(Copyright Hedrick Smith 2013. All rights Reserved – may be transmitted in full, but not for excerpting without written permission)
Esteemed journalist Hedrick Smith is a Pulitzer Prize-winning former New York Times reporter and editor, and Emmy award-winning producer and correspondent. His books include The Russians, The Power Game: How Washington Works, and his latest, Who Stole the American Dream?
A: For me, one key discovery in researching WHO STOLE THE AMERICAN DREAM? was the Powell Memo, written by famous corporate attorney Lewis Powell, who was named by President Nixon to the Supreme Court in late 1971. Powell was an ardent advocate of the free enterprise system and strongly anti-union. He was deeply disturbed by the power of organized labor, the consumer movement led by Ralph Nader, the women’s movement and its push to increase and improve pay for women in the workplace, by the environmental movement and the impacts of regulations and controls to protect the environment, and by the proliferation of regulatory agencies established by the Nixon administration.
Friends of Powell at the U.S. Chamber of Commerce urged him to put his ideas down in writing and when he did, they circulated his memo privately to business leaders across the country. Powell warned, with considerable exaggeration, that the U.S. free enterprise system was in mortal danger. And so, like a modern-day Paul Revere, he issued a call to arms. He urged business leaders to get organized politically, to make a long-term plan, to pool their money, to identify their political enemies, such as organized labor, consumer advocates like Ralph, government regulators, academics, anyone who tried to put limits. He told them to come to Washington and use their political muscle. His memo fell on fertile ground. Business leaders responded quickly.
Powell's memo had a profound impact. It set off a "revolt of the bosses" that changed the landscape of power in Washington, Its impact is still with us today, because business lobbyists dominate the Washington power game. And it all goes back to the late 1970s.
Within a few months of Powell's memo in 1971, the CEOs of the biggest 150 blue chip companies in America formed the Business Roundtable; the National Association of Manufacturers moved its headquarters to Washington; the number of companies with Washington offices mushroomed from 175 in 1971 to 2,425 in 1980; by the time Reagan took office, there were 50,000 people working for business trade associations, 9,000 registered lobbyists, and 8,000 corporate PR people. And that political army generated by Powell's Army had impact even when the Democrats were in control of Congress and the White House in the late 1970s. They blocked pet legislation of organized labor and Ralph Nader. They instituted the 401k plan, rolled back regulations in trucking and communications, changed the corporate bankruptcy law, eliminated the ceiling on interest rates, and cut corporate taxes and the capital gains tax rate from 48% to 28%. So the whole direction of politics changed. What was the anti-business Congress of the early 1970s became the pro-business Congress of the late 1970s - and ever since.
Q: How long did it take to do the research for this book, and what in your research did you find most surprising?
A: It took me about a year to do the research and reporting for WHO STOLE THE AMERICAN DREAM? I was doing reporting all over the country - in Ohio, Washington State, Florida, Virginia, and contacting people from Boston to Denver to Los Angeles, and lots of places in between. I was also devouring books and articles on American economic and political history over the past half century. With the help of my full-time researcher Owen Smith, I was studying government tables on household income, productivity, foreign trade balances, job offshoring, whether there was a shortage of STEM workers in America (Rand says there is not), and on and on. Then it took me another year to write the first draft of my book, and another six months to do four more drafts.
