Felix Rohatyn is short, occasionally rumpled quick of tongue, and even quicker of mind. He does not fit the image of the globe-trotting financier. Nor, for that matter, do his liberal politics. But in his office high above Rockefeller Center in New York, this senior partner of Lazard Freres, an international investment banking house, makes deals between some of the world's most important companies and Plots the future of the Democratic Party.
It is this latter activity that makes Rohatyn a force with which to contend. The Austrian emigre is likely, according to some political observers, to become Secretary of the Treasury in the next Democratic Administration. And his policies could significantly affect how the United States does business. The reason, and the reason for Rohatyn's promineuce is embodied in the acronym RFC.
RFC stands for Reconstruction Finance Corp., the new Deal-era agency that Rohatyn, among others, wants to resurrect, albeit with significant changes. Supplysiders deride the idea as central planning; leftists vilify its creator as a corporatist. But one thing is clear: Democratic Party leadership is rallying around the belief that a national investment strategy is a given, and a mechanism for carrying it out, a must. Felix Rohatyn's plan, the most detailed and best known of those put forth, is at the center of the debate.
The original Reconstruction Finance Corp. was Herbert Hoover's last-ditch effort to help return the Depression-wracked United States to stability. Enacted in January 1932, it was initially designed to extend direct loans to only two industries -- financial institutions and railroads. The Hoover Administration was voted out before the RFC could be used effectively, but the bank flourished under Franklin Roosevelt and RFC chairman Jesse Jones, an influential and wealthy businessman from Houston. During the 12 years Jones ran the RFC, its powers were gradually broadened to allow it to make loans to mining companies, businesses, and disaster victims and for agricultural improvement and public-works construction. Eventually the RFC was authorized to buy the securities of any business enterprise. Finally, it got a blank check to take whatever steps the President and the Federal Loan Administrator thought essential to the war effort. Many of the U.S. war industries -- the basis for the spectacular growth of the U.S. economy after the war -- were financed by the RFC. After World War II, the RFC was put under tightening reins, and it was finally disbanded in 1954.
The RFC originally was capitalized with $500 million from the Treasury Department and could borrow $1.5 billion. This expanded to such an extent that by its demise, the RFC had raised and disbursed a total of $40.6 billion. In 1933, it accounted for over half of all federal spending and at one point employed 36,000 people in Washington, D.C., and 31 branch offices. And yet, unlike most government assistance programs, the RFC paid for itself. Interest income and other revenues covered losses and expenses, and when Congress closed its doors, the RFC returned $6 billion to the Treasury.
Felix Rohatyn first proposed a new version of the old New Deal agency in 1975. Rohatyn's experience as chairman of New York City's Municipal Assistance Corp. has convinced him that an independent body outside of government, business, and labor, but including representatives from each, could play a role in revitalizing the faltering U.S. industrial economy as successfully as MAC (chartered as a state agency) had helped to save New York from bankruptcy.
Recalls Eugene Keilin, MAC's first executive director and now a senior vice-president of Lazard Freres: "MAC came in and had the power to convene the parties, to bring them together in a room. It couldn't say, 'You must do this and that.' It made deals among the parties, in the form of concessions each of them would have to make in order to keep the operation -- New York -- going."
What distinguished MAC from a run -- of-the-mill mediator -- and made it the model for Rohatyn's RFC -- was that it had something to offer: capital. "It had the ability," says Keilin, "which the city did not have, and which for legal and maybe political reasons the state did not have directly, to borrow money and use it, first, to avert the city's bankruptcy, then to keep the city's operations and services continuing, and finally to provide for new capital spending."
This last function best characterizes Rohatyn's RFC. It would be a capital-targeting device; it could be called (despite its originator's vehement protest) a sort of central-planning agency. In any case, just as MAC could intervene in New York's economy by raising capital and disbursing it in loans and loan guarantees, the RFC would be a forum for intervention -- investment -- in the national economy.
A series of national investment bank proposals have been floated by various economists and policy formulators within the Democratic Party. All emerge from the understanding that the "free market" is a piece of American mythology and that the U.S. government has intervened in the operations of the marketplace in myriad ways, from the land grant acts of the nineteenth century that helped in settling the West to today's military procurement policies, which actively seek to bolster the industries and companies that supply the armed forces. If the government already intervenes, say these Democratic thinkers, best make that intervention coherent.
The Japanese, through the Ministry of International Trade and Industry (MITI), set national goals and actively steer capital to what they believe the growth industries -- with the greatest competitive potential internationally -- are now and will be in the future. Japan's success, first in small cars, then in consumer electronics, and currently in semiconductors, is the stuff of modern economic legend and has U.S. businesspeople gritting their teeth. But Japan isn't the only nation to target and allocate capital and credit. So do France and other European nations. Most major U.S. trading partners do it also. The United States adheres to the myth of the unsullied market, say many Democrats, and the fairy tale is giving way.
From this point, however, interests diverge, as do the potential solutions. The national bank proposals fall mostly into two categories: the Big City-Big Labor-Big Industry banks, and the high-tech investment institutions. The best example of the former is Felix Rohatyn's RFC.
