‘‘Managed Competition’’ Through much of the 1980s, a coalition of conservative Democrats, many from southern states, had undermined proposals by liberal party members in Congress, and often joined with Republicans to pass legislation. A major voice for conservative Democrats in the House was the Conservative Democratic Forum (CDF). One CDF member who would play a central role in the health care debate was Representative Jim Cooper of Tennessee. Along with his aide Atul Gawande, Cooper set out to develop an approach to reform that would appeal to moderate and conservative Democrats. He learned about the new managed competition approach advocated by the Jackson Hole Group, and eventually Cooper and Texas Representative Mike Andrews decided to develop a health care bill based on the Jackson Hole model. Their top health policy aides met with Ellwood and health consultant Lynn Etheridge in Washington DC in January, 1992. The aides were invited to the February meeting of the Jackson Hole Group, where ‘‘they plotted their subsequent legislative course with Ellwood, Enthoven, and Mary Jane England, who offered to put the resources of the WBGH at their disposal’’ (Hacker, 1997, pp. 69–70). Eventually, a CDF bill sponsored by Cooper and Andrews would emerge from this process. But there was a crucial difference between the original Jackson Hole approach and the bill eventually sponsored by Cooper. The Cooper bill would not include an employer mandate. This omission reﬂected the political constraints faced by members of the CDF in the House. From the Jackson Hole perspective, leaving out the employer mandate undermined the basic logic of the plan. For them, cost containment required universal coverage. Since most of the uninsured worked, an employment-based system

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of insurance required an employer mandate. But the CDF members in the House had to consider another type of ‘‘logic’’: the political logic dictated by their small business constituencies.10 This was the ﬁrst of many points at which small business interests would inﬂuence the political process.

THE ‘‘LIBERAL’’ VERSION OF MANAGED COMPETITION AND THE CLINTON PLAN Around the time that the Jackson Hole Group was ﬁnalizing its blueprint for managed competition, a variation of this approach was being developed by a group of health care ofﬁcials in California, notably California Insurance Commissioner John Garamendi and his Deputy Commissioner Walter Zelman. Zelman headed a commission set up by Garamemdi to develop a plan to provide universal health insurance for the state (Skocpol, 1996, p. 43). The plan that emerged from the Garamendi commission blended elements of managed competition and the single-payer approach. It proposed a single ‘‘health insurance purchasing cooperative’’ for the entire state – a ‘‘single payer’’ for all purchasers of insurance statewide. Health insurance would be ﬁnanced by a payroll tax. However, medical costs would be contained through competition between health plans and providers. Contributions for insurance would be limited to a ﬁxed amount, tied to the cost of the lowest priced plan in a region. Providers would have the incentive to reduce costs, and health care consumers would have the incentive to shop among competing plans for those that offered the best price for a standard package of beneﬁts (as in the Jackson Hole Plan) (Hacker, 1997, pp. 92–93). This program was later extended by sociologist Paul Starr into a model for national health care reform (see Starr, 1992). While competition and the logic of prepaid managed care were important elements, the liberal variant also relied on global budget constraints and a much larger role for the regional purchasing alliances. The version of managed competition developed by Garamendi, Zelman, and Starr would be the basis for the proposal eventually put forward by the Clinton administration (see for example, Starr & Zelman, 1993). The Clinton Campaign: A ‘‘New Democrat’’ Middle-Way In the early stages of the 1992 Presidential season, the Clinton campaign was uncertain about its approach to health care. Health care reform was shaping

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up to be a major issue. Costs were escalating and public concerns were growing. From November 1991 to November 1992, Clinton would make two critical decisions that would shape the trajectory of the health care debate. The ﬁrst was his early rejection of the single-payer approach as a viable political option. The second was his eventual decision to embrace the liberal version of managed competition as the framework for his own reform policy. Clinton was attempting to walk a ﬁne line that appealed to everyone: business and the ﬁnancial community, policy elites, party liberals, and the general voting public. He sought a ‘‘New Democrat’’ position somewhere between traditional New Deal liberalism and Republican conservatism. He wanted to avoid the charge of favoring ‘‘big government’’ and ‘‘higher taxes.’’ In November 1991, Clinton ruled out a single-payer approach as a politically feasible alternative (Hamburger, Marmor, & Meacham, 1994), and he would continue to do so at several points in the policy process.11 Early in the campaign, he supported a vague version of play-or-pay as a ‘‘middle way’’ position. But this approach came under increasingly harsh attack by the Bush administration as a ‘‘big government’’ plan that would require significant new taxes. On August 10, 1992, there was a meeting of Clinton’s main health policy advisors and several invited health care experts. The meeting was an important turning point. Play-or-pay was subjected to strong criticism, and it became clear that some form of ‘‘managed competition’’ would become Clinton’s new approach to health care reform. It was agreed that the ‘‘market’’ elements of managed competition were appealing and would be especially beneﬁcially politically. But most of Clinton’s health advisers did not believe that the ‘‘pure’’ market approach of the Jackson Hole Group would adequately constrain health care costs. From the Garemendi–Zelman–Starr version of managed competition, the campaign took the idea of overall budget limits and a much broader role for the purchaser alliances, and added a backup system of regulations if competition failed to control costs (Hacker, 1997, p. 111). On September 24, 1992, Clinton unveiled his new health care reform plan in a major speech at Merck Pharmaceuticals. As outlined, the proposal was very similar to the Garamendi–Zelman–Starr approach.12

THE POLITICS OF POLICY FORMATION IN 1993 Upon taking ofﬁce, the new administration immediately faced significant institutional and political constraints on any policy initiative. Institutionally, the administration was limited by the budget deficit, and by the

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pressures from a variety of sources (external and internal) to reduce it. This was a legacy of earlier Reagan-era tax cuts and subsequent calls for deficit reduction favored by the conservative-business coalition. Not only did the deficit itself limit spending possibilities. The constraints of the budget were embedded in the rules of the Congressional budget process that had been passed in 1990. Any new expenditures had to be matched by savings (i.e. cuts) and/or new revenues from other sources. And the budgetary effects of any new program had to pass muster with the Congressional Budget Ofﬁce (see Skocpol, 1996, p. 67). Politically, the administration was also entering ofﬁce in a weak position. Not only was Clinton’s electoral ‘‘mandate’’ on the weak side (43 percent of the popular vote), but he did not pull many new Democrats in with him. The Democrats retained only very slim majorities in Congress, and the party itself was sharply divided between liberals, conservatives, and moderates. Development of the Clinton health care proposal began ofﬁcially on January 25, 1993, with the announcement of a Task Force on Health Care Reform. It was composed of 12 members headed by Hilliary Clinton, but it was advised by a much larger group of policy experts and Congressional staff persons that would eventually number over 500 members, managed by Ira Magaziner. It was this larger group that was usually identiﬁed as the ‘‘Task Force’’ in most accounts. The organization of the Task Force was complex. The advisors were divided into over 30 working groups that examined a wide range of issues, alternative proposals and problems, such as mechanisms for ﬁnancing health insurance or maintaining cost control (Hacker, 1997, pp. 123–124; Jacobs & Shapiro, 2000, pp. 85–94). While the Task Force was quite large, it was not particularly inclusive. The participants were primarily executive branch ofﬁcials, selected health policy experts, and staff members of key Congressional Democrats. Meetings were closed and security was tight, supposedly to allow discussion free from interest group pressure or media scrutiny. Stakeholder groups with a ﬁnancial or occupational interest in the existing health care system were excluded from the Task Force proper. However, administration ofﬁcials held numerous meetings with representatives from various stakeholder groups representing business, the insurance industry, and health care providers (Skocpol, 1996, pp. 56–57). In spite of its size, and the attempt to air every possible position in the health care debate, the Task force process ended up angering many who were excluded or who felt that their ideas were mainly expressed in ‘‘endless discussions’’ with no real inﬂuence on policy (Jacobs & Shapiro, 2000, p. 90). Nevertheless, there were a number of political compromises made by

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the administration during the spring and summer of 1993. To increase the support of major manufacturers, the White House proposed that the government assume responsibility for 80 percent of the health care costs of early retirees – a move that would save auto and steel companies billions. The administration also rejected the idea of restricting tax deductions for expensive health plans – a component of more conservative ‘‘managed competition’’ proposals, but strongly opposed by major corporations and their unions. For small businesses, major subsidies were added to reduce the cost of purchasing insurance. To attract the support of skeptical liberals, the standard beneﬁts package was enhanced significantly, including the addition of a prescription drug beneﬁt and long-term care provisions for seniors. This was a nod to the American Association of Retired Persons (AARP). Direct regulation of physician fees, hospital charges, or drug prices was rejected to avoid offending these powerful interests. However, overall budget controls on federal health spending and insurance premium caps based on the inﬂation rate were included to placate liberal critics and policy elites (especially in the Congressional Budget Ofﬁce) who were doubtful ‘‘market’’ forces alone would constrain costs. In short, the massive Clinton bill not only reﬂected the complex technical structure required for ‘‘managed competition within a budget.’’ It also embodied the many political compromises that the administration felt were necessary to gain enough support for passage.

Unveiling the Clinton Plan Clinton ﬁnally unveiled the Health Security Act in a televised speech to a joint session of Congress on September 22, 1993. There was strong support for Clinton’s initiative in the period immediately following the speech; over 60 percent of the public expressed support for the plan (Pear, 1993a; Jacobs & Shapiro, 2000, pp. 133–134). But despite the positive initial reaction, the administration did not immediately follow-up on this opening advantage. A series of contingent events intervened, leading to more delays. Emerging foreign policy crises in Somalia, Russia, and Haiti had to be addressed. More significantly, Clinton was engaged in a tough battle over the North American Free Trade Agreement in Congress, which took much political capital and public relations work. A draft of Clinton’s health care reform bill was ﬁnally released at the end of October (White House Domestic Policy Council, 1993). Its basic elements were close to the design of Garamendi, Zelman, and Starr. It sought to

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provide universal health insurance coverage through an employer mandate– mandatory coverage with employers paying 80 percent of the cost. Subsidies would be provided for small businesses and low-income individuals to pay for coverage. Consumers, except for the largest businesses with over 5,000 employees, would be organized into large purchasing groups, or regional health alliances. Medical providers would be organized into competing health plans. A standard package of beneﬁts would be offered by all providers. To control costs, insurance premiums would be capped, based on the inﬂation rate and other local factors, and the entire system would operate under a national health budget. A National Health Board would set quality standards, review beneﬁts packages, provide consumer information, and certify various state plans (Congressional Quarterly, 1995, pp. 322–323; White House Domestic Policy Council, 1993). The administration drew on the principles (and ideological cachet) of ‘‘managed competition.’’ But there were some fundamental differences between its health reform framework and the approach of the Jackson Hole Group. First, its global budgeting system administered through a complex formula of premium caps was a central cost-control mechanism. Such ‘‘price controls’’ were rejected by the Jackson Hole Group. In addition, the purchasing alliances played a much different role in the Clinton plan. They were mandatory for all but the largest corporations, they would have broad administrative and regulatory powers, and they would manage budgets at the state level. Unlike the small purchaser pools of employers envisioned by the Jackson Hole Group, Clinton’s alliances would be very large, quasipublic agencies focusing on consumer interests. More significantly, though downplayed by the administration, they would actually transform the relationship between health insurance and employment for the vast majority, and operate as a regional ‘‘single payer’’ in the management of competing health plans.13

INITIAL REACTION TO THE CLINTON PLAN BY MAJOR BUSINESS ORGANIZATIONS During the summer of 1993, the administration had added a number of sweeteners to its health care bill to attract business support. For example, they agreed that the government would assume 80 percent of the cost for early retirees, and they rejected the taxation of high-priced health plans. But as the details of the Clinton administration’s massive health care proposal

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trickled out, the uneasiness of the business community increased. Objections by specific corporate interests differed depending on their particular position in the medical industrial complex (McNamee & Garland, 1993). In general, the leading concern of major corporate employers was that they would lose control of their own health care plans to the proposed purchasing alliances. Under the Clinton plan, 98 percent of all ﬁrms would no longer manage their own health plans. Even for large ﬁrms with more than 5,000 employees, stringent rules restricted options for those who wished to self-insure. In the view of many beneﬁts managers, they had been the ones who had pioneered innovations in health provision in the 1980s, enrolling employees in managed care networks, instituting wellness programs, and bargaining for discounts. Just when their actions were beginning to pay off, instead of drawing on their expertise, the state was proposing to remove health care from their control and place it in the hands of a new, untested government bureaucracy.14 Big business groups, and all proponents of ‘‘market’’-based solutions to the health care crisis, were also uneasy over the ‘‘price controls’’ in Clinton’s plan. While direct regulation of hospital charges, physician fees, or drug prices had been ruled out during earlier negotiations, the administration plan did call for caps on insurance premium increases, the centerpiece of its national health care budget strategy. Critics saw this as excessive government regulation that would impede the efﬁciency-generating effects of the market, discourage capital investment, and lead to rationing of health care (McNamee & Garland, 1993). Not all reaction to the Clinton plan from the business community was negative, however. There were cautious statements of support for elements of the plan, and for its overall goals. In testimony before the Health Subcommittee of the House Ways and Means Committee in early October, William Archey of the Chamber of Commerce noted that the administration’s plan ‘‘incorporates several principles in line with Chamber policy’’ (Thompson, 1993; see Archey testimony in U.S. Congress, 1994b). This was not surprising, since many elements of the Clinton plan had been modiﬁed in consultation with the Chamber, including its funding mechanism (Judis, 1995). In particular, Archey supported the goal of universal coverage and, more significant, an employer mandate to achieve it. This reﬂected the Chamber’s own conclusions about the requirements for meaningful health care reform. On the other hand, Archey also noted some ‘‘serious concerns’’ the Chamber had with the Clinton proposal. These included: (1) the size of the proposed regional alliances; (2) the creation of ‘‘a huge new bureaucracy,

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including a National Health Board, with excessive power to regulate, monitor, and ultimately tax employers’’; (3) reliance on governmentspeciﬁed premium caps, rather than ‘‘market forces,’’ to determine growth rates for health insurance costs; (4) ‘‘unrealistic’’ savings and revenue assumptions; and (5) the requirement that employers pay 80 percent of the cost of their employees health insurance (the Chamber favored a 50 percent requirement) (Archey testimony in U.S. Congress, 1994b; Thompson, 1993). But while the Chamber had these reservations about the Clinton plan, its ofﬁcial position was that this was a positive beginning, and that business could work with the administration to achieve significant health care reform.15 The responses of other business groups to the Clinton plan were similar. The National Association of Manufacturers (NAM) praised the president’s general goal of achieving universal coverage, his efforts to make insurance more affordable for small business, and – not surprisingly – the proposal that the government would cover 80 percent of the health insurance costs of early retirees. But the association was also concerned about several elements of the proposal. NAM president Jerry Jasinowski cited the size of the standard beneﬁts package as a problem, and suggested scaling back some of its provisions, such as the prescription drug beneﬁt, mental health services, or long-term care for the elderly. Another worry shared with other big business groups was the size and authority of the proposed purchasing alliances. NAM proposed reducing the threshold at which ﬁrms could opt out of the alliances from 5,000 employees to 500. There was also concern about giving state governments too much power to regulate health insurance within their borders, which could seriously complicate the management of health care by large, multistate employers. And NAM shared the skepticism of the Chamber of Commerce (and many other critics) about the proposed savings in the Clinton plan (Chandler, 1993). The public reactions by NAM and the Chamber of Commerce were mirrored by the WBGH and the Jackson Hole Group. Representatives of both organizations praised the general direction of the Clinton proposal toward managed competition, but raised concerns about the premium caps, the size and power of the alliances, and the degree of corporate autonomy in the management of health care (PR Newswire, 1993; testimony of Sean Sullivan for the Jackson Hole Group in U.S. Congress, 1994d, pp. 46–50). Stronger statements of support came from the CEOs of Ford, Chrysler, Bethlehem Steel, and other manufacturing corporations that were part of the NLC (Gates, 1993).

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REACTION OF THE HARD OPPOSITION: THE HIAA AND NFIB After Clinton’s September 22 address, the opponents of reform stepped up their lobbying efforts. There was an intensive mobilization of resources by those interest groups with the most to lose, led by small insurance and business organizations, in particular the HIAA and the NFIB. As the health care debate progressed, the coalition of hard opposition groups would become more committed and uniﬁed, while supporters of reform would grow increasingly fragmented.

The HIAA Offensive As noted earlier, the HIAA was divided over the issue of health care reform in the early 1990s. The major disagreements were between the largest insurance companies that were rapidly moving into managed care, and the majority of smaller insurers who would likely be displaced by these changes. Eventually, the ﬁve largest companies left the HIAA and formed the Alliance for Managed Competition, which would lobby for the Jackson Hole approach (see Garland, 1992; Stone, 1994). In spite of the loss of millions in annual membership dues, the departure of the ‘‘big ﬁve’’ insurance companies strengthened the HIAA ideologically, to the extent that its members’ interests were now more uniform, and the organization’s focus tighter (Skocpol, 1996, p. 136). The HIAA was especially concerned about the Clinton proposal to organize health insurance through a small number of large regional purchasing alliances. To the extent that the health insurance market was reorganized through such agencies, small insurers would be displaced. It was also strongly opposed to regulations that would limit their ability to set premium rates, either through caps on premium increases, or by rules that greatly limited ‘‘risk rating’’ and required insurers to group clients into large ‘‘community-rated’’ pools (see Center for Public Integrity, 1995a, p. 610). The most widely noted element of the HIAA offensive was its infamous TV ad campaign featuring ‘‘Harry and Louise,’’ produced by the California ﬁrm of Goddard*Clausen/First Tuesday. These featured a middle-aged couple fretting about the Clinton plan to force a ‘‘bureaucratic,’’ ‘‘big government’’ health care plan on citizens and take away their health care

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‘‘choice.’’ Drawing on survey data and focus groups, the spots utilized ‘‘priming’’ phrases that would resonate with middle class viewers, particularly their doubts about ‘‘big government’’ and loss of ‘‘choice’’ (Johnson & Broder, 1996, pp. 204–206; West, Heith, & Goodwin, 1996). Like the antireform effort overall, the HIAA campaign used public skepticism toward government to frame the Clinton approach as an intrusive and inefﬁcient bureaucracy rather than a more equitable and efﬁcient system of health care provision. Perhaps even more effective than their ad campaign was the grassroots effort of the HIAA, especially when combined with similar pressure from other opposition organizations. Its mobilizing efforts ‘‘produced more than four hundred ﬁfty thousand contacts with Congress – phone calls, visits, or letters – almost a thousand to every member of the House and Senate’’ (Johnson & Broder, 1996, p. 213). The HIAA set up special ﬁeld ofﬁces in the states of crucial members of Congress who represented undecided swing votes on health care. Like the other ‘‘grassroots’’ operations of small business or provider associations, the effectiveness of this effort came from the vast network of insurance agents and ofﬁces throughout the country, especially in crucial Southern and Midwestern states.

The Role of the NFIB While the media campaign of the HIAA received much of the publicity, the most inﬂuential lobbying organization among the committed opponents of health care reform was the NFIB, led by its chief lobbyist John Motley. The NFIB was one of the earliest and most vigorous opponents of the Clinton bill. While other business groups were cautiously conciliatory in the early stages of the health care debate, the NFIB declared war from the start. It even refused an invitation to testify before the Task Force in March 1993 along with other stakeholder groups.16 The NFIB was most effective at creating widespread grassroots opposition – or at least the appearance of opposition – to Clinton’s health care initiative. It targeted undecided members of Congress, especially in key committees felt to be up for grabs (Headden, 1994; Lewis, 1994). Their extensive grassroots mobilization efforts included ‘‘a constant stream of ‘‘Fax Alerts’’ and ‘‘Action Alerts’’ to its tens of thousands of small business owners’’ from its Washington headquarters to the hinterlands (Johnson & Broder, 1996, p. 200). The NFIB ofﬁce polled its entire 600,000 members, and sent the results, along with other supporting ‘‘facts,’’ in

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lobbying packets to members of Congress. It also organized meetings and public forums in crucial states through its local membership, and rapidly mobilized key local business leaders to contact their representatives to explain the impact of Clinton’s ‘‘big government’’ plan on small business – and the jobs they provided in their state (Lewis, 1994; Johnson & Broder, 1996). One other feature of the NFIB is noteworthy here. Most business organizations could be classiﬁed as ‘‘pragmatic’’ interest groups. Their primary concern was the economic interests of their members. The NFIB, however, often appeared to be much more like an ideological interest group. It exerted maximum effort to define the problem (big government, mandates) and the interests of ‘‘small business’’ in a narrow way, though in reality the economic interests of small businesses were quite diverse. Its success was no doubt aided by the more conservative ideological orientation of small business owners. But when particular owners were questioned about specific elements of the Clinton plan, many discovered that they were not hurt as badly as they had been led to believe, and in fact many beneﬁted from some of the small business provisions in the bill (Pearlstein, 1993; Belton, 1993). In spite of the very mixed interests on health care reform among the vast small business constituency, the NFIB was adamantly opposed from the beginning to any expansion of government. Moreover, it was part of a broader coalition of ideologically oriented conservative organizations like the Christian Coalition and Citizens for a Sound Economy, and conservative Republicans in Congress led by Newt Gingrich. This coalition had a much broader political agenda than simply defeating a health care bill (on the right wing conservative network see Balz, 1994; Johnson & Broder, 1996, pp. 223–224; Skocpol, 1996, pp. 143–157).

CONGRESSIONAL REACTION TO THE CLINTON PLAN From a public relations standpoint, Clinton’s September 22 unveiling of his health care plan was a rousing success. The early Congressional response was also positive. Moderate Democrats, and even Republicans, expressed cautious support for the overall goals of universal coverage and cost containment, and pledged cooperation in an effort to achieve them. The conciliatory rhetoric would be short lived, however. Immediately after the September unveiling, the opponents of the Clinton plan began their well-funded and well-organized media blitz and grassroots-lobbying

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campaign, led by the HIAA and the NFIB. This steady criticism in the media had a significant effect, especially in the absence of any real administration response. Public opinion of the Clinton plan began to decline almost immediately in the fall of 1993. This, combined with the growing wariness of big business organizations toward Clinton-style reform, quickly emboldened Republican leaders to intensify their public criticisms of the bill (Devroy & Priest, 1993). By December 1993, Congressional Republicans began to carry out the recommendations of conservative strategist William Kristol, who counseled total opposition not only to Clinton’s bill, but to any Democratic health care proposal.17 The reaction of conservative Democrats in Congress was similar to that of the major business groups. They did not reject the administration bill at the outset, but there were clearly major differences between the administration approach and that favored by ‘‘centrist’’ Democrats. Their position was represented in the bill offered by Representative Jim Cooper. During the spring and summer of 1993, Cooper had met with both Ira Magaziner and Hillary Clinton to see if they could ﬁnd a basis for agreement on health care reform. But they were too far apart for compromise (Johnson & Broder, 1996, pp. 311–312). For Cooper, the Clinton proposal was shaping up as too much government. He was also running for the Senate in Tennessee, and raising a lot of campaign money from insurance companies and hospital groups (Johnson & Broder, 1996, p. 312; Center for Public Integrity, 1995a, pp. 594–596; Lieberman, 1994). On October 6, 1993 – after Clinton’s September speech but before the administration had presented its actual bill to Congress – Cooper introduced a new version of his health care bill with Iowa Republican Fred Grandy. Their proposal did not include an employer mandate or controls on insurance premiums. It did include the limit on tax deductions for health beneﬁts favored by the Jackson Hole Group. It would encourage competition between health care plans and the formation of health-purchasing alliances by small businesses. But the alliances would only be ‘‘mandatory’’ for companies of fewer than 100 employees (ﬁrms would receive small business tax credits if they used the alliances). And these ﬁrms would not be required to pay for insurance, only make coverage available to their workers (i.e. ‘‘universal access’’ rather than universal coverage) (Cooper, 1993; Toner, 1994a). The Cooper bill was harshly criticized by the Clinton health care team and its supporters in Congress. Not surprisingly, the business reaction was much friendlier. The NFIB liked the bill, in that it did not include an employer mandate. But as Johnson and Broder note, ‘‘big business y was not a natural ally for Cooper’’ (1996, p. 316). For one thing, major corporations

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were especially concerned about the cost-shifting that raised their own premiums. Without a mandate, the Cooper bill would do little to address this issue. Further, most were opposed to any proposal to end employer tax deductions for high-cost health plans (Johnson & Broder, 1996, p. 316). On the other hand, the major business organizations all had difﬁculties with the Clinton proposal. Big business groups were especially worried about the size and regulatory power of the mandatory purchasing alliances and the ‘‘price control’’ elements in the administration’s plan. Cooper’s bill had neither. Critics argued that it would do little to increase coverage or reduce costs. But it relied much less on ‘‘government regulation’’ than the Clinton proposal. For that reason, it received public praise from most business groups.

BIG BUSINESS ‘‘ABANDONS’’ THE CLINTON PLAN: FEBRUARY 1994 As Clinton’s plan ﬁnally entered the Congressional stage of the legislative process, it faced increasing public criticism from two major groups whose support had been crucial to the administration’s political strategy: big business and liberal proponents of reform. In quick succession in early February 1994, the Business Roundtable, the Chamber of Commerce, and NAM rejected Clinton’s approach to health care reform. This was widely viewed as the crucial turning point in the reform effort. The Roundtable endorsed the less restrictive Cooper bill as a ‘‘starting point,’’ and the other business organizations praised Cooper as well, as did the Jackson Hole Group. At the other end of the ideological spectrum, a coalition of labor unions and public interest groups sent a letter to the president accusing him of backtracking on reform, and of being too eager to compromise on ‘‘fundamental principles of health care reform’’ in order to pass a bill (Pear, 1994). The attempt by the administration to craft a grand compromise that would attract both liberals and ‘‘moderates’’ was losing support at both ends. Reversal of the Chamber of Commerce As noted above, the Chamber had problems with the Clinton proposal from the beginning. But it had been inﬂuential in shaping some elements of the bill and had originally sought to work with the administration. Its eventual disavowal of the plan was the result of intensive conservative pressure from within and outside the organization. Especially, noteworthy was the ‘‘cross

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lobbying’’ by the NFIB, and the ‘‘reverse lobbying’’ pressure from conservative Republicans in Congress. From its early decision to cooperate with the incoming Clinton administration, the Chamber came under intense criticism from conservatives. In the House, the Conservative Opportunity Society, a coalition of 75 conservative Republicans led by Ohio Representative John Boehner, exerted intensive ‘‘reverse lobbying’’ pressure on the Chamber leadership to reconsider its conciliatory position.18 Boehner reportedly notiﬁed Lesher and Archey that it was ‘‘the Chamber’s duty to categorically oppose everything that Clinton was in favor of’’ (Judis, 1995, p. 68). Congressional conservatives mobilized their own ‘‘grassroots’’ pressure on the Chamber leadership through their state and local Chamber chapters (Rich & Devroy, 1994; Judis, 1995). Added to this was the cross-lobbying pressure of small business associations, especially the NFIB and its allies. The NFIB used the Chamber’s moderate stance, especially its endorsement of the employer mandate, to stir up its small business membership, and even threatened to ‘‘raid’’ the Chamber’s constituency. Allied with congressional conservatives, it also waged a ‘‘grassroots’’ war, stirring up local and state Chamber constituents to express their outrage to its out-of-touch leaders in Washington (Weisskopf, 1994a). The anti-mandate message of the NFIB was appealing to Chamber members who did not provide health insurance to their workers. And these were not just small mom and pop businesses. The Chamber included many major corporations with large divisions in service sectors that did not provide health beneﬁts; for example, PepsiCo, General Mills, and Woolworth. The National American Wholesale Grocer’s Association was strongly opposed to the mandate and in fact resigned from the Chamber over the issue. The National Retail Federation put strong pressure on the Chamber through its own substantial membership. Like their counterparts among liberal groups, many business supporters of Clinton’s health care proposals were ambivalent and conﬂicted, while the opponents of reform were motivated and vociferous. As one Chamber staff member reported, ‘‘It was the 30 percent that didn’t provide insurance that were the most vocal’’ (quoted in Judis, 1995, p. 68). Internal and external pressure mounted on the Chamber leadership to modify its stance toward the administration’s effort. The Chamber’s ﬁnal reversal included a bit of drama. Robert Patricelli was scheduled to testify before the House Ways and Means Committee on February 3, 1994. As was customary, he submitted a copy of his testimony prior to his appearance, which reﬂected the ofﬁcial Chamber position supporting universal coverage and a mandate. When House Republicans

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learned of Patricelli’s message, they quickly contacted Chamber members in their districts, who ﬂooded the national ofﬁce with protests. Lesher reversed the Chamber position, and forced Patricelli to change his testimony at the last minute. The excuse given was that a staff member had submitted his written statement without prior authorization. In his ‘‘revised’’ February testimony, Patricelli rejected the Clinton bill on behalf of the Chamber, declaring ‘‘it proposes such a burden of high employer premium contributions, rich beneﬁts, counterproductive regulation, and new Federal and health alliance bureaucracy, that we believe that it cannot even be used as a starting point for committee markup.’’ He also reported that the Chamber was ‘‘reexamining in our committee process whether there are alternatives to reaching universal coverage beyond employer or individual mandates or single-payer systems,’’ given ‘‘the tendency of the political process to so encumber mandates with excessive costs, price controls, and bureaucracy that what might seem theoretically acceptable becomes unsustainable in practice’’ (U.S. Congress, 1994c, pp. 16–17). A few weeks later, the Chamber board of directors made their policy reversal ofﬁcial by voting to oppose not only an employer mandate, but universal coverage as well. Archey was ﬁred as the Chamber’s chief lobbyist, and Patricelli resigned as the head of its health policy subcommittee (Kranish, 1994; Pearlstein, 1994). By mid-1994, the Chamber of Commerce had joined the hard opposition, using its resources to kill the Clinton bill, and the other health care initiatives struggling for support in Congress (Judis, 1995).19

Rejection by the Business Roundtable In one sense, the Business Roundtable was more homogenous than other business groups. Unlike the diverse Chamber of Commerce, the Roundtable was truly a big business organization. Its members were exclusively CEOs of Fortune 500 corporations. However, its membership did not hold identical interests in the health care debate. Judis (1995) distinguishes four broad positions among the membership of the Roundtable on health care during the Clinton effort. The strongest supporters of major restructuring were the large employers who already provided substantial beneﬁts. Most prominent were major manufacturers like the big three automakers and major steel companies. Many of these corporations were members of the NLC that had earlier supported the play-or-pay plan, and were now supporting the Clinton

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proposal. Others, like IBM or Kodak, had reservations about the Clinton bill but supported an employer mandate. Since many of these ﬁrms had been leaders in corporate health care innovation, they were concerned about losing control of their own health care plans to state-sponsored purchasing alliances or restrictive regulations. But in general, they supported the efforts of the administration. A second group within the Roundtable represented major health insurers, pharmaceutical manufacturers, or health care providers. This group ‘‘included large insurance companies like Prudential and CIGNA, drug companies like Abbott and Eli Lilly, and health care conglomerates like Humana’’ (Judis, 1995, p. 69). These ﬁrms supported the ‘‘market’’ version of managed competition represented by the Jackson Hole Group and the Cooper bill that relied much more on voluntary private sector initiatives, and much less on government regulation and mandates, than the Clinton plan. Not surprisingly, this group opposed any regulation of drug prices or insurance premiums. They supported managed care (many were already involved in such networks), but they preferred that these networks be created and managed by the private sector. A third prominent segment of Roundtable membership consisted of corporations with diverse holdings among businesses such as restaurants, department stores, or hotel chains that did not offer beneﬁts. Among these members were such companies as PepsiCo, Sears, General Mills, J.C. Penny’s, and the Marriott Corporation (Judis, 1995, p. 69). These ﬁrms opposed major health care reform, especially an employer mandate requiring provision of health insurance. Some of them proposed incremental reforms to guarantee ‘‘universal access’’ that were similar to plans proposed by conservative Republicans in Congress. A fourth group of CEOs represented those who were opposed to any expansion of government intervention in health care (or anything else) on ideological grounds, regardless of the short-term economic beneﬁts that might result. From this perspective, any measure that increased the role of the state risked ‘‘opening a wedge for a more interventionist government that would eventually threaten their prerogatives in other areas’’ (Judis, 1995, pp. 69–70). This group cut across the other categories. The White House was counting heavily on big business support to pressure Congress to pass its health care plan. It made extensive efforts to convince the Roundtable that its bill was in the best interests of major corporate employers. But a cursory glance at the above breakdown of membership suggests that this hope was doomed from the beginning. Only the ﬁrst group supported the Clinton plan or something like it, and they

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were a minority in the Roundtable. Further, they were even less represented on the Roundtable’s Health, Welfare, and Retirement Task Force. That committee was chaired by Robert Winters, CEO of Prudential, and 18 of its 35 members represented health insurers or providers, or companies with a significant percentage of uninsured workers (Judis, 1995, p. 70; Weisskopf, 1994a). The Roundtable Task Force voted to reject the Clinton approach, and endorsed the Cooper bill instead. In his public statement, Roundtable chair John Ong declared that the Clinton bill, ‘‘has the potential to create additional unfunded, off-budget entitlement programs. It also seeks to control costs through government regulation of the health care industry and price controls’’ (Priest & Devroy, 1994). Their support of the Cooper bill was somewhat hollow, however, since they rejected one of its central mechanisms: the elimination of corporate tax deductions for high-priced beneﬁts plans. Cynics argued that the Roundtable endorsement of Cooper was simply a means of rejecting the Clinton bill while appearing to be for something.

Not Health Costs, but ‘‘Big Government,’’ as the Enemy The administration went 0-for-3 in its efforts to obtain the support of the major business organizations when NAM rejected the Clinton plan a few days later. Although somewhat more conciliatory in tone, the NAM decision followed the same pattern. While there was strong support among some members (generally, the same large manufacturers that supported the administration in the Roundtable), the majority, especially smaller companies, favored the Cooper bill. Ultimately, the NAM membership could not overcome its original concerns, which included the cost of the standard beneﬁts package, premium caps, and mandated participation in the regional alliances (see Uchitelle, 1994a). The ‘‘defection’’ of the Business Roundtable and the Chamber of Commerce simply reinforced their decision. The WBGH and the Jackson Hole Group also rejected the Clinton bill, for similar reasons. By this time, in fact, the Jackson Hole Group had backed away from its own earlier position requiring an employer mandate, proposing instead a more incremental approach as the ﬁrst phase of a two-stage process (Thompson, 1994). Both the WBGH and the Jackson Hole Group advocated corporate-centered managed competition with much smaller purchasing alliances and no ‘‘price controls’’ on premiums or other fees.20

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The administration had chosen a ‘‘managed competition’’ strategy and rejected a single-payer approach in order to gain the support of big business. Ironically, in the end the majority of the big business community echoed the ads of the HIAA and the grassroots forums of the NFIB. In the words of PepsiCo CEO D. Wayne Calloway, ‘‘The Clinton plan is clearly a centralized bureaucracy-type plan that’s going to be run by the government’’ (quoted in Priest & Devroy, 1994).

THE DEMISE OF HEALTH CARE REFORM: FEBRUARY TO SEPTEMBER 1994 Given the political alignments proﬁled above, it is easy to conclude that health care reform was doomed by the time it entered the Congressional process. Certainly by early February 1994, the Clinton plan had (1) very little business support, and in fact was rejected by the major business organizations; (2) no Republican support at all in the House, and only a tiny handful of moderate Republicans in the Senate who were willing to deal with the Democrats; and (3) no support from the conservative Democrats, who were convinced that their approach provided the only basis for a ‘‘bipartisan’’ compromise. The resistance of conservative Democrats was strengthened by the rejection of Clinton’s plan and ‘‘support’’ of Cooper’s by the Business Roundtable and other business organizations. On the political left, many liberal Democrats in Congress, labor organizations, and public interest groups were willing to back the Clinton plan, but they were unenthusiastic supporters. Most preferred the single-payer approach (see Center for Public Integrity, 1995b). In this context, the health care bill entered the labyrinth of the Congressional committee system. The complex legislation was considered fully by ﬁve major committees and several subcommittees. In the House, the Clinton bill was referred to the Committees on Ways and Means, Energy and Commerce, and Education and Labor. In the Senate, health care reform would have to pass through the liberal Labor and Human Resources Committee, chaired by Edward Kennedy, and the conservative Finance Committee, chaired by an unenthusiastic Daniel Patrick Moynihan. The two labor committees were ﬁrst to clear bills, both of which were close to the administration’s proposals. But the labor committees were generally considered too liberal to provide much of a guideline for what might happen on their respective ﬂoors. In the House, the real attention was on the

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powerful Ways and Means Committee chaired by Dan Rostenkowski, and the Energy and Commerce Committee headed by John Dingell of Michigan. In the Senate, the Finance Committee was the crucial gatekeeper. I consider briefly the actions of the latter two committees in order to illustrate the steadily shrinking ‘‘window of opportunity’’ for reform advocates.21

‘‘Grassroots’’ Pressure and Political Stalemate: The Energy and Commerce Committee The obstacles to health care reform in Congress were especially apparent in the futile efforts of Dingell to clear a bill. Energy and Commerce was viewed as a crucial battleground. Its ideological makeup closely mirrored that of the House as a whole. A bill that cleared the committee had a good chance in the full House. But this meant that Dingell would have to push a measure through the opposition of every Republican member and secure enough votes from conservative and ‘‘moderate’’ Democrats.22 Dingell started with a bill that followed Clinton’s in providing universal coverage through an employer mandate. But it reduced the standard beneﬁts package and weakened the purchasing alliances, making them voluntary. One by one, Dingell confronted uncommitted Democrats, trying to deal to secure their vote.23 But despite his best efforts, Dingell could not get enough conservative Democrats to support a Clinton-style plan. The mandate was an especially important obstacle. Nearing the end of the markup, he remained one vote short. The focus of Dingell’s efforts was directed at moderate Democrat Jim Slattery of Kansas. Slattery happened to be running for governor of Kansas in 1994, and he was under extreme pressure from small business and insurer groups in his home state. He was pressured by Dingell, House Speaker Tom Foley, and the President himself (Johnson & Broder, 1996, p. 338). The Health Care Reform Project ran ads in the state arguing that the average citizen should have the same health care coverage as a member of Congress. But from the other side, major business groups pushed harder, including two of the largest employers in the state: Hallmark and PepsiCo (Johnson & Broder, 1996, p. 339). Both had card shops and Pizza Huts throughout the state that did not provide health insurance. Executives of both companies warned of widespread layoffs that would result from an employer mandate. Further contributing to Slattery’s reticence was the ‘‘grassroots’’ mobilization of the NFIB, which sent out an Action Alert to its 8,000 members in Kansas to let him know that a mandate would lead to layoffs and business

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closures (Johnson & Broder, 1996, p. 340; Headden, 1994). He was also visited by local small town insurance agents mobilized by the National Association of Life Underwriters (NALU) and the National Association of Health Underwriters (NAHU), one of whom was a close personal friend (Franklin, 1995). Slattery ﬁnally informed Dingell of his decision not to support the bill on April 21. A similar onslaught of local small business lobbying occurred in the districts of every wavering or undecided committee member. Dingell was unable to obtain the last vote needed for passage without a major reduction in the scope of the bill. Unwilling to compromise further, he gave up. The stalemate in a bellwether committee, chaired by one of the most effective members of Congress, was not a good omen for the prospects of the administration’s bill.