For me, the surprises were endless - amazing because I had covered so much of this period in my reporting for the New York Times and for lots of documentaries that I created for PBS and for Frontline. I didn’t know when I started that the main victims of sub-prime loans were solid prime borrowers, who got talked, bamboozled and cheated into buying high-interest, high-fee loans. Millions of them are still stuck in those bad mortgages. It surprised me to find out that homeowners, mostly middle-class homeowners, lost $6 trillion in home equity - their most important source of accumulated wealth - before the housing boom hit bottom. They were sucking $750 billion a year out of their home equity by constantly refinancing their homes, taking out home equity loans, or just simply borrowing from their mortgages. I had not known that the 401k plan was never intended as a national retirement system, but began merely as a profit-sharing bonus tax shelter for a few New York banks plus Kodak and Xerox. I had forgotten that we had really good growth rates in the U.S. under Eisenhower when the maximum marginal tax rate was 92% and under John F. Kennedy when the top tax rate was 77% and that we had the worst growth rates in seven decades under GW Bush and Obama, when the maximum tax rage was only 35%. So I learned that there is a lot of political nonsense being tossed around about how we have to keep tax rates down on the wealthy in order to generate economic growth. That is not what generates growth. The main driver of growth is consumer demand - strong buying power by the middle class, and that only happens when tens of millions of middle-class families have good steady jobs at good and rising pay, not the kind of high unemployment and stagnant wages that cripple the middle class today.
Q: What were the factors that resulted in major changes in the U.S. economy, leading to the situation you describe today?
A: As readers will see in WHO STOLE THE AMERICAN DREAM? the most important change was the shift in mindset and corporate ethics among American business leaders from stakeholder capitalism to shareholder capitalism.
In the heyday of the American middle class, the 1950s, 1960s, and 1970s, business leaders believed that companies should share the wealth generated by economic gains. When you read the statements of former CEOs such as Charlie Wilson of General Motors or Reginald Jones of General Electric or Frank Abrams of Standard Oil of New Jersey, you see that they believed that it was their responsibility as CEOs to balance and support the interests of all the stakeholders in their companies. By stakeholders, they meant all the groups that had a stake in the success of the corporation. Of course, that included the shareholders as owners of the company. But it also included the managers, rank-and-file employees, the suppliers, creditors, customers and communities in which their companies operated. One way that they balanced those interests was to pay their workers well, to raise their pay as the company made higher profits, and to provide their workforce with lifetime pensions and fully paid employer health insurance. These terms were often embodied in the contracts that these major companies signed with trade unions that represented their workers.
Under this social contract, the American middle class prospered for three decades and became the envy of the world. From 1945 to 1973, the productivity of the American workforce almost doubled. It rose 97% and along with that, the earnings and incomes of average Americans rose 95%. In short, as President Kennedy said, the rising economic tide lifted all boats. The nation's wealth was widely shared.
That wide sharing of wealth was reinforced by the exercise of people power, the political power of mass movements like the consumer movement led by activist Ralph Nader, the women's movement pushing for equal pay for women, the environmental movement demanding protections for the environment, the organized labor movement bargaining with American businesses for solid wages and worker benefits. Republican presidents like Dwight Eisenhower and Richard Nixon as well as Democratic presidents like Johnson Kennedy and Lyndon Johnson heeded people power and so did members of both parties in Congress. They responded with policies that protected middle-class prosperity and steadily raised minimum wages and other worker protections.
But as we moved into the widely heralded New Economy of the 1980s and beyond, the mindset of business leaders shifted. Instead of stakeholder capitalism, they pursued shareholder capitalism. As economist Milton Friedman defined it and Harvard Business School and others taught it, the CEO's sole mission was to deliver the maximum return to shareholders. Instead of running the business to benefit all the stakeholders, New Economy CEOs focused on delivering higher profits and higher company stock prices for the benefit of big investors on Wall Street and elsewhere. CEO's like Jack Welch of General Electric won favor with Wall Street by cutting costs - laying off tens of thousands of workers, freezing wages, moving employees out of lifetime pension programs paid for by the company into 401 (k) plans.
Back in 1980, 84% of the workers in companies with more than 100 employees got lifetime pensions from their employers and 70% got fully paid employer health benefits. Under shareholder capitalism those numbers shrank drastically. Today, only 30% get lifetime pensions and only 18% get fully paid employer health insurance. So hundreds of billions of dollars in costs for those benefits were shifted from the corporate books to the checkbooks and pocketbooks of average Americans, costing the middle class dearly.
