If you are like me, you have probably never heard of Hedrick Smith before. Those people a little older than me know his work very well. Hedrick was a journalist and the former head of the Washington D.C. bureau for the New York Times. He covered at least four Presidents as a reporter and is an accomplished author. Hedrick even won a Pulitzer Prize for his work in Russia and Eastern Europe in 1974.
Hedrick’s newest book is called ‘Who Stole the American Dream?’ and it provides a very detailed description of what happened to the middle class in America.
- What lead to the sub-prime mortgage crisis that nearly bankrupted America?
- What happened to the labor unions and prosperity of the middle class?
- Why is business now more powerful in Washington than the people our elected officials are supposed to be representing?
After saying that “being here reminds me of the heyday of the labor movement,” Hedrick started his lecture by asking the question “How did we get to here?” How did we get to a point in America where you are either just barely getting by or one of the ultra-wealthy?
Hedrick said “Some people ask me, aren’t you preaching to the choir?” when speaking to labor groups. His response: “All the choir members need to sing from the same sheet music.” We will not be able to fight back against these changes until we understand how we got here. Hedrick described his book as an intellectual arsenal for the labor movement and other socially progressive organizations.
Rebuilding America with excess money from the DOD.
“Labor is a strong protector of the middle class,” Hedrick said. “The heyday of the middle class was a time when the labor movement was strong.”
Hedrick talked about how we need to rebuild our infrastructure and get Americans back to work, how we need to focus on what is happening here, and stop spending all of our tax dollars fighting in other countries. “Why are we building bridges in Kandahar, and not in Kansas?” Hedrick asked. He explained that too much of our federal budget is going to the Pentagon; Defense spending is higher now than it was in the Cold War – even though, during the Cold War everyone was afraid of an all-out nuclear war.
In his book, Hedrick details how much money we have spent on the current ‘wars’ that we are involved in: an estimated $3.5 to $4.5 trillion dollars have been spent, even though taxes have not been increased to pay for it. Even now, as the conflicts in Iraq and Afghanistan are winding down, the “extra” money Congress spent on those war efforts is still in the federal budget. That means Defense is enjoying grossly inflated appropriations – even though there are no actual ‘wars’ to fight.
Hedrick suggested that if we need to find the money to rebuild our roads and bridges, we should start by looking at the Pentagon budget. He also proposed the idea of mandatory military service, if not for everyone then for everyone in Congress. “We would go into a lot less wars if we had mandatory (military) service,” he said. Hedrick also questioned Congress’ ability to make decisions about war if the representatives have never served themselves.
Stakeholder Capitalism vs. Shareholder Capitalism
There are two very different perspectives about how a business should be run. On one hand there is the view – best described by Henry Ford – that a company is there to produce something, and pay people a wage high enough that they could become your customers. This is commonly referred to as ‘Stakeholder Capitalism’.
“There is one rule for the industrialist and that is: Make the best quality of goods possible at the lowest cost possible, paying the highest wages possible.”
On the other hand, there is the current business philosophy that companies are only there to make their owners and shareholders money. This is called ‘Shareholder Capitalism’.
This difference is a major focus in Hedrick’s new book. He spent a majority of the time during last week’s discussion talking about the differences between these two views – and how ‘Shareholder Capitalism’ has led to the decline of the middle class.
Hedrick explained that ‘Stakeholder Capitalism’ drove the American economy after World War II. From 1945-1970, the productivity of American workers went up by 96%. At the same time, the average median income grew by 94%. “Growth in productivity lead to shared prosperity,” Hedrick observed. Everyone from the poor to the wealthy prospered during these years – in fact, those at the bottom of the wealth spectrum benefitted even more than those at the top.
Then, beginning in the 1970s, businesses moved into ‘Shareholder Capitalism’. Productivity continued to rise by leaps and bounds, yet workers’ wages stayed flat. The added revenue the company received from the higher productivity had to go somewhere – and it went right to the executives and shareholders. This is why the average CEO’s salary is now 380 times higher than the average worker’s salary. [Read Citigroup’s report “Plutonomy: Buying Luxury, Explaining Global Imbalances” here.]