Conservative Democrats and the Senate Finance Committee This Committee was the last to pass a health care bill. Unlike the others, Finance was able to pass a measure with modest bipartisan support. The vote was 12 to 8, with nine Democrats and three Republicans in favor of the measure (Toner, 1994b). But to squeeze out this slim margin, committee chairman Moynihan allowed the bill to be strongly shaped by a centrist coalition of three conservative Democrats and three moderate Republicans who favored the market-based approach of Cooper and Jackson Hole model. They would form the basis for the self-styled ‘‘Mainstream Group’’ in the Senate that pushed for a Cooper-style compromise throughout the summer. The ﬁnal version of the Finance Committee bill did not include an employer mandate or premium caps. It did reduce tax breaks for high-cost health plans, a measure conservatives believed would provide cost control incentives (Rubin, 1994a). But it did not provide universal coverage. There was a provision that if 95 percent coverage was not attained by 2002, Congress would ‘‘revisit’’ the issue by establishing a bipartisan commission to recommend measures to expand coverage. Congress would then decide whether to take their advice (Congressional Quarterly, 1995, p. 341).24 Like the Energy and Commerce Committee in the House, the Senate Finance Committee was considered a bellwether for legislation, since its ideological makeup was close to that of the full Senate. Failure to pass universal coverage or the administration’s cost control measures signaled danger ahead for the chances of a Clinton-type health care plan.

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Business Unity and the End of the Reform Effort By the time the House and Senate committees were beginning to report their bills, business opposition to reform had intensiﬁed. With a few exceptions like Ford, Bethlehem Steel, and other manufacturers in the National Leadership Coalition, business was becoming more uniﬁed in its efforts to defeat the reform initiatives in Congress. By early May, Louis Uchitelle reported in the New York Times ‘‘opposition to big government has become the corporate rallying cry,’’ and ‘‘the broad corporate resistance presents a big obstacle to passage of the White House proposal.’’ (Uchitelle, 1994b). The majority of the corporate community had decided that the threat of government expansion outweighed the possible beneﬁts of cost constraints in the Clinton plan. Big business groups joined with their well-organized small business counterparts to form ‘‘mega-coalitions’’ to battle the reform effort in Congress. For example, the ‘‘Anti-Mandate Coalition’’ brought together small business groups like the NFIB, National Restaurant Association, and the National Retail Federation, with major corporations like McDonalds, PepsiCo, General Mills, and Marriott to defeat an employer mandate. They were able to draw on their respective resources in an effective division of labor; large corporations supplied the money, and the small business associations supplied the ‘‘grassroots’’ troops (Priest, 1994; Kosterlitz, 1994; Hamburger, 1994). The Democratic leadership in Congress did not believe any of the four surviving bills could be brought to the ﬂoor as they were. In early July, House Majority Leader Richard Gephardt, Senate Majority Leader George Mitchell, and House Speaker Thomas Foley began putting together new bills from elements of those that had cleared. Seeing the writing on the wall, the President and the Democratic leadership made a decision to scale back the proposal and give up on full universal coverage. This was agreed upon in a meeting at the White House in early July, right after the Finance Committee vote rejecting the mandate (Johnson & Broder, 1996, p. 437).25 In the House, Gephardt put together a strong health care proposal based on the Ways and Means bill that included an employer mandate and expanded Medicare coverage. But House Democrats did not want to vote on a health care bill until it was clear what the Senate would do. They were fearful of voting for the controversial mandate and then being left hanging if the Senate backed away. This shifted the focus to the Senate. The Democratic proposal in the Senate, developed by Majority Leader Mitchell, was much more conservative than the House bill. It proposed to reach 95 percent coverage by the year 2000. Bowing to pressure from

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conservative Democrats, Mitchell ‘‘proposed to give market forces a chance to increase coverage before turning to government enforcement’’ (Congressional Quarterly, 1995, p. 350). There would be no employer mandate until 2002 at the earliest. It would only apply to states that had failed to reach the 95 percent coverage level, and it would not be applied to businesses with fewer than 25 workers. Even if the mandate was imposed, ﬁrms would not be required to contribute more than 50 percent of the cost of their employees’ premiums. Business pressure continued to grow as the process moved out of the committees and onto the ﬂoor. Big business groups became even more active in opposing anything resembling the Clinton plan, even though by July it was clear that one of their major fears – the mandatory alliances – would not be part of the plan.26 By late summer, the majority of business groups were organized into coordinated ‘‘super-lobbies’’ to oppose the legislation constructed by Gephardt and Mitchell. One such coalition was coordinated with Bob Dole’s ofﬁce. Another was organized by the Association of Private Pension and Welfare Plans, which brought together the Corporate Health Care Coalition, the NFIB, NAM, and other business groups with the provider, insurance, and pharmaceutical interests of HEAL (Weisskopf, 1994b). In short, by the end of the process, all major business organizations, with the exception of the remaining members of the NLC, had joined together in a well-organized effort to block reform. They were especially focused on stopping the moderate Mitchell bill, which in their view had more of a chance for passage. The Mitchell bill was announced publicly on August 2, 1994. The ad campaign run by the Democratic National Committee was to stress how ‘‘conservative’’ the new bill was (Devroy & DeWar, 1994). But in spite of the considerable move to the right, Mitchell was not able to overcome division among Democrats and uniﬁed Republican opposition. Failing to round up enough votes to defeat a threatened Republican ﬁlibuster, he ﬁnally gave up on his own bill in late August (Congressional Quarterly, 1995, p. 355). But health care reform was not quite dead. The bipartisan group of centrists, the ‘‘Mainstream Group,’’ led by moderate Republican John Chafee and conservative Democrat John Breaux, attempted to come up with their own compromise plan. It relied mainly on incremental reforms, with the goal of 93 percent coverage by 1999. It did not include an employer mandate, but it did provide a ‘‘soft trigger’’: if adequate coverage was not realized by 2002, a national commission would reexamine the issue. The tax deductibility of health insurance costs would be capped. Subsidies to the poor would help them purchase private insurance, but these would be ﬁnanced by significant

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cuts in Medicare and Medicaid funding (Congressional Quarterly, 1995, pp. 350–351). With this move, the once massive health care reform bill had been whittled down to a set of incremental reforms rejected as grossly inadequate by most Democrats less than 2 years before. But as the health care proposals grew weaker, the opposition by business and conservative groups only intensiﬁed. The ‘‘Mainstream’’ plan attracted little support. Republicans who once favored stronger reform measures themselves now denounced the meager plan as ‘‘big government’’. Liberal Democrats saw little reason to support it. Mitchell gave up for good on September 26, when it was clear there were not enough votes to overcome a threatened Republican ﬁlibuster (Rubin, 1994b). In the end, health care reform died without a vote being taken in either house of Congress.

DISCUSSION: THE CHANGING TRAJECTORY OF CORPORATE POLITICAL INTERESTS Changes in health care markets and institutions, and in the overall structure of the economy, generated considerable support for major health care reform by the early 1990s. These conditions also led to political mobilization by a variety of business groups. The perceived problems were not identical across economic sectors, and business responses varied. One effect was the fragmentation of business and elite interests that undermined the traditional anti-reform coalition and created new opportunities for significant health care legislation. Political coalitions formed along intra-class fault lines by the early 1990s, with large business purchasers of health care favoring reform. However, even among corporate reformers, there was variation in the degree to which they were willing to trade increased government control for cost reduction. There was never a unified ‘‘reform’’ coalition among corporate interests, let alone a consensus with nonbusiness reform groups. But ‘‘big business’’ interest in reform reinforced the perception that change might ﬁnally be possible. Corporate Ambivalence over Health Care Reform Most policy analysts recognized that an expanded role for the state would be necessary for significant health care reform, particularly if the broader social goals of universal coverage and overall cost containment were to be

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realized. The crucial question for business groups was: how much government? An expansion of the regulatory capacity of the state would reverse the trajectory of state retrenchment and greater corporate autonomy that business had actively fought for in the 1970s and 1980s. This was reﬂected in the discomfort of all corporate groups over the regulatory elements of the Clinton bill such as the mandatory purchasing alliances or premium controls. An employer mandate also limited business autonomy. But in the early stages, many business groups that already provided health beneﬁts were willing to accept this as a mechanism to reduce cost shifting. Most, however, wanted to retain decision-making power over the scope and management of their own health plans. Ultimately, fear of loss of control – especially, if they were required to pay 80 percent of the cost – led the majority of corporate interests to withdraw from the reform effort. Only a minority with the most to lose – mainly the manufacturing interests of the NLC – were willing to accept Clinton’s proposal for state-organized ‘‘managed competition.’’ A second, and less often discussed contradiction stems from the determination to preserve employer-based insurance in all mainstream reform proposals. Such an approach would strengthen the responsibility of employers for the social provision of their employees. But this ran counter to the rapidly weakening ties between capital and labor in the ‘‘postindustrial’’ economy of the U.S. Our system of private, employment-based social provision was unraveling by the early 1990s (O’Connell, 1993). Corporations were downsizing, contracting contingent workers, relocating, and otherwise exercising greater managerial ‘‘ﬂexibility’’ in adapting to a rapidly changing global economy.27 This brings up an interesting question, however. How do we explain the strong push for health care reform by the old-line manufacturers most affected by economic restructuring? Indeed, autos and steel were among the few corporate interests that continued to support the Clinton plan until the end. The answer is relatively straightforward. Their concerns were neither the long-term restructuring of the health care system, nor the broad social goals of universal coverage. Rather, they sought to utilize the state to reduce labor costs that had been locked in by previous institutional arrangements (i.e. labor contracts and collective bargaining agreements) (see Gordon, 1991 for an early assessment of the motives of the NLC along these lines). In other words, as in the past, the manufacturers of the NLC were interested in their own brand of ‘‘cost-shifting’’: transferring their health care costs to other employers, or to the state. The payoff was high enough that they were willing to accept an expanded government role,

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as in previous periods when particular businesses or industries have sought state help in protecting their economic interests.

The Effect of the ‘‘Hard Opposition’’ Another significant force shaping health care discourse and politics was the mobilization of the hard opposition of small business and insurer coalitions. As the case study illustrates, the opposition had a number of advantages over the various proponents of reform. They were relatively uniﬁed and coordinated, had strong motivation, and possessed significant ‘‘grassroots’’ resources to inﬂuence the political process. The interest groups pushing for reform, on the other hand, were politically fragmented, operating with diverse motives and goals, and they were mainly elite organizations attempting to inﬂuence other elites. Some liberal reform groups had the capacity to mobilize locally, in particular organized labor and the AARP. The leadership of these organizations put forth considerable effort on behalf of the Clinton bill. But they could not generate much enthusiasm among their rank-and-ﬁle. This contrasted greatly with the rapid-response resources of the NFIB, HIAA, and other small business groups. The political inﬂuence of the small business lobby shaped the political process at several key points; for example, in (1) inﬂuencing the specific form of the Cooper bill, in particular its omission of an employer mandate; (2) shaping the administration’s bill and gaining concessions through the threat of small business resistance, concessions that were costly and ultimately unsuccessful; (3) affecting the position of major lobbying organizations like the Chamber of Commerce or the AMA through ‘‘cross-lobbying’’; (4) mobilizing grassroots opposition to inﬂuence the legislative process in Congress, targeting key committees and committee members who were vulnerable; and (5) shaping the public debate through its considerable resources and uniﬁed voice.

A ‘‘Market’’ Solution? The Ideological Role of ‘‘Managed Competition’’ Clinton’s health care proposal called for significant expansion of government, which the administration saw as necessary for achieving its central goals of universal coverage and cost containment. But given the increasingly narrow political and ideological parameters of the 1990s, this was partially disguised as something else. An important element in the strategic framing

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of the Clinton health care proposal was its presentation as a market-based plan that would not significantly increase government regulation or taxes. To do this, the administration appropriated the language of ‘‘managed competition.’’ This reﬂected the ideological dominance of the ‘‘market’’ ideal by the 1990s, and the political barriers to policy alternatives that were viewed as excessively regulatory or redistributive. ‘‘Managed competition’’ seemed to point to a possible path for health care reform without ‘‘big government.’’ This was how the paradigm was sold by the political entrepreneurs of the Jackson Hole Group. By the end of 1992, they had drawn in supporters from big business, large insurers, and the medical profession. They had also established connections with conservative Democrats in Congress who would sponsor legislation that followed the Jackson Hole model. Their tentative support for the Clinton plan at the outset was based on the shared language of managed competition. However, the Jackson Hole model was based on the market paradigm, with a limited role for the state. The administration plan was a much broader synthesis that attempted to link market mechanisms with a system of expanded state regulation. The complex Clinton proposal reﬂected the technical requirements of achieving managed competition within a budget. But it also reﬂected the broader set of interests and political pressures operating on the administration. In addition to satisfying business interests, Clinton had to consider a wider constituency, including (1) liberal interest groups whose main concern was providing universal coverage, adequate beneﬁts, and cost controls, and who were suspicious of the administration’s ‘‘market’’ model for doing so; (2) a segment of the policy elite who were skeptical ‘‘managed competition’’ or other ‘‘market’’ measures alone could contain costs; and (3) the general public, whose concerns were also different from those of most elites. The administration knew that the backing of major business groups was crucial for passing health care reform, but it was not enough. They would also need the support of liberals, the general public, and the policy establishment. Clinton’s health care plan was an attempt to bridge the gap between these very divergent perspectives. Ultimately, managed competition failed as a framing strategy by the administration to build a broad, liberal-centrist coalition around its health care reform project. As the regulatory elements of the Clinton plan became clearer, the coalition supporting a market version of managed competition withdrew support. They concluded that the threat of state expansion and loss of autonomy over their health plans was greater than the potential beneﬁts in terms of cost containment. More objective analyses, including that of the Congressional Budget Ofﬁce, had concluded that voluntary,

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private sector approaches would not sufﬁciently constrain costs. But as Brown noted presciently in 1993, ‘‘The heart of business’s enigmatic role in health policy is its wish to have its costs contained without much growth in the role of government’’ (Brown, 1993, p. 352). This was a wish that Jim Cooper and the Jackson Hole Group played on as ‘‘policy entrepreneurs.’’

The ‘‘Reconstruction’’ of Business Interests, 1993–1994 The position of moderate business groups toward health care reform shifted from 1993 to 1994. As the political process unfolded, business became more pessimistic about the possibilities of passing a bill that reﬂected their preferences. To some extent, this reﬂected the distance between their original goals and those of the administration. However, their position was not uniform throughout the process. By the summer of 1994, most business groups were actively opposing modest measures like Mitchell’s Senate bill, and even the watered-down Cooper-like bill offered by the Senate Mainstream Group. With a few exceptions, the ambivalence of big business was resolved in favor of no reform. They would rather take their chances in dealing with health care on their own than face the risks of increased government control. Concerns about rising health care costs gave way to fears of a new wave of government expansion. This led them to reject the administration proposal and join with other opponents to defeat the Clinton plan, and other reform proposals as well. There are alternative explanations for the rapid change in the ‘‘big business’’ position on health care reform from 1992 to 1994. One possibility is that the early business support for reform was not sincere. Perhaps, the early position of major business organizations did not represent their ‘‘real’’ interests, but rather ‘‘induced’’ or ‘‘strategic’’ preferences (Hacker & Pierson, 2002) reﬂecting feasible policy options given the apparent momentum for reform. In this view, major business organizations felt that health care reform was going to occur; to resist it completely would exclude them from the political process. Therefore, they pursued a conciliatory strategy until the political climate changed enough to make open resistance less threatening. This argument is applicable to a degree. The major business organizations and other proponents of the ‘‘market’’ version of managed competition did not reject the Clinton proposal at the outset, in spite of their serious reservations. They had been inﬂuential in shaping the Clinton approach and felt they could push it further in the desired direction. In 1993 they had every reason to believe that some type of reform would pass, and they did not

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want to be left outside the political process. ‘‘Moderate’’ business organizations like the Chamber of Commerce certainly saw cooperation to be in their strategic interests, given a Democratic White House and Congress. However, the push for reform by many business coalitions was not simply a ploy. They had real concerns about rising health care costs by the early 1990s. As we have seen, several business organizations had proposed significant reforms before Clinton was elected – and even before his campaign settled on its version of ‘‘managed competition.’’ The notion of ‘‘induced’’ or ‘‘strategic’’ preferences seems to describe better Clinton’s choice of managed competition over play-or-pay or the single-payer approach, or the Republicans’ early expressions of cooperation, which turned quickly as public opinion appeared to decline. Another factor is emphasized by Swenson and Greer (2002). They hold that improving economic conditions and falling health care costs in the early 1990s changed the objective economic interests of big business during the course of the debate. Again, there is some merit to this argument. The rate of health care inﬂation did fall significantly during this period (Swenson & Greer, 2002, p. 610). This fact was cited by proponents of more market-oriented ‘‘managed competition’’ approaches to justify their emphasis on private-sector solutions. But careful reading of the debates from late 1993 through 1994 reveal two things. First, most business purchasers of health care realized that without major structural reforms, moderating health care costs were likely to be short term, the effect of lower overall inﬂation, a ‘‘low point in the underwriting cycle’’ (Swenson & Greer, 2002, p. 624), a one-time effect of restructuring in the health care market, or simply a response by providers to the threat of increased government regulation. Most saw a significant health care ‘‘crisis’’ that called for major reform (see Findlay, 1994). Second, it is clear that in spite of their concern about health care costs, business leaders grew increasingly fearful of the degree of government control, and the possible loss of corporate autonomy, in the Clinton plan as the political process unfolded through 1993 and 1994. They did not see the problem as disappearing, but they were increasingly concerned about the solutions being proposed.

CONCLUSION: THE RETURN OF ‘‘BUSINESS UNITY’’ Ideologically, most business leaders ‘‘distrust the state’’ in the U.S. (Vogel, 1978), even though business has been more autonomous here than in most other advanced industrial nations. But under conditions that threaten their perceived economic interests, sectors of business will support government

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action, including an expanded state role, to restore conditions favorable to profitable investment. The health care crisis of the 1980s generated calls for ‘‘reform’’ by many major business groups, and an acknowledgement that an expanded state role might be necessary. However, support for such government expansion will vary among sectors of capital, depending on the particular interests and the policy issue at hand. This was clear in the intra-class conﬂicts of interest over health care reform. There were sharp conﬂicts between business coalitions that supported significant health care reform and those that did not. Many of the latter mobilized for active resistance to the reform effort. But even among pro-reform business groups, there was significant disagreement over the degree of state expansion necessary to deal with rising health care costs. Some desired mainly legal reforms in the rules governing insurance markets that would make it easier for corporate-managed care to operate (e.g. the WBGH). Others were willing to tolerate stronger actions, in particular an employer mandate, to spread health care costs more equitably across businesses (e.g. the Chamber of Commerce leadership). Still others were willing to go further and allow government-expanded regulatory power to control fees in the health care sector (the NLC). Ultimately, there are limits on the degree of government intervention tolerated by any business interest in the U.S. In the context of the neoliberal project, these limits were considerable by the early 1990s. The Clinton proposal clearly went beyond these limits for most business groups, stimulating the eventual reversal of policy preferences by corporate supporters of reform. From the administration perspective (and that of many policy elites), cost containment required significant expansion of government regulatory authority over health insurance. The administration carefully constructed a policy framework they believed would avoid the ‘‘big government’’ label and attract sufﬁcient support from big business and other elites. But the goals of the administration and those of various business interests were not identical. Both sides faced the contradictions of providing a ‘‘public good’’ like universal health insurance through a for-profit market system. For business groups, the primary concern was not universal health care, but the reduction of medical costs. These differences marked the outer boundaries of ‘‘acceptable’’ social provision in a health care system that was inextricably embedded in the structure and logic of a market economy. ‘‘Business interests’’ on health care policy were neither uniﬁed nor transparent in the early 1990s. Rather, they were the subject of political struggle, both between various interest groups and within major business organizations like the Chamber of Commerce and the Business Roundtable.

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This was but one element in a period of exploration for a new ‘‘social structure of accumulation’’ to restore conditions for profitable accumulation. ‘‘Managed competition’’ provided early hope for a response that would satisfy diverse ‘‘reform’’ advocates without a return to ‘‘Old Democrat’’ solutions. But the degree of state expansion acceptable to business proved too narrow for compromise. In the end, ‘‘business unity’’ was reestablished after a period of fragmentation, coalescing around an old enemy: fear of ‘‘big government.’’

NOTES 1. The literature analyzing the Clinton health care initiative is extensive, and analysts have emphasized a variety of causal factors in accounting for its failure. My primary focus is on the interests and political mobilization of major business coalitions rather than providing a comprehensive examination of the health care debate. For very useful overviews see Johnson and Broder (1996), Skocpol (1996), Hacker (1997), and Jacobs and Shapiro (2000). For a sample of the variety of competing explanations for its failure, see the essays in Aaron (1996), and the articles in the special issue of the Journal of Health Politics, Policy and Law, 20(2), Summer, 1995. 2. The best-known formulation of this concept is by Gordon et al. (1982), who deﬁne a social structure of accumulation as the specific institutional environment within which the capitalist accumulation process is organized. Such accumulation occurs within concrete historical structures: in ﬁrms buying inputs in one set of markets, producing goods and services, and selling those outputs in other markets. These structures are surrounded by others that impinge upon the capitalist accumulation process: the monetary and credit system, the pattern of state involvement in the economy, the character of class conﬂict, and so forthy (1982, p. 9).

They were especially interested in the ‘‘character of class conﬂict’’ as it is manifest in historical struggles over the organization of labor in the workplace. My main concern here is with the ‘‘pattern of state involvement’’. For a useful overview of this approach, see the essays in Kotz, McDonough, and Reich (1994). 3. The AMA itself was considerably weaker than it had been during earlier political battles (Galen & McNamee, 1993). Other organizations had emerged to speak for particular segments of the profession, such as the American College of Physicians and the American Academy of Family Physicians. But even the conservative AMA itself was divided, with some leaders beginning to acknowledge major problems in the system (Wilson, 1996, pp. 115–116; Galen & McNamee, 1993). 4. In an address to the Midwest Business Group on Health in March 1991, England noted a WBGH member survey that showed an overwhelming majority of its Fortune 500 members wanted major changes in the health care system. However, her survey also revealed that 90 percent of the respondents felt that employers should be the major suppliers of health care beneﬁts, 71 percent were opposed to an employer mandate, and 87 percent favored ‘‘managed care’’ as a central element of

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reform (Woolsey, 1991). Whatever the validity of this survey, it was congruent with the policy stance of the WBGH from 1991 to 1994 under England. 5. The burgeoning health care crisis generated numerous proposals for reform. By late 1991, three general approaches were prominent: (1) conservative measures to improve health care coverage through incremental reforms in private health insurance markets; (2) liberal proposals to expand the role of government to provide universal health insurance coverage directly, often referred to as the ‘‘single-payer’’ approach; and (3) a set of proposals to foster universal coverage and cost containment by extending the existing system of employment-based health insurance – an approach referred to as ‘‘play-or-pay’’ (Dwyer & Garland, 1991; Skocpol, 1996, pp. 30–35). Play-or-pay was often touted as the pragmatic ‘‘centrist’’ position between incrementalism and a Canadian-style single-payer approach. The name derived from its basic principle. Employers would be required to provide either a basic health care package for their employees (i.e. ‘‘play’’), or pay a tax that would help fund publicly provided insurance for those not covered through their employer. Proposals varied on the details, such as the level of required minimum beneﬁts or the regulation of health care costs (Skocpol, 1996, pp. 33–35). 6. The NLC plan was similar to one that had emerged from another commission: the U.S. Bipartisan Commission on Comprehensive Health Care, or the ‘‘Pepper Commission’’. This ‘‘bipartisan’’ Congressional group was not able to reach a consensus on the best way to improve health care in the U.S. But a bare majority did recommend a version of the play-or-pay approach that became the basis of a health care reform bill sponsored by several Senate Democrats (Rich & Swaboda, 1991; Skocopl, 1996, pp. 34–50). 7. NAM went through a similar process in 1990–1991. But its board of directors rejected the play-or-pay plan recommended by its health care task force, reﬂecting both ideological opposition and the economic interests of particular members. See Martin (1993, p. 377). 8. Hacker (1997, p. 45) nicely summarizes some of the problems: The medical sector clearly does not ﬁt the paradigm of ‘‘perfect competition’’y. On the demand side of the equation, federal and state governments and large private payers such as the Blues have concentrated purchasing power that allows them to affect prices. Patients, the ‘‘consumers’’ of health care, are poorly informed relative to suppliers, unable to accurately compare services, and insulated from the full costs of their medical decisions by third-party insurance. On the supply side, there exist substantial barriers to entry, such as licensing and accreditation requirements for physicians and other practitioners. Health care providers make many of the most costly decisions concerning the delivery of care (opening the door to what economists call ‘‘supplier-induced demand’’). And providers themselves are largely insulated from cost pressures, since insurance will pay for most of the care they give. For these reasons and others, the medical sector deviates greatly from an ideal-type perfectly competitive market.

9. On the links between the Jackson Hole Group and major business and insurance interests, including funding support, see Priest (1993) and Toner (1993). Hacker provides a complete list of participants in the Group from 1990 to 1992 (1997, Appendix B).

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10. As Hacker (1997, p. 70) observes: (N)early two-thirds of all uninsured workers are employed in ﬁrms with one hundred or fewer employees. An employer mandate would therefore disproportionately affect small business, an extremely important constituency in the South. The CDF members, loathe to antagonize the small business sector and generally wary of mandates and payroll taxes, believed that the goal of universal coverage was one that could wait.

Cooper introduced his original bill in the House in September, 1992 (HR 5936), entitled ‘‘The Managed Competition Act of 1992,’’ with 21 cosponsors. A companion bill was introduced in the Senate by conservative Democrats David Boren of Oklahoma and John Breaux of Louisiana. (SR 3299). 11. It should be noted that public opinion favored moderate tax increases and expanded government regulation if it led to the provision of a more efﬁcient health care system (see Jacobs & Shapiro, 1995, 2000). As Clinton became the eventual Democratic nominee, and then the President, this was a decision (or ‘‘nondecision’’) that kept the single-payer option out of the ‘‘realistic’’ policy loop. This was the case even though it had more of a constituency – in Congress and among the general public – than any variant of managed competition, or any other alternative being considered. 12. In his speech, Clinton emphasized that the plan was a private system of insurance with no new taxes. Universal coverage would be guaranteed by requiring employers to cover their workers (i.e. by an employee mandate). But smaller businesses would receive subsidies to assist them in doing so. Costs would be contained through competition among health care providers and managed care networks. Publicly sponsored purchasing alliances would join small businesses and individuals to allow them greater bargaining power in the purchase of health insurance. Global budgeting at the national and state levels would set upper limits on overall health care expenditures (‘‘competition within a budget’’) (Hacker, 1997, p. 113). The idea of ﬁnancing the new health care system through a payroll tax was abandoned. Instead, the plan would be ﬁnanced through employer contributions. While this created a number of problems of its own, it allowed Clinton to claim that the new plan would not raise taxes. 13. The administration argued that large mandatory alliances were needed to prevent adverse selection and cost shifting. But the large and powerful purchasing alliances were a red ﬂag for large corporations and their beneﬁts managers, who wanted to maintain control over employee beneﬁts decisions. In their view, this would remove a significant element of corporate decision-making power, while leaving them with 80 percent of the bill. For example, see the testimony of Mary Jane England of the WBGH in U.S. Congress (1994a); and Michael Becker, representing the view of the Corporate Health Care Coalition, in U.S. Congress (1994c). 14. In addition, corporate managers feared that the economic advantage they enjoyed as large purchasers in a fragmented market would disappear, as even the largest employers would be dwarfed by the alliances. There was also the issue of who would control these alliances. The Clinton administration saw these groups as ‘‘nonprofit agencies overseen by boards representing businesses and consumers.’’ But business feared that control of these agencies would become politicized, giving oversight of a huge sector of the economy to state ofﬁcials and political appointees (McNamee & Roush, 1993).

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15. For its small business constituency, the Chamber also had some words of comfort. Its analysis of the impact of the Clinton proposal on small business did not support the horror stories of the NFIB. It noted the extensive system of graduated subsidies that would allow small business to purchase insurance at bargain rates. In reporting its assessment, Nation’s Business, the Chamber’s magazine, even took a swipe at the press coverage of the Clinton proposal, implying that the media focused on the negative impact on a minority of small employers without insurance rather than the positive beneﬁts for small employers who already provided coverage (Thompson, 1993). Patricelli told the Senate Labor Committee on October 15, 1993 that small business opposition to the mandate was ‘‘exaggerated’’ (Clymer, 1993). 16. Nevertheless, the administration was accessible to the NFIB. Clinton himself met with NFIB president Jack Faris several times in an effort to solicit the support of small business. The administration kept meeting with the NFIB, and kept offering compromises, through much of 1993. Concessions included significant (and costly) subsidies to small business for purchasing insurance that became part of the ﬁnal bill. Meanwhile, Motely and the NFIB kept working behind-the-scenes to kill the legislation (Johnson & Broder, 1996, pp. 217–219). 17. Kristol laid out this strategy in a now-famous series of memos (Skopol, 1996, pp. 145–147; Johnson & Broder, 1996, pp. 23–35). They echoed the HIAA ads in loudly warning that the Clinton health care plan meant ‘‘big government,’’ ‘‘higher taxes,’’ and ‘‘socialized medicine.’’ Polls had shown that, while the majority of Americans wanted health care reform, most were generally satisﬁed with their own health care. This became the basis of attempts by the opposition to change the focus of public discourse on the issue. Negative ads and attacks by elites warned of higher taxes and health care costs, more bureaucracy, and less choice of doctors if the Clinton plan was passed. The aim was to shift the attention of middle class voters from what society would gain from health care reform to what they might lose (Lo, 1998). These intensifying criticisms of Clinton’s health care plan were dutifully echoed in the media. Conﬂicting claims of major protagonists in the debate were generally reported without critical analysis, increasing the public confusion about the causes of the health care crisis and the effects of various solutions. Media coverage became increasingly negative and one-sided. Contributing to this was the relative silence of the administration to these attacks in the last quarter of 1993 as it was preoccupied with NAFTA and various foreign policy crises. The public campaign by the opposition was successful. Public support for the Clinton plan declined steadily from its peak in late September, and never recovered. On the deﬁciencies of media coverage and its relation to public and elite opinion see Lieberman (1993, 1994), Hamburger et al. (1994), Lo (1998), Jacobs and Shapiro (2000). A useful systematic content analysis of media coverage of the health care debate is provided in ‘‘Media Coverage of Health Care Reform: A Final Report,’’ Columbia Journalism Review, March/April 1995 Supplement, by the Times Mirror Center and the Kaiser Family Foundation. 18. By ‘‘reverse lobbying’’ I refer to the process in which public ofﬁcials pressure key interest groups to support or oppose particular policy initiatives. 19. A similar process occurred in the AMA, which reversed its earlier stance supporting an employer mandate under reverse-lobbying pressure of conservative Republicans in Congress and cross-lobbying pressure by the NFIB. See Weisskopf (1994a).

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20. See the testimony of England for the WBGH, and Sara Singer for Alain Enthoven and the Jackson Hole Group, in U.S. Congress (1994a). See also the testimony of Michael Becker on behalf of the Corporate Health Care Coalition in U.S. Congress (1994c). 21. Space prevents discussion of the Ways and Means deliberations. They are of interest for a variety of reasons. During this time, powerful committee chair Dan Rostenkowski was indicted for inﬂuence peddling and had to step down. After a tough struggle, acting chair Sam Gibbons was able to clear a health reform bill. It included some noteworthy elements, in particular a radical alternative to the administration’s approach to universal coverage. The Ways and Means bill proposed to expand the Medicare system to cover the poor and uninsured, and would also make it available to businesses of under 100 employees. 22. Two of the latter were sponsoring their own ‘‘bipartisan’’ alternatives to the administration’s bill: Cooper, and Roy Roland of Georgia, who was cosponsoring his own incremental reform proposal with Republican Representative Michael Biliakis. 23. For example, he agreed to cut regulation of new drug prices to accommodate two members with heavy representation of biotech ﬁrms in their districts, freshmen representatives Lynn Schenk (California) and Majorie Margolies-Mezvenski (Pennsylvania) (Johnson & Broder, 1996, pp. 335–336). Modiﬁcations of a proposed cigarette tax were offered to sway Richard Boucher of Virginia, who had to face the powerful tobacco interests of his state. 24. The crucial vote was taken on June 30. The committee had already decided to delay imposition of an employer mandate for a time, allowing ‘‘market’’ forces to work to reduce health costs. On the table was a proposal to impose a mandate if 96 percent of the population was not insured by the year 2000. This so-called ‘‘hard trigger’’ provision had been proposed by conservative Democrat John Breaux (Congressional Quarterly, 1995, p. 341), and it reﬂected the evolving thinking of the Jackson Hole theorists as they backed away from the politically unpopular mandate idea (see Thompson, 1994). But the committee rejected the hard trigger proposal by a decisive 14–6 vote, with ﬁve conservative Democrats joining all nine Republicans in opposition (Rubin, 1994a). That effectively killed the employer mandate, and universal coverage, in the Finance bill. Eventually, a ‘‘soft trigger’’ was passed – the provision for a bipartisan commission if 95 percent coverage was not attained. 25. The decision was not announced publicly for several weeks, however. Given the President’s pledge not to accept anything short of universal coverage, such a retreat had to be handled carefully. On July 19, in a speech to the National Governors Association, Clinton hinted at compromise, speaking of a goal of ‘‘functional universal coverage’’ of ‘‘around 95 percent’’ of all Americans (Rubin & Donavan, 1994). His remarks set off an uproar in the press, and among liberal supporters who were already suspicious about his willingness to ﬁght for universal coverage. In a prearranged maneuver, the Democratic leadership ‘‘took the heat off Clinton’’ by publicly calling for a compromise that scaled back the ambitious administration proposal. They ofﬁcially declared the Clinton bill dead, symbolically distancing themselves from the administration (Rubin & Donovan, 1994). This was a calculated strategy to avoid the negative political baggage associated with Clinton, and project a willingness to be ﬂexible in hopes of obtaining enough support by moderates to pass a bill.

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26. Ironically, one stimulus to big business opposition was the generous subsidies offered to small business by Congress to buy their support. Many representatives of large corporations saw this as simply another means of shifting costs back to them (McNamee, 1994). Increasingly, big business simply distrusted the political process. By July, most major corporate lobbies favored incremental reforms – or none at all. 27. One health policy expert who recognized, and nicely summarized, this contradiction is Morone (1995, pp. 395–396): Since the 1920s, American corporations have offered their employees a private welfare system. Companies provided health care beneﬁts, old age pensions, job security, and vacations. The public welfare state was constructed around the private system – ﬁlling gaps, regulating beneﬁts. The Clinton plan’s employer mandate was a typical example. Now, after seven decades, the corporate welfare state is coming to an endy A new international economic order is creating an economy of ‘‘hollow corporations’’ and ‘‘contingent workers’’y For workers, the new order brings job insecurity and haphazard social welfare beneﬁts. It explains why there is such profound anxiety despite a relatively good economy. It suggests why business is likely to resist mandated health care beneﬁts with increasing vigor. And it points to the coming crisis in American health care: If business will not pay, who will?

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PUBLIC AIRWAVES, PRIVATE INTERESTS: COMPETING VISIONS AND IDEOLOGICAL CAPTURE IN THE REGULATION OF U.S. BROADCASTING, 1920–1934 Stephen Lippmann ABSTRACT The nature of the relationship between private corporate actors and the state has been of interest to sociologists for some time. In this analysis of the radio broadcasting industry between 1920 and 1934, I examine the process through which commercial broadcasters influenced the National Radio Conferences and the Federal Radio Act, the first regulatory legislation to govern the broadcasting industry. In doing so, I propose a theory of ideological capture, which outlines a set of conditions under which private influence on the state is likely to be realized. Private interests are likely to succeed at ideological capture when they (1) are highly mobilized and (2) frame their intentions, purposes, and visions of themselves and their role in an industry in a manner similar to the prevailing ideologies of important state actors.