Rohatyn's bank would be politically independent, capitalized with $5 billion from the Treasury and with the authority to raise $25 billion more through the issuance of federally guaranteed bonds. It would thus become one of the country's 10 largest banks, but its one special purpose would be to bail out large cities, as well as struggling major industries in those areas.
"The RFC will not set economic policy," says Keilin, who wrote a draft of the bank plan. "It will have considerable discretion, all right, but it is in the means to achieve an objective for which it is specifically created. . . . It will be designed to achieve a policy of looking at important industries, whatever they happen to be -- autos, steel, rubber, or, God help us, banking or something else -- and say, 'It is economic policy to preserve these industries. Not necessarily in their present form, not necessarily intact, but to preserve them, as opposed to writing them off.' Once that policy is set, the RFC would go out and do it, in exchange for concessions, modifications, changes of behavior on their part that are designed to ensure their survival."
On the public side, Rohatyn's RFC would lend money to floundering city governments for infrastructure projects. In 1981 in The Economist, the influential British newsmagazine, Rohatyn cited the example of decaying public transit systems in such cities as New York; Birmingham, Ala.; and Chicago. The RFC's lowinterest loans to rebuild those systems, he noted, would be conditioned on guarantees by local unions and management of higher productivity and on the local legislature's grant of effective tax support.
The most serious criticism of Rohatyn's plan is that it is merely a bail-out mechanism to prolong the agony of dying corporations at a greater long-term cost to the public than if their demise proceeded normally. Rohatyn and his policy people respond that, first, certain industries, like steel, are necessary for national security reasons Second, the RFC's authority to purchase equity in corporations would be predicated on an equivalent infusion of private money. And third, the private markets should not be the only determinant of the viability of a business.
Says Keilin: "If you had asked the market -- whatever and whoever it is -- in 1975, 'Should New York survive?' there would have been a unanimous answer, 'No! ' And there wasn't any capital available for New York. You couldn't borrow a penny for the city. Market says City dies,
cheered on by the President at that time. In hindsight, look at it: I don't think there's anybody of substance who says New York should not have been saved."
Josh Gotbaum, an assistant to Rohatyn, claims that no evidence exists for assuming that the RFC would lend indiscriminately. "The current federal government, which has basically proved itself a whore to any large disaster situation, still does not bail out every sick company that comes along," notes Gotbaum, who worked on economic and industrial policy in Jimmy Carter's White House. "When I was in the White House, every industry request for assistance. . . came across my desk. To some we said yes, to most we said no. And that's in an institution which is, politically, extremely responsive " A politically insulated RFC, he adds, would have more discretion in choosing industries to aid and could exact a greater return for its investment.
But it is just this independence that has rankled many, particularly among left-of-center Democrats. Rohatyn's RFC would probably be governed by a mixed board of directors from the public and private sectors, with the President having great flexibility in appointments. Staggered terms of four years for the directors would according to Keilin's proposal, "seem appropriate so that the board does not become intimately tied to any one Administration."
Michael Kinsley, editor of Harper's and formerly editor of The New Republic, one of the most respected liberal journals in the United States, has called such a system "fascism." One top aide of Gov. Edmund C. "Jerry" Brown Jr., of California, has labeled it "technocratic planning beyond public accountability in any sense." And Gar Alperovitz, who heads the left-leaning National Center for Economic Alternatives, charges that it is "centralized national planning by an elite group of bankers insulated from the public."
But the most salient criticism is that the RFC's focus on declining industries necessarily slights growing parts of the economy. Superficially, at least, with its orientation to crisis and its concern for industries as a whole, the bank seems weighted against small business. "To the extent you succeed in raising capital and channeling it," admits Keilin, "it does mean that capital is somewhat less available and somewhat more expensive for everybody else." But in the long run, he adds, this helps small and medium-size investment. "If the auto industry were stabilized around Detroit, or the steel industry around Pittsburgh, it would be more likely that some of the new technologies would take root and would be financeable by conventional means, like venture capital," he says.
Others aren't so sure. "The danger of the RFC is that it will basically be an instrument that will look to the needs of the major corporations, " says Roger Vaughan, an economist with the Democratic National Committee who served recently on the staff of Gov. Hugh Carey of New York. "The central thing is to look toward an entrepreneurial economy, an open economy that generates new business."
Advocates of the entrepreneurial economy represent the other side of the debate -- national investment banks geared toward America's "sunrise" industries Although they do not, as their opponents have charged, ignore the plight of labor and large industries, these analysts -- among the more prominent are economist Lester Thurow of Massachusetts Institute of Technology and Robert Reich of Harvard University's John F. Kennedy School of Government -- argue that with the rapid industrialization of the Third World, the United States will no longer be able to compete internationally in heavy manufacturing. And studies point to the incontrovertible fact that the overwhelming majority of jobs are created in new and small businesses. So much of the sunrise talk focuses on high-technology enterprises that its proponents have been called "Atari Democrats."