Through the 1970s, CEOs knew that shared prosperity was good business. “The job of the CEO was to balance the needs of all the Stakeholders,” Hedrick explained. That means balancing the wages of the workers with the cost to consumers, and the need to turn a profit for the shareholders. This was the job of the CEO. Some of those needs were very simple. The workers needed money.
The middle class had been the major consumer in our economy. Middle class Americans are spenders, not savers: they spend 90% or more of what they bring home. For the majority, the only savings they accrue is paying off their mortgages. If the middle class does not have money to spend (like our current situation) then the economy is very slow to recover from any economic downturn.
In 1948, the United Auto Workers (UAW) and the CEO of General Motors Charlie Wilson signed the first collective bargaining agreement that included a lifetime pension. This means that after you put in your many years of service to GM they would pay you a salary for the rest of your life. This trend continued in union and non-union companies for the next few decades. GM became the model for industry and labor relations throughout the country.
By 1980, 84% of all companies with 100+ employees had a full pension for their retired workers; 70% of them had full healthcare coverage for retirees as well.
Now that ‘retirement security’ has all but disappeared. Only 30% of companies with 100+ employees offer a pension; and only 18% offer retiree healthcare. Those numbers go down every year, as workers who retired with these ‘outdated’ pensions are passing away.
“GM used to be the template for a successful industry, now Wal-Mart is the template,” said Hedrick. Wal-Mart is the modern day success story in the world of ‘Shareholder Capitalism’: they have experienced massive growth and high stock returns. Just disregard the fact that they do not offer healthcare to the majority of their employees, or pay wages that would keep their workers out of poverty.
In ‘Shareholder Capitalism’ the stakeholders (consumers, shareholders, and workers) are in conflict with each other. The shareholders are the only people the CEO cares about: business is all about profits and stock prices. This is also why corporations like Wal-Mart buy back their stock to continue to drive up stock prices.
“The middle class is not getting their share of the pie,” said Hedrick. “The system (economy) will not work until the middle class get more of the pie”
The middle class used to drive the political bus
Hedrick discussed how the middle class used to drive our political system. Especially from the 1960s through the 1980s the middle class effected the most change.
The middle class was made up of many different movements, including the civil rights movement, the environmental movement, and the women’s movement. Hedrick noted that organized labor was right there in the middle of it: labor was there helping to safeguard the rights of all workers, regardless of color or gender, and ensuring that all were paid equally.
For many years, labor and these organizations pushed the political system. Hedrick noted that the AFL-CIO nationally seems to be making a push to be more like the labor movement of the past. Labor is working with outside groups to help workers who are not official union members. Hedrick praised the union groups who are helping to push legislation in Congress and state Legislatures to raise the minimum wage.
Hedrick described one other thing that helped these organizations move the middle class ahead. It’s something that has been completely lost in today’s political system: hope.
People in the middle class used to believe that when something was broken in Washington that together they could change it. They effected a great deal of political change and helped move our country forward. Many people do not feel they can make a difference anymore. We need bring hope back. We need people to believe again.
The Shift In Political Power
All through the 1960s, the middle class prospered and dominated the political system. Now that is completely the opposite. Business and their paid lobbyists control Washington. What happened to cause this major shift?
Hedrick asked, “How many of you have ever heard of the Powell Memorandum?” Hedrick admitted that until he started writing Who Stole The American Dream he had never heard of it before either. Even though Hedrick was a journalist in Washington, D.C. in 1974, he had never heard of it. It was not given to the press or the public; instead, it was shared “under the table. ‘
Lewis Powell was conservative, a corporate lawyer, and eventually a Supreme Court Justice. The 1974 ‘Powell Memorandum’ drafted a plan for business and industry to counter middle class movements. Powell said, “These movements and regulations are killing the free enterprise system.” He argues that the business industry needed to organize (like many of the other movements of the time), that they needed to put people on Capitol Hill and use their collective will to influence the regulations and policy changes that are hurting business.
“Does that sound familiar?” Hedrick asked the AFL members.
Starting in the mid-1970s, business took this message to heart. They created the ‘Business Round Table’, a group of businesses who pooled their resources to lobby Congress. Now the BRT is the largest single lobbying group in the nation’s capital. The US Chamber of Commerce went from 6,000 members in 1974 to over 600,000 members in 2010.