Politics and the Corporation Research in Political Sociology, Volume 14, 109–148 Copyright r 2005 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN: 0895-9935/doi:10.1016/S0895-9935(05)14004-2

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INTRODUCTION Commercially supported, for-profit radio broadcasting has been the dominant format throughout most of the industry’s existence. During broadcasting’s formative years, however, several competing visions and broadcasting ideologies co-existed on the radio dial. For nearly a decade, these visions were realities as non-profit religious and educational broadcasters occupied a significant proportion of the country’s airwaves. However, with the passage of the Federal Radio Act of 1927 and the Federal Communications Act of 1934, non-profit broadcasters were squeezed from the dial and commercial broadcasters rose to prominence. In this chapter, I seek to answer the following questions: how did non-profit radio stations, which in the mid-1920s comprised 55% of the total stations on the radio dial, become nearly extinct by 1934, when the Communications Act was passed (U.S. Department of Commerce, 1925; Federal Radio Commission, 1934)? Why did for-profit stations supported by commercial advertising become the dominant station format by the 1930s, despite Herbert Hoover’s earlier insistence that ‘‘it is inconceivable that we should allow so great a possibility for service, for news, for entertainment, for education, and for vital commercial purposes, to be drowned in advertising chatter, or for commercial purposes that can be quite well serviced by our other means of communication?’’ (U.S. Department of Commerce, 1922b, p. 3).1 I provide answers to these questions by examining the frames that competing groups of broadcasters employed when trying to inﬂuence the emerging Federal Radio Commission (FRC), and in so doing offer an explanation for why commercial broadcasters succeeded. Frames, which are cognitive tools that ‘‘render events or occurrences meaningful and thereby function to organize experience and guide action,’’ and framing processes have received considerable attention from social movement theorists (Benford & Snow, 2000, p. 614). In this chapter, I argue that a focus on framing processes can shed considerable light on the relationship between organizational actors and the state. According to recent accounts of broadcasting’s early history (e.g. McChesney, 1993; Streeter, 1996; Starr, 2004), commercial broadcasters and organizations not only won the battle for control over the airwaves but also controlled the political process, which led to the creation of regulatory legislation favorable to their interests. They also played a large role in the definition of the ‘‘public interest’’ standard that guided regulatory decisions in broadcasting to favor stations offering general programming over those with more narrow foci. These accounts attribute this success of

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commercial broadcasters to their size and power, but unfortunately fail to specify adequately the mechanisms through which this occurred. Because of the technological limitations on the number of broadcasters that could feasibly operate in a particular market, it was clear that a regulatory solution was necessary to solve the problem of interference in the broadcasting industry. However, the newness, novelty, and rapid growth of the industry presented a unique set of problems to regulators and limited the applicability of standard ‘‘associationalist’’ regulatory policies, which were common in the 1920s, to the industry. Through a focus on several factors, including group mobilization and the alignment of rhetorical frames surrounding the role and purpose of broadcasting, I propose a theory of ideological capture to explain the conditions under which efforts at political inﬂuence by corporate actors are realized. Economists have developed the notion of ‘‘regulatory capture’’ to describe private inﬂuence on governmental processes (Stigler, 1971). According to the economic theory of regulatory capture, because government power associated with capture can bestow beneﬁts on individuals or groups, it can be treated as a commodity governed by the laws of supply and demand (Becker, 1983). As certain industries or interest groups increasingly value the beneﬁts that regulation might bestow upon them (i.e. restrictions on entry, exemption from anti-trust laws, favorable treatment in legislation), they are more likely to devote individual and collective resources to support the passage of regulatory legislation through lobbying, campaign donations, and the like (Posner, 1971). If private organizations devote enough resources to such an effort, regulatory agencies become ‘‘captured’’ by the regulated ﬁrms, and they tend to serve the interests of those ﬁrms and increase the incomes of actors within them. However, research in organizational and political sociology leads us to believe that this process may also have weaker forms and may occur in more subtle ways than those portrayed in economists’ accounts. Skocpol’s (1985) effort to ‘‘bring the state back in’’ has led to a ﬂurry of theory and research on state autonomy. When the state can act autonomously, its capture by private organizations becomes significantly more difﬁcult than the economic theory of regulatory capture leads us to believe (Hooks, 1990). In her initial statement, Skocpol argued that state actors may be only boundedly rational, and lack the capacity to act in the public’s or society’s interest. Also, in many cases, state policies do not serve the ruling class. In fact, Skocpol found that state policies may actually shape the capacity of elites for collective action, instead of the other way around (1979). She argued that the state is not simply a structure intended to serve the interests of the public or a tool of the elite used to congeal their power. Frequently, states and the actors

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who staff them act as autonomous agents, and make decisions that serve their own interests (Skocpol, 1980; Skocpol & Amenta, 1986). Recent scholarship on the subject has moved away from these extreme views, and focused on the conditions under which the state is able to remain autonomous or becomes captured by private interest groups (Prechel, 1990; Carruthers, 1994). Ideological capture, a ‘‘weak’’ form of regulatory capture, builds on this work by focusing on the social processes that allow organized interest groups to inﬂuence regulatory bodies and gain favorable treatment in regulatory legislation. Studies by economists and political scientists of private inﬂuence on the regulatory process abound, but this process remains understudied by sociologists. In this chapter, I develop a sociological account of the process through which well-organized commercial broadcasters successfully competed for inﬂuence in regulatory procedures and content in their industry.

THE ORIGINS OF BROADCASTING AND THE NEED FOR REGULATION The formative years of radio broadcasting provide an excellent context for investigating issues related to private inﬂuence on the state. First, the broadcasting industry continues to be a heavily regulated one, as the scarcity of airwaves necessitates an overarching framework for determining who may have access to them. Early on, however, adequate regulations did not exist. By examining the debates that occurred among broadcasters and the Department of Commerce, we can understand the process that led to the regulatory solution codiﬁed in the Federal Radio Act of 1927 and the Federal Communications Act of 1934. In addition, the U.S. case is exceptional in comparative terms. As many organizational and political sociologists are wont to argue, the regulatory scheme that emerged in the U.S. is not the ‘‘one best way’’ to organize the industry or simply a natural, inevitable, or rational outcome of competition or other market forces. It is a social and political construction that could have – and indeed has – developed very differently given different circumstances.2 Broadcasting’s Formative Years Radio has its roots in the last decade of the 19th century. Marconi patented his ﬁrst ‘‘wireless telegraph’’ during the summer of 1897, and from there the

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medium grew rapidly (Barnouw, 1966). At ﬁrst, radio broadcasting was chiefly the domain of amateurs and hobbyists, who had complete autonomy in their use of the airwaves. Their relatively small numbers permitted this freedom. When interference did occur, it was non-consequential, and considered a challenge to be overcome by the amateurs. In 1910, amateur broadcasters lost their dominance of the ether, as Congress mandated that all passenger ships carry wireless sets (Douglas, 1987). This created considerably more clutter in the airwaves, and the need for some order became clear in 1912 with the Titanic disaster. According to Krattenmaker and Powe (1994, p. 5), ‘‘investigation into the disaster revealed that distress calls [from the Titanic] had been received by the Marconi station in Newfoundland. As the news broke, however, amateur radio operators along the East Coast ﬁlled the air with questions, rumors, and, most of all, interference,’’ severely hampering rescue efforts. This interference became the impetus for the Radio Act of 1912, which required that all broadcasters hold a license from the Secretary of Commerce and Labor (Radio Act of 1912). The U.S. Navy was given optimal wavelengths, and both Naval and distress communications took precedence over other types. Amateurs were still free to listen at will, but communications originating from their sets would now be limited to wavelengths too short to be heard beyond the immediate vicinity of the broadcast point (Krattenmaker & Powe, 1994). With the Radio Act of 1912 in place, broadcasting followed a rather uneventful course throughout the 1910s. Experimentation with and development of radio in labs and by enthusiasts came to a halt during World War I (Barnouw, 1966). After the War, however, experimentation occurred once again with increased vigor. Radio manufacturing corporations such as Westinghouse and General Electric produced affordable receiving sets available to the general public. Amateurs were continually learning not only how to make use of their short waves, but also to negotiate their way around the regulations of the Radio Act of 1912 (Krattenmaker & Powe, 1994, p. 7). With the broadcasting of the presidential election results of 1920 on KDKA in Pittsburgh and the World Series of 1921, radio began to penetrate many aspects of American life. As the popularity of radio broadcasting increased, however, many problems arose which the Radio Act of 1912 was illequipped to handle. Chaos, Confusion, and the Need for Regulation Given the number and range of broadcasters, and the continuing growth in popularity of radio broadcasting, it was only a matter of time before the

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airwaves were full. And once they became full, Secretary of Commerce Herbert Hoover’s then limited role as a licensor of stations gave him no power to deny licenses to stations (Bensman, 1970). In the 1923 Supreme Court decision Hoover vs. Intercity Radio, the Secretary of Commerce was stripped of the power to deny broadcast licenses, and was reduced to little more than a processor of licenses for all applicants. However, Hoover interpreted this decision as giving the Department of Commerce (and himself, as the Department’s Secretary) the power to assign frequencies and hours of operation to prevent interference (Bensman, 1970). When the Zenith Corporation challenged this power in the 1926 Supreme Court decision United States vs. Zenith, the Secretary of Commerce was once again stripped of all regulatory power, including the ability to deny licenses to applicants, and to assign frequencies and impose hour restrictions (Garvey, 1976). He was again forced to give licenses to all who applied. Given the popularity of radio at the time and the low barriers to organizational entry, the number of applicants was enormous. From July 1926 until March 1927, no fewer than 221 stations were licensed. Fifty stations changed transmitter locations, and almost 200 [increased] their power and more than 100 ‘pirated’ other wavelengths. When congress convened and the president ﬁnally signed the compromise which became the Radio Act of 1927, Feb 23, 1927, the number of stations had grown to 733, with almost 200 more under construction (Bensman, 1970, p. 435).

Without the ability to deny station licenses, the number jumped by 25% from 1923 to 1927. During this ‘‘breakdown of the law’’ period in 1926 and early 1927, the general chaos that had ruled the airwaves since the industry’s inception threatened its existence. ‘‘Wandering’’ across frequencies, as the radio evangelist Aimee Semple McPherson was fond of doing in Los Angeles, became common. In some major urban markets, there were simply not enough frequencies to handle the number of stations operating. KLDS and nearby WOS were forced to broadcast on the same frequency, and after WOS violated the agreement the two stations had reached, the two stations took their conﬂict to court. As more stations went on the air, problems grew, from periods of interference and static to situations such as one ‘‘in Cincinnati, [where] two stations on the same frequency could not ﬁnd a satisfactory solution and simply broadcast simultaneously for weeks’’ (Krattenmaker & Powe, 1994, p. 11). The need for a solution was clear even in the earliest years of the industry, but the nature of the solution was not. In 1927, Congress passed the Federal Radio Act as a temporary solution to the problem of interference and chaos on the air. It created the FRC, which was given authority to grant radio

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licenses to stations that operated in the ‘‘public interest, convenience, or necessity’’ (U.S. House of Representatives, 1927, p. 4). In 1934, the Federal Communications Act would make permanent the provision of the Federal Radio Act. Before 1927, and for some time after, however, interference and the tremendous growth in radio’s popularity made it the site of an intense debate over the nature and scope of an appropriate regulatory solution. The state, by all appearances, was determined to protect the public interest on the airwaves. Exactly how and why commercial broadcasters were able to exert significant inﬂuence on the broadcasting industry can shed light on the origins of regulatory legislation.

RETHINKING REGULATORY CAPTURE Research in political and organizational sociology on organizational interests and policy formation provides a conceptual toolkit for understanding how a solution to the broadcasting industry’s problems was devised. Early on, the Department of Commerce intended to remain autonomous, acting on the public’s behalf. How was it that the commercial broadcasters were able to exert significant inﬂuence on the Department’s activities despite their public interest orientation? Two existing views of the policy formation process have emerged which challenge the sweeping theoretical frameworks of both state autonomy and regulatory capture by focusing on the conditions under which the state is likely to remain autonomous or become captured (Skowronek, 1982; Amenta & Carruthers 1988; Hooks, 1990). The materialist and the cultural approach both highlight organizational and environmental contexts in which policy is debated and formed. These contexts, they argue, can limit or enable actors in private organizations and the state to successfully pursue their interests.

The Materialist Approach The materialist view of politics and the political process focuses on actors, their interests, and the structural opportunities available to help them realize their goals. The materialist view holds that state autonomy varies over time, ﬂuctuating with the varying structural capacities of the state and competing groups to pursue their interests. The United States Department of Agriculture, for example, had a great deal of autonomy during the New Deal due to the professionalization of its staff and the insulation provided

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by the rigid and centralized bureaucratic features of the New Deal (Skocpol & Feingold, 1982; Hooks, 1990). It was only after federal restructuring and a shift in focus away from domestic issues during World War II that the Department’s autonomy declined (Hooks, 1990). In their analysis of social spending in the U.S. during the great depression, Amenta and Carruthers (1988) found that states enacted spending policies regardless of political or economic conditions – individual states’ bureaucratic and ﬁscal capacities alone explained much of the variation in social spending programs among U.S. states. Subsequent materialist research on state policy paid more attention to external pressures on the state from organized private interest groups. By focusing attention on changes in the ‘‘organizational state environment,’’ the ability of states and state actors to act as autonomous agents was seen as a function of not only the organization of the state bureaucracy itself, but also environmental characteristics, including the degree to which economic and political power is concentrated among capitalist groups, and the historical conditions which these groups may attempt to inﬂuence policy (Prechel, 1990, p. 650). At various points in U.S. history, for example, collective actions by private steel organizations have pushed for different types of state policy that continually favored capital accumulation in the face of changing markets and economic conditions. The internal structure and coherence of capitalist-class organization and their growing reserves of capital determined their efﬁcacy at inﬂuencing policy (Prechel, 2000). In the 1930s, strategic collective action on the part of chain stores enabled them to effectively push for the repeal of anti-chain legislation that was passed in the ﬁrst decades of the 20th century (Ingram & Rao, 2004). In the debate surrounding anti-chain store legislation, collective action among highly mobilized and resource-rich chain stores allowed them to organize national coalitions and inﬂuence federal law surrounding chain-store legislation and defeat the state-level actions by less-inﬂuential independent retailers. The materialist approach shares the assumption with the capture theory that actors both in and outside of the state are rational and work strategically to pursue their self-interest. However, it recognizes that there are political, economic, organizational, and other real constraints on their ability to realize their goals. These material constraints provide the basis for competition among private interests and between them and the state for economic dominance and inﬂuence in policy making. State actors, according to the materialist view, are able to pursue their own agendas only when the organizational structure of the state insulates them from external pressures and bestows upon them the resources and capacity for effective action.

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Private interest groups are most likely to realize their inﬂuence upon the state when they have sufﬁcient economic power that enables them to mobilize and inﬂuence actors and agencies within the state.

The Cultural Approach The cultural approach arose, in part, as a response to the rationalist assumptions underlying the materialist approach described above. This view de-emphasizes actors’ self-interests and their abilities to act strategically to pursue those interests, and instead focuses on the cultural context in which policy is formulated. According to this view, which is rooted in the neoinstitutional perspective of Meyer and Rowan (1977) and DiMaggio and Powell (1983), action by the state and private interest groups are constrained by a variety of cognitive and normative forces. Actors operate within normative frameworks that color their visions of appropriate solutions to particular kinds of problems and legitimize certain kinds of action in the eyes of key stakeholders and the general public. Normative frameworks also constrain cognitive processes of perception and recognition. Culture, in this view, constitutes a deep structure of codes that infuses certain actions with social value. These actions, then, become taken-for-granted and alternatives are difﬁcult, if not impossible, to conceptualize (Campbell, 1998). From this viewpoint, industrial policies are rooted in national political and institutional cultures instead of being a rational corrective to market failure (Dobbin, 1994; Hart, 1998; Aguilera & Jackson, 2003). In his inﬂuential study of industrial policy in the 19th century France, Britain, and the U.S., Dobbin (1994) argued that national strategies for economic governance and growth were infused with meanings from the political cultures in which they were created. The United States, with a strong tradition of community self-rule and a de-emphasis of centralized control, wrested industrial planning in the hands of local and state governments. The French state, fearful of excessive private control and potential monopolies, exerted significant inﬂuence in its supervision of the railroad industry, while Britain ensured the political autonomy of individuals by leaving industrial development in the hands of private investors. The symbols and meaning systems that constitute national political culture ﬁlter actors’ identiﬁcation of problems and constrain their abilities to conceive of policy solutions. States are also more likely to succeed in acting autonomously whenever such action ﬁts into some sweeping normative framework, or can be justiﬁed

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in terms of a prevailing cultural ideology – when actions are, in a word, legitimate. In Depression-era Great Britain, for example, the British government adhered to the orthodox ‘‘Treasury view,’’ which held that government expenditure would suppress private investment. This modus operandi had become an entrenched part of the institutional infrastructure of the British Treasury well before the depression, and inﬂuenced their approach to economic policies, even in the complicated and turbulent Depression. Sticking to this policy, which had become the norm, allowed the British government to remain autonomous, even though increasing the level of the treasury’s investments may have served both public and private economic interests (Carruthers, 1994). The cultural perspective has uncovered the nuances of the policy-making process by focusing on its embeddedness in a cultural system that constrains actors’ choices according to normative and cognitive frameworks of what is legitimate and even feasible. Economic actors are not completely free to pursue their self-interests. Instead, individuals and organizations often act in accordance with cultural scripts that are embedded deep in the cultural constitution political systems and society. At its best, this approach provides a rich account of the ways that cultural codes and symbols infuse the actions of policy makers in subtle ways (Sewell, 1992). Because of this focus, however, this perspective has been accused of portraying actors as ‘‘cultural dopes’’ who act unreﬂectively in accordance with prevailing norms.

IDEOLOGICAL CAPTURE My theory of ideological capture builds on the theories described above by focusing in the interplay of material interests and cultural forces in the policy formation process. According to Campbell (1998, p. 379), ‘‘to ask whether either interests or ideas are the chief determinants of policy outcomes is a misleading way to pose the question because it neglects the possibility that the it is the interaction between the two that countsy.’’ Instead of treating materialist and cultural perspectives as competing frameworks (see Dobbin, 1994; Edelman & Suchman, 1997), ideological capture holds that actors can act strategically in their self-interest and are embedded in a cultural and normative framework. In my view, the mobilization of private interest groups in pursuit of their material interests is a necessary but not sufﬁcient step toward realizing political inﬂuence.

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Mobilization facilitates a variety of cultural and social processes through which groups inﬂuence the state in their favor. In entirely new industries, such as radio broadcasting in the 1920s, these processes include increasing access to key stakeholders and policy makers, the creation of a uniﬁed body of organizational knowledge and coherent identities, and the shaping of a cultural and institutional framework within which organizational, industrial, and regulatory development plays out (Aldrich & Fiol, 1994; Suchman, 1995). Indeed, the ingredients of this cultural framework can even be used strategically as resources in the competition for inﬂuence (Swidler, 1986; Clemens, 1997). Ideological capture pushes the current debate forward by focusing on the rhetorical frames that actors employ when trying to inﬂuence legislation, in addition to group mobilization and legitimacy. It explains why particular frames are more resonant with key stakeholders than others. State agencies often have some degree of autonomy and they often act either in what they perceive to be their own or the public interest. However, if some organizational forms (organizational goals, activities, and identities) are aligned with these interests, organizations and actors afﬁliated with that form will achieve a measure of legitimacy that will facilitate their inﬂuence on policy debates. Stated succinctly, the theory of ideological capture holds that: through collective action and the symbolic and rhetorical alignment of organizational activities with prevailing discussions about an industrial domain and the government’s role in it, organizations are able to legitimate their authority and influence on the policy formation process, opening the door for regulatory capture. Originally introduced by Goffman (1974, p. 21), ‘‘frames’’ refer to the cognitive and social psychological process through which individuals ‘‘locate, perceive, identify, and label’’ events in their own lives and in the world. Social psychologists initially viewed frames as part of subconscious cognitive structures that enable people to negotiate meanings, make sense of, and talk about the world around them (Goffman, 1974; Turner, 1978). However, others have adopted the concept and promoted alternative understandings of frames and framing processes, which highlight the ways that individuals and groups can actively use and manipulate cognitive frames in their favor. According to Campbell (1998, p. 394), ‘‘actors intentionally appropriate and manipulate public sentiments for their own purposes. Hence, policy makers are not just constrained by public sentiment, they also enjoy some leeway to mobilize it toward their own ends’’ by framing their arguments effectively. Political parties, for example, actively frame issues in terms of fundamental, moral, and ideological codes that will make them

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meaningful and capable of mobilizing further support. Groups which are successful at maintaining coherent and succinct frames are more likely to mobilize support among constituents (Lakoff, 2002). Social movement theorists adopted the framing perspective and moved it forward by studying processes of ‘‘frame alignment’’ (Snow, Rockford, Worden, & Benford, 1986). Frame alignment is the ‘‘linkage of individual andyorganizational interpretive orientations, such that some set of individual interests, values, and beliefs, andyorganizational activities, goals, and ideologies are congruent and complementary’’ (Snow et al., 1986, p. 464). This process can be part of organizational strategy, in which ‘‘global’’ issues are turned into local and even personal ones in order to foster social movement participation. It also describes the cognitive processes through which people interpret movement or organizational initiatives in terms of their own lives, and align the two in order to justify participation. The effectiveness of these active framing projects is due in part to their resonance in the minds of targeted individuals. Frames are likely to resonate with the public or key stakeholders when they resonate sufﬁciently with an overarching ideological or cognitive framework (Gamson & Modigliani, 1989; Babb, 1996). As neo-institutional theory was reﬁned throughout the 1980s and actors and cognitive processes began to play an increasingly important role in theoretical accounts, neo-institutionalists used framing theory to understand cognitive processes behind institutional change. In an early theoretical statement, Friedland and Alford (1990, p. 248) focused on the variety of institutional logics, or the ‘‘set of material practices and symbolic constructions’’ in a given environment. Because of the contradictions built into competing logics and the latitude for agency and choice they allow, individuals can elaborate upon and exploit these logics to their own advantage through manipulation and interpretation. Clemens (1993, 1997) adopted a similar perspective in her study of organized challenges to the U.S. political structure at the turn of the last century. She started with the assumption that ‘‘any given society will encompass a heterogeneous set of organizational forms’’ (Clemens, 1997, p. 48). Depending on peoples’ experiences with different kinds of organizational forms, they will develop a distinct ‘‘organizational repertoire,’’ or familiarity with different kinds of organizations. Institutional change, Clemens argues, is facilitated when individuals apply organizational forms from their personal repertoire to new areas of organizational life. In explaining the rise of interest group politics, Clemens argues that previously marginal groups – farmers, labor, and women – succeeded in

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not only pushing forward their political agendas but also in transforming politics through the innovative application of organizational repertoires with which these groups gained familiarity in other spheres of social life. Clemens’ study teaches us that material interests and cultural frameworks often interact to produce policy outcomes. Political innovation, which in the early 20th century included the pooling of individual resources and exerting collective power in the political process, was clearly a process that had ramiﬁcations for material functioning of American politics. However, Clemens argues that the process of mobilization, which has been treated by many merely as the aggregation of individual interests, is a cultural process in which actors actively employ institutionalized scripts and codes of action, which increases their legitimacy and efﬁcacy. To this point, neo-institutional analyses of the use of frames by organized interest groups have taken on a decidedly one-sided character. In the case of women’s groups’ success in inﬂuencing U.S. political organization described above, Clemens’ primary focus is on the adoption of novel forms by the women’s groups. She states, ‘‘Women’s groups, along with others, were politically successful insofar as they adapted existing non-political models of organization for political purposes’’ (Clemens, 1993, p. 758). However, in order for inﬂuence to be felt, some basic process of frame alignment had to occur. Through the importation of repertoires from one institutional sphere (the family) into another (politics), women were able to legitimize their participation in a sphere from which they had hitherto been excluded. They framed their political participation in a way that aligned it with prevailing world-views, which increased the efﬁcacy of their action. In order for private actors to successfully inﬂuence an autonomous or partially autonomous state, the frames of the two parties must be congruent in order for agents of the state to be receptive to proposals from outsiders. In the approach I propose, I argue that the use of novel or innovative frames or repertoires alone is not sufﬁcient to bring about punctuated institutional change such as industrial regulation. When an organized interest group attempts to inﬂuence another, it is by definition a bilateral process. An adequate theory of political inﬂuence and institutional change needs to take both sides into consideration. In considering the process of ideological capture in the early radio broadcasting industry, I not only consider the structure and ideologies of for-profit, commercial broadcasters, but also those of the relevant Federal bodies concerned with radio broadcasting and its regulation. Any effort toward political inﬂuence by commercial radio broadcasters could only have been successful if those state actors in charge of regulating the industry had accepted it.

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IDEOLOGICAL CAPTURE IN THE RADIO BROADCASTING INDUSTRY The acute need for a solution to the problems plaguing the broadcasting industry created an opportunity for commercial broadcasting organizations to capture the various agencies in charge of regulating radio broadcasting. As a result, they were able to gain very favorable treatment in the ﬁrst piece of legislation intended to regulate modern broadcasting, the Federal Radio Act of 1927. Further, they shaped the definition of the ‘‘public interest’’ in broadcast regulation to include those stations offering general program content over those narrowly focused stations aimed at specific niches. Through group mobilization and the rhetorical framing of their goals, activities, and intentions in a manner acceptable to the state, or the process of ideological capture, commercial broadcasters were able to exert considerable inﬂuence on the decisions of Federal regulators and win favorable treatment in regulatory legislation.

Mobilization Commercial Broadcasters To a large degree, the organization and mobilization of large, commercial broadcasting organizations made them highly visible, helped to unify their goals, and increased their power and the efﬁcacy of their action. This unmatched level of political mobilization was the result of a dense interorganizational network brought together by the Radio Corporation of America (RCA). RCA was formed when the General Electric (GE) Company bought out one of its major rivals in the wireless communication industry, American Marconi. Shortly after this acquisition, GE proposed to two other major U.S. producers of wireless equipment, the American Telephone and Telegraph Company (AT&T) and Westinghouse, a patent pooling arrangement that would result in the crosslicensing of over 1,200 radio-related patents among the companies and would be known as RCA. Under the RCA agreement, GE and Westinghouse would manufacture radio receiving sets, ‘‘RCA would be responsible for sales and distribution as well as for radiotelegraph services, and AT&T would have exclusive rights to telephone service and to interconnection of wired and wireless systems’’ (Starr, 2004, p. 227). When AT&T withdrew from the agreement in 1923, it developed two major innovations. The ﬁrst was the creation of the ﬁrst

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broadcasting network (what would soon become the National Broadcasting Company) through the connection of stations via telephone lines. The second was the direct sale of airtime to advertisers, thus, making broadcasting itself a profitable venture. Shortly after AT&T withdrew from the RCA agreement, RCA would buy from AT&T the stations and connections that would soon constitute NBC. As an umbrella for Westinghouse, GE, and NBC, RCA now controlled the ﬁrst national broadcasting network and two of the major producers of receiving sets in the U.S. Through RCA, commercial radio broadcasters’ activities and interests were uniﬁed. Non-Profit Broadcasters Non-profit broadcasters, on the other hand, were fragmented at best, and faced deep ideological divisions in some instances. There is little evidence that educational broadcasters, who were issued 128 licenses between 1921 and 1925, mounted an effort to mobilize themselves. This can be attributed to several causes. Many educational broadcasters in the early 1920s operated on shoestring budgets, if they had ﬁnancing at all. Throughout the 1920s, almost a third of all college-afﬁliated stations gave up their licenses within a year of obtaining them because of a lack of ﬁnancing (Frost, 1937). In addition, there was considerable diversity in the interests educators had in using the radio. Some stations, such as the University of Wisconsin’s WHA, scheduled instructional programming intended to replicate college classes (University of Wisconsin, 1969). Others, like WBAA at Purdue University, were operated by the department of engineering, and were used primarily for faculty research. Still others were intended to be community service stations, as many college-afﬁliated stations are today. This lack of resources, coupled with divergent goals and perceptions about the role that radio broadcasting could play in higher education, made any attempts at mobilization early in the medium’s development unlikely. It was not until 1929 – two years after the passage of the Federal Radio Act that would help to seal the fate of non-profit broadcasters – that educators received funding from the Payne Fund and began a concerted effort to inﬂuence the course of broadcasting in the U.S. (McChesney, 1993). By that time, however, they were too late. Religious broadcasters also failed to mobilize themselves around a common goal, but for more volatile reasons than educational broadcasters. In the early 1920s, religious organizations of various sorts and from across the U.S. established scores of radio stations. However, this development led to a ﬁrestorm of controversy within many religious communities, which undermined the ability of religious broadcasters to effectively mobilize themselves

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and protect their interest on the dial. The debate surrounding religious radio broadcasting reﬂected a wider debate occurring between modernists and fundamentalists in religious circles in the early decades of the 20th century. Some advocates for radio in religion saw an enormous potential that the new medium could have in reaching more people and spreading religious doctrine. Several religious ﬁgures, such as Billy Sunday, ‘‘Fighting’’ Bob Schuler, and Aimee Semple McPherson, hosted wildly popular radio programs and played a vital role in the growth of radio’s popularity (Bruns, 1992; Erickson, 1992). Other, less celebrated ﬁgures hailed radio’s possibilities for reaching new audiences. Dr. John Roach of New York City installed a broadcast system in his Baptist church to attack the theater, evolutionary theory, dancing, and ‘‘the latest style.’’ He declared that his system was ‘‘so efﬁcient that when [he] twist[ed] the devil’s tail in New York, his squawk will be heard across the continentythe advantages and beneﬁts from the religious use of this modern invention will far outweigh any possible incidental disadvantages’’ (New York Times, February 25, 1923). In 1923, the Reverend E.J. van Eaton, who helped pioneer the ﬁrst religious broadcast in Pittsburgh, hailed radio’s ability to reach shut-ins and spoke of the wholesome challenge it presented to churches to ‘‘make good or go out of business’’ (New York Times, February 19, 1923). Similar sentiments were echoed repeatedly by many other religious leaders. Reverend Dr. J. Lewis Harstock likened radio to an ‘‘angel of the everlasting gospel’’ and the best way to reach the ‘‘unchurched’’ (New York Times, November 26, 1923). In New Jersey, radio receivers were installed at a country club so Sunday morning golfers could hear church services (New York Times, February 20, 1922), and in Omaha, Nebraska, a sermon was broadcast to reach explorers in the Arctic Circle. Dr. James Ludlow, pastor emeritus of the Mann Avenue Presbyterian Church predicted radio would make preachers improve their sermons and lead to increased attendance and popularity. However, not all shared this positive view of the role that radio broadcasting could play in religion. Some feared that the broadcasting of religious services and other programs would threaten the existence of established religious venues and institutions (Berkman, 1988). One statistician claimed in a newspaper opinion piece that ‘‘a hundred thousand churches in this country and their millions of members little realize how their institutions are to be changed by radio broadcasting. People travel the path of least resistanceyand are apt to remain at home to use the radio’’ [to hear services] (New York Times, January 25, 1923). Many religious leaders feared the same outcome. Others objected to religion on the radio on ideological grounds. Many mainline Protestants feared that broadcasting religious programming and

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services on the radio would cheapen its value and undermine its sacred nature (Schultze, 1988). Presbyterian minister, Clarence McCartney, for example, feared that religious radio content would be ‘‘grotesque and irrelevantyIt would tend to cheapen the meaning of the church service and the preaching of the Gospel’’ (quoted in Berkman, 1988, p. 6). Another observer wrote that many programs were ‘‘cheap and tawdry and tend to bring Protestant radio into disrepute’’ (quoted in Schultze, 1988, p. 290). Despite such objections, religious radio stations became increasingly popular throughout most of the 1920s until the passage of the Federal Radio Act of 1927. Because of this practical and ideological debate and denominational nature of the station operators, however, religious broadcasters operated primarily in isolation from one another. Commercial radio broadcasters, which in 1922, only represented a small proportion of all broadcasters, were a well-mobilized group even in the earliest days of broadcasting. Under the auspices of RCA, many of what would become the most powerful and inﬂuential players in the U.S. broadcasting industry aligned their interests and complimented one another through the patent pooling agreement that divided the tasks of broadcasting and manufacturing, and, in turn, reduced competition among them. Their largest non-profit counterparts – educational and religious broadcasters – were both fragmented at best, and in some cases, deeply divided. The commercial broadcasters’ high degree of mobilization gave them power and made them highly visible players in the earliest efforts in regulating broadcasting. Individual organizations that mobilize with other similar organizations to form a uniﬁed organizational community are better able to act collectively to pursue their shared interests than individual organizations acting alone. Collective action among organizations makes organizational learning much easier, and helps to increase a particular organizational form’s legitimacy in the eyes of key stakeholders (Aldrich & Fiol, 1994; Miner & Haunschild, 1995). Mobilization and collective action among organizations can also help to unify interests and goals, and can facilitate organizational populations’ efforts at inﬂuencing the state, as commercial broadcasters were able to do (Aldrich, 1999). Collective action is particularly important to organizations attempting to inﬂuence regulatory legislation in their favor. Collective action can increase organizational knowledge, which can not only lead to innovation and the development of industries, but can also help organizational actors to develop ‘‘expertise’’ and exert legitimate inﬂuence in policy-making circles (Moore & Hala, 2002). Collective action also helps to create a uniﬁed set of

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goals around which various organizations can mobilize. Mobilization around collective goals ‘‘may enable new populations to shape the course of government regulation and perhaps win favorable treatment’’ (Aldrich, 1999, p. 250; also see Edelman & Suchman, 1997). In addition, collective action enables organizations to pool economic and political resources. The mobilization of these resources enables political inﬂuence through lobbying efforts, public relations campaigns, and strategies that may make it more difﬁcult for competing organizational forms to enter into or survive in the organizational population (Ingram & Rao, 2004). Mobilization ﬁrst enabled commercial broadcasters to spread their image among the general public. AT&T, a major partner in RCA, was a pioneer in the corporate use of public relations. Through its in-house ‘‘information department’’, one of the ﬁrst of its kind, AT&T had throughout the early years of the 20th century honed the use of publicity to generate not only public acceptance of the Bell system monopoly on telephone service, but also a general sense of excitement about the AT&T technologies and respect for the company’s progressive employment policies (Ewen, 1996). AT&T successfully won the battle for telephone industry dominance with the public, independent phone companies, and the government. In collaboration with newly formed public relations departments of other members in the RCA agreement, including General Electric and Westinghouse, AT&T embarked on a similar successful campaign to stiﬂe any potential public resistance for commercially supported radio broadcasting (Nye, 1985). RCA and its constituents pursued a multi-pronged strategy to persuade the public and other stakeholders that the organization of radio broadcasting along commercial lines was beneﬁcial to their interests. First, they had ready access to the public via the broadcasting stations owned by RCA subsidiaries. In addition, RCA pursued a new strategy of public relations that would not only increase the company’s exposure greatly, but also its legitimacy as an authority on a variety of issues related to radio broadcasting. David Sarnoff, a vice president in charge of radio broadcasting at RCA, early on appreciated the value of mass persuasion and favorable public relations (Bilby, 1986). Sarnoff cultivated warm relationships with journalists at major newspapers, and his thoughts on the development of the industry and speaking engagements became ‘‘newsworthy’’ events. Between 1924 and 1926, Sarnoff’s speeches to a variety of organizations, ranging from the Boston Chamber of Commerce to the Sphinx Club, were covered regularly by several major U.S. newspapers. Over the course of this coverage, both Sarnoff and RCA received massive exposure, virtually all of it positive. Coverage of these events served RCA by addressing major issues

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facing the industry and the ways in which RCA was prepared to deal with them. In addition, his newspaper connections enabled him to pen a series of editorials in which he addressed issues relevant not only to the general public, but also to musicians, actors and theater owners, and educators, all of whom had keen interests in the future of broadcasting and its relation to their respective ﬁelds. Despite the efforts that RCA poured into its public relations campaign, much of the debate for control took place behind the scenes and away from the public eye. Commercial broadcasters got their best chance to pursue their interests early in the industry’s history, when an important opportunity for collective action opened up as a result of the growing chaos on the airwaves. In 1922, Herbert Hoover convened the ﬁrst of four National Radio Conferences in order to discuss possible solutions to the problems plaguing the ﬂedgling broadcasting industry. Because of increased visibility and legitimacy that commercial broadcasters enjoyed as a result of their mobilization, they played a vital role in these conferences and the regulatory solutions that arose as a result of them. The National Radio Conferences The primary goal of the ﬁrst Radio Conference was, according to Hoover, to ‘‘advise the Department of Commerce as to the application of its present powers of regulation and to develop the situation generally with a view to some recommendations to Congress, if it be necessary, to extend to present powers of regulation’’ (U.S. Department of Commerce, 1922b, p. 1). The conference in 1922 was held directly after a meeting of an association of amateur enthusiasts called the American Radio Relay League, who represented the interests of one of the largest groups involved in radio broadcasting, along with the government, commercial, and non-profit groups (Sarno, 1969). The ﬁrst National Radio Conference was presided over by Secretary Hoover and a committee comprising representatives from several Federal agencies and experts on radio technology, summarized in Table 1. Those invited to testify before this committee at the First National Radio Conference included members of selected organizations and institutions with a direct interest in radio regulation. Their afﬁliations are summarized in Table 2. It should be noted that full-time commercial broadcasters comprised almost three-fourths of the participants in this inaugural conference, but comprised less than 10% of stations in operation during that year.3 Stations owned by companies afﬁliated with the Radio Corporation of America sent 24% of all representatives and comprised one-third of all commercial broadcasters in attendance at the conference, but they owned

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Committee of the First National Radio Conference.

Table 1. Committee Member

Afﬁliation

Herbert Hoover Dr. S.W. Stratton Major General George O. Squire Captain Samuel W. Bryant Mr. J.C. Edgarton Mr. W. A. Wheeler Wallace H. White R.B. Howell Dr. Alfred N. Goldsmith Hiram Percy Maxim D. B. Carson C. M. Jansky L.A. Hazelton Edwin H. Armstrong

Table 2.

Secretary of Commerce Department of Commerce War Department Navy Post Ofﬁce Department of Agriculture Congress Post Ofﬁce Institute of Radio Engineers American Radio Relay League Department of Commerce University of Minnesota Stevens Institute of Technology Columbia University

Afﬁliations of Participants in First National Radio Conference, 1922. Commercial

N %

RCA

Non-RCA

Amateur

Government

Total

5 24

10 47

4 19

2 10

21 100

and operated only six of the more than 300 radio stations on the air in 1922. On the other hand, religious and educational broadcasters, who together comprised over 20% of the stations in operation and were two of the most common station formats on the air, were absent from the conference altogether, although two committee members from educational institutions served as technical advisors at the conference (U.S. Department of Commerce, 1922b). It was from the debates and discussions at this and three subsequent radio conferences that the content and spirit of Federal Radio Act of 1927 would be derived. While their superior mobilization was an important factor leading to their dominance at the National Radio Conferences and eventually their

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dominance on the airwaves, it was not mobilization alone that allowed commercial broadcasters to realize their interests in the regulation of the industry. While they were a well-organized group in an obvious position to pursue their material interests, the coherent organization and economic power did not translate directly into market dominance and political inﬂuence, contrary to a materialist interpretation. In the early years of broadcasting, barriers to entry were low and new stations could be organized with relative ease and little expense. Amateur knowledge of broadcasting technology was extensive, often superior to that of the commercial broadcasting organizations (Douglas, 1987). Organizations of a variety of sorts could easily tap into this knowledge pool in order to start a station, and by all indications, they did just that (Douglas, 1987). Fig. 1 plots the number of commercial, religious, and educational broadcasters on the airwaves from 1923 to 1934.4 As Fig. 1 shows, commercial broadcasters were unable to dominate the unregulated broadcasting market before the passage of the Federal Radio Act of 1927. Thus, while commercially supported stations were often better funded than the non-profit ones and some were afﬁliated with large, powerful corporations including AT&T and RCA, this economic

400

350

commercial educational religious

number of stations

300

250

200

150

100

50

0 1923

Fig. 1.

1924

1925

1926

1927

1928

1929

1930

1931

1932

1933

1934

Station Formats, 1923–1934. Source: U.S. Department of Commerce, 1923– 1926; Federal Radio Commission 1927–1934.