The most controversial feature of such high-tech RFCs is the dichotomy they seem to set up between sunrise and sunset industries. Some Atari Democrats, worrying that the image will hurt them with the party's labor constituency, have even begun to lash out at it. The sunrise-sunset image, writes Sen. Gary Hart (D-Colo.), a leading neoliberal Presidential contender, in his draft policy statement, Restoring Economic Growth (June 1982), is "deeply flawed, divisive, and unnecessary."
The split, however, may be more imaginary than real. "Sunrise-sunset was somebody's clever way of discrediting the whole industrial policy debate from the beginning," says James Galbraith, staff director of the Joint Economic Committee of Congress, "by setting up an apparently comprehensive and exclusive choice between two categories of industry." One leader in making the division is Charles Schultze, chairman of the Council of Economic Advisors under Jimmy Carter, a leading liberal economist but an implacutle foe of industrial policies and RFCs. Schultze opposed every RFC proposal in the Carter years -- battling with Rohatyn throughout -- and has made light of industrial policies that try to identify winning industries. He notes that during the '70s the highest-growth industry in the United States was poultry farming.
Still, if there isn't a clear split, there is a markedly different emphasis in each investment bank plan. "I've argued with Felix that his investment bank is a little too focused on bailing out losers, rather than helping winners," says MIT's Thurow. "If I were running a bank, I would be willing to lend money to high-technology ministeel mills. I would not lend money to build big, integrated pig-iron facilities." So far, Rohatyn's RFC is the most comprehensive Big City -- Industry bank. While many share Thurow's concerns, a similarly comprehensive alternative has yet to garner the same attention.
Nevertheless, Governor Brown's office has drafted such a proposal. Michael Kieschnick, of California's Department of Economic and Business Development, and Nathan Gardels, director of the pension investment unit of the California Governor's Office, have developed a sunrise-oriented plan. This plan stems from an economic strategy that calls for "strategically planned investment" as the thematic counterbalance to "supply-side economics" -- investment being a key neoliberal motif likely to characterize new Democratic political strategy.
The Brown group proposes the Innovation Finance Corp., a public financial institution that would absorb risk and increase the availability of long-term capital to targeted industries, primarily in high tech. Two subsidiary corporations would target capital to specific areas, much as the Federal Nationl Mortgage Association (Fannie Mae) operated under the original RFC and continues to work today. The Technology Development Bank would direct funds to large companies requiring investment capital of $50 million or more. The Technology Development and Mortgage Assurance Corp. ("Teddie Mac") would be geared toward small and medium-size high-tech companies, by insuring risk and creating a secondary loan market. Teddie Mac securities would be sold to institutional investors, such as pension funds, that would lend to high-tech businesses ineligible for Teddie Mac loans.
"We live in a world of technological equals and resource limitations," says Gardels. "So any industrial strategy must be technology-based and resource-efficient." Teddie Mac, he explains, would be responsible for major development projects as well as large infusions of capital into large companies, a la Rohatyn's RFC, but would focus more specifically on the teehnological retooling of those entities. Teddie Mac "would be oriented toward what we call development investing. . . [specifically] small and medium-scale businesses, hightech companies."
Opponents of high-tech development banks argue that existing capital markets handle the sunrise industries' investment needs adequately -- witness the venture capital bull market of recent years. But evidence increases that small, technologybased companies, while producing most capital industrial innovations, can't obtain the capital needed to continue operating successfully.
"Being first may be good, but being big often is better in high-technology industries," said The Wall Street Journal recently, noting a trend toward absorption of smaller companies by larger, established ones because of tight capital markets. The Journal left unsaid that mergers and acquisitions in the industry inevitably result in lost jobs and less of the innovation necessary to fuel the economy of post-industrial America.
Nevertheless, the RFC proposal will go before the Democratic National Advisory Panel on Economic Growth and Opportunity, as well as several committees of Congress. The advisory committee itself is evidence that the seeming split between the high-tech and big-industry camps may not be serious, for in addition to Nathan Gardels, the members include Felix Rohatyn, Robert Reich, and Sheldon Friedman, research director of the United Auto Workers, who has opposed rising-industry industrial policies.
And one shouldn't forget that an RFC is a few years off at best, giving proponents time to iron out differences. Even so, many Democrats are not ready to take the giant leap toward a national investment bank but would prefer a smaller, albeit significant, jump first. "To come in with a bill for an RFC, that's the fifth step," says Rep. Richard Gephardt (D-Mo.), co-chairman of the advisory panel, and an influential neoliberal member of the House Budget and Ways and Means committees. "An RFC may be okay," he says, "but I think it's putting the cart before the horse. If you don't have a basic understanding that we want to starve these industries and nurture those, then the RFC will be a group without a consensus, a group without a mandate. And it won't work. "
Gephardt's caution still seems to reflect the majority view in his party. Nevertheless, an American MITI-without-teeth may accomplish nothing. Proponents of various types of national investment banks remain optimistic for a convergent plan. "I'm not sure there is any one blueprint," admits Rohatyn. "There are many roads that lead to Rome -- as long as you're willing to intervene."