At the same time, middle-class paychecks stagnated, even though the economy grew and corporate profits soared. The rising tide no longer lifted all boats. The link between the nation's rising labor productivity and the incomes of average Americans was broken. From 1975 to 2011, the productivity of the American workforce rose 80% but the incomes of average American households, right at the middle of our economy, went up only 10%. Male workers were particularly hard hit. According to the U.S. Census Bureau, the hourly compensation of the typical male worker in 2011 was equal to the level in 1978 (actually a tiny fraction lower), adjusted for inflation. Three decades of going nowhere.
Over that same long period, top-level incomes have skyrocketed. CEOs now dominate that sliver of the super rich in the top 1%. Why? Because they are being paid mostly in stock grants or stock options by the companies they run. CEOs and other top executives are the primary beneficiaries of shareholder capitalism. In some companies, CEOs and other top executives can get a grant of a million or more stock options in one year, with their earnings in one year sometimes running into hundreds of millions of dollars
So while middle-class Americans were stuck in a rut, CEOs went from making about 40 times the average worker's pay in the 1960s to making more than 360 times the average worker's pay in the 2000s. Big-time CEO salaries jumped 300% to 400% while worker wages stagnated. Among the top 1%, incomes rose 600%. So the shift from stakeholder to shareholder capitalism over the past thirty years has cost the middle class heavily and created massive gaps of economic inequality, gaps so great that Citigroup, in one of its fancy investment brochures in 2005, compared the hyper concentration of wealth in America today to 16th Century Spain.
In fact, economists warn us that today's lop-sided income distribution in the US is bad for the country. It is not smart economics. Several economic studies have found that high income inequality is harmful for growth. On the contrary, history shows that economics of stakeholder capitalism which produced the "Great Compression" in incomes is actually the best condition for growth.
Q: Is there another period in American history that you would compare to this one? If so, what would it be?
A: What we are seeing in America today is the third wave of the great concentration of wealth in the hands of the business and financial elite. We saw that first in the 1880s and 1890s during the era of the railroad boom and the Robber Barons. We saw it again in the roaring 1920s. Each of these eras not only generated high inequality of income but also led to long depressions. So what we are seeing now is not new. We are once again seeing that high inequality of income - the concentration of so much wealth and political power in the hands of the 1% or 2% at the top of the economic pyramid - is not only unfair but bad economics. It generates slow growth or depression and recessions.
Q: You say that civic engagement is necessary to reverse the country's direction. How likely do you think this is to occur, and from which sources is it likely to come?
A: There are many issues on which a new surge of civic engagement could emerge - creating a fairer tax system so that companies which move jobs overseas do not wind up paying lower corporate rates than companies which operate entirely inside the U.S.; making the banks that got bailed out by taxpayers bail out homeowners who still stuck in bad, high-interest bubble-era mortgages; fixing our broken election system so that it is easier for voters to vote; restoring the legitimacy and integrity of elections for the House of Representatives and for state legislatures by ending the egregious gerrymandering of political district lines by political parties and turning that important task over to nonpartisan commissions; reducing the overwhelming influence of big money in elections either through public financing of state and federal elections or through changes in federal election rules to bar political campaign donations by organizations and institutions such as corporations and labor unions; opening up party primaries to all candidates and all voters to force politicians to appeal to the political middle and reduce the polarization in Congress. You’ll find a list of reforms in WHO STOLE THE AMERICAN DREAM?.
Different groups are already at work on these issues, such as Fair Elections, No Labels, Take Back the American Dream, The Organization for Campaign Finance Reform, and others. Smart middle-class voters will start getting active in issue campaigns - just as people got engaged in the environmental movement, consumer movement, women’s movement, civil rights movement in the 1950s, 1960s and 1970s- when they get angry enough at the corruption of our politics by Big Money and the unfairness of wedge economics.
I am not sure what the specific trigger will be. But there is a mass of public discontent out in the country. It is political tinder just waiting to be set off - if people will stop feeling powerless to change America and Washington through direct citizen action.
(copyright Hedrick Smith, 2013 All rights Reserved. May be transmitted or Tweeted in full but not for excerpting without written permission)
--Interview with Deborah Kalb