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disparity in the early years of the broadcasting industry did not translate into market dominance by commercial broadcasters. By treating the mobilization of commercial broadcasters as an enabling factor in their movement to capture the regulatory process, I build on the materialist approach which holds that economic power and mobilization translate into political inﬂuence. The mechanisms through which resourcerich organizations inﬂuence the political process are underspeciﬁed in many materialist accounts (but see Domhoff, 1990).5 By turning our attention to the social, ideological, and cultural processes through which capture takes place, the theory of ideological capture can explain how the FRC became captured even as government actors viewed their role in the broadcasting industry as protectors of the public interest in the face of a growing corporate presence and increasing concentration in the new medium. The debates and discussions that took place during the National Radio Conferences are instructive for our understandings of the role that culture plays in the policy-formation process. Culture, in the neo-institutional view, provides a deeply structured set of constraints that infuse the actions of policy makers subconsciously. Radio broadcasting emerged in an era when the political culture was characterized by the idea of ‘‘associationalism,’’ an idea promoted enthusiastically by Hoover himself. Associationalism promoted the dissemination of new knowledge, innovation, and scientific discoveries across industries through collaboration and cooperation among industries and, to a lesser degree, between industries and the government (Hart, 1998). After an expansion of government intervention during the anti-trust activity of the early 20th century, many in the government, including Hoover and Treasury Secretary Andrew Mellon, hoped to retrench the Federal role in economic regulation. Through the encouragement of informal and formal industrial associations, Hoover and others believed that the pooled resources of private organizations could be used to speed industrial progress and create a system of economic self-governance that, over time, would replace the need for federal intervention in industrial matters (Hawley, 1974). According to Hawley (1989, p. 99), associationalism sought to ‘‘shift policy-making power fromygovernment regulators to associational networks and corporate bodies arising out of the private sector.’’ Rather than being the result of Hoover’s own distrust of big-government, ‘‘Hoover believed that the components of this associational order were evolving naturally and had been for the past thirty years’’ (Hawley, 1974). Policy-makers’ weariness toward increasing government intervention, and their positive evaluations of the private sector cooperation during World War I, propelled the associational movement forward in the 1920s.

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This ‘‘natural’’ evolution contributed to the taken-for-granted nature of associations as suitable solutions to market failure, and Hoover’s endorsement of this policy legitimized it and made it a common course of action in a variety of industrial settings (Hawley, 1989). Hoover and his associates, however, did not blindly adopt an associationalist policy toward broadcasting, as a neo-institutionalist account might predict. The broadcasting industry presented a unique set of challenges to both private broadcasting organizations and federal policy makers. Merely adapting a use of the ‘‘associative state’’ to guide the evolution of the industry was not appropriate for several reasons. Because of the explosion of the popularity of the medium and the large number of broadcasting organizations in operation, an immediate solution to the problem of interference and general chaos on the dial was necessary. Accordingly, Hoover felt broadcasting was ‘‘one of the few instances that I know of where the whole industry and country is earnestly praying for more regulation’’ (Department of Commerce, 1922b, p. 4). Given the ease with which new stations were entering the ether and the lack of effective regulatory guidelines, even Hoover felt it necessary to abandon his associational approach to industrial evolution, and instead promoted an active and direct federal intervention in the broadcasting industry. In addition, the state of the art in broadcasting technology was developing rapidly without government intervention. Because of this, Hoover’s approach to the broadcasting industry differed from his usual associational approach. Hoover’s associationalism hinged on the idea that the federal government, and especially his Department of Commerce, should encourage associations and cooperation among private groups and between those groups and the government for industrial development, the advancement of technology, and for increasing efﬁciency in American enterprise. Because broadcasting technology was developing at a rapid rate already, Hoover conceptualized government intervention in the industry in exceedingly and uncharacteristically narrow terms, especially when compared to the Department of Commerce’s activities in new industries such as the airlines and other forms of communication (Hawley, 1989). Hoover and other key actors involved in the regulation of broadcasting repeatedly drew an analogy between their role as broadcast regulators and ‘‘trafﬁc cops’’ (McChesney, 1993; Willihnganz, 1994). They were merely there to guide stations onto frequencies and keep them there once assigned, and had no interest in helping shape the future of the industry. Given the varying interests of groups in the broadcasting industry, an associationalist solution to the broadcasting problem was untenable. The need to construct a regulatory

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solution from scratch, one that departed significantly from the associationalist spirit of the times, opened the door for the strategic actions of commercial broadcasters and, ultimately, the ideological capture of the FRC by those actors. Cultural frames did play an important part of the discussions at the National Radio Conferences, but not as cognitive and normative constraints on action. Instead, they were actively invoked in strategic ways by commercial broadcasters vying for inﬂuence on the regulatory process.

Frame Alignment Collective action is likely to be more successful when structural opportunities emerge in the political system that mobilized groups can exploit to their advantage (McAdam, 1982). The chaos on the airwaves and the National Radio Conferences provided such an opportunity for the highly mobilized commercial radio broadcasters. These conferences gave commercial broadcasters a point of access to policy makers and a forum in which to voice their opinions about broadcasting, as described above, and occurred at a time when the future of radio broadcasting and broadcast regulation was wide open. Both the indeterminacy involved with the regulation of any entirely new industry and the highly symbolic nature of the services being provided by broadcasting organizations made the regulation of radio broadcasting particularly susceptible to capture. Commercial broadcasting organizations, through mobilization and collective action, were able to legitimize their expertise and inﬂuence on the general public and policymaking circles. With this high degree of legitimacy, and by strategically framing their visions of broadcasting and purpose on the airwaves in a way that was strikingly similar to Hoover’s own vision, they played an integral part in both the debates surrounding regulatory legislation and in determining the content of that legislation. The Government’s View of Broadcasting Early on in the history of broadcasting, the Department of Commerce faced several crucial decisions about the structure of the industry and the role they would play in it. According to Starr (2004, p. 328): broadcasting posed a set of constitutive choices. Now that radio was no longer conceived only as a means of point-to-point communication, governments had to reexamine earlier decisions about carving up the spectrum into different regions and regulating the use of

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the airwaves. These decisions, however technical in appearance, were often deeply political in their significance.

Before any decisions were made, though, Secretary Hoover and other state actors were developing notions about what role the new medium should serve in commercial and public life. In his opening address at the First National Radio Conference in 1922, Hoover made it clear that he considered the airwaves to be a public resource, and the primary concern of the Department of Commerce was to protect and safeguard the airwaves on the public’s behalf. Hoover realized that the rapid and tremendous growth of the industry presented imminent problems. These problems, he insisted, would be solved with the public’s interest in mind. His vision was that the radio was intended for the: spread of certain pre-determined material of public interest from central stations. This material must be limited to news, to education, to entertainment, and the communication of such commercial matters as is of importance to large groups of the community at the same time. Therefore, it is primarily a question of broadcasting and it becomes of primary public interest to say who is to do the broadcasting, under what circumstances, and with what type of material (Department of Commerce, 1922b, p. 2, emphasis added).

Public interest would play a large part in both the Department of Commerce’s perception of their role in the new industry and would eventually ﬁnd its way into the Federal Radio Act as the guiding standard, along with public convenience and necessity, for the licensing of stations and determinations of appropriate broadcasting content. Given the need for greater regulation, however, Hoover cautioned that ‘‘there is involved y in all of this regulation the necessity to so establish public right over the ether roads that there may be no national regret that we have parted with a great national asset into uncontrolled hands’’ (Department of Commerce, 1922b, pp. 1–5). In his short opening address at the First National Radio Conference, Hoover referred directly to the public interest seven times, and this notion infused the character and spirit of subsequent discussions and legislation surrounding radio broadcasting. The ‘‘public interest’’ standard, which appears ﬁrst in Hoover’s opening address to the First National Radio Conference, became the backbone of legislation governing broadcasting for the next half-century. According to the Federal Radio Act: except as otherwise provided in this act, the commission, from time to time, as public convenience, interest, or necessity requires, shall make such regulations not inconsistent with law as it may deem necessary to prevent interference between stations and to carry out the provisions of this act: Provided, however, that changes in the wave lengths,

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authorized power, in the character of omitted signals, or in the time of operation of any station, shall not be made without the consent of any station licensee, unless, in the judgment of the commission, such changes will promote public convenience or interest or will serve public necessity or the provision of this act will be more fully complied with (U.S. House of Representatives, 1927, Section 4).

In 1922, however, the public interest standard was ambiguous at best. Because this standard was not deﬁned by Hoover, the Department of Commerce, or anyone until well after the passage of binding regulatory legislation,6 it was left open to interpretation and the table was set for well-organized commercial broadcasters to realize their inﬂuence. Commercial Broadcasters and the Public Interest Commercial broadcasters’ primary source of income early on in the industry’s history was through the sale of receiving sets, and General Electric and Westinghouse were industry leaders in sales and innovations. Their early success depended on a widespread demand for radio programming that would reach the largest possible market. When AT&T pioneered program production ﬁnanced through the sale of advertising time, the commercial potential of radio skyrocketed. Commercial broadcasters like those in the RCA agreement realized the value of the airwaves early on. Through presenting themselves at the First National Radio Conference in a manner that was complementary to Hoover’s views of the new technology, commercial broadcasters secured their place in regulatory debates, their interests in regulatory legislation, and their space on the dial. As noted, the First National Radio Conference gave commercial broadcasters unmatched access to the state actors who were determined to secure and regulate the airwaves in the interest of the public. And members of the RCA patent pool initially bought into this view and emphasized the ways in which their stations and broadcasting format served the vaguely understood public interest. According to A.H. Griswold of AT&T: our idea [with regard to radio broadcasting] is this: that it is up to the public to make whatever use of this that is desirable and valuable to the public. It is not up to AT&T to promote the use of radiotelephony by putting on, perhaps, and very wonderful program that would make everyone desirous of buying expensive receiving sets and getting into the radio game. It is not our idea to promote the sale of equipment. We have no direct interest in the sale of equipment, but it is our idea to give the public a service and let that service, so far as we can, seek its own level. That is, it is up to the public to make use of that service in whatever way is advantageous and desirable to the public y the point is this, that we are interested in providing for the public the things that will give them the best service and will result in the greatest good to the public in general. (Department of Commerce, 1922b, p. 7).

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It is true that AT&T had no direct interest in the sale of receiving sets. However, they were interested in developing the infrastructure of the industry, which would help to send better signals to more people, and surely beneﬁt AT&T’s partners in RCA who were interested in selling radio receiving sets: Westinghouse and General Electric. The representatives from RCA’s constituent organizations would continue to make claims throughout the conference that their organizations were well equipped to operate in the public interest. Over the course of the two-day conference, representatives afﬁliated with RCA referred to the public interest in a manner similar to that described above over 100 times (Department of Commerce, 1922b). When the issue of commercial advertising, which Hoover was initially opposed to, was raised, commercial broadcasters also framed the issue in terms of the public interest and providing high-quality services to the public. E.P. Edwards, of General Electric stated: It would seem reasonable to me that advertising should be conﬁned to a few stations and to daylight hours unless means could be provided for carrying on every kind of entertainment and commercial advertisements over a range of wavelengths sufﬁcient to accommodate all of them, but in the radio game, when the whistle blows at night, I am glad to stop talking shop and listen to a little entertainment, and if they could conﬁne advertising to daylight broadcasting, I think it would be a fairly good plan. (Department of Commerce, 1922b, p. 21).

Hoover expressed concern and asked Edwards, ‘‘Have you gone into the question as to whether commercial users could monopolize the area of transmission as against the interest of public education, news, etc?’’ In addition to the over-commercialization of the airwaves, Hoover was concerned that the airwaves’ potential for public services would be overshadowed by entertainment. Edwards responded that ‘‘I should think that one method, as I stated, would be to conﬁne such broadcasting to daylight hours, if you please, provided there were not sufﬁcient wavelengths to enable you to carry on a simultaneous program of entertainment and commercial advertising’’ (Department of Commerce, 1922b, p. 22). Some commercial broadcasters, it seemed, shared the concern that radio broadcasting should not be used solely for commercial purposes. To some at RCA, however, the entertainment provided by commercial broadcasters was precisely what the public demanded. J.W. Elwood noted that his company, RCA was ‘‘establishing in New York a broadcast stationyfor entertainment. The public demands it; they want it’’ (Department of Commerce, 1922b, p. 30). A view of broadcast stations seemed to be emerging among commercial broadcasters that interpreted service of the public interest, not in terms of a radio dial full of a variety of different types

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of stations, each serving a different purpose (religion, education, entertainment, agricultural, and market reports each provided by specialist broadcasters) but in a broad sense, in which each station on the dial ought to provide as wide a range of programming as possible. L.R. Krumm, of Westinghouse, worried that: ‘‘there is a limitation to the number of broadcasting stations that can operate successfully and if you are going to get the desired results there must be some regulation and possibly limitation of the number of these stations.’’ Stations such as the Westinghouse station KDKA in Pittsburgh were most suitable for these limited stations, according to Mr. Krumm, because: we give out crop reports, market reports, weather forecasts; we give a certain amount of news. We transmit lectures, sermons, and speeches. I believe the Secretary [Hoover] himself made a speech at Pittsburgh which we broadcasted, so I will say, important speechesy. We put our equipment in churches, broadcasting the complete service from the chimes to the collection, and we feel assured we are pioneers in that. (Department of Commerce, 1922b, pp. 34–36).

In addition to realizing the importance of public interest in broadcasting, commercial broadcasters such as KDKA’s Krumm were instrumental in deﬁning exactly what form broadcasting in the ‘‘public interest’’ would take. Early on, the precise definition of the public interest was intentionally vague. While many agreed that the airwaves should be used in such a way as to provide the greatest beneﬁt to the largest number of people in the country, it was unclear exactly how this was to be accomplished. Commercial broadcasters argued that they were in the best position to serve the public interest, given the natural limits that the spectrum imposed on the number of stations who could broadcast in a given area. Stations broadcasting in the public interest, they held, would include the widest variety of broadcasting, including entertainment, music, and even educational and religious programming. In dealing with the latter subjects, however, commercial broadcasters were careful to emphasize ‘‘broad truths’’ programming, and staunchly avoided denominational or controversial programming on any subject. The newly formed National Broadcasting Company, for example, drafted its own interpretation of the public interest, which included a formal policy of steering clear of ‘‘doctrine and controversy’’ (National Broadcasting Company, 1939; Erickson, 1992, p. 3). Given increasing ethnic, class, religious, and ideological diversity in major metropolitan markets in the early 20th century, commercial broadcasters felt that their range and variety, in addition to their avoidance of potentially controversial topics, would best serve the public interest (McChesney, 1993). In addition, and not

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coincidentally, such programming would also reach the largest audience and appeal to sponsors and advertisers (Ewen, 1976; Bagdikain, 2004). In time, Hoover’s view of stations serving the public interest would take a tone similar to those of the commercial broadcasters and the alignment between the public interest frames held by private commercial broadcasters and Hoover and the Department of Commerce became closely aligned. In 1924, he said: The local station must be able to bring to its listeners the greatest music and entertainment of the Nation, but far beyond this it must be able to deliver important pronouncements of public men; it must bring instantly to our people a hundred and one matters of national interest. To this it must add matters of local interest (Third National Radio Conference, p. 3).

By the Fourth National Radio Conference in 1925, the proceedings reﬂected the apparent need for regulation and previewed the form this regulation would eventually take. Instead of valuing space for broadcasters of all types, as before, the need to limit and indeed reduce the number of broadcasters was expressed. Now, Hoover stated: So far as opportunity goes to explain one’s views upon questions of controversy, political, religious, or social, it would seem that 578 independent stations, many competing in each locality, might give ample opportunity for great latitude in remarks; and in any event, without trying out all this question, we can surely agree that no one can raise a cry of deprivation of free speech if he is compelled to prove that there is something more than naked commercial selfishness in his purpose. (Fourth National Radio Conference, p. 7).

Not only was there no room for any more stations to broadcast, the solution to congestion and interference now lie in reducing the number of stations on the air. The committee resolved: That the bands of frequencies now assigned to broadcasting is overcrowded, causing serious interference. Therefore, the committee recommends, in the interest of public service, that no new stations be licensed until through discontinuance the number of stations is reduced and until it shall be in the interest of public service to add new stations. (Fourth National Radio Conference, p. 23).

Commercial broadcasters made strategic use of the access to Hoover and the Department of Commerce that their participation in these conferences allowed. Through this unrivaled access, commercial radio broadcasters were able to actively frame their perceptions of the industry and the government’s role in it in a manner complimentary to those held by important policy makers. In 1925, for example, RCA’s chief radio engineer wrote a letter to Hoover stating: ‘‘It is a duty as well as a pleasure, to work with a division of

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government which shows so completely an understanding of the needs of the radio industry and so strong a determination to assist in guiding the industry to intelligent solutions of its various problems’’ (quoted in McChesney, 1993, p. 13). Through an active process of frame alignment between themselves and the government, commercial broadcasters secured the socio-political legitimacy needed to ensure future inﬂuence in the policymaking process. As a result of the National Radio Conferences, an interpretation of the ‘‘public interest’’ began to take shape, which would best be served by stations that broadcast the most general programming. Commercial stations made a concerted and uniﬁed effort to frame their stations and the programming they offered as best suited to the vaguely understood ‘‘public interest.’’ Stations owned by educational and religious institutions, despite their demonstrated popularity, fell out of favor with Hoover and the Department of Commerce when commercial broadcasters utilized the public interest frame. Their stations, which were operated for profit, were intended to reach as large a market as possible. By making convincing claims about public service, they were able to secure valuable space on the dial that was for several years occupied by non-profit competitors (Bagdikain, 2004). Commercial stations did set aside time for the broadcasting of both educational and religious programming. However, the policies they adopted toward this content resulted in watered down, innocuous programming that was vastly different from what the independent religious and educational broadcasters had provided (Leach, 1983; Lippmann, 2000). The future of broadcasting as a profit-generating, commercial enterprise was taking shape.

THE FRC AND THE FATE OF RADIO BROADCASTING Through their collective action and by framing their vision of broadcasting (which would differ dramatically from their practices that developed throughout the 1920s) in a manner congruent with Hoover and the Department of Commerce, commercial broadcasters were able to inﬂuence the regulation of radio in a way that was unmatched by two competing formats – educational and religious broadcasters. Their ﬁrst significant inﬂuence was in the discussions, which shaped the content of the Federal Radio Act, which was passed by the Congress in 1927 and was the ﬁrst piece

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of legislation to cover radio broadcasting. In the Federal Radio Act, the ‘‘public interest, convenience, or necessity’’ was codiﬁed into the guiding standard for licensing decisions. Their second was through the establishment of formal ties between the FRC and the commercial broadcasters. The authors and sponsors of the bill that became the Federal Radio Act, who included Senator Clarence Dill (D) of Washington and Congressman Ewin Davis (D) of Tennessee, were deeply suspicious of RCA’s dominance of the airwaves and of placing too much regulatory power in Hoover’s hands. Indeed, they saw that these two issues are interlinked (Godfrey, 1977). The bill, as written, transferred the power to grant licenses from the Secretary of Commerce to the newly created FRC. However, Hoover and his supporters succeeded in retaining the power for assigning the Commissioners in the hands of the Secretary of Commerce. The ﬁve-member FRC assumed the executive and legislative duties performed by Hoover throughout the 1920s. The chief duty of the Radio Commission was to grant licenses to stations deemed suitable for the air, but their power in this was substantially greater than that formerly vested in the Secretary of Commerce. The Radio Commission had the power to deny applicants licenses and revoke licenses from previously licensed stations (U.S. House of Representatives, 1927, Sections 9, 11, 13). Despite Section 3 of the 1927 Radio Act, which speciﬁed that ‘‘no member of the commission shall be ﬁnancially interested in the manufacture or sale of radio apparatus or in the transmission or operation of radiotelegraphy, radiotelephony, or radio broadcasting,’’ four of the ﬁrst six Federal Radio Commissioners had direct ties to commercial broadcasting. In Fig. 2, I show the careers of four of the ﬁrst FRC commissioners and the ﬁrst FRC General Council, including their tenure with the FRC and their ties with commercial broadcasting. Commissioner Harold Lafount, who had previously served as an advisor to radio manufacturing companies, was in the process of opening his own commercial station at the time of his appointment, and considered commercial broadcasting ‘‘the lifeblood of the industry’’ (McChesney, 1991, p. 352). Commissioner Sam Pickard left the FRC in 1929 to become a vice-president at CBS (Who was who in America, 1943). The decisions of the commission and their interpretations of ‘‘the public interest, convenience, and necessity’’ clearly reﬂected these strong commercial ties. Both the content of the Federal Radio Act and the composition of the FRC led to decision making that reﬂected commercial broadcasting interest and led to the decline of alternative, non-profit station formats and the halfcentury domination of large, commercial broadcasters. When the FRC

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-Attorney for commercial station WGN -Legal advisor to NAB and NBC -Chairman, ABA Standing Committee on Radio Law

Louis Caldwell

Henry Bellows

General Councel, 1928-1929

1927

Sam Pickard 1927-1929

Harold Lafount 1927-1935 Orestes Caldwell 1927-1929

-V.P. CBS(1929-?)

-Editor of several industry trade publications, including Electrical Merchandising, Radio Retailing, and Radio Today (1916-1935) -Commentator on NBC program Radio Magic

Fig. 2.

-Manager of commercial station WCCO (1925-27, 1928-29) -President, Northwest Broadcasting, Inc. (1929-30) -V.P. CBS (1930-34) -Director of legal commission, NAB (1928-1935)

-Radio Equipment manufacturer (1925-1927) -President, Atlantic Coast Network -President, Greater New York Broadcasting Corporation (Dates unknown)

Early Commissioners’ Commercial Ties.

ﬁnally adopted an ofﬁcial definition of ‘‘public interest’’ in their Third Annual Report in 1929, the inﬂuence of commercial broadcasters was evident. The author of the ofﬁcial interpretation was General Counsel Caldwell, whose law practice included many large commercial broadcasters as clients. His definition of public interest clearly reﬂects the frames that the commercial broadcasters had employed years earlier in the National Radio Conferences. According to the definition of this term, because of the limited space on the dial, ‘‘there is not enough room in the broadcast band for every school of thought, religious, political, social, and economic, each to have its separate broadcasting station, its mouthpiece in the ether’’; and that: the tastes, needs, and desires of all substantial groups among the listeningpublic should be met, in some fair proportion, by a well-rounded program, in which entertainment, consisting of music of both classical and lighter grades, religion, education and instruction, important public events, discussions of public questions, weather, market reports, and news, and matters of interest to all members of the family ﬁnd a place (Federal Radio Commission, 1929b, p. 34).

Stations ﬁtting this model, which were almost exclusively commercial, for profit stations, were classiﬁed as ‘‘public service stations’’ and were looked upon very favorably by the FRC. Stations operated ‘‘exclusively by or in the private interests of individuals or groups so far as the nature of the program is concerned’’ were deemed ‘‘propaganda’’ stations – a term the

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commissions insisted was not meant to be derogatory, just convenient – and unﬁt for the air (Federal Radio Commission, 1929b, p. 32). The Commission did acknowledge that ‘‘there are and have been for a long time in existence a number of stations operated by religious stations or similar organizations’’ (Federal Radio Commission, 1929b, p. 35). These ‘‘enterprising’’ organizations were quick to see the value of radio in religion, and secured a space on the dial before the air was regulated. However, because they were broadcasting ‘‘propaganda’’ according to the FRC’s new definitions, these stations were not broadcasting in the public interest. While the commission acknowledged their popularity among listeners, they thought that these ‘‘propaganda’’ stations must be dealt with. Despite the popularity of much particularistic religious programming, the Commission ofﬁcially gave preference to any ‘‘public service’’ station by giving them superior wavelengths, even if the same wavelengths were already occupied by religious stations; and, in its words, assigned ‘‘less desirable positions to the latter to the extent that engineering principles permit. In rare cases, it is possible to combine a public service station and a high-class religious station in a division of time, which will approximate a well-rounded program. In other cases, religious stations must accept part time on inferior channels or on [less desirable] daylight assignments, where they are still able to transmit during the hours when religious services are usually expected by the listening public’’ (Federal Radio Commission, 1929b, p. 35). These interpretations led directly to a dramatic change in the composition of the airwaves, as shown in Fig. 1. In 1926, the industry began to shift from one comprised of a mix of stations of various formats, including full-time commercial stations, educational stations, and religious stations, to one dominated by full-time commercial stations. By 1934, the year that the Federal Communications Act made permanent the provisions of the Federal Radio Act, religious and educational combined for less than 10% of the stations on the air, and the commercial nature of U.S. radio broadcasting was entrenched (U.S. House of Representatives, 1934).

DISCUSSION AND CONCLUSION Political sociologists have shown great interest in the nature of the relationship between corporate interests and the state (Domhoff, 1978; Mills, 1956; Skocpol, 1985). Recent efforts have moved away from sweeping attempts to determine whether the state is autonomous or becomes ‘‘captured’’ by well-organized corporate interests. Instead, scholars have

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reframed the questions in order to understand the conditions under which the state remains autonomous or may become captured (Prechel, 1990; Carruthers, 1994). One body of work focuses on the structural contexts in which actors pursue their material interests. Another literature focuses on the ways that interests are culturally embedded, and normative frameworks constrain action. In this chapter, I have described a set of conditions that lead to ideological capture, a concept that focuses on the processes through which corporate interests may inﬂuence the state and regulatory agencies. Ideological capture is a weak form of regulatory capture, a term economists coined to describe a situation in which the state comes under heavy inﬂuence of an industry it initially set out to regulate. By focusing on the interplay of cultural frames and material interests, I have offered a theory that takes interest and agency seriously, while also paying attention to the cultural frameworks and legitimacy in organizational action. The theory of ideological capture focuses on two general sets of sociocultural conditions that make the capture of regulatory agencies by organizational actors possible. First, groups of organizations that mobilize their resources are in a better position to capture the regulatory process than those who act alone. Inter-organizational networks increase the efﬁcacy of organizational action by pooling economic, social, and political resources, and aid in the development and pursuance of common organizational goals. Mobilization makes individual organizations and particular organizational forms highly visible and in the case of broadcasting, it gave commercial broadcasters access to key stakeholders in government who were critical to the policy-formation process. Second, well-organized and highly mobilized organizational actors are able to develop coherent accounts of their organizational roles, activities, and goals, and frame them in ways that resonate with the regulatory agencies they are trying to inﬂuence. In the early stages of an industry’s evolution, meanings and understandings are underdeveloped. Through the strategic framing of their organizations and activities in a socially acceptable and legitimate manner, private organizations are more likely to inﬂuence policy and the policy-formation process. By drawing attention to frames and framing processes, we can understand how institutional entrepreneurs not only organize resources, support, and allies in their efforts at institutional change, but also how they draw on cultural codes and normative frameworks in their efforts to legitimize their positions and organizations in the eyes of key stakeholders including the state and the general public. In the early years of the radio broadcasting industry, the tremendous growth in the medium’s popularity and the relative ease with which

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individuals and organizations could transmit messages over the ‘‘ether’’ caused considerable chaos on America’s airwaves. Groups of all sorts, including educational institutions, religious organizations, small businesses, and large broadcasting corporations all jumped on the wireless wagon within months of the ﬁrst radio broadcast in 1920. Clearly, some sort of regulation was needed. The exact nature and scope of this regulation, however, was much less obvious. Several different groups had competing visions of what radio broadcasting should look like and what purpose it would serve. The superior mobilization of commercial broadcasters made them highly visible, increased their collective efﬁcacy, and enabled them speak in a uniﬁed voice at the National Radio Conferences. The discussion at these not only laid the groundwork for the eventual regulations that would govern the industry, but also provided commercial broadcasters with a forum in which to realize their interests and help to create the uniquely American form of radio broadcasting. Of course, the early history of radio broadcasting represents only one industry in one historical context. The specific mechanisms through which ideological capture occurred here are not universal across historical and industrial contexts. The high degree of uncertainty and lack of takenfor-granted knowledge of this entirely new industry, coupled with the highly symbolic nature of the services provided by broadcasting organizations, facilitated the ideological capture of policy makers and the policy-making process. In established industries characterized by inertial forces of history, and where institutionalized understandings of the industry are highly embedded in both consciousness and in policy streams, ideological capture may be more difﬁcult. However, in a general sense, this research is intended to focus attention on the process of private inﬂuence in state affairs, in addition to the attention that has been paid to outcomes. By drawing attention to the degree to which interest groups are mobilized and the rhetorical frames they employ when attempting to inﬂuence the regulatory processes, I have provided a conceptual framework for understanding how, why, and under what conditions the capture of regulatory agencies may take place.

NOTES 1. Herbert Hoover, as the Secretary of Commerce, was in charge of radio broadcasting before the creation of the Federal Radio Commission in 1927. 2. A cross-national comparison is beyond the scope of this paper. There are, however, alternative models, such as those in Great Britain and Japan, characterized

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by greater and more direct state subsidies and control. In Sweden, broadcasting is organized as a not-for-profit joint-stock company. Public broadcasting in Greece is partly ﬁnanced by a special tax on electricity. These broadcasting systems have been referred to as ‘‘public-service’’ systems as opposed to the ‘‘commercial’’ system in place in the U.S. (Voltmer, 2000). 3. Less than 10% of stations were owned and operated by interests devoted solely to the manufacturing of radio equipment and/or production and broadcasting of programs. A significant proportion of stations was owned and operated by individuals and companies who used radio programming to generate interest in their primary business. 4. Fig. 1 reports stations owned by companies devoted entirely to manufacturing receiving sets or producing radio programming, such as those that were part of RCA. ‘‘Secondary’’ commercial broadcasters, those owned by other commercial enterprises and intended to generate interest in those enterprises, are not included in this ﬁgure. The number of these stations had been declining steadily throughout the 1920s, as the sale of indirect advertising grew in popularity. 5. Domhoff focuses primarily on networks and the connections that organizational structures provide between elites in industry and the state. My approach focuses on the processes of inﬂuence made possible by these connections. 6. It wasn’t until 1929, two years after the Federal Radio Act, which made permanent the ‘‘public interest, convenience, or necessity’’ as the guiding force behind licensing decisions, that the public interest standard in broadcasting was deﬁned by Louis G. Caldwell, the ﬁrst general counsel of the Federal Radio Commission (Caldwell, 1930).

ACKNOWLEDGMENT I would like to thank Howard Aldrich, Martin Ruef, Harland Prechel, and three anonymous reviewers for their helpful comments on earlier versions of this chapter.

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BANKS IN CRISIS: PUBLIC POLICY AND BANK MERGERS, 1976–1998 Theresa Morris ABSTRACT By the early 1970s, the relatively stable and profitable American banking industry became increasingly competitive. I use contingent capitaldependence theory to examine how banks politically mobilized to impact the policy-formation process to incur favorable regulatory changes and then used merger, an opportunity that was won through regulatory changes, to respond to the newly competitive economy. The findings suggest that contingent capital-dependence theory explains organizational change in the banking industry and question the free-market assumption that consolidation of deregulated industries takes place through the elimination of weak firms.

INTRODUCTION The institutional arrangements of banking have changed dramatically over the past 40 years. High interest rates, beginning in the late 1960s, and the advent of money market funds and short-term securities, beginning in the late 1970s, marked a competitive environment unprecedented since the Great Depression. During the same time period, the Keynesian view of the Politics and the Corporation Research in Political Sociology, Volume 14, 149–178 Copyright r 2005 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN: 0895-9935/doi:10.1016/S0895-9935(05)14005-4

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economy was toppled, and the free-market school of thought predominated, such that the ideological dimension of banks’ institutional arrangements shifted in a way that advocated deregulation of the industry (Kuttner, 1997, p. 33). A central theme in this free-market ideology was that the economic crisis of banking was caused by regulations that protected weak banks and allowed the number of banks to proliferate beyond the economy’s carrying capacity (Holland, 1998). An assumption within this new ideological framework was that consolidation of the banking industry would be beneﬁcial, as weak banks would be eliminated (Cooper & Fraser, 1984; Kane, 1994; Khoury, 1997; Hanweck & Shull, 1999). Given legitimacy from the free-market ideology that prevailed in the 1980s, banks politically mobilized to deregulate the industry. One of the opportunities opened up to banks as a result of deregulatory policy changes was increased opportunity to merge (Peristiani, 1997; Rhoades, 2000). The number of bank mergers swelled, with nearly 8,000 mergers involving $2.4 trillion in acquired assets occurring between 1980 and 1998 (Rhoades, 2000).1 Some of these mergers were very large, including the 1992 merger of BankAmerica Corporation and Security Paciﬁc Corporation, with an estimated $150.5 billion in collective assets; the 1994 merger of BankAmerica and Continental, with an estimated $176 billion in collective assets; the 1996 merger of Chase Manhattan and Chemical Banking, with an estimated $176.5 billion in collective assets; the 1997 merger of NationsBank and Boatmen’s, with an estimated $198 billion in collective assets; and the 1998 merger of NationsBank and BankAmerica, with a whopping $443 billion in collective assets (Rhoades, 2000). Studying mergers in the banking industry gives sociologists an important opportunity to study organizational behavior during a crisis situation. In fact, the time period examined in this chapter, 1976–1998, has been characterized as ‘‘the most turbulent period in U.S. banking history since the Great Depression’’ (Berger, Kashyap, Scalise, Gertler, & Friedman, 1995). In addition, studying the banking industry furthers our understanding of the relationship between the political-economy and organizational change because it is one of the most heavily regulated industries in our economy, and, thus, banks have a vested interest in the regulations operating to their beneﬁt (Holland, 1998). Further, mergers are important because they often lead to industry consolidation (Rhoades, 2000). In fact, the number of banks has dropped steadily since 1984, when there were 14,381 banks (Rhoades, 2000). By 1998, the number of banks had decreased by 40 percent to 8,697 (Rhoades, 2000). Accompanying this trend of fewer banks is the concentration of assets.

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The percentage of assets controlled by the largest 25 banking organizations increased by 76 percent between 1980 and 1998, from 29.1 percent in 1980 to 51.2 percent in 1998 (Rhoades, 2000). A stunning example of increased concentration in the banking industry is the 1998 NationsBank and BankAmerica merger, which resulted in the bank controlling 10.7 percent of domestic U.S. banking assets (Rhoades, 2000). In this chapter, I empirically examine the organizational response of banks to the newly competitive environment in two ways. First, I examine the political mobilization of banks around the policy-formation process of banking regulation. Second, I examine the consequences of regulatory changes by focusing on bank merger as a response to opportunities in the deregulated economy. In contrast to much literature in political sociology, I not only examine the policy-formation process, but I also examine the consequences of policy changes.

CURRENT KNOWLEDGE This chapter spans two sociological literatures: political sociology and organizational sociology. Political sociologists have historically focused much attention on the policy-formation process, from a state-centered perspective (Block, 1977; Skocpol, 1980, 1985; Weir, Orloff, & Skocpol, 1988; Hooks, 1990; Evans, 1996), from a class-unity perspective (Domhoff, 1978; Useem, 1979; Mintz & Schwartz, 1985; Mizruchi, 1987, 1989, 1992), and from a structural perspective (Poulantzas, 1978, 1980). Prechel (1990, 2000) and Akard (1992) utilize a historically contingent framework to analyze the policy-formation process, suggesting that the ability of the capitalist class and of state actors to inﬂuence state policies varies with historical conditions. In addition sociologists and economists have examined which organizations are likely to be acquired (Palmer, Barber, Zhou, & Soysal, 1995; Wheelock & Wilson, 2000) and which organization are likely to be acquiring organizations (Manne, 1965; Mueller, 1985; Ravenscraft & Scherer, 1987; Scherer, 1988; Schleifer & Vishny, 1988; Haunschild, 1993; O’Keefe, 1996; Wheelock & Wilson, 2002). Some of this literature is speciﬁc to bank mergers. For example, O’Keefe (1996) and Wheelock and Wilson (2002) ﬁnd that size and management competence have positive impacts on the probability of a bank’s undertaking a merger. O’Keefe (1996) also ﬁnds an effect of liquidity and loan concentration, while Wheelock and Wilson (2002) ﬁnd that overall CAMEL score is important.2 Wheelock and Wilson

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(2000) examine the target banks of merger and ﬁnd that capital ratios are negatively associated with the likelihood of being a target. Each of these literatures, however, has a gap, which I ﬁll with this study. The political sociology literature has given us a wealth of knowledge regarding the policy-formation process, but has informed us less about the consequences of the policy changes that are enacted through this process. Likewise, the organizational literature has advanced our understanding of which organizations are most likely to be acquired, or to acquire another organization. However, an examination of the acquired and acquiring ﬁrms rarely occurs within the same industry, leaving a comparison of such ﬁrms wanting. I ﬁll gaps in these literatures by using contingent capital-dependence theory to understand both the policy-formation process of banking deregulation and the impact of regulatory changes on the event of bank merger for both acquired and acquiring banks. This theory suggests that, when faced with the demise of institutional arrangements that in the past assured capital accumulation, organizations respond by politically mobilizing to change the structure of opportunities available to respond to such constraints. Once these structures have been changed, organizations respond to opportunities presented by the changed structures through new or altered behaviors. Thus, I suggest that banks mobilized to impact deregulation of the banking industry, when the institutional arrangements no longer assured consistent capital accumulation and that the resulting deregulation opened up merger as an opportunity for banks with internal ﬁnancial crises to deal with the precarious environment. Because both acquiring another bank and being acquired are mechanisms for solving ﬁnancial crisis, both types of merger should be linked to internal organizational crisis. If this is the case, the assumption that deregulation weeds out weak banks will be called into question. The research question this chapter asks is how does contingent capital-dependence theory inform our understanding of bank political and economic behavior during environmental crisis and deregulation?

THEORY Contingent capital-dependence theory, a variant of resource dependence theory, emphasizes the importance of the environment to organizational survival, with survival being the ultimate goal of any organization (Prechel, 2000). It builds upon resource dependence theory by focusing on ‘‘corporations’ historically contingent capital-dependent relationship to

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the political, economic, and ideological dimensions of their institutional environments’’ (Prechel, 2000, p. 10). In other words, whereas resource dependence theory focuses broadly on sources of environmental uncertainty and organizational resources, contingent capital-dependence theory focuses speciﬁcally on the importance of capital to the organization and on how an organization’s dependence upon capital structures its relationship to the speciﬁc historical institutional environment in which it is embedded. As Prechel (1990, p. 665) states: ‘‘Historical variation in the conditions of accumulation structures the motives and actions [of organizations] y as well as its interests and the opportunities for satisfying them. This theory also suggests the importance of turning points, ‘‘consequential shifts that redirect a process in corporate form’’ (Prechel, 2000, p. 9). Such a turning point may occur when institutional arrangements no longer assure capital accumulation. Under such constraints, organizations act politically to change the institutional arrangements, often through attempting to inﬂuence the regulatory policy-formation process, and once regulatory changes are in place, organizations exploit opportunities presented by the new structure to once again assure accumulation. Applying contingent capital-dependence theory to the banking industry suggests that the economic crisis led banks to mobilize in an attempt to change the regulatory structure of banking to deal with the crumbling institutional arrangements.3 As Roy (1997) suggests, one dimension of power is ‘‘the ability to determine the context within which decisions are made by affecting the consequences of one alternative over another.’’ Banks acted politically to change these consequences by attempting to change legislation such that they would be able to expand their powers, for example into non-bank activities, often through mergers. Of course, not all banks had the same interest or access to power. For example, investment banks and small commercial banks were interested in stymieing regulatory changes for commercial banks, while large commercial banks fought hard for these changes. This conﬂict is consistent with Poulantzas’ (1978, 1980) contention that fractions of capital often have inherently different interests and that the state maintains relative autonomy to these fractions in order to mediate the conﬂict in the interest of continued accumulation. A structuralist argument is particularly relevant to the banking industry because, as Cooper and Fraser (1984, p. 17) suggest: The federal government, through its legislative and executive branches, is obviously greatly concerned about the functioning of the nation’s depository institutions. Indeed, the ﬁnancial system of the United States could not work effectively unless the major depository institutions were performing their deposit-taking and credit-making functions

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effectively. The concern of the federal government with depository institutions is especially pronounced during periods of uncertainty and stress on these institutions.