These changes shifted the power from the people and pushed it toward the business community. These lobbyists started pushing more and more money into the political system and began to overpower the voices of the people. They quickly got to work: pushing for lower taxes, lower regulations and what they called ‘business-friendly’ policies.
“They started by deregulating trucking and telecom,” said Hedrick.
In 1978, with a Democratic President and both Houses of Congress controlled by Democrats, the business lobby passed some of the most damaging laws for American workers. For example, they changed the tax code and wrote in paragraph 401 sub-section K to allow executives to have a tax shelter for their earnings. The 401(K) provisions quickly became the answer to lowering retirement costs and keeping more profits. Some companies, such as ENRON, even forced their workers to use their 401(k)s to buy stock in the company – which would force stock prices up and up. But then if the company goes under, as ENRON did, the workers have completely lost their retirements as well as their jobs.
The business lobby also changed the bankruptcy law to allow the current management to continue to control the company through the bankruptcy process. Previously, a neutral third party was brought in to divide the company assets and ensure that workers’ pensions were protected; but now, companies can file for bankruptcy and sell off all assets, leaving the workers stranded. In his book, Hedrick uses the United Airlines bankruptcy as an example of how this policy hurts working families. We can also see the effects of this change in the aftermaths of the Hostess and Patriot Coal bankruptcies.
The ‘Powell Memorandum’ created a political monster. Now we have the ‘Gang of Six’, a Washington based lobbying group that “represents 40,000 member companies from beer distributors to furniture suppliers, is the dean of a bloc of a half dozen U.S. trade groups. The groups represent companies that employ more than 22 million people and generate at least $5.2 trillion in goods and services, or almost half of U.S. gross domestic product. If the Gang of Six were a country, it would constitute the world’s second-biggest economy, eclipsing Japan’s $4.7 trillion GDP.”
This ultra-powerful lobbying group is lead by Dirk Van Dongen, the “most powerful man you never heard of,” said Hedrick. This is the guy that Carl Rove had lunch with the day after President G.W. Bush was inaugurated – that is how powerful Van Dongen is.
What can we do about this? How can we stop this cycle and get back to an age of prosperity again?
Many of Hedrick’s ideas have to do with fixing our broken political system. “We need to get the big money out of politics,” said Hedrick. “We need to fix the gerrymandering” of our Congressional districts. We need to have open disclosure on all campaign contributions. “This may mean we need to go back to publicly funded campaigns again,” said Hedrick. We need the Federal Election Commission to do a better job of regulating the elections and enforcing the current election rules. Hedrick continued, “The FEC could pass a rule that would enforce open disclosure tomorrow if they wanted to.”
Hedrick talked about ‘Open Primaries’ as a way of countering gerrymandering. There would be no such thing as safe districts any longer. Regardless of political party, all candidates would be on the same primary ballot – then the top two candidates in the primary would run against each other in the general election. Hedrick said that in some ‘Open Primaries’ have resulted in two general-election candidates from the same party. He also noted that places that had ‘Open Primaries’ saw a 20% increase in voter turnout – because people once again believe that their vote will make a difference.
Hedrick also suggested making changes to the corporate tax structure, particularly reducing taxes for corporations that bring jobs here to the United States and raising taxes on those that send jobs away and keep profits overseas. “Last year corporations held $1.7 trillion in corporate profits overseas,” said Hedrick. “Now they want to bring it back, so they are pushing Congress for another ‘tax holiday’.” A tax holiday would allow these corporations to bring their money back from overseas without any penalty. Many of them would immediately buy up shares of their own corporations, forcing stock prices up, and increasing their returns. The people (the government) get nothing out of this.
Income inequality, the fall of the middle class, and the rise of business profits are all related. Our world is very interconnected and what seemed like minor policy changes 30 years ago have turned out to be some of the most damaging. We need to take back our political system and get back to making Congress work for the people, not the corporations.
Hedrick Smith laid out a number of these ideas in his hour-long lecture – but there is so much more in his new book. I recommend that everyone go out a get a copy of ‘Who Stole the American Dream’.