The regulatory changes implemented were an attempt to solve the crisis of banking by introducing new institutional arrangements, which altered the opportunities, motives, and behaviors of banks. Merger allowed acquiring banks to expand geographically and to concentrate capital, while providing the acquired bank an inﬂux of capital. This is consistent with contingent capital-dependence theory, which posits that rapid organizational change happens during crisis. All banks were confronted with a newly competitive environment, but the banks most likely to respond to the change should be the ones with internal crises. Thus, change in the form of merger is likely to happen for the acquired and acquiring banks for similar reasons, internal ﬁnancial crisis. The difference in these types of merger will likely be tied to the size of the bank, as large organizations have the resources to survive external threats due to rich resources (Schumpeter, 1942; Pfeffer & Salancik, 1978).

CHANGING INSTITUTIONAL ARRANGEMENTS IN THE U.S. BANKING INDUSTRY Institutional Arrangements Established during the New Deal The institutional arrangements in which banks were embedded through most of the 20th century were established during the New Deal. The Banking Act of 1933 (The Glass–Steagall Act) set in place these arrangements and stipulated a number of constraints on bank behavior. First, it established the Federal Deposit Insurance Corporation (FDIC).4 Second, the Glass–Steagall Act enabled the Federal Reserve to set limits on the interest that banks could offer on time deposits and forbid the offering of interest on demand deposits. This was done to stop ‘‘cut-throat’’ competition between banks, often blamed for bringing banks to the brink of insolvency (Klebaner, 1990, p. 145). Third, the act is perhaps best known for its separation of investment banking and commercial banking. Such separation was deemed necessary due to the belief that the October 1929 stock market collapse caused the Great Depression.5 Finally, the Glass– Steagall Act stipulated that if state banks were not allowed to branch, national banks that were headquartered within that state would also not be allowed to branch, and if state banks were allowed to branch, national

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banks headquartered in that state must also be allowed to branch. However, this regulation had the effect of nullifying branching as no state had laws permitting branch banking at the time (Rose, 1997, p. 31).

Economic Competition and the 1980s As Garten (1991) demonstrates, the banking regulatory structure implemented during the Great Depression left the industry proﬁtable and low-risk through the 1970s. The 9 percent industry earnings growth rate remained above the inﬂation rate. Few alternatives offered investors the same liquidity as did bank deposits. Further, because the federal government capped interest rates on time deposits and forbade the payment of interest on demand deposits, deposits were not very costly to banks. These low-cost liabilities were coupled with favorable assets. Bank loans were under signiﬁcant demand, partly due to the limited number of alternatives. For example, corporations found that issuing securities, one of the most viable alternatives to bank loans, was an expensive and difﬁcult process. Consequently, ‘‘[Bank] loan demand was so strong during the 1960s and 1970s that the chief problem for banks was how to attract sufﬁcient deposits to satisfy the needs of borrowers’’ (Garten, 1991, p. 10). However, other corporations were aware of these advantages and responded by encroaching on the proﬁt-making activities of banks (Cargill & Garcia, 1985; Garten, 1991; Reinicke, 1995). For example, the market for commercial paper and short-term debt securities began to rise, increasing banks’ competition for assets (Garten, 1991). Between 1980 and 1990 the share of business borrowing from commercial bank loans dropped from 50 percent to 10 percent, while the share of business borrowing from corporate bonds increased from 44 percent to 70 percent (Reinicke, 1995, p. 44). Another signiﬁcant change in the institutional environment of banking was the skyrocketing interest rates in the late 1970s. The interest rate cap on deposits, formerly an advantage to banks, suddenly became an enormous liability (Cooper & Fraser, 1984; Garten, 1991). For example, the federal fund interest rate increased from 1.79 percent in 1955 to 11.20 percent in 1979, an increase of over 500 percent (Federal Reserve, 2005). Because bank interest rates were capped at much lower levels than the newly increased market rate, many individuals and businesses moved their funds from banks to government securities, short-term debt and mutual funds, draining banks’ deposits (Garten, 1991; Reinicke, 1995). Thus, a cycle began, with the disintermediation of funds spurring more alternatives for investments.

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In fact, by the early 1980s, investments in money market mutual funds had grown to more than $200 billion (Garten, 1991). As Garten (1991, p. 13) suggests, ‘‘[b]y the 1980s, the magic was gone from the deposit-lending business. The old strategy of borrowing cheaply from depositors and lending safely and proﬁtably to borrowers no longer worked.’’

Banks’ Political Response to Crisis The institutional arrangements were no longer beneﬁting banks, and as contingent capital-dependence theory would suggest, banks politically mobilized in an attempt to resolve the crisis through regulatory change. However, the banking industry was far from united on what changes were necessary. In this case, large banks wanted Glass–Steagall repealed because they were most apt to expand their activities into securities and commercial papers. These banks argued that repealing Glass–Steagall would allow them to compete with non-banks, which had already begun to invade much of banks’ traditional markets (Reinicke, 1995). Big banks were represented by the American Bankers Association (ABA). Small banks, on the other hand, wanted to keep banking and investment activities separate because they likely would not engage in investment activities and because they believed that lifting the separation would give large banks an unfair competitive advantage. They were represented by the Independent Bankers Association of America (IBAA). Other groups opposed to changing regulations were thrifts; investment ﬁrms, represented by the Investment Company Institute (ICI) and the Securities Industry Association (SIA); and insurance ﬁrms (Reinicke, 1995). Large banks witnessed an early, although partial, success. The Depository Institutions Deregulation and Monetary Control Act (DIDMCA) of 1980 deregulated the banking industry and, by allowing banks to compete with non-bank ﬁnancial institutions, increased competition in the banking industry. The DIDMCA had a number of important components, with the most dramatic change being the phasing out of interest rate caps on deposits. In addition, banks were granted the authority to offer interestbearing checking accounts or Negotiable Order of Withdrawal (NOW) accounts. Both of these changes increased levels of competition among banks, as well as between banks and other types of ﬁnancial institutions. Large banks were hopeful that the Reagan administration would provide them opportunity to gain more sweeping deregulation (Reinicke, 1995). Newly appointed Secretary of the Treasury, Donald Regan proved to be

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sympathetic to their cause, as did Senator Jake Garn, the new Republican Chairman of the Senate Banking Committee. In fact, in the fall of 1981 Senator Garn argued that banks were operating under a competitive disadvantage that should be corrected by legislative action (Reinicke, 1995). Further, in September 1981, a Justice Department ofﬁcial suggested that the Glass–Steagall Act had become unnecessary due to securities acts passed since its inception (Reinicke, 1995). Clearly, the ideological component of the institutional environment was beginning to change in favor of giving banks increased access to strategies that would help them to respond to competition. By October 1981, Senator Garn introduced a bill in the Senate to deregulate the ﬁnancial industry by allowing banks to participate in the mutual funds business and to underwrite municipal revenue bonds (Reinicke, 1995). He scolded small banks for being critical of legislation that would modernize the banking industry. However, there was a signiﬁcant opposition in the House, where small banks had substantial political inﬂuence, and the bill died (Reinicke, 1995). The gridlock between the Senate and House continued in 1982 over the extent to which banks would be deregulated (Reinicke, 1995). When Senator Garn realized that some of the Republican senators on the Senator Banking Committee did not support his proposal, most notably Senator Alfonse D’Amato, an advocate of Wall Street investment banks, he eliminated the authorization for banks to underwrite revenue bonds and authorized banks to offer Money Market Deposit (MMD) accounts, (short-term interest accounts) rather than Money Market Mutual Funds (MMMF) accounts, which would compete more directly with investment banks (Reinicke, 1995). This move appeased the security industry’s interests, as it limited banks from encroaching into their domain. The revised bill passed the Congress and became the 1982 Garn–St. Germaine Bill. Besides, allowing banks to offer MMD accounts, the bill expanded lending activities in which thrift institutions could engage. In addition, this bill legalized the merger of a large failing bank or thrift with a bank that was headquartered in another state, if there was no possibility of the failing bank merging with a bank in its home state. The industry seemed poised for more sweeping deregulation when on May 17, 1984 the FDIC rescued Continental Illinois National Bank & Trust Co. of Chicago from failure by loaning the bank $7.5 billion (Reinicke, 1995; Holland, 1998). Senator Garn, Federal Reserve Chairman, Paul Volcker, and FDIC Chairman, Bill Isaac, all argued that Continental’s failure was more a result of the bank’s harnessed ability to compete than any

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misdeed of the bank (Reinicke, 1995). However, as often happens during times of crisis, political ideology shifted suddenly and, when the S&L crisis fully erupted in 1986, attention more fully shifted away from deregulation of the banking industry toward managing the crisis and ensuring that regulations were in place to prevent future crises.6 Further, the 1986 election led to a Democratic majority in the Senate, ousting Senator Garn from his position as Chair of the Senate Banking Committee and reinstating Democratic Senator William Proxmire, who was considered pro-consumer and was in favor of restricting the entry of banks into non-bank activities (Reinicke, 1995). It also became clear in the coming months that a systemic crisis had erupted across the ﬁnancial sector. For example, during the ﬁrst six months of 1987, U.S. banks lost $106 billion, the worst 6-month loss in U.S. banking history (Khoury, 1997). Further, the October 19, 1987 stockmarket crash brought renewed attention to the importance of government regulation of industry. As Khoury (1997, p. 56) states, ‘‘The spirit of deregulation was dissipating.’’ Regulators were an ardent force in the set of hearings surrounding the Financial Institutions Reform, Recovery, and Enforcement (FIRREA) Act of 1989, which sought to increase control of the banking industry. For example, William Seidman, Chairman of the FDIC, argued forcefully that the FDIC needed increased powers to restrict banks and S&Ls (Khoury, 1997). However, large banks continued their support of a repeal of Glass– Steagall, even launching a major advertising campaign aimed at informing the public of the consequences of the U.S. banking industry’s losing its edge in competition against foreign banks (Reinicke, 1995). But, with the thrift crisis in full view and with key supportive congressmen ousted in the election, most notably Representative St. Germain, the large banks were unsuccessful. A slew of unfriendly amendments, including more restrictive oversight powers for the FDIC and civil and criminal penalties for mismanagement of banks, were passed. Only two years later the issue of increased competition in the bank industry and the need for deregulation was at the forefront again, a clear indication that the state had not yet provided institutional arrangements to solve the accumulation crisis of banks. The 1991 Federal Deposit Insurance Corporation Improvement Act (FDICIA) originated in a report prepared under the leadership of Department of the Treasury Secretary Nicholas Brady. This act sought relief for big banks by expanding their ability to offer non-bank services, watering down deposit insurance, and centralizing the regulatory structure (Khoury, 1997). Although many believed that the FDICIA would easily pass, it met with strong opposition from the insurance

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industry, which opposed giving bank’s increased ability to underwrite insurance policies. The insurance industry was joined by the ‘‘Main Street Coalition,’’ consisting of small bankers, state ofﬁcials, farmers, smallbusiness owners, and consumer groups, all of whom opposed increasing the span of banking abilities (Congressional Quarterly, 1991). In addition, the American Association of Retired Persons joined the ﬁght against the bill (Congressional Quarterly, 1991). In short, these competing classes and class fractions formed a coalition and organized politically to oppose this public policy. Recognizing the need to infuse funds into the FDIC, The House and the Senate passed a scaled-down bill on November 21, 1991, and Congress on November 27, 1991. As passed, its impact was to recapitalize the FDIC. This legislation also regulated the management practices of banks by requiring that the FDIC ‘‘develop and distribute management standards and policy statements to guide the management and policies of private banks and thrifts in dealing with asset growth, loan portfolio quality, dividend policies, risk management, and other serious management problem areas’’ (Rose, 1997, p. 55). In addition, it allowed federal and state regulatory agencies to seize and sell or close troubled thrifts and banks ‘‘whose capital to tangible assets ratio dropped below 2 percent’’ (Rose, 1997, pp. 55–56). The FDICIA also legalized the merger of savings associations with commercial banks. Although the Clinton administration supported expanding the powers of banks, the administration did not push for Congress to consider this issue because it was usually considered in tandem with expanding securities and insurance powers of banks, battles the administration did not wish to ﬁght. However, by 1994, the issue of branching took precedence, partly because the insurance industry reversed its opposition to branching, opening up its serious consideration in the Congress. The event symbolizing this reversal was a February 1993 speech on the ﬂoor of the Senate by Senator Chris Dodd of Connecticut, a long-time supporter of the insurance industry, in which he suggested that he would ‘‘decouple’’ the issues of branch banking and insurance powers of banks (Congressional Quarterly, 1994a). In addition, this bill was seen as likely to pass because it included a provision that addressed the concerns of small banks (Congressional Quarterly, 1994a). Speciﬁcally, the bill being considered required that banks wanting to set up branches across state lines must buy an existing bank, and that de novo banking, which allows banks to open a branch without acquiring an existing bank, would only be allowed if states permitted it (Congressional Quarterly, 1994a). This provision reduced the probability of new branches

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being opened that would compete with small banks. In short, the political focus shifted back in favor of large banks, and ‘‘[t]he overwhelming sentiment in Congress [was] that interstate banking and branching [were] long overdue’’ (Congressional Quarterly, 1994b, p. 2563). With the S&L scandal resolved the federal government could turn once again to solving the original crisis. Expanding interstate branching abilities was seen as a politically viable way to accomplish this goal. The resulting Riegle–Neal Interstate Banking and Branching Efﬁciency Act of 1994 successfully completed the restructuring of the institutional arrangements of banking such that banks were once again proﬁtable. This act allowed bank holding companies to acquire a bank in any state beginning in 1995, and to convert interstate banks into branches beginning in 1997. The new institutional arrangements allowed banks to compete with non-bank ﬁnancial institutions and to expand geographically and into new markets through merger. These institutional arrangements were successful at solving the overall ﬁnancial crisis of banking, as indicated by improved stock and proﬁt rates, which rose steadily from the early 1990s to ‘‘exceptionally high levels’’ through 1998 (Rhoades, 2000, p. 30). Further by conﬁning the focus to branch banking and by protecting small banks from the threat of new banking organizations being opened as branches of out-of-state banks, the state was able to mediate the conﬂicting interests of different segments of capitalists.

Changes in Bank Behavior I use contingent-capital dependence theory to examine how the behavior of banks changed during the time period when banks’ institutional arrangements were in ﬂux, 1976–1998. As this theory would suggest, these changing arrangements gave banks new opportunities to merge in response to challenges posed by the precarious environment. Such opportunities were greatly impacted by changing regulations, which altered the opportunity structures of banks. Three regulatory impacts occurred during this time period. The 1980 DIDMCA and the 1982 Garn–St. Germain Act each had the effect of deregulating the banking industry. Taken together, the DIDMCA and the Garn–St. Germain Act caused increased competition for banks and increased banks’ access to merger. Thus, mergers should increase after the passage of both of these acts. The 1989 FIRREA and the 1991 FDICIA tightened up management of banking. Further, the legislations made clear what would happen to both the managers and the

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banks if these requirements were not met (i.e. criminal and civil penalties for the managers, increased insurance fees, and possible closure for the banks). Thus, increased scrutiny should lead to fewer opportunities to merge and a resulting decline in mergers. The 1994 Riegle–Neal Act gave banks increased access to merger by legalizing interstate branching. Because de novo banking was not allowed, the only way to accomplish a branching structure was to merge with an existing bank and to convert it into a branch. Thus, mergers should increase. Hypothesis 1. After the passage of the DIDMCA in 1980 and the Garn– St. Germain Act in 1982, the odds of bank merger increased. Hypothesis 2. After the passage of the FIRREA in 1989 and the FDICIA in 1991, the odds of bank merger decreased. Hypothesis 3. After the passage of the Riegle–Neal Act, the odds of bank merger increased. Besides being the source of capital for industrial organizations, banks also need resources to survive. For banks, the need to be ﬁnancially strong is even more apparent than organizations in other industries because banks are more heavily regulated than industrial corporations. Speciﬁcally, federal and state regulators monitor their levels of capital adequacy, asset quality, managerial competence, earnings, and liquidity.7 If a bank’s indicators of ﬁnancial soundness drop too low, it faces the possibility that its regulator will take it over. This is consistent with literature from the banking industry, which suggests that banks focus on keeping ﬁnancial variables at acceptable levels. For example, Scott and Weingast (1994) argue that low levels of capital prompt banks to engage in behavior to resolve their capital crises. Further, Cooper and Fraser (1984, p. 165) argue that banks with low levels of capital are at risk for failure because of their ‘‘inability to absorb losses due to lack of a capital ‘cushion.’’’ According to contingent capitaldependence theory, this situation will threaten the survival of the bank and lead the bank to respond. Hypothesis 4. The odds of a bank’s being involved in a merger varies inversely with capital adequacy, asset quality, managerial competence, earnings, and liquidity.8 Resources also determine how an organization will respond to an external threat (Pfeffer & Salancik, 1978). Large organizations have more resources than do small organizations to deal with survival threats (Schumpeter, 1942; Pfeffer & Salancik, 1978; Baker, 1990). Thus, large organizations should be

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more likely to be the acquiring bank in a merger, and small banks the acquired bank in a merger. Hypothesis 5. Size varies positively with the odds of a bank’s acquiring another bank. Hypothesis 6. Size varies negatively with the odds of a bank’s being acquired.

POPULATION AND SAMPLE The population for this study consists of all U.S. banks in existence in 1976. Only the largest bank (ranked by assets) of a multibank holding company is included in the population. Including subsidiaries of a holding company would violate the assumption of independent observations. Also, branches are not included in the population as they are not independent organizations. I also exclude banks that are not located in a U.S. state. Using these criteria, the population of banks in 1976 is 12,822. From this population, I selected a systematic random sample, stratiﬁed by state, of 3,160 banks. The size of the sample was determined by the desire to have a high level of conﬁdence in the ﬁndings.

OPERATIONALIZATIONS AND DATA SOURCES Explanatory Variables The data for this study are gathered from several sources. Most data on individual banks were gathered from the Federal Reserve System’s Bank Condition and Income Database (Federal Reserve, 1999a). As stated above, the ﬁnancial variables used in this research align with the indicators used by regulators (CAMEL ratings) to monitor banks’ ﬁnancial soundness. Thus, the operationalizations used are measures commonly used by those in the banking industry. Capital adequacy, which represents ‘‘the ability of a bank to absorb operating losses or shrinkage in asset values’’ (Fitch, 1990, p. 103), is operationalized as net worth divided by total assets, with net worth being computed as the difference between total assets and total liabilities. Asset quality is an estimate of the quality of a bank’s assets (Fitch, 1990) and is operationalized as net loans divided by total assets. This also serves as a measure of the past performance of the bank (Haunschild, 1993).

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Management competence is the competence of bank management to run a bank and is operationalized as total loan charge-offs divided by total assets. Earnings, the income of a bank, is operationalized as net income divided by total assets. Liquidity is the ability of a bank to meet its ﬁnancial obligations (Fitch, 1990, p. 357). Liquidity is operationalized as total loans divided by total deposits. Bank size is operationalized as total assets in thousands of 1982–1984 dollars.

Dependent Variables Data for the merger dependent variables come from the Federal Reserve System (1999b).9 Two dependent variables are analyzed. The ﬁrst is whether the bank has acquired another bank. An acquiring bank is deﬁned as the bank involved in a merger whose charter continues following the merger. The second dependent variable is whether the bank has been acquired by another bank. An acquired bank is deﬁned as a bank involved in a merger whose charter is discontinued following the merger. Each of these variables is a dummy variable, coded as 0 if the bank did not have such an event occur in the given year and as 1 if it did.

Control Variables A number of control variables are introduced into both analyses. First, state-level regulations are important to banks, particularly whether individual states allow unrestricted branch banking. Banks located in states that allow branch banking may have increased odds of bank merger. Thus, the branch-banking laws of each state are operationalized using a dummy variable, indicating whether the state allowed unlimited branch banking each year. These data are collected from Jayaratne and Strahan (1997). Second, the economic environment may have an effect upon a bank’s behavior and should thus be controlled. This includes the economic environment of the state, which is operationalized as the state unemployment rate. These data are collected from The Statistical Abstract of the United States (United States Bureau of the Census, 1978–1998). The economic environment also includes the health of the national economy, which is operationalized as the interest rate on the average 3-month Treasury bond for the year (Federal Reserve Board, 1999c). Third, economic competition has the ability to greatly impact banks and is

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operationalized as the number of domestic banks per one thousand population.10 The data on the number of domestic banks come from the Federal Deposit Insurance Corporation (2002), while the data on the population of each state come from The Statistical Abstract of the United States (United States Bureau of the Census, 1978–1998). I also control for relevant bank characteristics. According to population ecology theory, banks’ inertia may increase with age and size, thus reducing the likelihood of organizational change (Hannan & Freeman, 1977). Bank age is operationalized as the difference between the year of the data and the date the bank was established. Efﬁciency of the bank is also controlled. This tests a key variable in transaction-cost analysis of mergers, which suggests that efﬁciency concerns are the driving force of organizational change (Williamson, 1975, 1988). Efficiency represents the ability of a bank to maximize outputs and minimize inputs and is operationalized as totaloperating expenses divided by total assets. The structure of the bank is also controlled because independent or unit banks may be more or less likely to engage in certain strategies. A unit bank is a bank that offers banking services in a single ofﬁce and is operationalized with a dummy variable indicating whether or not the bank is a unit bank. In addition, I introduce two additional controls into analysis of acquiring banks: the number of previous mergers the bank has been involved in since 1977, and the length of time in years since the previous merger. These controls are added for methodological reasons, described below.

METHODOLOGY I use discrete-time event history models to test the hypotheses presented. Event history models allow the dependent variable to be the hazard that an event will occur (Allison, 1982, 1984). This method is appropriate when the units of time analyzed are large (years in this case) and when one wants to model dynamic processes without assuming stability over the time period (Allison, 1982). The method is ﬂexible in that it allows time-varying independent variables, such as the ones used here. Discrete-time models assume that we observe n independent cases, beginning at time t, and that t takes on a positive value (Allison, 1982). Each observation continues until time ti, at which time the observation experiences the event or is censored (Allison, 1982). The hazard rate for

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discrete-time event history analysis is deﬁned as Pit ¼ Pr½T i ¼ tjT i Xt; xit , where T is the variable that indicates the time of occurrence of the event (Allison, 1982). This equation gives the conditional odds that an event occurs at time t, given that the event has not already occurred (Allison, 1982). I use the logistic regression function to indicate how the hazard rate of the event occurrence depends on the independent variables and on time. This is one of the most widely used regression models for discrete-time event history models (Allison, 1982). The logistic regression function is given by the following equation (Allison, 1982): Pit ¼ 1=1½þ expða b0 xit Þ The logit form of this equation can be given by the following equation (Allison, 1982): log½Pit =ð1 Pit Þ ¼ a þ b0 xit , where x is a vector containing values of the independent variables, b the unstandardized coefﬁcients of the effects of the explanatory variables and a being a constant. It can be shown that when the probabilities of discrete-time event history models are expressed as a function of a hazard rate, the models can be estimated using similar methods as an analysis of dichotomous data (Allison, 1982).11 In order to use these methods, one deﬁnes the cases in the analysis as a case year (Allison, 1982). In this study, cases are bank-years. Thus, for each bank in the study, I have one case for each year of the bank’s existence. The dependent variable is coded as 1 if the event occurred during the particular year under study and 0 if it did not occur. For example, in the analysis of acquired banks if a bank is acquired in 1987, it would have a score of 0 for the dependent variable for the years 1977–1986, and a score of 1 for the year 1987. Values of the independent variables are measured for each year. All of the observations are then pooled, and Maximum Likelihood (ML) estimates are computed (Allison, 1982). Lags can be incorporated into the analysis by using data for independent variables of year t and the dependent variable for year t+x, with x being the lag one is using. I lagged the dependent variables in each model by one year for the following reasons. First, bank mergers are necessarily preceded by a decision made by individuals within the bank. It is suggested that decisions are generally made with recent data, likely end-of-the-year data from the

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previous year (Mason, 1997). Second, because banks anticipate going through this regulatory approval, one would expect that banks would take some time to plan their legal strategies before pursuing a merger. I employ this method on the analysis of both dependent variables. I analyze legislative impacts by analyzing a model including all years (1977– 1998) with dummy variables for policy changes.12 The years before deregulation began (i.e. 1976–1979) serve as the reference category in the analysis. The ﬁrst policy changes came in 1980 and 1982 with the passage of the DIDMCA and the Garn–St. Germain Act. Thus, the years 1980–1988 mark the years when deregulatory policies were in effect. The next policies tightened regulations around the management of banks. These changes were demarcated by the passage of the FIRREA and FDICIA and include the years 1989–1993. The ﬁnal years are marked by the deregulation of the 1994 Riegle–Neal Act and include the years 1994–1998.13 All banks in the sample for a given year are at risk of being involved in a merger. Acquired banks drop out of the sample once that event occurs, but an acquiring bank continues in the sample. Because a bank can acquire another bank in more than 1 year, the event of being an acquirer is deﬁned as a repeated event (Allison, 1984). One approach to analyzing repeated events if the process is expected to be the same across successive events is to treat the intervals between the events as a separate observation (Allison, 1984, p. 51). Using this approach, a simple way to minimize the consequences of violating the independence assumptions is to add control variables for the number of events that occurred prior to the current event and for the length of the previous interval (Allison, 1984, p. 65). I add these variables to the models analyzing the likelihood of a bank’s setting up an organizational strategy of acquisition during each policy period.14

FINDINGS Descriptive Statistics of the variables in the analysis are given in Table 1. The results from the multivariate event history analysis are given in Table 2 for the non-survivor analysis, and in Table 3 for the survivor analysis.15

Acquired Banks I ﬁrst turn to a discussion of the ﬁndings from the analysis predicting the likelihood of a bank’s being acquired. Model 1 examines all of the

Banks in Crisis: Public Policy and Bank Mergers, 1976–1998

Table 1.

Descriptive Statistics.

Minimum Dependent variables Acquiree in merger Acquired in merger Financial variables Capital adequacy Asset quality Management competence Earnings Liquidity Bank size Public Policy Policy Policy

policy impacts Environment 1980–1988 Environment 1989–1993 Environment 1994–1998

Control variables Unemployment rate Interest rate Domestic competition Branch banking state Bank age Efﬁciency Unit bank Number of cases

167

0 0 0.272 0.000 0.000 0.250 0.000 962.62 0 0 0 2.200 3.020 0.010 0 0 0.000 0

Maximum

1 1

Mean

Standard Deviation

0.023 0.019

0.151 0.135

0.923 0.092 1.030 0.537 5.040 0.002 0.210 0.006 29.500 0.616 159,000,000 247,689.80

0.033 0.136 0.022 0.006 0.275 2,824,516.30

1 1 1 18.000 14.030 0.300 1 191 8.810 1

0.44 0.21 0.14

0.496 0.404 0.342

6.391 7.310 0.101 0.490 65.030 0.039 0.506

2.047 2.745 0.073 0.500 32.298 0.040 0.500

54,026

independent variables, but without the impact of the regulations. Model 2 adds these impacts. One can compare twice the log likelihood of these models to assess whether the model with the dummy variables representing regulatory changes improves upon the model without dummy variables. Based on a w2 distribution with three degrees of freedom and ap0:05; the test statistic of 82.417 exceeds the critical value of 7.81, indicating that the hazard rate is impacted by regulatory changes. Thus, I will base my discussion on Model 2. This analysis demonstrates the usefulness of contingent capital-dependence theory to understand banks’ organizational behavior. As the theory suggests, both capital adequacy and earnings are negatively related to the odds of a bank’s being acquired. Low capital adequacy and earnings signal a ﬁnancial crisis and difﬁculty with future survival. Thus, a response such as merger should result. Further, the impacts of regulatory changes mostly conform to the predictions of this theory. By exponentiating of the logistic coefﬁcients,

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Table 2.

Logistic Coefﬁcients for Regression of the Event of a Bank being Acquired on Independent Variables.

Financial variables Capital adequacy Asset quality Management competence Earnings Liquidity Bank size Public Policy Policy Policy

Model 1

Model 2

3.998 0.233 .248 12.461 .056 0.000

5.232 0.261 0.173 12.653 0.048 0.000

policy impacts Environment 1980–1988 Environment 1989–1993 Environment 1994–1998

1.023 0.823 1.159

Control variables Unemployment rate Interest rate Domestic competition Branch banking state Bank age Efﬁciency Unit bank

0.017 0.049 4.023 0.746 0.005 0.338 0.725

0.011 0.071 4.085 0.567 0.006 0.294 0.556

Constant

2.485

2.969

2 Log likelihood Change in w2 Number of bank-years

11,335.007 54,026

11,252.590 82.41 54,026

po0.01.

we can discern the effect of a one-unit increase in a variable on the odds of a bank’s being acquired. Compared to the ﬁrst time period, banks have increased odds of being acquired of ððe1:023 1Þ 100Þ 178% in 1980–1988, ððe0:823 1Þ 100Þ 128% in 1989–1993, and ððe1:159 1Þ 100Þ 219% in 1994–1998. Recall that I hypothesized an increase in merger in the 1980–1988 and 1994–1998 time periods, but a decrease in the 1989–1993 time period. Note that this is true because compared to the 178% increase in mergers in 1980–1988 over the 1976–1979 time period, the 1989–1993 time period only witnesses a 128% increase compared to the earliest time period. Thus, the 1989–1993 time period actually experiences a decrease in the odds of merger compared to the 1980–1988 time period.

Banks in Crisis: Public Policy and Bank Mergers, 1976–1998

Table 3.

Logistic Coefﬁcients for Regression of the Event of a Bank being an Acquirer on Independent Variables.

Financial variables Capital adequacy Asset quality Management competence Earnings Liquidity Bank size Public Policy Policy Policy

169

Model 3

Model 4

10.412 0.291 21.333 9.672 0.206 0.000

9.254 0.289 19.587 8.242 0.212 0.000

policy impacts Environment 1980–1988 Environment 1989–1993 Environment 1994–1998

0.118 0.543 0.501

Control variables Unemployment rate Interest rate Domestic competition Branch banking state Bank age Efﬁciency Unit bank Number of previous mergers Length since previous merger

0.101 0.005 3.111 0.445 0.005 0.615 1.447 0.483 0.027

0.070 0.042 3.004 0.662 0.005 0.501 1.534 0.487 0.031

Constant

4.208

3.710

2 Log likelihood Change in w2 Number of bank-years

8,445.004 54,026

8,402.32 42.68 54,026

po0.05. po0.01.

Several control variables have a signiﬁcant impact on the likelihood that a bank will be acquired. Branch banking has a positive impact on the odds of a bank’s being acquired in a merger. States that allow branch banking present an environment conducive to the implementation and expansion of an organizational structure widely believed in the banking industry to allow banks to deal with geographic and market uncertainty. The other two environment variables that are statistically signiﬁcant, the interest rate and domestic competition, both have negative impacts on the odds that a bank

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will be acquired. It appears that acquired banks are more likely to be located in less-competitive environments and in times of lower interest rates. In addition two bank-level control variables have a statistically signiﬁcant impact on the odds of a bank’s being acquired in a merger. Age is negatively associated with the odds of acquisition, supporting the idea that age inertia is an impediment to organizational change. Unit bank is also negatively related to the odds that a bank will be acquired in a merger. Thus, unit banks, compared to banks that are subsidiaries of holding companies, are less likely to be acquired. This is likely due to subsidiaries of holding companies being easier to assimilate into a larger organizational structure, as they are already a part of a multilayer subsidiary form.

Acquiring Banks Findings from the analysis of the likelihood of a bank’s being an acquiring bank have some interesting similarities and differences from the analysis of the likelihood of being acquired. Model 3 represents the analysis without the dummy variables representing regulatory impacts, and Model 4 represents the analysis with the dummy variables. One can compare twice the log likelihood of these models to see whether the model with the dummy variables improves upon the model without dummy variables. Based on a w2 distribution with three degrees of freedom and ap0.05, the test statistic of 42.68 exceeds the critical value of 7.81, indicating that the hazard rate varies with regulatory changes. Thus, I will focus on the ﬁndings from Model 4. This analysis supports contingent capital-dependence theory. Both capital adequacy and liquidity are negatively associated with the odds of a bank undertaking an acquisition. This indicates that it is not only banks in ﬁnancial crisis that are likely to be acquired, but ﬁnancial crisis also increases the likelihood that a bank will acquire another bank. Size is positively related to the odds of a bank’s acquiring another bank, as hypothesized. Note that this ﬁnding is inconsistent with population ecology’s concept of size inertia. The analysis also supports the decline in acquisitions contingent-capital dependence theory suggests should happen in the 1989–1993 period of tightening regulation. A number of control variables signiﬁcantly impact the likelihood that a bank will acquire another bank. Branch banking positively impacts this likelihood. States that allow unlimited branch banking give banks a strategy to cope with a competitive environment and also open up opportunities to merge. Similar to the ﬁndings from the previous analysis, the interest rate

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and domestic competition have negative impacts on the odds of being an acquiring bank. Banks may be less likely to merge when interest rates are high as they are especially vulnerable to high interest rates compared to nonﬁnancial ﬁrms due to the asymmetrical responses of their assets (loans) and liabilities (deposits) to interest rate changes (Cargill & Garcia, 1985, p. 11). Interestingly, although banks are less likely to merge when they exist in highly competitive states, they are more likely to merge in states with high unemployment rates. Perhaps the general economic environment is more indicative of a crisis for banks than is heavy competition. Two bank-level control variables are statistically signiﬁcant in this analysis. Bank age has a positive impact on the odds that a bank will be an acquirer in a merger. This is contrary to arguments based on age inertia, which suggest inertia is an impediment to organizational change. Unit banks are less likely than banks that are subsidiaries of holding companies to be the survivors of mergers. The number of previous mergers a bank has undertaken has a positive impact on the odds of acquiring another bank. In addition the length in years since the previous merger has a positive effect on the odds of the bank’s being an acquiring bank.

DISCUSSION These ﬁndings inform us about political implications of policy changes and question the free-market assumption that weak banks were weeded out during deregulation. Deregulation clearly had the effect of concentrating mergers within a few banks that tend to be having ﬁnancial problems. Many banks are acquired, but few are the acquirers. Thus, a small number of banks are buying up a larger number of banks, concentrating assets in the banking industry. For example, in 1999, Citigroup had almost 20 acquisitions for approximately $2 billion (Beckett, 2000). However, this only becomes apparent by examining both types of merger. If one were to only examine the likelihood of a bank’s being acquired,16 the negative effects of capital adequacy and earnings would seem to support the view that the weak banks are weeded out. However, when we turn our attention to likelihood of a bank’s acquiring another bank, we see that capital adequacy has the same negative impact on the likelihood of merger. In other words, banks facing a capital crisis are likely to be both acquiring and acquired banks. The weakest banks are not necessarily being eliminated. The acquirers in the merger tend to be facing capital and liquidity problems, but are big, while the targets of mergers are facing capital and earnings

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problems. Thus, both types of banks are facing ﬁnancial crisis, but the acquirers are big and have the power and the resources to survive the crisis. Theoretically, this chapter supports contingent capital dependence theory as a conceptual framework to explain two critical dimensions of corporate behavior. First, the analysis shows that, like other kinds of corporations (e.g. industrial), banks do not passively react to policies enacted by the federal government as some neo-institutional researchers suggest (Edelman, 1990). Instead, in response to the capital accumulation crisis, banks mobilized in order to transform the political–legal relations in which they were embedded. Second, after the institutional arrangements in which they are embedded were transformed, banks restructured in order to advance their capital accumulation agenda. I ﬁnd only limited support for population ecology theory and transaction cost-economics. For acquired banks, age is an impediment toward change. However, for acquiring banks the odds of merger increase with age and size. This suggests that age and size should be conceptualized as measures of power, rather than measures of inertia. That is, older and bigger banks have more opportunities to develop networks that they can use to assist them during periods of ﬁnancial crisis and are, thus, able to obtain the resources (e.g. capital) to ﬁnance mergers in order to solve the crisis. In contrast, young, small organizations are more likely to be acquired. This is consistent with Levinthal (1991), who suggests that age imparts resources upon an organization to survive threats, and Schumpeter (1942), who suggests a similar effect of size. Efﬁciency also does not have a signiﬁcant effect in either analysis. This calls into question transaction cost-economics’ contention that organizational change is primarily a response to efﬁciency concerns. In summary, this chapter suggests that during crisis period it is important to examine the interaction between corporate political and organizational behavior. Organizations actively work to restructure institutional arrangements that no longer foster adequate rates of capital accumulation. This restructuring opens up new opportunities for organizations to respond to external pressures. Studying both sides of this process is important, as it gives us a more wider picture of the ability of organizations to be social actors rather than passive recipients of environmental constraints.

NOTES 1. Stearns and Allan (1996) analyze merger waves that occurred in the industrial sector, one of which took place between 1984 and 1989.

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2. CAMEL ratings ‘‘measure the relative soundness of a bank’’ (Fitch, 2000, p. 73). CAMEL refers to a bank’s measures of Capital adequacy, Asset quality, Managerial competence, Earnings, and Liquidity. 3. Neo-institutional theorists focus on how state policies alter the institutional environment and have a resulting impact on organizational behavior (e.g. see Fligstein, 1985; Dobbin & Dowd, 1997; Scott, 2003). However, neo-institutional theory gives little attention to how state policies are restructured by cultural factors and institutions (for an exception see Schneiberg & Bartley, 2001) or how organizations mobilize politically to change the historically speciﬁc conditions of capital accumulation. 4. See Calomiris (2000) for a discussion of bank responses to the initial imposition of deposit insurance. He ﬁnds a link between agrarian populism, unit banks, and the lack of congressional support for such insurance. Calomiris (2000) work demonstrates the multilevel role that interest groups played in the development of deposit insurance in the United States. 5. Some researchers assert that the collapse of the stock market was not a strong causal factor of the depression (see Burk, 1988). Rather, they argue that the stock market collapse put pressure on the credit markets and that the Federal Reserve could have expanded credit, but chose not to. This suggests that the Great Depression was caused by political decisions rather than an economic crisis (Burk, 1988). However, it was widely believed that the two events were intrinsically linked. This belief was likely relevant to the decision-making process of legislators and regulators. 6. For a discussion of the political process around the S&L bailout, see Kaufman (1994). 7. Scores on these variables are given to banks, ranging from 1 to 5 and are often called the CAMEL ratings. In this analysis, each variable will be measured independently, and I do not use actual CAMEL scores. The measurement of variables is discussed in the methods section of the chapter. 8. One reviewer suggested that I hypothesize interaction effects between these ﬁnancial characteristics of banks and the different regulatory structures. Although I examined interaction effects, I did not include them in this chapter for two reasons. First, these effects are not of theoretical interest to the chapter, as I am interested in how the 1976–1998 time period represents a unique historical period in which the institutional arrangements of banking are in ﬂux. Second, for the most part these interaction effects were not statistically signiﬁcant, and they did not add to the explanatory capacity of the model. 9. Because only one bank charter is continued post-merger, merger and acquisition are synonymous in the banking industry. 10. This measure is consistent with population ecology theory’s concept of density dependence. However, because the density dependence argument addresses the birth and death of organization forms across the history of an industry, this concept cannot be properly tested in this analysis. 11. See Allison (1982, pp. 74–75) for a thorough discussion of this. 12. See Pong (1994) for an example of how dummy variables can be used to represent policy environments in using event-history analyses. 13. The analysis stops in 1998 because in 1999 another major regulatory change occurred, signiﬁcantly changing the institutional arrangements. In November 1999,

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the Glass–Steagall Act was dismantled. Legislation passed at this time allows banks, insurance ﬁrms, and securities ﬁrms to combine. 14. A bank can also acquire more than one bank per year. Although examining what impacts the number of mergers a bank is involved in during a given year is important, in this chapter I am concerned speciﬁcally with whether or not a bank set up a merger strategy. 15. See appendix for a correlation matrix of the independent variables in the analysis. Multicollinearity does not appear to be an issue. Only one bivariate correlation is close to exceeding the value of 0.700, that between the interest rate and the years 1980–1988, with a bivariate correlation of 0.690. I ran all models in OLS to obtain VIF factors, none of which caused concern. 16. Acquired banks are often viewed as ‘‘losers’’ of a merger because, by deﬁnition, their charters fail to continue. However, the stockholders and board members of the acquired banks often beneﬁt ﬁnancially much more than the stockholders and board members of the acquiring bank.

ACKNOWLEDGMENTS I thank Harland Prechel, Tim Woods, and three anonymous reviewers for their thoughtful comments on this chapter, and Emily Lukingbeal for her research assistance.

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APPENDIX. CORRELATION MATRIX OF INDEPENDENT VARIABLES (2)

(3)

(4)

(5)

(6)

(7)

(8)

(9)

(10)

0.289 0.029 0.343 0.055 0.054 0.056 0.067 0.011 0.156 0.051 0.064 0.012 0.078 0.047 0.055 0.128

0.023 0.118 0.595 0.041 0.013 0.044 0.019 0.065 0.125 0.007 0.135 0.066 0.000 0.018 0.096

0.099 0.017 0.003 0.016 0.015 0.009 0.014 0.009 0.006 0.008 0.005 0.004 0.015 0.016

0.039 0.023 0.013 0.036 0.084 0.056 0.058 0.077 0.044 0.033 0.039 0.005 0.054

0.014 0.017 0.043 0.001 0.072 0.083 0.017 0.100 0.071 0.007 0.033 0.066

0.014 0.013 0.009 0.021 0.002 0.015 0.078 0.060 0.053 0.009 0.066

0.403 0.232 0.204 0.091 0.242 0.065 0.302 0.150 0.092 0.306

0.468 0.413 0.387 0.690 0.107 0.370 0.098 0.119 0.137

0.238 0.142 0.191 0.045 0.335 0.094 0.014 0.221

0.265 0.463 0.156 0.421 0.175 0.082 0.242

(11)

(12)

(13)

(14)

(15)

(16)

0.218 0.315 0.102 0.166 0.354 0.412 0.112 0.120 0.007 0.173 0.077 0.116 0.013 0.018 0.039 0.127 0.224 0.092 0.204 0.103 0.008

THERESA MORRIS

(1) Capital adequacy (2) Asset quality (3) Management competence (4) Earnings (5) Liquidity (6) Size (7) Years 1977–1979 (8) Years 1980–1988 (9) Years 1989–1993 (10) Years 1994–1998 (11)Unemployment Rate (12) Interest Rate (13) Domestic Competition (14) Branch Banking State (15) Age (16) Efﬁciency (17) Unit Bank

(1)

PART III: CORPORATE POLITICS AND LABOR PRACTICES AND POLICIES

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MAKING CHANGE IN FEMALE SUPERMARKET MANAGERIAL REPRESENTATION: EXAMINING THE ROLE OF LEGAL, INSTITUTIONAL, AND POLITICAL ENVIRONMENTS Sheryl Skaggs ABSTRACT This paper, drawing on both organizational and inequality theory, examines change processes in female supermarket managerial representation resulting from various legal and normative environments. Because workplaces also are embedded in the larger political environment, I examine the extent to which these forms of external pressure vary across presidential administrations. The results from estimated fixed-effects models highlight the importance of direct pressure associated with a sex discrimination lawsuit filing and indirect pressure related to public perceptions of gender equality for three political periods. Only a moderate effect is shown for monetary losses associated with a lawsuit settlement or award.

Politics and the Corporation Research in Political Sociology, Volume 14, 181–209 Copyright r 2005 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN: 0895-9935/doi:10.1016/S0895-9935(05)14006-6

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Over the past several decades, employers and employees have become increasingly aware of the implications of equal employment opportunity (EEO) legislation, particularly as it pertains to women. While this has brought about some change in workplace practices and policies, the progress toward widespread transformation has been slow. Organizational research focusing on change processes has demonstrated the inconsistencies in employer response to general forms of external pressure such as that arising from industry-derived normative expectations (Sutton, Dobbin, Meyer, & Scott, 1994; Edelman, 1992), government oversight (Baron, Mittman, & Newman, 1991; Sutton et al., 1994) and local norms and values (Beggs, 1995). The implication is that for many organizations, particularly those not directly regulated by the federal government, the push toward gender equality is likely to have little inﬂuence without a combination of direct and indirect regulatory forces. Over the last several decades, discrimination litigation has become a more visible form of direct pressure targeting long-standing unfair workplace practices and policies. It remains unclear, however, to what extent organizations respond to this type of pressure and what, if any, impact it has had on women’s employment opportunities. The complexity of the legal system, especially as it relates to employment discrimination, suggests that the potential beneﬁt derived from litigation cases may be inﬂuenced by the larger political climate. This environment not only controls more direct aspects of the legal system through legislation and judicial appointments, but also signals the intensity of general pressure including EEO regulation and enforcement. In this study, I investigate the consequences of direct, external regulatory pressure in the form of sex discrimination lawsuit ﬁlings and subsequent settlements/awards on the representation of women in retail supermarket leadership roles. Although discrimination occurs at all occupational and job levels, I argue that the most persistent barriers are at the highest ranks and that changes in the gender composition of leadership roles provide a strong overall measure of movement toward equal opportunity in this industry. Research exploring the effect of workplace discrimination litigation has been limited. In the few studies focusing on this issue, the emphasis has primarily been on individual outcomes rather than organizational change processes (Burstein, 1998; Burstein & Edwards, 1994). Although such research may prove valuable for understanding the extent of unfair workplace practices and policies, it fails to make evident how structural barriers are eradicated. Because inequalities are explicitly embedded in organizational practices and policies, it is important to understand the processes leading to change.

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This study offers a theoretically unique approach to examining change processes by combining both organizational perspectives and relevant inequality theory. It is through the examination of organizational theories including new institutionalism and resource dependency that the relationship between the external environment and established internal practices and policies becomes more evident. Inequality literature focusing on internal labor market processes compliments these organizational perspectives by addressing the types of structures that tend to create and perpetuate disparity in employment opportunities and outcomes. Using comprehensive EEO-1 establishment-level data over a 15-year time period (1983–1998), I developed a series of models that take into account the inﬂuence of external regulatory and normative environments on internal structures, while controlling for stable organizational traits. Specifically, the analyses examine whether a sex discrimination lawsuit ﬁling, the visibility of a subsequent settlement or award as well as progressive local normative environments will increase the representation of women in supermarket managerial and ofﬁcial positions. I also examine to what extent these factors matter, given the national political climate in which organizations are embedded. While organizational studies emphasizing legal and political interconnections are not new, little research has focused on how these environments and general normative expectations lead to changes in the gender composition of managerial ranks. This type of study has a number of important research and policy implications. Retail supermarkets serve as the focus of this study primarily due to the industry’s history of economic stability and uniform internal organizational arrangements (i.e., internal labor markets). In addition, the industry’s large female workforce and historically embedded discriminatory employment arrangements, along with heightened public awareness of unfair labor practices more generally, have contributed to an increasingly litigious organizational environment. These combined factors tend to make this a particularly appropriate and interesting research population with which to address change processes.

EXTERNAL REGULATORY ENVIRONMENT AND CHANGE PROCESSES I draw on two major organizational theories – new institutionalism and resource dependency – to explain how change processes occur. Although

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these perspectives offer a different approach to change, they share the assumption that pressures arise primarily from external inﬂuences such as government regulatory agencies, litigation, customers, suppliers and advocacy groups. This basic approach is consistent with my perception of how organizational policies and practices are transformed. In addition, similar to resource dependency, I argue that the extent to which change occurs is also contingent on the larger political climate, which tends to set the tone for how effective direct external pressures (e.g., lawsuits and monetary losses) are perceived. In the absence of intense pressure, change is unlikely, particularly given the tendency for structures to become stable overtime. Discrimination lawsuits, particularly those involving large monetary settlements and high visibility, may provide this degree of pressure. Although such cases do not directly affect all establishments (i.e., individual worksites) within a given industry, the threat, if sufﬁciently large, may extend beyond those specifically targeted.1 According to institutional theorists (DiMaggio & Powell, 1983; Meyer & Scott, 1983), organizational arrangements are not necessarily a product of efﬁciency but rather reﬂect existing values and beliefs within the institutional context. Thus, organizations tend to adopt policies and practices that mimic other organizations of similar form as a way of gaining legitimacy. Cultural rules, models and myths within the organizational environment are likely to shape internal structures and practices. Once established and normatively accepted, practices within the institutional context become difﬁcult to alter. This is certainly the case for the long-standing retail supermarket industry where considerable uniformity in organizational form exists. Without specific legislation and costly penalties for violations (i.e., forfeiting legitimacy through sanctions), institutionalized patterns continue to be perpetuated (see Tolich & Briar, 1999). Some organizational scholars (Edelman, 1990; Sutton et al., 1994) argue that external legal pressures have brought about change in personnel procedures by creating a normative environment in which legitimacy is based on fair governance. In this context, laws are seen as a pervasive belief system, which permeates the most fundamental morals and meanings of organizational life. Thus, legal pressure is thought to have an indirect effect on the establishment of formalized employment practices and policies. Increased formalization tends to reduce ambiguity and personal discretion through the creation of objective standards for training, job evaluations, hiring, and promotions. Sutton and his colleagues (1994), on the other hand, suggest that coercive pressure may not be particularly important in the establishment of nondiscriminatory practices because personnel practices

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are largely symbolic responses to external pressure. Edelman (1992) asserts that while the normative environment may, to some degree, increase organizational conformity to EEO policies, the combination of internal forces (i.e., counsel by labor attorneys and personnel departments) along with external pressure (i.e., requirement by regulatory agencies to establish personnel departments) may be necessary for change (see also Cockburn, 1991). In a study focusing on the effects of state and national institutional environments on gender and race workplace inequality, Beggs (1995) found that the quality of employment along with earnings for white women and, especially minorities, were positively inﬂuenced by both levels of the institutional environment. In addition, research by Guthrie and Roth (1999) provides evidence of improved opportunities for women in top corporate executive positions resulting from progressive legal and local political institutional environments. Blair-Loy (1999), in her study of executive women in ﬁnance careers, also found that changes in the social and legal environments had significant positive effects on the internal organizational structuring for women at these levels. These results substantiate the importance of legal, political and normative environmental pressure in producing changes in employment policies and practices. Resource dependency theory, on the other hand, focuses more specifically on the relationship between organizational resources and structural arrangements. From this perspective, organizations participate in exchanges with other organizations to secure necessary resources and thus, reduce uncertainty (Pfeffer & Salancik, 1978). Although all organizations have at least some dependency, those most reliant on exchanges in their environment tend to experience the greatest vulnerability. The degree to which organizations can protect themselves from uncertainties may be inﬂuenced by such factors as federal and state laws as well as government regulation and budgetary allocations (Baron et al., 1991). These are particularly relevant for public agencies and organizations subject to OFCCP (Ofﬁce of Federal Contract Compliance Program) oversight. For nonregulated private sector organizations, however, substantial changes in existing practices and policies are unlikely to occur as a result of general environmental pressure such as employment law. As Dobbin, Sutton, Meyer, and Scott (1993) indicate, one reason this may be the case is that public policy has been far more effective in creating a broad model of organizing equal opportunity policy rather than in compelling a narrow range of targeted organizations (e.g., those experiencing sanctions) to adopt fair labor practices. Thus, without strict enforcement of existing employment laws, the dependence for many organizations may be quite insignificant.

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In general, this perspective suggests that organizations with considerable resources (in the broadest sense) and low dependence can avoid conformity in the presence of seemingly weak or general environmental demands. It is presumed that the level at which organizations respond to pressure is linked to costs associated with monetary losses, public censure, labor disputes, resource constraints (i.e., loss of suppliers) or government sanctions. For any organization, conformity is most likely when these costs threaten existing status or even survival.

THE LITIGATION FACTOR In a historically unionized industry such as retail supermarkets, issues relating to unfair labor practices have been a recurring source of contention for more than half a century. Although some of these disputes have centered on gender inequality, only in the past decade and a half have issues of discrimination become powerful ammunition on the legal battleground. For instance, archived searches through legal documents, local, regional and national newspapers, and business publications, revealed 19 large sex employment discrimination cases ﬁled against supermarkets since the mid- to late 1980s. According to a number of legal, business and industry experts, there are several reasons for this recent proliferation. For one, it is believed that shifts in societal perceptions of equality in the past few decades coupled with the supermarket industry’s long-standing pattern of internal labor-market practices – many of which were established in a period when discrimination was standard business practice – have created a fertile environment for the growth of employment discrimination litigation (Price, 1997; Silverstein, 1999; Stickler, 1994). Moreover, legislative changes such as the passage of the 1991 Civil Rights Act may have reduced many of the legal obstacles confronted by aggrieved employees, most notably women and the disabled. This is especially the case compared to barriers in place during the 1980s. Under such legislation, plaintiffs involved in discrimination lawsuits are afforded the opportunity to seek far more damages than previously was the case, including punitive and compensation for emotional distress.2 However, possibly the most profound change resulting from the 1991 Civil Rights Act is the provision, which entitles plaintiffs to request a jury trial. Prior to this legislation, jury trials were only permissible for racial- and nationalorigin discrimination cases. It is believed plaintiffs are more likely to receive

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favorable outcomes in jury forums as a result of empathy compared to judge only trials (Price, 1997; Weinstein, 1992). The recent trend in resolving sex discrimination issues in supermarkets has been toward the establishment of large class-action suits. The result has been an increased risk of large monetary losses for targeted organizations. This is evidenced by several well-publicized discrimination class-action settlements: one in 1994 for $107 million involving California-based Lucky Stores, followed by a more recent case against the Florida-based chain, Publix Super Markets, for approximately $81 million. In only a few other U.S. employment cases have settlements exceeded these amounts. While such resolutions are considered large by any standard, in view of the supermarket industry’s notoriously low profit margins, intense competition and direct sales relationship with the public, it is likely that the associated resource loss (e.g., unfavorable publicity, monetary outlays, etc.) will have a substantial impact on internal practices and policies. Following this premise, several studies have found that litigation brought by employees against discriminating employers has provided sufﬁcient incentive for change in organizations resistant to indirect environmental pressures. Reskin and Roos (1990), examining changes in women’s representation in the publishing industry, found that a few large lawsuits ﬁled against discriminating organizations ‘‘prompted [other organizations within the industry] to implement broad programs to recruit and promote women and minorities’’ (p. 221). One industry employee reported that the mere threat of litigation was most inﬂuential. Bergman (1996) cites similar effects of lawsuits ﬁled in the supermarket and food industries but emphasizes that the size of the suit (i.e., number of employees ﬁling) and the settlement (i.e., in monetary terms) are particularly important to the overall impact on other organizations in the environmental ﬁeld. Kelly and Dobbin (1999) suggest that since U.S. employment law tends to be enforced ‘‘reactively through litigation rather than proactively through administrative scrutiny, employers respond to the visibility of new laws and the perceived risk of litigation rather than to the objective risk of legal sanction’’ (p. 460). Leonard (1990) as well as Smith and Welch (1989) argue that the 1980s trend toward the weakening of enforcement and the obstacles encountered by plaintiffs in proving discrimination is likely to reverse much of the earlier progress toward equal opportunity. Nonetheless, other researchers suggest that EEO enforcement can have long-term effects on organizational structures through the establishment of formalized personnel policies and practices (Edelman, 1990; Dobbin et al., 1993; see also Szafran, 1982). I suspect, however, that in the absence of intense external regulatory pressure

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involving high costs (e.g., monetary as well as public and supplier mistrust) of noncompliance, the weak state of EEO enforcement will largely generate symbolic changes.

POLITICAL AND NORMATIVE ENVIRONMENTS In addition to the inﬂuence of external pressure associated with legal action, organizational research indicates that change also may result from shifts in the political ideology (Prechel & Boies, 1998; Prechel, 2000) and normative variation related to public perception. Rose (1994) contends that prior to the Reagan administration, considerable support existed at the federal level for enforcement of EEO law. However, by the middle of Reagan’s ﬁrst presidential term, evidence had already emerged indicating a weaker stance on employment discrimination (see also Herbers, 1982; Burstein, 1998). This was particularly true for the Justice Department, which set the tone for a restrictive interpretation of federal legislation and less involvement by enforcement agencies. As a result, organizational practices such as the creation of gender segregated jobs (Reskin & Roos, 1990; Jacobs & Steinberg, 1990; Tomaskovic-Devey, 1993) and/or refusal to maintain accurate personnel records (Abramson, 1979) became pervasive. According to Rose (1994), it was also during this period that the number of class-action discrimination cases significantly diminished. Not until the early 1990s did a new trend begin to emerge. The passage of the 1991 Civil Rights Act seemed to signal that change in national leadership from conservative to moderate was more than symbolic. Likewise, the increase in large class-action discrimination lawsuits since this period also appears to be indicative of a more progressive political environment. Burstein (1998) argues that much of what is perceived as advancement for women and minorities due to EEO laws may in fact be explained in large part by shifts in public opinion and values regarding equality. However, there is little reason to believe that these perceptions are consistent across locations. In fact, the literature on gender workplace inequality suggests that variation in outcomes for women and minorities across geographic regions is related to differences in values and norms, which have direct (e.g., behavior and practices in specific workplaces) and indirect (e.g., state mandates) effects. Consistent with this type of argument, Beggs (1995), using a measure of the state institutional environment (i.e., tapping various local behaviors and norms toward equality), found employment equality among racial and gender groups to be higher in states with strong support for equal

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opportunity. Similarly, in a study by Sutton et al. (1994), adoption rates of due-process governance were shown to be higher in states such as California with progressive judicial and legislative histories (see also Guthrie & Roth, 1999). While progressive political and normative environments may positively inﬂuence employment opportunities and outcomes, without strong legal support, some organizations may ﬁnd creative ways to continue unfair practices.

SUPERMARKETS AND INTERNAL STRUCTURING As previously noted, the retail supermarket industry serves as a useful population in which to examine change processes, particularly given its relatively uniform internal structure. The economic transformation of the late 20th century, characterized by a decline of manufacturing and expansion of service-oriented industries, brought about substantial growth for the retail trade sector including supermarkets. Between 1975 and 1990, the retail supermarket industry experienced dramatic growth with an increase in employment by more than 70% (U.S. Bureau of Labor Statistics, 2004a). In 1998, retail trade comprised approximately 17.7% of total non-farm employment and of the 22.3 million workers in this sector (U.S. Bureau of Labor Statistics, 2004b), 14% were employed in the supermarket industry. Although there have been a number of external changes in the industry including expansion of markets, and increased scale of stores as well as product diversiﬁcation, much of the industry’s basic internal structuring has remained relatively impervious to time. Consistent with organizational literature (e.g., Stinchcombe, 1965), research on this industry suggests that many of the early personnel practices and policies have undergone few changes since its inception more than 75 years ago. Thus, many of the existing personnel practices and internal occupational hierarchy tend to resemble those in existence during the pre-civil rights era (Tolich & Briar, 1999) where women almost exclusively held peripheral positions with little or no promise of advancement. Organizational structures within the retail supermarket industry are generally characterized by internal labor markets (Doeringer & Piore, 1971; Althauser & Kalleberg, 1981). Individuals, thus initiate employment (often while in high school) at a few low-level entry ports (e.g., checkers, baggers, produce and deli clerks, meat wrappers, and customer service clerks – see Walsh, 1993) and progressively move their way up the fairly narrow hierarchical chain (i.e., department assistant heads or heads to section

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managers, and ultimately to store or unit manager). Although basic beneﬁts (e.g., medical insurance and paid vacation) are typically offered to full-time employees, a large number of positions, particularly at the lowest levels, are part-time. To a large degree, these positions (i.e., both full- and part-time) call for few skills, have only minimal educational requirements and thus, offer relatively low pay (Coggins & Senauer, 1999). Rather than relying on external training and education, advancement has typically been based on industry-specific experience. For this reason, it is not uncommon to ﬁnd retail managers with extensive tenure but no more than a high school education (Coggins & Senauer, 1999; Silverstein, 1999). From an inequality perspective, the problem with this type of structure is that men and women tend to be found in qualitatively different job ladders with imbalanced opportunities and rewards. While men have historically dominated the top-level positions, research has shown that the process for advancement has been far more restrictive for women who often have limited opportunity to obtain extensive industry-specific training and experience (Tolich & Briar, 1999; Silverstein, 1999). For instance, in a study of several California supermarket establishments, Tolich and Briar (1999) noted that ‘‘despite [the lack of gender specific job titles], an informal yet pervasive gender division of labor’’ exists among the various ranks within retail establishments (p. 130). This type of structuring is evident in Walsh’s (1993) study of two grocery organizations in which he found women to be concentrated in service-oriented positions such as deli- and seafood-clerks (i.e., 94% and 83% female, respectively) while men more commonly dominated similarly skilled but significantly higher-paid production positions such as meat cutters and produce workers (i.e., 64% and 69% male, respectively). In such cases, the distinction between male and female tasks often result in varying opportunities for experience and training, ultimately creating inequality in promotions. Although the actual number of women in supervisory and managerial positions has increased over time from just over 20,000 in 1983 to over 61,000 in 1998,3 research has well documented their relatively low representation compared to men. For instance, in spite of the fact that in 1998 more than half of all employees were female, women comprised only about 34% of the nearly 180,000 managerial positions (up from approximately 28% in 1990 and 21% in 1983). Additionally, evidence suggests that even when women reach these top levels, they tend to be segregated into lowerpaying and less prestigious positions (Tolich & Briar, 1999; Bielby, 1992; Tomaskovic-Devey, 1996, 1998). In fact, according to a recent industry report, none of the top 20 supermarkets are run by women (Food Marketing

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Institute, 1995). When compared to other U.S. industries, gender disparities, particularly at these highest levels, also tend to be more pronounced (Silverstein, 1999).

HYPOTHESES From the theories presented here, I derive several formal hypotheses. Specifically, I contend that organizations are likely to respond to external pressures, especially when they jeopardize market position or seriously increase resource dependence. For establishments in the supermarket industry, a sex discrimination lawsuit ﬁling has such potential through legal sanctions and negative publicity. Although the pressure associated with litigation may inﬂuence establishments throughout the industry as indicated by the new institutional theory, it is presumed that the greatest effect will occur for those directly targeted (i.e., establishments or stores named in the suit). However, because cases are ﬁled against a parent corporation rather than individual establishments where allegations originated, the effect on targeted stores may vary depending on geographic proximity to the ﬁling. For instance, it seems reasonable to argue that establishments named in a lawsuit and operating in a location where specific allegations occurred will experience more intense pressure as a result of elevated employee, customer and media scrutiny. Therefore, I derive the following hypothesis: Hypothesis 1. The representation of women in supermarket managerial and ofﬁcial positions will be higher for targeted supermarket establishments in close geographic proximity to a lawsuit ﬁling. In addition to the above prediction, I expect that a second event involving a sex discrimination settlement or award will increase women’s supermarket managerial representation due to a monetary resource loss. While the outlay, regardless of size, should matter to some extent, I hypothesize that as the size of the settlement/award increases, the representation of women in leadership roles will increase monotonically. Hypothesis 2. The representation of women in managerial and ofﬁcial positions will increase with the monetary size of a sex discrimination lawsuit settlement or award. According to new institutional theory, organizations tend to generate internal structural arrangements which are consistent with their normative environment. This suggests a broad range of external inﬂuences arising not

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only from the state or economy but also from more generally diffused societal expectations and beliefs. For instance, the extent to which employers hire women and men to ﬁll certain positions likely reﬂects local public perceptions of equality. As such, I expect that organizations will positively respond to pressure arising from progressive norms, values and attitudes in the local environment. Therefore, the third hypothesis is: Hypothesis 3. The representation of women in managerial and ofﬁcial positions will be higher for establishments in geographical regions with progressive normative values and attitudes regarding gender equality. Lastly, the way organizations respond to external pressure is believed to be mediated by the broader political climate in which they operate. Thus, I argue that the extent to which external pressure inﬂuences women’s access to leadership positions is contingent upon the conservative or progressive nature of state ideology, economic policy and legal mandates. This suggests the following hypothesis: Hypothesis 4. The effect of legal and normative pressure on women’s representation in supermarket managerial and ofﬁcial positions will vary based on shifts in the broader political climate.

DATA, MODELS, AND MEASURES The data used for this study are derived from EEO-1 reports of retail supermarket establishments (i.e., individual facilities or worksites) across the United States covering a 15-year period (1983–1998).4 Annually, private employers with 100 or more employees or federal contractors with 50 or more employees (or ﬁrst-tier federal subcontractors involving agreements worth $50,000) are required to provide such reports regarding the sex and race/ethnic composition of their workforce. These data are used by the Equal Employment Opportunity Commission (EEOC) in carrying out enforcement duties as well as by other federal, state and local agencies charged with the enforcement of EEO laws. The availability of such extensive data with over 9,000 supermarket store (i.e., establishments) observations per year offers a unique opportunity to examine changes in female access to management for establishments across an entire industry. Analyses are conducted at the establishment-level rather than the occupational – level, which provides a number of advantages over the majority of previous studies in this area. Perhaps most importantly, variation across

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establishments will not be forfeited as would be the case with organizational-level analyses. For instance, many large supermarket corporations have stores located throughout the country. Although practices and policies may be relatively uniform across stores associated with a specific parent corporation (e.g., all Kroger stores), factors within the local environment including the ﬁling of a large discrimination lawsuit as well as public perceptions about gender equality may create significant variation in environmental pressure for EEO. By aggregating data to the organizational level, this type of geographical variation would be lost.

Model Specification To examine whether, over a 15-year time period, external pressure from legal and normative environments will increase the representation of women in supermarket managerial and ofﬁcial positions, I develop a series of ﬁxedeffects models. These models are the most common method used to analyze longitudinal data with continuous outcome variables and are optimal when examining the consequences of events such as a lawsuit ﬁling and a subsequent settlement or award. In addition, a ﬁxed-effects approach is an effective method for controlling unmeasured establishment-level differences in the dependent variable that are stable over time. Although establishments that experience an event may be different from those that do not, it is possible, using this type of method, to obtain unbiased estimates of event effects as long as those differences are stable.5 In other words, ﬁxed-effects models are used to control for otherwise unobserved, stable characteristics of establishments such as geographic location. Specifically, the models used to analyze these data are estimated with ordinary least-squares (OLS) regression using deviation scores calculated as the difference between the actual value of a case, and the mean for that case over all time points (Allison & Bollen, 1997). While it is possible to include time-varying explanatory variables in ﬁxed-effects models, observed timeconstant coefﬁcients (e.g., courts where discrimination cases are heard) cannot be estimated as long as they are correlated with other observed variables in the model – which is generally the case. Thus, these variables are treated as ﬁxed constants and conditioned from the data.6 One major concern for these types of models is the introduction of autocorrelation, particularly when dealing with repeated observations. This may result in the estimation of biased standard errors and test statistics. However, Allison (1994) suggests that in most cases, a ﬁxed-effects estimator

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will adjust for factors which contribute to these large correlations – most often the result of stable differences across individuals or establishments.7

Dependent Variable Although discrimination can occur for all jobs, I argue that the most persistent barriers are at the highest ranks.8 It is expected that changes in the gender composition of leadership roles will provide a strong overall measure of movement toward equal opportunity in the supermarket industry. To determine the representation of women in managerial and ofﬁcial positions, I use the natural log odds ratio calculated as: W mngrs M mngrs ðlnÞ Gender odds ratio ¼ W non-mngrs M non-mngrs An odds ratio of one represents total ﬁrm equality and an odds ratio below one means that women are underrepresented in managerial and ofﬁcial positions compared to men. An odds ratio greater than one is expected to be quite rare, but would indicate that women are more likely than men to hold managerial and ofﬁcial jobs.9 The choice of measure is an important one. While the general trend in the literature is to rely on a measure of the percentage of women in management, this may merely reﬂect inter-ﬁrm gender segregation. By using the odds ratio measure, it is possible to determine the organizational-level erosion of male control of management, holding constant the general gender composition of employment.10 This is particularly appropriate considering the normative character of internal labor market structures within the supermarket industry, which implies that almost all top-level positions are ﬁlled internally.11

Independent Variables Legal Pressure As previously noted, I expect organizations will respond to direct external pressure based on the risk posed to resource supplies and overall stability. For this study, such losses are likely to occur as the result of legal sanctions and negative publicity associated with a lawsuit. A total of 19 sex discrimination cases ﬁled from the period of 1985 to 1998, effecting over 7,000 supermarket stores, are available for analyses. Using electronic searches of

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legal records, local, regional and national newspapers as well as business/ professional publications,12 I selected cases that were referenced in more than one source and/or on multiple dates.13 I argue that the nature of these high proﬁle cases should make them an especially strong indicator of legal pressure and will most likely provide the greatest potential for organizational change. To capture the effects of legal pressure, I include three dummy variables that denote different levels of resource threat based on geographic proximity to a discrimination lawsuit ﬁling. I operationalize geographic proximity as the state in which sex discrimination allegations originated. The ﬁrst category consists of establishments directly named in a lawsuit and operating in the state where the allegations and subsequent ﬁling occurred. For instance, if in a given year, the parent corporation known as Food Saver (ﬁctional name) experiences a lawsuit ﬁling in California, all Food Saver retail establishments located in that state receive a coding of 1 (one), while all others are coded zero. Pressure is presumed to be highest for these establishments given the direct pressure associated with legal sanctions and intense scrutiny by employees, the public and media. Slightly weaker pressure is captured by a second category coded 1 (one) for establishments directly named in a sex discrimination lawsuit during a given year, but located outside the state of ﬁling. A third measure, used as the reference category, includes non-targeted establishments (i.e., not named in a suit) located both within and outside the state of origination.14 Visibility of Litigation As a second indicator of resource dependency, a measure capturing the visibility (i.e., monetary cost and publicity) of litigation, is included. In particular, I use the natural log of total monetary loss involved in a sex discrimination lawsuit settlement or award which favors the plaintiff(s) for the year following such a resource loss.15 The assumption is that if litigation costs are large enough to jeopardize overall stability, change in internal structuring is a likely outcome. I contend that in the supermarket industry with high competition and low profit margins, this measure will serve as an effective indicator of a resource loss for establishments directly involved in a settlement or award. Local Normative Environment In order to examine the effects of local norms on the opportunity for advancement of women, I include a time-varying measure using data from the General Social Survey (GSS) for selected years from 1983 to 1998.

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Specifically, I employ a multi-item additive scale created at the individual level, which represents local norms, values and attitudes regarding equal opportunity and equality.16 This scale is aggregated to the region-level (a grouping of states), based on GSS area assignments.17 Items were coded with higher values corresponding to less progressive norms, values and attitudes (greater gender bias), while lower values indicate greater overall equality. Similar to the legal climate, I expect that establishments will positively respond to pressure arising from progressive norms, values and attitudes in the local environment. Political Environment In longitudinal studies, it can be expected that at least some of the changes in outcome variables will occur as a factor of time, reﬂecting general societal change. Thus, while it may be argued that change in terms of advanced opportunities for women have been of a linear, progressive nature, I contend that shifts in the larger political climate over this 15-year period have modiﬁed the time path of the gender odds ratio. I operationalize political climate as presidential administration, which is intended to capture such factors as economic policy, including EEOC budgetary allotments, legal mandates and general state ideology. I include three separate analyses representing the Reagan (1983–1988), Bush (1989–1992), and Clinton (1993–1998) administrations. The decision to run subgroup analyses is based in large part on the expectation that the effects of independent variables, particularly those representing legal pressure and visibility will vary based on the period in which they occur.18 For instance, legal pressure experienced during the early and mid-years of this study – which coincide with the conservative Reagan and Bush presidential terms – may have a negative effect on the managerial odds ratios compared to the more recent, progressive Clinton term. Although both the Reagan and Bush administrations represent an overall conservative political climate, I expect the inﬂuence on women’s access to management to be distinctly different in the two eras. This is based, in part, on shifts in congressional control over spending and the number of presidential federal court appointments (i.e., the level at which discrimination lawsuits are heard). Control Variables Much of the organizational literature suggests that internal practices and policies are often a product of size. For instance, small organizations have fewer jobs than large organizations and thus, are likely to have fewer managerial and ofﬁcial positions. On the other hand, research also suggests that

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as size increases, so too does the propensity for organizations to use bureaucratic control mechanisms to foster gender segregation through the creation of specialized job titles (Tomaskovic-Devey & Skaggs, 1999). To control for variation based on these factors, I include a variable measured as the natural log of establishment size with the expectation that the effect will be positive but at a diminishing rate. The general ﬁxed-effects models described are reﬂected by the following notation: ORðln Þit ¼ at þ b1 LPit þ b2 VISIBit þ b3 NORMSit þ b4 SIZEðln Þit þ it

RESULTS Descriptive statistics for the dependent and independent variables included in the ﬁxed-effects models are presented in Table 1. These statistics represent the typical values averaged over the establishment years 1983–1998 as well as values for years representing each of the three political periods. The range of the natural log of the gender odds ratio for this population is 7.25 to 1.61, with an average over the time period of 2.40. This mean value suggests that, on average, women employed in a supermarket establishment from this sample are far less likely (i.e., odds ratio of 0.38) to be in managerial and ofﬁcial positions compared to men. The value is similar for years 1986 and 1990, but by 1996, it has been reduced to 2.02 (i.e., odds ratio of 0.44). This indicates a slight positive change in women’s access to managerial and ofﬁcial positions, although their representation remains much lower compared to men. In terms of legal pressure, nearly 1.5% of supermarket establishments in closest geographic proximity to a ﬁling have been exposed to a sex discrimination lawsuit in a typical observation year. However, this exposure varies considerably over time. For instance, in 1990 and 1996, the percentage of establishments experiencing this type of legal pressure is somewhat lower (i.e., approximately 1.5%) than the average. On the other hand, over 2% of establishments were targeted by a lawsuit but were located outside the state of ﬁling in a typical observation year. Again, variation by year is indicated for these establishments, with the largest percentage affected in 1986. On average, just over half of supermarket establishments examined did not experience direct legal pressure from a sex discrimination lawsuit ﬁling. In general, the results make apparent the geographically dispersed nature of litigation cases as well as the variation by political era.

198

Table 1.

Descriptive Statistics for Fixed Effects Models Predicting Gender Managerial Odds Ratios.

Variables

Gender odds ratio (ln) Gender odds ratio Legal pressure – ﬁling, in state Legal pressure – ﬁling,outside state Legal pressure – others Visibility of litigation (ln) Visibility of litigation Gender normative scale Establishment size (ln) Establishment size Reagan admin. (1983–1988) Bush admin. (1989–1992) Clinton admin. (1993–1998) N (establishment years)

Average

1986

1990

1996

Mean/Pct.

S.D.

Mean/Pct.

S.D.

Mean/Pct.

S.D.

Mean/Pct.

S.D.

2.40 0.38 1.47% 2.26% 51.67% 10.00 21.2M 7.89 4.62 121.21 29.95% 25.73% 44.32%

2.65 0.41 0.12 0.15 0.50 7.09 34.7M 0.35 0.52 140.87 0.46 0.44 0.50

2.58 0.33 1.56% 12.32% 86.12% 0.01 0.00 8.25 4.53 114.62 100.0% — —

2.65 0.38 0.12 0.33 0.09 0.00 0.00 0.29 0.52 156.64 — — —

2.54 0.36 0.49% 0.00% 99.51% 0.01 1.01 7.90 4.64 125.55 — 100.0% —

2.70 0.41 0.30 0.00 0.07 0.00 0.00 0.30 0.52 172.23 — — —

2.02 0.44 0.62% 4.65% 94.73% 11.49 97,352 7.71 4.68 126.62 — — 100.0%

2.48 0.42 0.08 0.21 0.22 0.00 0.00 0.18 0.51 113.73 — — —

193,554

9,990

12,402

14,605

SHERYL SKAGGS

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Similar to a lawsuit ﬁling, the visibility of litigation also is shown to vary substantially by year. For instance, in 1986 and 1990, there were no lawsuit settlements/awards reported. However, in 1996, a monetary loss totaling more than $97,000 is indicated but is quite small compared to the average loss of $21.2 million across establishment years. This disparity as well as the noted difference across time periods suggests a concentration of large settlements/awards in a limited number of years. Although not indicated in reported statistics, the trend has been toward increasingly large monetary losses since the early 1990s. This is consistent with legislative changes during this period, which increased the amount of damages awarded to plaintiffs in sex discrimination cases. The gender normative scale, ranging from values of 7.23 to 9.10, has a reported average of 7.89 across establishment years. A gradual decrease in the mean score occurs between 1986 and 1996, indicating a slight trend toward more progressive public perceptions of gender equality (i.e., higher scores representing more conservative attitudes and norms). Given the importance of normative expectations on employment equality found in previous studies (Beggs, 1995; Burstein, 1998), it is quite possible that even such moderate shifts in regional attitudes will translate into greater access for women in supermarket management when examined in multivariate models. Table 2 presents the results from three ﬁxed-effects models by political era, which corresponds to the Reagan, Bush and Clinton presidential administrations.19 To facilitate interpretation, the ﬁndings are discussed using odds ratios rather than the natural log transformation. Overall, the results suggest that legal and normative effects not only exist, but vary by political administration. For example, in the ﬁrst model representing the Reagan presidential era, ﬁndings indicate that women employed by establishments experiencing a lawsuit ﬁling in their state, in contrast to all other establishments, are over twice as likely to be in managerial or ofﬁcial positions compared to other establishments. Likewise, the effects are similar but slightly stronger for targeted establishments located outside the state where allegations originated. While not entirely consistent with earlier predictions, these ﬁndings, particularly during the Reagan and Bush eras, seem to imply that the strongest pressure is derived from direct involvement in a lawsuit alone rather than from geographic proximity to the ﬁling. As a second measure of resource dependency, the visibility of litigation in terms of the size of a settlement or award is shown to be significant but only during the Reagan administration. In particular, I ﬁnd that as resource loss (e.g., monetary costs) for targeted supermarket establishments increases,

Variable

Intercepta Legal pressure – ﬁling, in state Legal pressure – ﬁling, outside state Visibility of litigation Gender normative scale Establishment size (ln) N R2 F-value

Bush Erab 1989–1992

Reagan Era 1983–1988 Coefﬁcient (ln odds ratio)

Coefﬁcient (odds ratio)

Coefﬁcient (ln odds ratio)

— 0.753 (0.147) 0.895 (0.055) 0.003 (0.006) 0.096 (0.046) 0.664 (0.046)

— 2.12

— 0.191 (0.054) 0.335 (0.054) 0.001 (0.001) 0.266 (0.046) 0.581 (0.050)

57,966 0.739 7.54

—

2.45 1.00 0.908 1.94

—

49,795 0.834 10.13

— 1.21 1.40 1.00 0.766 1.79

—

Clinton Erab 1993–1998 Coefﬁcient (ln odds ratio) — 0.092 (0.040) 0.117 (0.036) 0.003 (0.002) 0.229 (0.051) 0.322 (0.039) 85,793 0.746 9.68

Coefﬁcient (odds ratio)

— 1.10 1.12 1.00 0.800 1.38

— —

SHERYL SKAGGS

Note: Numbers in parentheses are standard errors. po0.05. po0.01. po0.001 (two-tailed tests). a Fixed-effects estimates contain no intercept. b F-test comparing the two models indicated significant difference.

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200

Table 2. Fixed-Effects Coefﬁcients Predicting Gender Managerial Log Odds Ratios from Regulatoryronmental Inﬂuences and Other Independent Variables by Political Period.

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women’s representation in management becomes similar to men. The lack of significant ﬁndings for the Clinton presidential term – considered more progressive than either the Reagan or Bush administrations, may in fact reﬂect a more general trend in which large monetary losses have become less important for inciting change than actual lawsuit ﬁlings. For instance, even though the 1991 Civil Rights Act included a provision for increased monetary awards in sexual discrimination cases, it is quite possible that such legislation had a greater impact on signaling imminent costs at the time of a ﬁling than upon settlement. Thus, rather than taking a ‘‘wait and see’’ approach to litigation, the results suggest supermarket establishments may in fact be primarily responding to increasingly intense negative publicity (e.g., Internet and cable news media) brought about by the initiation of discrimination charges. Following the tenets of new institutional theory, the results provide evidence of a normative environmental effect on women’s representation in supermarket leadership positions. This is especially the case for the Bush and Clinton presidential periods. As hypothesized, the negative coefﬁcients suggest that diminished public perceptions of equality are associated with a decrease in the managerial gender log odds ratio, after controlling for all other factors. Thus, during the Clinton era, women employed in geographic regions with more conservative views are less likely (i.e., odds ratio of 0.80) to be in leadership roles compared to men. Finally, the results indicate that establishment size significantly increases women’s representation in managerial and ofﬁcial positions for all three political periods. Although this measure was primarily introduced as a control, it stands to reason that larger supermarket establishments will present greater managerial opportunities in general compared to those with few employees. More employees generally require a greater number of managers and leaders, providing more room for women to attain positions of authority. Additionally, larger establishments tend to have more formalized internal structures including personnel ofﬁces (Edelman, 1990; Dobbin et al., 1993), which are often pressured to promote fair employment practices.

FINDINGS The purpose of this study has been to measure changes in female supermarket managerial representation resulting from legal, institutional and political external pressure during the period between 1983 and 1998. This

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research, largely based on key organizational theories of new institutionalism and resource dependency, demonstrates the extent to which supermarket establishments respond to strong direct as well as general indirect pressure arising from political and normative environments. Several important ﬁndings emerge from this research. The results indicate that targeted supermarket establishments in this sample respond to strong external regulatory pressure from sex discrimination lawsuit ﬁlings. However, somewhat inconsistent with predictions in H1, the ﬁndings suggest that these establishments, regardless of geographic proximity to discrimination allegations, respond to litigation by increasing women’s managerial representation. The implication is that local employee, customer and media scrutiny associated with a ﬁling runs secondary to the threat of legal sanctions and negative publicity more broadly deﬁned through industry publications and national/regional media attention. Likewise, it appears that the actual experience of being directly involved in a sex discrimination lawsuit is the primary driving force which jeopardizes resource supplies and market position for the supermarket establishments examined. A second ﬁnding provides only moderate support for resource dependency associated with monetary losses from a lawsuit settlement or award. Specifically, the predicted relationship between women’s managerial representation and the visibility of litigation noted in H2 holds just during the Reagan administration; even then, it is somewhat weak. For subsequent political eras, the effect of a monetary loss is insignificant. These results seem to suggest that as the prevalence of large class-action lawsuit cases increased during the 1990s, settlements/awards became less important for signaling the ‘‘costs’’ of litigation. This implies a shift in the source of pressure over time, moving from the combined resource threat of a lawsuit ﬁling and subsequent monetary losses merely to the initiation of a lawsuit. Thus, it seems likely that targeted establishments, cognizant of the potential for substantial resource loss, were more willing during the Bush and Clinton terms to change existing internal practices based on the impact of a lawsuit ﬁling and associated negative publicity. Last and in accordance with H3, the results conﬁrm the importance of progressive normative expectations in increasing women’s access to supermarket management, while highlighting the geographical character of the institutional environment. From a new institutional perspective, it is suggested that the existence of normative external pressure may accelerate the diffusion of more egalitarian employment practices and policies given the propensity of organizations to mimic behavior of those within their institutional environment (i.e., industry). For all three political periods

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examined, the ﬁndings suggest that supermarket establishments create and alter internal structures, which correspond to local expectations and norms regarding fair employment. This is particularly the case during the Bush and Clinton administrations. It also seems likely, as Burstein (1998) argues, that increasing public intolerance for discriminatory practices has helped to pave the way for women’s advancement by applying pressure for legislative changes such as the 1991 Civil Rights Act.

CONCLUSION Although the study presented here is far from conclusive, this line of research certainly advances existing knowledge about the responsiveness of organizations to external environmental forces. Perhaps the most significant contribution to the literature is in addressing the discontinuity between external pressure and change processes for a population of supermarket establishments. While it may be argued that restricting analyses to a single industry reduces the ability to generalize to different types of U.S. organizations, there is little reason to believe that other employment structures are substantially more impervious to external pressure. In addition, the advantage of focusing on a single industry with known employment practices (i.e., internal labor markets) and an active legal history far outweigh any limits to generalizability. On the other hand, focusing on discrimination litigation may prove somewhat restrictive when considering other industries where such legal action has been minimal. For instance, the importance of sex discrimination lawsuits and subsequent settlements/awards in this study may be, in large part, linked more to the number and size (e.g., quantity of ﬁlings and visibility) rather than the quality (i.e., specific merit) of cases examined. Thus, in industries where few discrimination cases have occurred, the pressure of litigation may be inadequate to incite significant change. At the same time, while the absence of litigation in some industries may indicate more egalitarian policies across the board, it is just as likely that internal employment practices make discrimination less visible and thus, difﬁcult to demonstrate in court. The internal promotion practices in supermarkets tend to make discrimination more apparent to employees and jurors alike. The ﬁndings presented here suggest a need to explore other, more generalizable forms of direct external regulatory pressure. One example may be to focus on employee-generated discrimination complaints ﬁled with state or federal EEO ofﬁces, which would likely cover a broader range of industries

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and organizations compared to actual lawsuit ﬁlings. It is quite possible that these types of complaints, while constituting a legal threat, would result in greater negotiations between employees and employers. Likewise, given the current ﬁndings related to the inﬂuence of political climate, it may be useful to introduce additional measures, which capture changes in federal EEOC budgetary allotments and state-level political ideology. Possibly such inclusions would provide further insight into the inﬂuence of legal pressure on establishment-level practices and policies. Also worth further exploration is the complex, historical interplay between organizations, the state and worker rights protection. For instance, given the observed shifts in legal action over the period examined in this study, it seems reasonable to argue that corporate–state alliances, particularly under pro-business political regimes, are likely to threaten worker protection or, at the very least, slow the pace of organizational change. In fact, the increased resource threats associated with large sex discrimination settlements/awards since the 1991 Civil Rights Act may explain corporate political mobilization during the George W. Bush administration to limit monetary outlays from class action lawsuits. While, for this study, the ﬁling of discrimination cases was conceptualized as a political strategy to encourage organizations to adopt more egalitarian policies and practices, such legal action may, in some cases, motivate corporate–political alliances that reduce organizational costs of noncompliance. On a ﬁnal note, the results presented in this study bring to light the fact that the supermarket landscape is changing. As such, factors previously regarded as catalysts for transformation may prove to be less inﬂuential in the future. In particular, over the past few years, dramatic changes in industry-driven norms have become apparent as new players such as retail giant, Wal-Mart and, more recently, Target have entered the ultra competitive industry. For one, this means that the old rules pertaining to internal labor markets are likely to go by the wayside as new workplace structures such as Target’s extensive management cross-training program draws labor from the external market. Compared to the pre-civil rights way of doing business, these structures emphasize formal education of management practices rather than industry experience alone. In addition, the trend toward ever-increasing numbers of nonunion retail establishments also will likely help to turn the industry on its head. The implication for future research in this industry as well as others with similar internal structures is that less protection from labor unions and professional associations may result in new forms of exploitation and inequality for all workers.

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NOTES 1. For instance, this may include other establishments under the same organizational heading (i.e., parent company) as well as those afﬁliated with an unrelated parent company in the same industry. 2. Businesses with fewer than 15 employees are exempt from punitive and compensatory damages against women and the disabled but not for cases based on race or color. 3. Figures based on EEO-1 reports (annual employer reports) to the EEOC. 4. Between 1982 and 1983, changes in policy regarding the minimum number of employees required for reporting were made by the EEOC. Specifically, prior to 1983, annual reports were required of federal contractors with 25 or more employees and noncontractors with 50 or more employees. Rather than introducing bias from the older reports, data collected prior to 1983 are excluded from the analyses. Given that the ﬁrst lawsuit to be included in the analyses occurred in 1986, this time frame (1983–1998) should provide a reasonable period (more than a decade) in which to examine changes in the gender composition of managers and ofﬁcials. 5. Compared with other types of models such as random-effects – which treat constant, unobserved differences across individuals (or establishments in this case) as random, ﬁxed-effects models automatically control unobserved heterogeneity. Likewise, in this study, ﬁxed-effects modeling is preferred over time series analyses given that cross-sectional variation is more significant than temporal variation of all units. 6. While it could be argued that the inability of ﬁxed-effects models to estimate the effects of time-invariant variables is a sufﬁcient disadvantage, the fact that the intent in these studies is merely to control for stable establishment-level characteristics rather than to estimate them should minimize the relevancy of this type of debate. 7. According to Beck and Katz (1995), one solution for addressing the potential introduction of such biased standard errors and test statistics is to include lagged dependent variables on the right hand side of the regression equations. This method was implemented in analyses not shown and did not produce substantively different results compared to the ﬁxed-effects models without lagged dependent variables. 8. The use of occupational measures in such analyses has been criticized by some researchers (Bielby & Baron, 1986; Smith & Welch, 1984) arguing that a system based on large occupational groups rather than specific job categories per se grants establishment executes a considerable degree of discretion in classifying positions. Although this is a valid criticism and job-level data is almost always preferable, for this study, the issue is less relevant given the empirical question to be addressed and the fact that the data are observed at the establishment-level rather than the nationallevel. In addition, since the focus is on change in female representation, reporting exaggeration on EEO-1 reports would also have to change to inﬂuence the results. 9. Preliminary examination of the data suggested possible reporting or coding errors. Following the implementation of a series of regression diagnostics including DFFITS and Cook’s D to determine the inﬂuence of outliers, a decision was made to exclude all odds ratio values greater than 25 (i.e., only 10 cases). Several alternative methods to address the issue of outliers were examined such as recoding extreme values. However, almost no difference was found in model outcomes as a result of

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such data transformations. In most of the cases with extreme right values, it was found through a case by case examination that managerial positions for these groups far exceeded the groups overall employment representation. This suggests possible hiring practices, which include a few token female managers or ofﬁcials. At the other extreme, where no female managers or ofﬁcials were reported by employers, 0.00095 was added to these cases to enable log transformations of the odds ratio. The natural logarithm was used to reduce skewness. 10. While data obtained from EEO-1 reports do provide establishment-level sex and race composition across large occupational categories, they lack information regarding internal workplace practices and policies (e.g., existence of a personnel ofﬁce, afﬁrmative action plan, etc.) or individual-level characteristics. The inability to model such effects is unfortunate but is offset by the advantage of employing ﬁxed-effects models, which control for all stable organizational traits. Thus, the lack of additional information is unlikely to inﬂuence the results. 11. Given that changes in the denominator of the female and male ratios could suggest shifts in internal practices such as the substitution of minority male workers for female workers (and thus, provide misleading information regarding the advancement of women), analyses (not shown) were also conducted examining the effects of the dependent variables on percent women in management. In addition, to control for the supply of female employees, analyses (using percent female in management as the dependent variable) were also conducted using percent female in nonmanagement as an independent variable. However, the results from both sets of analyses were not substantively different from those predicting the log odds ratios. 12. Electronic searches for lawsuit events were conducted using Academic Universe, a Web-based academic version of LEXISs-NEXISs, which provides news, business and legal information. 13. Only sex discrimination cases ﬁled by female employees are under consideration in this study. Lawsuit ﬁlings involving sexual harassment or those which resulted in either a dismissal or a ruling in favor of the defendant were not examined. While such cases are undoubtedly meaningful, access to this type of information is difﬁcult, if not impossible, to obtain systematically. Nonetheless, the primary focus of this study is on the impact of large, highly publicized discrimination lawsuits, which, following Bergman’s (1996) argument, are likely to have the most profound consequences in terms of inciting organizational change. 14. In analyses not included here, a fourth category was examined, which included non-targeted establishments located within the state where a ﬁling originated. However, the effect was not significant and upon removal, did not substantively alter the results. 15. Based on preliminary analyses of the data, I found the year following a settlement or award to have the greatest inﬂuence on women’s representation in management (for those establishments directly and indirectly involved in a sex discrimination lawsuit) rather than the year in which the loss was initially experienced. For years with no loss, $1.01 was used in order to compute the natural log transformation. 16. The seven items selected for the gender normative scale were included in the GSS data for the following years: 1985–1986, 1988–1991, 1993–1994, 1996, 1998. Questions used to create the scale were asked of both male and female respondents and inquired about issues related to the division of household labor, women’s roles

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in the workplace and in political ofﬁce, etc. Specific information regarding the GSS survey questions employed is available upon request. The reliability (Cronbach’s a) of the additive normative scale is 0.78. 17. Regions include: New England (MA, VT, NH, MA, CT, RI), Middle Atlantic (NY, NJ, PA), East North Central (WI, IL, IN, MI, OH), West North Central (MN, IA, MO, ND, SD, NE, KS), South Atlantic (DE, MD, WV, VA, NC, SC, GA, FL, DC), East South Central (KY, TN, AL, MS), West South Central (AR, OK, LA, TX), Mountain (MT, ID, WY, NV, UT, CO, AZ, NM) and Pacific (WA, OR, CA, AK, HI). 18. The use of subgroup modeling also allows for more straightforward interpretation. 19. As indicated in Table 2, overall results from the Reagan model compared to the Bush and Clinton models are significantly different. However, to compare differences between the Bush and Clinton models, I computed a Chow test for the two subgroups. The F ratio indicated a significant difference between these two models substantiating the importance of analyses by political era.

ACKNOWLEDGMENT I gratefully acknowledge helpful comments from Donald Tomaskovic-Devey, Julie Kmec, Melinda Kane, Chad King, Carole Wilson and four anonymous reviewers. All errors and ambiguities are of the author’s production.

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CORPORATE ACCOUNTABILITY AND THE PRIVATIZATION OF LABOR STANDARDS: STRUGGLES OVER CODES OF CONDUCT IN THE APPAREL INDUSTRY Tim Bartley ABSTRACT Recent struggles over corporate responsibility have fueled the emergence of codes of conduct and a range of private voluntary compliance initiatives. Some argue that these activities displace or ‘‘crowd out’’ public regulation and legal accountability. Analyzing the politics of the apparel industry in the 1990s, I show that the displacement hypothesis is partially supported but limited by an overly simplified conceptualization of the interactions between private regulation and pressures for public accountability. The analysis suggests a different approach, which highlights ways in which political conflict in organizational fields and path-dependent trajectories shape the consequences of private regulation.

Politics and the Corporation Research in Political Sociology, Volume 14, 211–244 Copyright r 2005 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN: 0895-9935/doi:10.1016/S0895-9935(05)14007-8

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INTRODUCTION Corporate power is always linked to particular vulnerabilities, which create spaces for conﬂict and struggle over the governance of capitalism. Recently, social movement organizations have attempted to exploit corporations’ dependence on ‘‘brand identities’’ to push for action on sweatshops, environmental protection, beneﬁts for same-sex partners, and a number of other issues. In response, many companies have adopted codes of conduct and joined private regulatory initiatives. In the apparel industry, for instance, sweatshop scandals in the 1990s generated various forms of ‘‘soft law’’ and private regulation of labor conditions – including codes of conduct, compliance monitoring programs, and initiatives to certify socially responsible companies (Gerefﬁ, Garcia-Johnson, & Sasser, 2001; Bartley, 2003; O’Rourke, 2003; Esbenshade, 2004). The vast majority of major apparel manufacturers and retailers now have codes of conduct that set minimum labor conditions for their contractors’ factories (Varley, 1998), and many hire external monitors to assess compliance in factories in the U.S. and around the world. In assessing the significance of this wave of private voluntary initiatives for ‘‘corporate social responsibility,’’ the key questions revolve around how private regulatory tools intersect with government regulation and public accountability. Specifically, how does the rise of codes of conduct and private compliance systems shape ongoing struggles over the legal responsibilities of corporations? Only the most naı¨ ve observers believe that voluntary labor standards programs will transform corporations and improve labor conditions so much that government regulation will be unnecessary. More commonly, social scientists and critical observers suggest that one unfortunate effect of the rise of private regulation will be to displace or ‘‘crowd out’’ public regulation and legal accountability (Strange, 1996; Cutler, Hauﬂer, & Porter, 1999). Many observers have raised this ‘‘displacement hypothesis’’ but few have assessed it empirically. This chapter examines the interaction of public and private regulatory practices in the U.S. apparel market in the 1990s. I ﬁnd partial support for the idea that the rise of codes of conduct and private monitoring undermined public regulation – much as the displacement hypothesis would expect. But I show that the partial privatization of labor regulation in the apparel industry has been contested and that its effects are therefore much more complex than the notion of crowding out implies. Specifically, in the early- to mid-1990s, apparel manufacturers and retailers adopted codes of conduct and other voluntary standards, partly to

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shield themselves from public pressure and legal liability. They succeeded to some extent, and a rising discourse of ‘‘code compliance’’ began to replace a previous focus on legal compliance. Furthermore, companies and their advisors framed codes of conduct and monitoring practices as alternatives to legal liability and used this argument to derail proposed legislation. But this shift did not so much displace concerns about legal accountability as it reshaped them, opening up new spaces of contention. Labor and human rights activists soon turned companies’ arguments on their heads, suggesting that codes of conduct and monitoring increased companies’ knowledge of and liability for labor conditions further down the supply chain. The courts partially endorsed this argument, which again shifted the debate over corporate liability. Building from this analysis, I develop an approach that moves beyond a mechanistic image of private practices displacing public ones, toward a dynamic account of their interplay. Grounded in research on politics in organizational ﬁelds (Rao, Morrill, & Zald, 2000; Fligstein, 2001; Stryker, 2002), my approach draws attention to the contested character of private models of accountability. Extending literature on path-dependence (Swedberg & Granovetter, 1992; Haydu, 1998; Mahoney, 2000; Pierson, 2000; Hacker, 2002), my approach recognizes that struggles over the corporation are constrained by their histories, although not necessarily constrained to go in a single direction. In sum, the interplay of public and private regulation should be seen as contested terrain, and the trajectory of this contestation is path-dependent, although not necessarily unilinear. This account of the politics of corporate accountability in the apparel industry sheds light more broadly on the consequences of private regulation, the dynamic character of social movement strategies, and the negotiated meanings of law and compliance.

CORPORATE RESPONSIBILITY AND THE RISE OF PRIVATE REGULATION: CONTEXT AND THEORETICAL PERSPECTIVES Concerns about the legal privileges and responsibilities of corporations stretch back to the 19th century, when reformers decried the limited liability corporation as a ‘‘pernicious movement’’ and called for stockholders to be responsible for paying workers’ wages when a corporation went out of business (Roy, 1997, pp. 160–161). Indeed, struggles over big corporations

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decisively shaped the trajectory of American capitalism (Berk, 1994; Roy, 1997; Prechel, 2000; Perrow, 2002; Schneiberg & Bartley, 2001). At the turn of the 21st century, similar concerns have resurfaced. As corporations have expanded their reach, they have generated new vulnerabilities and provoked innovative social movement strategies. Many contemporary anti-corporate activists seek to exploit contradictions between companies’ public images and actual performance, making corporate ‘‘brands’’ and logos into sites of struggle (Klein, 1999; Schurman, 2004).1 In addition, because predominant business theories now emphasize ‘‘shareholder value’’ and ﬁrms increasingly rely on institutional investors (Fligstein, 1990; Davis & Thompson, 1994), corporations are more vulnerable to activist-sponsored shareholder resolutions. At the macro-level, the globalization of capital and the rise of neoliberal ideologies have tended to diminish the power of the traditional regulator of corporations – the nation-state. According to Strange (1996), At the heart of the international political economy, there is a vacuum, a vacuum not adequately ﬁlled by inter-governmental institutions or by a hegemonic power exercising leadership in the common interest. yThe diffusion of authority away from national governments has left a yawning hole of non-authority, ungovernance it might be called. (p. 14)

While scholars disagree on the extent, causes, and precise character of these changes (Cerny, 1995; Schmidt, 1995; Sassen, 1996; Evans, 1997; Robinson, 2001), most agree that the role of the state is changing significantly in this era of global capitalism and neoliberal free trade rules. In this context, various forms of private regulation have emerged, in which ﬁrms and non-governmental organizations (NGOs) use voluntary standards and ‘‘soft law’’ (Abbott & Snidal, 2000) to temper corporate excesses. During the 1990s, ﬁrms and NGOs developed a range of private regulatory initiatives to monitor and certify companies’ compliance to a voluntary code of conduct (Braithwaite & Drahos, 2000; Gerefﬁ et al., 2001; Bartley, 2003; Elliott & Freeman, 2003). Such private forms of regulation have been created to address labor conditions in manufacturing (O’Rourke, 2003; Esbenshade, 2004; Rodriguez-Garavito, 2005), forest management (McNichol, 2000; Meidinger, 2003; Cashore, Auld, & Newsom, 2004), export agriculture (Schrage, 2004), and environmental safety (King & Lenox, 2000; Potoski & Prakash, 2005), and others.2 Private regulation is also important in the governance of ﬁrms and ﬁnancial markets, especially given the global ascendance of accountants, insurers, and credit rating agencies (e.g. Moody’s) (Strange, 1996; Sinclair, 1999; Ericson, Doyle, & Barry, 2003;

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Kennedy, 2004). Furthermore, some scholars have argued that ﬁrms are ‘‘internalizing’’ law itself, as the work of the legal system is increasingly accomplished through alternative dispute resolution, private policing, and other mechanisms of private governance (Edelman & Suchman, 1999). How, then, should we understand the interaction between private regulatory practices (e.g. codes of conduct, independent monitoring) and attempts to make corporations publicly accountable? One prominent view is that private regulation is essentially a substitute for public regulation. A number of scholars have argued that private regulation has emerged in large part to ﬁll a ‘‘regulatory void’’ created by the decline of the state (Strange, 1996; Cutler et al., 1999; Hall & Biersteker, 2002), and one of its main effects is to further displace public regulation. This displacement hypothesis conceptualizes private and public forms of authority as pushing against one another, so that as one rises in importance, it crowds out the other. As discussed by Cutler et al. (1999), private authority may displace public authority not because the former is more efﬁcient, but because powerful ﬁrms ﬁnd it easier to pursue their particular goals without demands for accountability or the need to interact with other stakeholders that are associated with public authority (p. 353).

While free-market ideologues may see this crowding out as a positive development, many activists and practitioners involved in labor and human rights campaigns are concerned that codes of conduct displace more effective ways of regulating ﬁrms and improving labor conditions (LARIC, 1999; Compa, 2001; Jenkins, 2001; interview with labor union ofﬁcial 3/19/04; interviews with labor rights organization leaders 8/12/02, 2/26/04).3 One report called codes of conduct ‘‘at best diversionary and at worst a threat to the regulatory role of the state’’ (Status of Women Canada, 1999), while another considered whether ‘‘a rush to corporate codes of conduct [will] undermine effective labor-law enforcement by governmental authorities’’ (Compa, 1999, p. 1). Indeed, one observer lamented that there are some people involved in ‘‘this broad corporate social responsibility movementy who are actually in favor of voluntary as opposed to government, and see that as preferable’’ (interview with labor rights organization leader, 2/26/ 04). Naomi Klein (1999) has articulated this concern in more general terms: The bottom line is that corporate codes of conduct – whether drafted by individual companies or by groups of them, whether independently monitored mechanisms or useless pieces of paper – are not democratically controlled laws. Not even the toughest self-imposed code can put the multinationals in the position of submitting to collective outside authority (p. 437).

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The displacement hypothesis has been discussed in a number of settings, but it has rarely been assessed empirically, and its proponents have little to say about the mechanisms by which private regulation might crowd out public regulation. I closely examine the ways in which codes of conduct and private monitoring systems have been used as a shield from public accountability. Yet my analysis suggests that the shield has not always been so solid, and attempts to displace public regulation have not always been successful. The key to understanding this is to pay attention to the ways in which the privatization of labor standards has been contested. This leads to a more dynamic account of the interplay between private and public regulatory initiatives – a view that takes seriously the political dynamics at play, which include social movement strategies, struggles within organizational ﬁelds, and debate about the meaning and implications of ‘‘compliance.’’ To be clear, my argument is not that codes of conduct are benign from the standpoint of public regulation. Instead, I argue that the image of displacement does not fully capture the effects of the rise of private regulation on attempts to hold ﬁrms publicly accountable. Even though corporations generally have much more power than their challengers, the challengers have sometimes ﬁgured out ways to turn structures and practices that were initially developed for corporate beneﬁt into sources of corporate vulnerability. This contestation matters. It shifts the trajectory of political struggles and remakes the terms of debate.

METHODS AND DATA This chapter develops and assesses these arguments by looking closely at the case of the U.S. apparel market from 1990 to 2000. The strength of a case study approach is that it ‘‘investigates a contemporary phenomenon within its real-life context, especially when the boundaries between phenomenon and context are not clearly evident’’ (Yin, 1994, p. 13). I examine the political and discursive dynamics in the apparel industry over time, paying attention to critical moments and the sequencing of events, as suggested by narrative and historical methods (Rueschemeyer & Stephens, 1997; Mahoney, 1999; Abbott, 2001). The apparel industry is an especially useful case for this analysis because it has seen a great deal of both public and private regulatory activity, allowing for an examination of their interplay. This industry has been the focus of anti-sweatshop activism and experimentation with codes of conduct, factory

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monitoring, and certiﬁcation systems. At the same time, it has been the site of campaigns by the Department of Labor to increase compliance with labor law, joint liability laws that hold manufacturers and retailers responsible for their contractors’ factories, and lawsuits against companies for domestic and international violations. To uncover the political dynamics surrounding the industry, I take a multi-method approach, using data from trade journals and in-depth interviews. Following previous research on politics in organizational ﬁelds (Hoffman, 1999; Hoffman & Ocasio, 2001; Lounsbury, 2001), I systematically collected articles from the two leading trade journals in the industry – Bobbin and Women’s Wear Daily (WWD) (Ulrich’s International Periodicals 2001/2002 database). I selected all articles from these two journals from 1987 to 2000 that at any point mentioned a specific practice associated with corporate accountability for labor standards (e.g. codes of conduct, independent monitoring, etc.). The full sample ðN ¼ 174Þ represents the population of relevant articles from Bobbin and a random sample of relevant articles from WWD.4 I coded the articles (using Microsoft Access) in a way that produced data useful for both quantitative content analysis and qualitative textual analysis. I also conducted 26 interviews with individuals who had worked to develop corporate accountability programs or campaigns. This included individuals afﬁliated with advocacy-oriented NGOs, government agencies, companies, monitoring organizations, and others. (See the appendix for the types of afﬁliations.) To select informants, I started with a short list based on recommendations from other leading researchers, public reports, and organizational websites. From there, I used snowball sampling to generate a longer list of potential informants and focused on interviewing those identiﬁed as especially knowledgeable key players. The informants took a wide range of positions on corporate accountability (from harsh criticism to enthusiastic support), which provided me with rich data for understanding the contours of the debates over codes of conduct, monitoring, and certiﬁcation. The interviews lasted from 40 minutes to over 3 hours, with a mean of around 1 hour and 20 minutes. All interviews were recorded and transcribed. In order to maximize the candor of the interviews and conform to common procedures for the protection of human subjects, the interviews were conﬁdential and the informants are identiﬁed here by the type of organization they are afﬁliated with and the date of the interview, rather than by name. To supplement the trade journal and interview data, I used a variety of secondary sources – particularly scholarly books and policy-oriented reports on the apparel industry and the anti-sweatshop movement.

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The analysis is organized in two stages. First, I examine the rise of labor codes of conduct in the apparel industry. I show that companies’ desire to displace public regulatory pressures was indeed a major factor in this process, and the existence of codes of conduct did have significant impacts on the politics of accountability. Yet the second stage of the analysis shows that the significance of codes of conduct and monitoring programs became more complex as activists contested the privatization of labor standards – a process that does not ﬁt easily with a simple expectation of displacement or crowding out.

THE RISE OF CODES OF CONDUCT: SHIELDS AGAINST POLITICAL PRESSURES The corporate code of conduct – a policy in which a company pledges to uphold certain social, environmental, or ethical principles – is one of the most prominent practices of voluntary regulation in the apparel industry. The story of the rise of labor codes of conduct in the apparel industry is largely consistent with the displacement hypothesis. Companies adopted codes in the midst of domestic and international controversies about labor and human rights – when the threat of government regulation was heightened. Furthermore, companies and their advisors sometimes explicitly argued that voluntary policies should be seen as a replacement for government regulation and could be an effective shield from a variety of political pressures. The business code of conduct has a long genealogy, sometimes said to stretch back to the International Chamber of Commerce’s 1937 standards on advertising practices (Murray, 1998). In the mid-1970s, international organizations like the OECD and International Labor Organization developed codes of conduct for multinational corporations, partly in response to corporate involvement in political upheavals in Latin America (Murray, 1998; Cavanagh, 2000; Kline, 2000). The early to mid-1980s witnessed a wave of code activity in response to several major scandals and catastrophes, including Nestle’s marketing of breast-milk substitutes in Latin America, the Three Mile Island and Bhopal disasters, and the apartheid regime in South Africa (Keck & Sikkink, 1998; Varley, 1998; Gerefﬁ et al., 2001; Seidman, 2003). Yet the corporate codes that existed in the 1980s were mostly focused on issues like conﬂicts of interest, bribery, and sexual harassment, not labor standards or human rights per se (Berenbeim, 1987; Murray, 1998).5

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The more recent wave of corporate codes emerged in the 1990s, in the context of debates over the globalization of capital and the resurgence of sweatshops and child labor – focused largely, though not exclusively, on brand-conscious ﬁrms in the apparel industry (e.g. Nike, the Gap, etc.). While codes of conduct are not unique to the apparel industry, apparel codes are more likely than those in other industries to include labor conditions and to apply to an entire supply chain – that is, the contractors and subcontractors of the company that adopts the code (Jeffcott & Yanz, 1999; author’s analysis of data from OECD, 1999).6 When Levi Strauss developed its ‘‘Terms of Engagement’’ for contractors in 1991, it was one of the ﬁrst companies to stipulate minimum labor conditions for its network of contract factories. By the end of the 1990s, the vast majority of major apparel brands and retailers in the U.S. had some sort of labor code of conduct.7 Many – including Nike, the Gap, JC Penney, and Liz Claiborne – were hiring external auditors to monitor and verify compliance with their codes. As shown in Fig. 1, industry attention to private monitoring of factory conditions, corporate codes of conduct, and other voluntary labor standards grew rapidly in the mid-1990s. While some have suggested that corporate codes of conduct stem from the ethical commitments of top managers (Berenbeim, 1987; Burns, Forstater, Osgood, Mong, & Zadek, 1997), I argue that the origins of codes do not lie

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The Rise of Voluntary Labor Standards and Monitoring in the Apparel Industry.

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in philanthropy or the goodwill or business, but rather in attempts to deﬂect growing concerns about the responsibility and legal culpability of corporations for labor conditions in ‘‘ﬂexible,’’ networked supply chains, characterized by multiple layers of contracting and subcontracting. Curiously, although social scientists have correctly noted that ﬁrms adopted codes of conduct in response to the anti-sweatshop movement (Fung, O’Rourke, & Sabel, 2001; Gerefﬁ et al., 2001), researchers have often overlooked the contribution made by somewhat earlier struggles over globalization and legal liability.8 A great deal of the early development of labor codes of conduct in the apparel industry can be traced to three main factors: (1) struggles over the globalization of production, (2) responses to U.S. government strategies to enforce domestic labor law, and (3) attempts to protect or repair companies’ reputations in the face of social movement campaigns. On the whole, a concern with displacing government regulation and deﬂecting external pressures – in both domestic and international settings – was central to the initial rise of codes of conduct. Voluntary Codes as Responses to Globalization Capital-labor conﬂicts over globalization, international sourcing, and U.S. trade policy drove some of the initial work on codes of conduct and voluntary labor policies. As political leaders called for trade agreements to be made conditional on labor and human rights standards, companies – particularly those retailers and manufacturers utilizing global production networks – began to view voluntary policies as a way to limit political opposition and ‘‘grease the wheels’’ of free trade. One of the earliest suggestions that apparel companies should adopt voluntary policies on labor standards came in response to debates in the early 1990s about the U.S. granting Most Favored Nation status to China. The Tiananmen Square incident generated a great deal of attention to human rights, child labor, and prison labor in China, and soon politicians from Richard Gephardt to Jesse Helms were calling for restrictions on Chinese trade.9 In this context, a lawyer writing in the trade journal, Bobbin, advised companies to insert language about child labor and prison labor into their contracts with Chinese ﬁrms and to inspect the factories. She explained: These are relatively small steps, but they may help ensure that you are not dealing with prison or child labor or with illegally transshipped merchandise. They may also help move these issues out of the U.S. spotlight. The fewer areas of friction there are between the U.S. and China, the more smoothly the next MFN renewal debate may proceed. (Jacobs, 1992, p. 65)

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As Levis and Sears adopted ‘‘sourcing guidelines’’ (Bobbin, 1992), advocates of free trade extended this view of codes of conduct and began to use them to justify de-linking U.S. trade policy and human rights. Speaking to an audience at the American Enterprise Institute, Senator Max Baucus, for instance, argue[d] that the MFN status should be extended permanently without conditions and ask[ed] U.S. importers to set codes of conduct on human rights and environmental protection in Chinese factoriesyBaucus cites companies – including Reebok, Sears, Roebuck, and Levi Strauss – that are already taking steps to insure better human rights policies in the Chinese factories that make their products. (Barrett, 1994, p. 23)

After mentioning Reebok’s code of conduct specifically, Baucus said: I would hope the President can challenge the business community as a whole to take similar measures and set up a top-level business commission to begin developing them. (Barrett, 1994, p. 23)

Soon thereafter, President Clinton signed a legislation de-linking MFN status from human rights considerations and introduced a set of ‘‘Model Business Principles,’’ which encouraged companies ‘‘to adopt and implement voluntary codes of conduct for doing business around the world’’ (qtd. in Varley, 1998, p. 8; Hartman, Shaw, & Stevenson, 1999). This endorsement of voluntary codes seems to have quickly entered the apparel industry’s baseline position on globalization. A 1995 Women’s Wear Daily article entitled ‘‘Industry Leaders in Agreement About Globalization’’ began with the idea that ‘‘companies must establish a code of ethics, for example with regard to child labor or worker exploitation, and enforce it universally’’ (WWD, 1995, A18). Neo-liberal trade advocates were not the only ones supporting codes of conduct however. In early 1994, the two main American garment workers unions – struggling to survive amidst the globalization of the industry – pushed unionized manufacturers to follow a code of conduct for foreign operations.10 The contract between the Amalgamated Clothing and Textile Workers Union (ACTWU) and the Clothing Manufacturers Association of the U.S.A (CMA) included a proviso that states management will abide by International Labor Organization (ILO) standards, meaning in essence the producers must guarantee decent working conditions for those who produce the non-union garments, no matter where they are made. (Abend, 1994, p. 24)

This provision was added by the union as a quid pro quo for allowing CMA companies to make a percentage of their products in offshore, non-union plants – something the union had previously resisted.

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Just a few months later, the International Ladies Garment Workers Union (ILGWU) signed a joint agreement with a group of companies that contained a similar provision for a code of conduct. This came in the midst of the ILGWU’s strike against manufacturer Leslie Fay, which was attempting to shift its production outside the U.S. In response to the union’s demands, a Leslie Fay representative ‘‘noted that the company had no problem with one union contract proposal: the code of conduct for the industry that the union developed’’ (Friedman, 1994, p. 12). This was the source of another of the earliest collective labor codes of conduct in the apparel industry. Thus, by 1994–1995, companies were adopting codes of conduct as part of a strategy for accessing global markets.11 Codes were a way for globalizing companies to appease unions and to grease the political wheels of free trade.

Codes as a Business Response to Government Intervention Apparel manufacturers also adopted voluntary policies about labor conditions in response to aggressive efforts by the U.S. Department of Labor (DoL) to enforce wage and hour laws in the garment districts of Los Angeles, New York, and other cities. By adopting policies that pledged their contractors to uphold labor law, manufacturers hoped to avoid getting ensnared in legal battles with the DoL. These policies laid the groundwork for a later explosion of corporate codes of conduct. Manufacturers’ and retailers’ liability for labor abuses by contractors was a hot point in anti-sweatshop debates and legislative action through much of the 1990s, especially in California, where joint liability legislation was vetoed twice by the governor (Bonacich & Appelbaum, 2000; Quan, 2001). As the DoL’s enforcement capacity diminished in the 1980s and 1990s, ofﬁcials in the DoL ofﬁce in Los Angeles devised a plan to hold manufacturers accountable for labor conditions in their contractors’ factories and to get these manufacturers to help police the industry (Bonacich & Appelbaum, 2000; Esbenshade, 2004; interviews with three current or former DoL ofﬁcials 6/27/02, 7/19/02, and 8/23/02). Their strategy involved an arcane ‘‘Hot Goods’’ provision of the Fair Labor Standards Act, which allowed the government to seize products made in violation of wage and hour laws to keep them out of inter-state commerce. A Labor Department ofﬁcial explained: We reallyyfelt we needed somebody else helping to monitor what was going on. So we dusted off this 1938 statute of Hot Goods and set up a program where we could use it administratively instead of only in a legal setting. (interview with DoL ofﬁcial 8/23/02)

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In an industry that puts a premium on speed to the market, the seizure of goods, even if only temporarily, could be very damaging. Similar programs were soon developed in New York and other garment districts. The actual or threatened use of the ‘‘hot goods’’ provision put apparel manufacturers on the defensive. In an attempt to limit their liability for contractors’ practices, some companies pushed their contractors to sign statements pledging their support for legal and acceptable labor conditions. Industry lawyers appear to have endorsed this strategy. In a February 1995 Bobbin column entitled, ‘‘Is your company ready for the wage and hour crackdown?’’ one lawyer argued that voluntary labor policies could reduce manufacturers’ liability: Manufacturers who get written assurances from jobbers, contractors and subcontractors that the goods have been produced by employees who were paid in accordance with the FLSA [Fair Labor Standards Act]yare protected from prosecution for violation of the hot goods provisions. (Rolnick, 1995, p. 92)

Two years later, this same lawyer wrote an article recommending that companies adopt codes of conduct, again using reduced liability as one beneﬁt: As with any good anti-harassment policy, it may provide you with a defense if you fail to take remedial measures because the employees did not report the alleged violations to you. (Rolnick, 1997, p. 73)

Thus, with lawyers’ encouragement, apparel manufacturers began writing labor standards policies. Some also monitored contractors’ compliance or hired auditors from the growing private monitoring industry. While some companies were forced into monitoring by agreements with the DoL, others began monitoring ‘‘voluntarily’’ to pre-empt further government involvement (Esbenshade, 2004).12 In this way, the rise of codes of conduct is a classic case of an industry engaging in self-regulation in order to fend off government intervention.

Codes as Reputation Protection Also contributing to the rise of private codes and monitoring mechanisms were ﬁrms’ responses to social movement campaigns that targeted corporate reputations (Klein, 1999; Bartley, 2003). Two major sweatshop scandals in the mid-1990s raised the reputational stakes in the apparel industry. First in the summer of 1995, Department of Labor ofﬁcials discovered 72 Thai immigrants working as indentured servants in an apartment complex in the Southern California city of El Monte, producing pieces of garments to

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be sold by major retailers (Su, 1997). This was one of the ﬁrst cases to spur industry reputation dilemmas, as articulated by the editor of the trade journal, Bobbin, in an article entitled ‘‘Bad Apples Need Not Apply:’’ Unfortunately, the old saying about a bad apple spoiling the whole bunch can be true – at least on the surface. Perhaps no one knows this better than reputable contractors, who must bend over backwards to distance themselves from illegitimate businesses that tend to give the whole apparel industry a bad rapyHow do the ‘good’ contractors, manufacturers and retailers convince John Q. Public that the El Monte situation is not the norm? (Black, 1995, p. 2)

Just a few months after the El Monte expose´, a young Honduran woman testiﬁed before a Congressional committee about the conditions endured by underage workers producing Kathie Lee Gifford-brand clothes for Wal Mart. As Women’s Wear Daily noted, ‘‘Allegations about the production of the Kathie Lee line follow other very public black eyes for the garment industry’’. (WWD, 1996, p. 1) Following these scandals, labor unions, human rights, and anti-sweatshop groups increasingly waged campaigns that targeted apparel manufacturers and retailers, trying, in the words of one apparel industry executive, ‘‘to publicly tarnish the reputation of the industry as a whole in order to achieve their own ends’’ (qtd. in Nett, 1997, p. 38). One corporate advisor explained the impact: Major consumer brands began to recognize that there was at least public relations risks associated with poor sourcing practicesyEverybody in the consumer products world that was sourcing from labor intensive industries began to see that this could be them. You know, there was Kathie Lee, there was Gap, there was Reebok. There was certainly Nike – a tremendous amount of attention focused on Nike. And so companies began to sort of lift their heads up and say, you know, ‘Oh shit, what do we do?’. (interview with a CSR consultant 8/23/02)

Within the industry, some suggested that companies might develop codes of conduct and systems for verifying compliance with their codes as a way to ‘‘put a muzzle on these watchdog groups’’ (Rolnick, 1997, p. 72). In sum, the origins of corporate codes of conduct and voluntary labor standards policies lay largely in ﬁrms’ attempts to preempt or co-opt public pressures. In itself, this suggests something like a displacement effect. Further effects can be seen in the industry discourse and in the politics surrounding ‘‘joint liability’’ legislation. Shifting Discourse: From Legal Compliance to ‘‘Code Compliance’’ By the late 1990s, voluntary labor standards had risen to prominence in the apparel industry. Although these policies initially resonated with concerns

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about legal compliance – that is, compliance with U.S. wage and hour laws – in the late 1990s, a new notion of ‘‘code compliance’’ arose in the industry discourse. The privatization of labor law succeeded in at least a discursive respect. This shift can be seen by looking at the industry discourse over time, to examine the kinds of themes that were associated with the practice of monitoring factories. As companies began monitoring their contractors, industry actors spoke of monitoring largely as a tool for ensuring legal compliance. Between 1991 and 1995, a vast majority (73%) of articles mentioning monitoring or certiﬁcation of factories dealt in some way with issues of legal compliance. For instance, as Guess and several other companies began monitoring, it was described as a way of ‘‘polic[ing] their contractors for wage and hour violations’’ (Ramey, 1992, p. 15) and a way ‘‘to insure compliance with federal wage and hour laws.’’ (Ramey, 1995, p. 2). One company representative noted that its contractors ‘‘don’t feel good’’ about being monitored, but live with it, since ‘‘it’s either us helping them or the Department of Labor stepping in’’ (Dang, 1993, p. 16). Some California manufacturers started a group called the Compliance Alliance, with the goal of ‘‘insur[ing] that contractors comply with the Fair Labor Standards Act.’’ (Farr, 1995, p. 5). An expanded, extra-legal sense of compliance emerged in the latter part of the 1990s. As more companies adopted ‘‘voluntary’’ workplace standards, the meaning of monitoring shifted from compliance only with laws to include compliance with codes of conduct. Increasingly, codes, guidelines, or other ethical standards were being cited alongside, in addition to, or instead of labor laws. For example, one article mentioned ‘‘compliance with labor laws and human rights standards’’ (Wilson, 1997, p. 17) while another included a lengthy discussion of monitoring with only one brief mention of legal standards (Rolnick, 1997). Between 1996 and 2000, nearly half (48%) of the articles that mentioned monitoring or certiﬁcation of factories also made mention of voluntary codes of conduct or sourcing guidelines. Certainly, by the year 2000, ‘‘monitoring’’ was imbued with a much different set of connotations that it had when the Department of Labor ﬁrst started encouraging companies to monitor their contractors in the early 1990s. In tandem with this trend, discussions of legal compliance declined somewhat in the discourse, occurring in 54% of the articles on monitoring or certiﬁcation between 1996 and 2000, compared to 73% in the earlier period.13 Fig. 2 shows these shifts graphically, by charting the proportion of articles that mentioned legal compliance or voluntary codes or policies. The

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The Rise of Corporate Codes and the Decrease in Legal Compliance Discourse.

downward trend in the prevalence of legal compliance themes is accompanied by an upward trend in discussions of codes of conduct. There is also some suggestive evidence that voluntary codes and legal statutes were seen as contradictory (or at least orthogonal) in the industry discourse. Among all the trade journal articles, there is a negative and statistically significant correlation (albeit a weak one, r ¼ 0:189; po0:05) between mention of a corporate code of conduct and mention of compliance with legal statutes. While this is certainly not deﬁnitive proof that codes of conduct crowded out legal standards, it is at least consistent with this hypothesis.

The Politics of Joint Liability: Self-Policing as a Shield The rising discourse of voluntary regulation and ‘‘code compliance’’ also got put to political uses. Given the difﬁculty of enforcing laws in the ﬂy by-night world of garment contractors, labor unions and activists often argued that more powerful and stable manufacturers and retailers must be held accountable for labor conditions in their contractors’ factories. As joint liability issues reemerged on the legislative agenda in the late 1990s, several

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industry actors argued that monitoring could serve as a substitute of sorts for legal liability. Faced with a joint liability bill in New York that would make retailers – along with manufacturers – responsible for contractors’ labor practices, the Retail Council of New York State mobilized in opposition, using the existence of self-regulatory practices to bolster their position. As a representative explained in Women’s Wear Daily, ‘I’m not under any delusion we’ll be able to walk in there, put our ﬁnger on it and stop it,’ said Potrikus. However, he feels that since retailers have increased their cooperation with the DOL [Department of Labor] and initiated compliance seminars and methods of self-monitoring, the lobbying group could argue to maintain a system of self-regulation. ‘It would be a more unpopular position to take if the retail industry had completely walked away from the problem here,’ he said. (Wilson, 1998a, p. 9)

Retail associations soon backed a measure that would exempt retailers with codes of conduct. WWD explained: Most major retailers have policies in place that require a manufacturer or contractor to provide written assurance that apparel is being made for the store in accordance with all applicable laws. According to the Retail Council [of New York State], that assurance would be a sufﬁcient defense for any retailer challenged for payment of back wages at a contracted factoryy By establishing strict vendor compliance codes, Potrikus said, retailers can better insure legal manufacturing conditions on their own. ‘When the hot goods bill [in New York] was passed in 1996, there was a piece that was a safe harbor for retailers that sought to recognize when retailers try to do the right thing, such as if they had a vendor compliance program or written compliance,’ Potrikus said. ‘Now the law will clearly recognize that if the retailer has the written assurance from the vendor they are working with, then they will not be subject to the penalties proscribed [sic] under the labor law. (Wilson, 1998b, p. 1)

The New York joint liability law passed in August of 1998 (Bonacich & Appelbaum, 2000, pp. 244–245), but it excluded retailers from its scope. Having won the ﬁght against extended liability, a representative of the Retail Council thanked the legislators for ‘‘the careful and thorough consideration they gave to the retail industry’s concerns in developing this legislation’’ (qtd. in New York Ofﬁce of the Governor, 1998). This incident shows how companies attempted to use codes of conduct and monitoring to reduce their liability for their contractors. In the case of the New York joint liability law, this argument facilitated retailers’ successful campaign to escape liability. In sum, ﬁrms initially developed codes of conduct to shield themselves from several types of external pressures. In at least some instances, they then used their engagement in voluntary efforts as a way to ward off further government intervention.

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PRIVATIZED COMPLIANCE AS CONTESTED TERRAIN: CASE STUDIES While the initial emergence of codes of conduct is largely consistent with the displacement hypothesis, private regulation of labor standards quickly became contested terrain, which made the relationship between private regulation and legal responsibility more complex than the displacement hypothesis would suggest. Labor rights activists worked to invert the meaning of monitoring and codes of conduct, drawing out new implications of these practices, and turning these apparent shields into points of corporate vulnerability. Two campaigns illustrate how this occurred. The ﬁrst involves a campaign by the main U.S. garment workers union, the Union of Needletrades, Industrial, and Textile Employees (UNITE), while the second deals with a class-action lawsuit brought by several labor and human rights NGOs against companies sourcing in Saipan.

UNITE’s Guess Campaign Labor unions struggled to organize garment workers in Southern California throughout the 1980s and 1990s. The globalization of the industry greatly complicated the task, since it bolstered companies’ implied threats of moving to Mexico if American plants were unionized. In the mid-1990s, UNITE (and its predecessor, the ILGWU) was involved in a protracted campaign targeting the Los Angeles-based manufacturer, Guess. The union sought to organize the company’s cutting and warehouse workers and hold the company responsible for the labor practices of its contractors (Bonacich & Appelbaum, 2000). But in order to hold Guess responsible for its contractors, the union needed to show that Guess was more than just a customer of the contractor. In a novel twist, UNITE used the emerging practice of monitoring to demonstrate this link in a 1997 complaint to the National Labor Relations Board. As described by Women’s Wear Daily, the union contends Guess is liable because its contractors are actually an adjunct of the manufacturer since the company participates in a Labor Department prescribed contractor monitoring program. (Ramey, 1997, p. 14)

Guess responded in part by denying that its monitoring activities actually provided it with significant knowledge of factory conditions. As stated by one of Guess’s lawyers,

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You cannot know what people are diong 24 hours a day in their own factoriesy We don’t work in the factories. They’re independent factories. We can only know so much.’’ (qtd. in News Hour, 1997).

Another of Guess’s lawyers wrote a letter to the Secretary of Labor arguing that monitoring and legal liability should be seen as substitutable. He suggested that were the NLRB to adopt UNITE’s position, it would threaten to destroy the efforts of the White House and [the Department of] Labor to get manufacturers to monitor contractors. (Ramey, 1997, p. 14)

Despite these claims, the case was eventually settled, with Guess agreeing to pay backwages and rehire ﬁred workers (UNITE, 1998). This case marked the beginning of a larger debate about whether codes of conduct and monitoring of contractors increase or decrease manufacturers’ and retailers’ legal liability.

The Saipan Case The biggest turn in this liability debate came when anti-sweatshop groups ﬁled a series of lawsuits against major retail and apparel companies sourcing in the U.S. territory of Saipan (U.S. Commonwealth of the Mariana Islands) – where Chinese and Filipino workers’ ‘‘recruitment fees’’ made them, in effect, indentured servants producing clothes labeled as ‘‘made in the U.S.A.’’ Over 25 major ﬁrms – including the Gap, JC Penney, Sears, and Tommy Hilﬁger – were named in the lawsuits, which charged that industry practices violated labor laws in the U.S. and Saipan as well as international human rights standards, and that the U.S.-based ﬁrms conspired with their contractors to allow labor abuses to occur (Rolnick, 1999; Sweatshop Watch, 2002; Global Exchange, 2003). Notably, the ability to charge retailers and manufacturers – who did not own the factories themselves – hinged on the argument that these ﬁrms were in substantial control of the factories in Saipan, in part because they had created codes of conduct and were monitoring compliance with these codes. Activists argued that these activities gave ﬁrms even greater knowledge of and responsibility for labor conditions in their supply chains. As one activist involved in the suits explained it, they send quality control monitors, and in some cases compliance monitors, to the factories, so they must be aware of the conditions because they are exercising a lot of control and oversight. (interview with labor rights organization leader 3/29/04)

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This argument provoked the following reaction from a Bobbin editor: Have self-imposed ‘codes of vendor conduct’ become a liability?y In the past, such selfpolicing has proved beneﬁcial in deﬂecting negative press and helping to build good business relationships. However, in a new twist, these companies are ﬁnding themselves subject to legal scrutiny over the same codes. As a result, some in the industry are speculating that companies under ﬁre will feel pressured to either own up to having knowledge of abuses if they are identiﬁed, or at the very least, admit that current monitoring procedures are not up to pary The plaintiffs charge that companies with codes of conduct and monitoring programs in place would be aware of any abuses; they argue that these companies were fully aware of the abuses, yet continued to advertise their products as ‘sweatshop free.’(Meadows, 1999, pp. 16–20)

The anti-sweatshop groups that ﬁled these suits skillfully turned the relationship between monitoring and liability on its head. In a sense, they called corporations on their bluff – arguing that by adopting symbols of corporate responsibility, the companies had indeed made themselves more legally responsible. The courts gave at least a partial endorsement of this theory by allowing the class-action lawsuit to go forward. This was partly because the court recognized that retailers’ monitoring of factories, along with their inﬂuence over other aspects of production (e.g. quality control inspections, turnaround times, etc.), gave the retailers ‘‘some means of joint control’’ over the factories (qtd. in Smith, 2004, p. 745). None of the cases were fully resolved, but all except one of the companies eventually agreed to contribute to a $20 million settlement that would pay backwages owed to workers and set up an industry-wide compliance program – which, interestingly, included a system for independent monitoring of factories (Collier, 2002; interview with non-profit monitoring organization representative 7/18/02; interview with labor rights organization leader 3/29/04). In the wake of the Saipan lawsuits, companies became even more concerned with limiting legal liability. Some framed programs for standardized certification of factories as ways of limiting liability. A Bobbin editor, for instance, presented certiﬁcation as a possible way of preventing lawsuits like the Saipan case. After reviewing objections to certiﬁcation plans, she said I believe these are all valid concerns, but I can’t help wondering what the companies recently embroiled in the Saipan sweatshop litigation would think about spending, for example, $1,500 to $3,000 to certify each of their contractors’ plants. Consider that those companies having already settled in this caseycumulatively will be forking up approximately $3 millionynot to mention digging deep in their pockets for hefty sums to pay legal feesyLet’s face it, in most cases prevention is less costly than damage control. (Rabon, 1999, p. 1)

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Others have articulated similar concerns. One of the developers of the American Apparel Manufacturers Association’s factory certiﬁcation program (WRAP – Worldwide Responsible Apparel Production) explained how he might ‘‘sell’’ certiﬁcation to companies in the following way: ‘‘I would use the legal argument. I believe that well-crafted certiﬁcation programs are shields from legal liability for supply chain practices.’’ He went on to explain: My argument is, had there been a credible certiﬁcation system in place for Saipan, ya credibleycertiﬁcation program would effectively insulate the retailers from any chance of liability in the Saipan context. (interview with a CSR consultant 8/23/02)

In this way, initial debates about the implications of codes of conduct and monitoring shaped the trajectory of further struggles. To some extent, these debates led to an elaboration of private standards systems, as ﬁrms and their advisors began to frame certiﬁcation as a more solid shield than mere codes of conduct.14 In a broader sense, the meaning of codes and monitoring had come full circle: Having started as tools for reducing manufacturers’ liability for their contractors, these practices became potential sources of corporate liability, due in part to UNITE’s strategic campaigns and the Saipan lawsuits. This contestation of private regulation has potentially changed the calculus regarding ﬁrms’ public avowals of ‘‘corporate social responsibility.’’ In fact, even though companies initially developed codes of conduct in part as a public relations move, or a form of ‘‘symbolic compliance’’ with external pressures, many companies now appear to be shy about trumpeting their social or environmental responsibility. Even those that have joined private monitoring and certiﬁcation programs are sometimes hesitant to publicize their activities, in fear of becoming better targets for social movement campaigns. As one apparel executive put it, No good deed goes unpunishedyNike has worked diligently for close to a decade on this issue. At least in the last 6–7 years, every time they’ve attempted to say anything public about what they’re doing in terms of public reporting or statements etc., they end up with some sort of adverse campaign. Most recently they got sued.15 And a lot of other companies sit back and say, ‘Why should I say anything? I’m not going to say I participate or don’t participate – publicly. I’m not going to produce annual reports. I’m not going to say anything.’yThe public reporting for a number of companies only serves to make them a target. (interview with a senior manager of a major apparel ﬁrm 8/1/02)

As another informant put it, ‘‘raise your head above the parapet and somebody’s going to shoot at you, because it’s such a politically charged topic’’ (interview with a CSR consultant 3/3/04). Similar worries have also kept

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companies from developing ‘‘no sweat’’ labels, even though this possibility has been raised on many occasions (interview with a CSR consultant 8/23/02; interview with a senior manager of a major apparel ﬁrm 3/9/04). Nike and other ﬁrms unwittingly helped create this situation, but it is fundamentally because of the contestation of private regulation that what was initially designed as a public symbol has, ironically, evolved into a guarded policy.

FINDINGS This research has produced four main ﬁndings. First, codes of conduct emerged as a strategy for ﬁrms to avoid or limit public accountability for labor conditions in their supply chains. Apparel manufacturers and retailers adopted voluntary labor standards to limit their vulnerability to domestic enforcement of labor law, to smooth over opposition to capitalist globalization, and to protect against threats to brand reputations. As codes and factory monitoring rose to prominence, industry actors increasingly deﬁned ‘‘compliance’’ in the privatized language of ‘‘code compliance’’ and used the existence of codes and monitoring to derail legislative campaigns that would have increased manufacturers’ and retailers’ legal liability for their contractors. In these ways, the rise of codes of conduct has tended to undermine public accountability. Second, although they started as tools for reducing corporate liability, codes of conduct and factory monitoring have evolved into potential sources of vulnerability for ﬁrms. Adopting a code of conduct for suppliers and monitoring compliance makes it more difﬁcult for ﬁrms to claim a lack of knowledge of or control over their contracted factories. As witnessed in UNITE’s Guess campaign and the Saipan lawsuits, the act of monitoring factories can make ﬁrms more, not less, vulnerable, to claims of legal liability. Third, these shifts in the meanings and implications of codes and monitoring occurred because social movement actors contested the privatization of law and skillfully used its tools for novel purposes. Activists turned practices that were initially designed as corporate shields into tools – albeit recalcitrant ones – in the struggle to increase multinational corporations’ liability for their supply chains. This skillful inversion led to additional rounds of debate over the limits of corporate responsibility and the extent to which private regulatory practices would serve as shields or as targets. In a sense, the very notion of ‘‘accountability’’ for labor conditions is being

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constituted by sequences of contestation, driven by the dynamic and adaptive strategies of social movements, ﬁrms, labor unions, and government agencies. Finally, these developments cannot be explained by a perspective that focuses on displacement or the simple ‘‘crowding out’’ of public regulations with private ones. The inﬂuence of private regulation is more subtle and complex than that. Rather than a simple process of crowding out public authority, the rise of private regulation brought about a set of twists and turns in the balance between private risk management and public accountability. It would be premature to generalize these specific ﬁndings to other national settings, such as the countries in Latin America and Southeast Asia where many apparel factories are located, or to the point of production, where an additional set of consequences (e.g. related to informal rules and power dynamics in the workplace) are especially relevant. Nevertheless, these ﬁndings can be used to build a broader analytic framework that should be useful in a variety of contexts.

CONCLUSION: TOWARD AN ALTERNATIVE APPROACH The rise of codes of conduct, monitoring, and related activities has undermined public regulation in some instances, but its consequences have been more complex than the notion of ‘‘crowding out’’ implies. Firms attempted to use codes of conduct as shields against public pressures, but activists challenged this move and questions soon arose about whether private compliance strategies would limit or increase ﬁrms’ vulnerability. In general, this analysis shows that private regulation of labor conditions is contested, intertwined with legal standards of responsibility, and evolving over time. The burgeoning literature on private regulation, private authority, and neoliberal governance (Cutler et al., 1999; Hall & Biersteker, 2002) should avoid the assumption that private regulation is a substitute for public regulation and instead theorize the more complex emerging combinations of public and private accountability. To move in this direction, analysts should recognize that codes of conduct, monitoring, and related activities may be inﬂuential not because they displace public regulation, but because their increased prominence shapes the terms of debate and struggle over corporate responsibility. As my

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analysis has shown, the rise of private regulation did not keep activists and policy-makers from treating legislation, lawsuits, and regulation as legitimate options for dealing with sweatshops, but it did mean that their positions and strategies on these matters had to articulate in some way with voluntary codes of conduct, monitoring, and other forms of private regulation. As a result, accountability politics in the apparel industry evolved in unanticipated directions. These dynamics are ignored by the displacement hypothesis but can be captured by an approach that pays greater attention to the contestation and evolution of private regulatory practices. Specifically, this approach takes account of (1) conﬂict in organizational ﬁelds and (2) path-dependent trajectories. An organizational ﬁeld refers to a set of mutually regarding actors that contribute, directly or indirectly, to some organizational output. This includes actors that are left out of traditional definitions of an industry, such as professions, consultants, government agencies, social movements, standard-setting bodies, and others (DiMaggio, 1991). A ﬁeld is akin to a reference group, in that organizations in a ﬁeld routinely take one another into account, even if they are competitors or antagonists (Fligstein, 2001; Armstrong, 2002). In fact, recent work in political and organizational sociology argues that conﬂict and social movement mobilization shape the emergence and operation of organizational ﬁelds in a variety of ways (Rao et al., 2000; Fligstein, 2001; Lounsbury, 2001; Schneiberg, 2002). In addition to drawing attention to an array of actors, ‘‘ﬁeld theories’’ argue that objects in a shared social space tend to inﬂuence each other in subtle ways (Martin, 2003), making this a useful framework for thinking about nuances in the interplay of public and private regulation. My analysis has shown how interactions among antagonistic yet mutually regarding actors shaped the meaning of private regulation of labor conditions. Firms, labor unions, and social movement organizations took account of each other as they developed and adapted their strategies for turning codes of conduct and monitoring to their own beneﬁt. For instance, the activists behind the Saipan suit in effect called the bluff of companies that were publicly claiming responsibility for labor conditions in their supply chains while simultaneously denying legal responsibility. Because social movement actors recognized and skillfully exploited this contradiction, voluntary statements and legally enforceable claims of liability got intertwined in consequential ways. In this way, conﬂicts among mutually regarding actors in an organizational ﬁeld helped deﬁne the meaning and implications of private regulation. A framework for analyzing private regulation should also recognize the path-dependent character of historical trajectories. Theories of path

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dependence argue that the specific outcome of past events shapes the possibility for social change in the future, by shifting action down certain roads, ‘‘locking in’’ some sets of options, and discouraging others (Swedberg & Granovetter, 1992; Haydu, 1998; Mahoney, 2000; Pierson, 2000). Pathdependent processes are not necessarily deterministic or unilinear, but attempts to alter their trajectories are built from the remnants of previous events, producing subtle forms of inertia.16 My analysis has illustrated how events at one point in time set the stage for later conﬂicts. Firms’ initial adoption of codes of conduct as shields from political pressures created the conditions for activists to argue that ﬁrms had enough knowledge of labor conditions in their supply chains to be held legally responsible. This, in turn, led to new struggles, as industry actors developed new strategies (including certiﬁcation) for strengthening their shields. Recognizing path-dependence and contestation within organizational ﬁelds can also shed light on the future of labor standards initiatives. Given that unions and social movement organizations have partially succeeded in contesting the privatization of labor standards, it is unlikely that the rise of private regulation will spell the demise of public regulation – even in those ﬁelds (like apparel) where private regulation is now prominent. However, if theories of path dependence are correct, then private regulatory practices will hold a privileged position in future rounds of struggle in these ﬁelds, and governmental initiatives are likely to be designed to complement private initiatives rather than clashing with them. This argument resonates with Hacker’s (2002) analysis of the historical interactions between public and private forms of welfare provision: More than simply restricting the scope for interventionypreemption of public alternatives pushes the roster of politically viable options toward forms of government intervention that are meant to bolster or work around, rather than to challenge, private social provision (p. 26, italics in original).

While Hacker shows that this type of public–private interaction shaped the American welfare regime in the 19th and 20th century, my analysis suggests that similar processes are likely to shape labor standards in the 21st century, as codes of conduct, monitoring, and certiﬁcation intertwine with standards of legal liability, policies of governments and inter-governmental organizations, and conditions in international trade agreements. This analysis of the politics of private regulation in the apparel ﬁeld speaks to at least two broader sociological literatures. First, it suggests that a stronger political approach might bolster analyses of ‘‘symbolic

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compliance’’ and the ‘‘endogeneity of law.’’ This strand of law and society research argues that since the meaning of ‘‘compliance’’ is malleable, law tends to get reshaped by the very actors it is meant to regulate. Specifically, ﬁrms respond to legal pressures by developing symbols intended to signal compliance to external audiences (Edelman, 1992). This allows ﬁrms to promote their preferred constructions of compliance, which tend to get institutionalized as the courts come to endorse them as ofﬁcial and authoritative (Edelman, Uggen, & Erlanger, 1999). My analysis shows that ﬁrms adopted codes of conduct as a form of symbolic compliance and that the meaning of ‘‘compliance’’ in the apparel ﬁeld did indeed shift over time. But in this case, ﬁrms’ constructions of compliance did not get fully institutionalized. Instead, activists challenged corporate-backed notions of ‘‘code compliance,’’ and this led to further evolution in the meaning and implications of compliance. As others have begun to point out, the meaning of law is not merely ambiguous and malleable, but also subject to political conﬂict and power plays in organizational ﬁelds (Stryker, 2002; Kelly, 2003). Second, while social movement theory has typically assumed that the state is the target of activism, my analysis highlights some of the strategies involved when social movements target corporations directly, in addition to or instead of the state. Scholars have recently worked to explain these types of movements by integrating social movement and organizational theory (Clemens & Minkoff, 2004; Davis et al., 2005) and by ‘‘decentering the state’’ in social movement theory (Armstrong & Bernstein, 2004; Schurman, 2004). Labor standards campaigns represent a useful case for this literature, while also suggesting that distinctions between targeting the state and targeting private organizations may be blurrier than they ﬁrst appear. Even movements that mainly target private organizations may wind up engaging in struggles over governmental vs. private strategies for assessing compliance.

NOTES 1. Scholars in the emerging ‘‘social movements and organizations’’ literature are grappling with how to theorize the emergence and effects of these movements and others that have been neglected by traditional versions of social movement theory (Rao et al., 2000; Armstrong, 2002; Clemens & Minkoff, 2004; Davis, McAdam, Scott, & Zald, forthcoming). 2. In the apparel industry, four different monitoring and/or certiﬁcation associations exist. The Fair Labor Association (FLA) emerged out of the Clinton administration’s Apparel Industry Partnership. Social Accountability International (SAI) was created by the Council on Economic Priorities, a non-profit organization

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concerned with socially responsible investment and purchasing. The Worker Rights Consortium (WRC) was developed by labor activists and United Students Against Sweatshops as an explicit alternative to the Fair Labor Association. The Worldwide Responsible Apparel Production (WRAP) program was developed by the American Apparel Manufacturers Association. 3. See the Methods and Data section for details on the interviews. While my focus here is on the potential displacement of government enforcement, scholars and activists have also worried about the effects of codes of conduct and private monitoring systems on union organizing campaigns. See Esbenshade (2004). 4. Because WWD is a daily publication, the initial search procedure produced a prohibitively large number (320) of relevant articles, leading me to select a random sample ðN ¼ 118Þ of these, stratiﬁed by year. 5. Notably, in a 1987 survey of companies with codes of conduct, ‘‘labor conditions’’ per se were not even included in the list of possible concerns, and ‘‘workplace safety’’ was ranked rather low in importance by the respondents (Berenbeim, 1987). 6. In an attempt to gather a broad sample, the OECD collected 107 corporate codes of conduct (and over 100 more developed by other kinds of organizations). Of the 43 codes developed by apparel manufacturers or retailers, a full 100% spoke about labor conditions and included contractors or subcontractors in their scope. For other industries, only around 63% of the corporate codes covered labor conditions specifically, and only around 59% covered contractors or subcontractors. 7. By 1996, over 85% of the 42 major apparel ﬁrms surveyed by the U.S. Department of Labor had voluntary policies against child labor. The Investor Responsibility Research Center found over 120 labor-related codes through a 1996 survey of the S&P 500 and 80 major retailers (Varley, 1998). In a 1998–99 study, the OECD found over 100 company-specific codes and 233 codes total (OECD, 1999). There is likely some serious selection bias in existing studies of codes of conduct (U.S. Department of Labor, 1996; Varley, 1998; OECD, 1999; Murphy, 2000), but they at least help to establish the existence of a sizeable group of companies with codes. 8. For an exception, see Esbenshade (2004). 9. In 1989, both Gephardt and Helms called for restrictions on trade to China (Chute, 1989), and by 1991, bills placing labor and human rights conditions on China’s MFN status had been introduced by Helms, Edward Kennedy, Nancy Pelosi, George Mitchell, and a number of others. 10. The two main unions, the Amalgamated Clothing and Textile Workers Union (ACTWU) and the International Ladies Garment Workers Union (ILGWU) merged in 1995 to form the Union of Needletrades, Industrial, and Textile Employees (UNITE). 11. This dimension of the story is conspicuously absent from most histories of codes of conduct. 12. These dynamics explain much of the increased attention to voluntary policies and non-governmental monitoring in the mid-1990s, which was illustrated in Fig. 1. 13. This difference across periods is statistically significant at the 0.05 level (one-tailed test). This shift in the discourse also coincides roughly with the shift from primarily domestic to international monitoring, as described by Esbenshade (2004).

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14. For this solution to take hold, governments would have to provide liability limits, regulatory relief, or ‘‘safe harbor’’ for companies with approved private regulatory systems. It is not yet clear whether governments will go this far in endorsing this model. 15. This is in reference to Kasky v. Nike, in which Nike was charged with making false advertising claims in its responses to sweatshop expose´s. For more on activist lawsuits, including those drawing on the Alien Tort Claims Act, see Sikkink (2002). 16. While Mahoney (2000) argues for an especially strong definition of path dependence, wherein a fully contingent outcome at time one produces a fully deterministic outcome at time two, I draw on less restrictive notions of path dependence, which emphasize that history conditions future trajectories and ‘‘choice sets’’ (Pierson, 2000; Abbott, 2001).

ACKNOWLEDGMENTS I thank the anonymous reviewers for Research in Political Sociology and Harland Prechel for their detailed comments on this chapter. For more general comments, I thank Elizabeth Armstrong, Ronald Breiger, Elisabeth Clemens, Kieran Healy, Ethan Michelson, Mike Mulcahy, Charles Ragin, Marc Schneiberg, Brian Steensland, and Mary Nell Trautner. An earlier version of this chapter was presented at the 2004 conference of the Law and Society Association.

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APPENDIX The types of afﬁliations are shown in Table A1. Table A1.

Organizational Proﬁle of Informants Interviewed.

Type of Organization Advocacy NGO focused on labor-, human-, or consumer rights Certiﬁcation or monitoring association Monitoring/auditing ﬁrm – forprofit Monitoring/auditing organization – non-profit Major apparel ﬁrm U.S. Dept. of Labor Corporate social responsibility (CSR) consultant Labor union Other Total a

Number of Informantsa 6 4b 3 3 3 3c 2 1d 1 26

Although some informants had multiple connections, for the sake of clarity this table assigns each informant to a single type of organization, based on the primary focus of the interview. b This number includes only those individuals employed by a monitoring or certiﬁcation association who were not directly afﬁliated with any of the other types of organizations listed below. c Includes current and former employees. d One additional labor union ofﬁcial was interviewed in a brief conversation that was not taped. In addition, several of the individuals from labor rights organizations had ties to organized labor.

ABOUT THE AUTHORS Patrick Akard teaches sociology at Kansas State University. He is currently completing a book on the politics of U.S. economic policy from the Carter administration to the early Bush years. Earlier work from this project has appeared in American Sociological Review, Political Power and Social Theory, Sociological Inquiry, and elsewhere. Other research interests include the media framing of public policy and recent theoretical debates on the concept of ‘class.’ Tim Bartley is Assistant Professor of Sociology at Indiana UniversityBloomington. His research focuses on organizations, politics, and processes of institutional emergence. His current work looks at the emergence and significance of private systems for regulating labor and environmental conditions, comparing labor standards initiatives in the apparel industry with environmental certiﬁcation programs in the forest products industry. He has published articles in Politics & Society, the American Journal of Sociology, Sociological Perspectives, and the Journal of Poverty. [email protected] Doug Guthrie is Professor of Sociology and Management at New York University. His primary areas of research focus on organizational theory, the impact of corporations on the social sector and the impact of foreign companies in China. His most recent work in these areas include Dragon in a Three-Piece Suit: The Emergence of Capitalism in China (Princeton, 1999), ‘‘Organizational Learning and Productivity’’ (Management and Organization Review, 2004), ‘‘The State, Courts, and Maternity Leave Policies in U.S. Organizations’’ (American Sociological Review, 1999), and ‘‘Social Entrepreneurship and Corporate Welfare in Urban Renewal (Stanford Social Innovation Review, 2004). Stephen Lippmann is an Assistant Professor in the Department of Sociology and Gerontology at Miami University in Oxford, OH. His dissertation research was on the emergence and evolution of the U.S. radio broadcasting industry. His other interests include involuntary unemployment, the 245

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employment relationship, and entrepreneurship. His paper entitled ‘‘Entrepreneurship and Inequality’’ was published in volume 15 of Research in the Sociology of Work (with Amy Davis and Howard Aldrich). Michael McQuarrie is Doctoral Candidate in the Department of Sociology at New York University. His dissertation focuses on the transformation of the Community Development Corporation movement in Cleveland. In addition to examining the ways in which changing legislation, like the LIHTC, has transformed the incentives that guide community development, he also looks at the ways in which these changes have transformed participatory democracy among grassroots organizations and the ways in which organizational ﬁelds become institutionalized. He also writes (with Craig Calhoun) on 19th Century popular movements. Theresa Morris is Assistant Professor of Sociology at Trinity College in Hartford, Connecticut. Her research focuses on regulative and organizational changes in the U.S. banking industry. She is currently conducting research on the consequences of these changes for mortgage lending to minorities and for communities. She has published articles in Sociological Forum, Sociological Inquiry, and Social Thought and Research. Sheryl Skaggs is Assistant Professor of Sociology and Political Economy and Public Policy at The University of Texas at Dallas. Her research focuses on the causes and consequences of earnings differentials within and across workplaces, gender and racial/ethnic inequalities in promotions and recruitment for non-professional, professional and managerial positions, and organizational change processes over time. Her work has been published in the American Journal of Sociology, Work and Occupations, and Research in Social Stratification and Mobility.

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