A recap of Hedrick Smith’s CWA presentation
We must make our choice. We may have democracy, or we may have wealth concentrated in the hands of a few, but we can’t have both.
— Louis Brandeis (Supreme Court Justice from 1916 to 1939)
Hedrick Smith, a Pulitzer Prize winning author, and former New York Times reporter and editor gave the keynote speech this year at the 65th Annual Conference on World Affairs at the University of Colorado. In response to a question from a very young audience member, Smith summed up the biggest problem in the US as the unequal distribution of wealth and its influence on politics. He explained that this wasn’t always the case in this country, providing several examples of how dramatically different our economy and political situation are today than during the decades following World War II.
Income tax rates are a case in point, with the top marginal tax bracket dropping from 92% during Eisenhower’s administration, to 77% under Kennedy to 35% the past few years. This lowering of the top tax rate added trillions of dollars in savings for the wealthiest members of our society.
Secondly, wage earners are receiving a shrinking share of the pie. In the first three decades of the post-war era, productivity in the US grew 97% while the median income of American households grew 95%, meaning the average worker was sharing proportionately in economic growth. But from 1975 to 2011, when US productivity rose an additional 80%, median household income increased only 10%.
A third example of rising economic inequality is CEO pay. In 1950, Charlie Wilson, the president of General Motors, ran the largest company and was the highest paid executive in the country. He made a little over $600,000 a year ($5 million in today’s dollars), which was about 40 times the pay of the average assembly line worker at that time. Today the average CEO compensation at major corporations is $14 million a year, with the biggest payday (mostly from exercising stock options) reaching $700 million (for Oracle’s Larry Ellison in 2001). CEO pay now averages about 380 times the compensation of the average employee.
It was once considered best practice to pay workers well. In addition to attracting and keeping talent, it was widely believed that this contributed to a virtuous cycle of economic growth. Business leaders embraced the concept that they had a “sacred trust” to balance the interests of all the stakeholders of a corporation. Smith described this era as “capitalism at its best”.
This approach later gave way to the philosophy embodied by Nobel prize winning economist Milton Friedman who wrote in 1982 that “There is one and only one social responsibility of business — to use its resources and engage in activities designed to increase its profits.”
According to Smith, we have moved from an era of widely shared prosperity and bipartisan politics, to a period of highly concentrated wealth and political gridlock among increasingly extreme factions (for which he blames gerrymandering). We have also gone through a financially engineered housing crisis during which American homeowners lost a massive $6 trillion, or about 30% of the value of their homes. And we are living in the shadow of Citizens United, a time when corporations are citizens, and money has a disproportionate impact on elections.
How did this happen? Who stole the American dream?
Smith traces the roots of the change to a memorandum written in 1971 by Louis Powell, a high profile corporate attorney who would soon become a justice to the Supreme Court. During the years immediately preceding this event, the middle class was a potent political force. A number of popular campaigns were very effective. These included the civil rights, labor, consumer, women’s and environmental movements. In 1970, 10% of the US population participated in the first Earth Day celebration, and related protests about the condition of our air and water, and in the next year, seven pieces of major environmental legislation were passed, and signed in to law by “that great tree hugger” Richard Nixon. We had a workable democracy, a connection between Washington and the people. But that would soon change.
The Powell Memorandum, circulated privately to top corporate executives, argued that it was time for American business to be far more aggressive than in the past in terms of vigorously lobbying on its own behalf. This message fell on fertile ground. Business went on the offensive. One hundred and fifty of the largest US corporations joined together to form the Business Roundtable, the most powerful commercial lobbying force in America. The National Chamber of Commerce doubled its staff and tripled its budget.
In 1971 there were 175 companies with lobbying offices in Washington. By 1980, that number rose to over 2,400, and the number of registered lobbyists jumped to 9,000, or 130 for every member of Congress. Today there are 12,000 corporate lobbyists, compared to 400 for labor and 200 for consumers.
The focus of American business shifted to maximizing shareholder wealth, and that wealth became ever more concentrated. Between 1978 and 2011, while average CEO pay rose 350% to 400%, the average male worker actually saw his compensation decline slightly when adjusted for inflation. In 1980, at companies with over 100 people on the payroll, 84% of employees had lifetime pensions and 70% had health insurance policies fully paid by their employers. Now those rates have dropped to 30% and 18%, respectively.
A major power shift, from the middle class to the wealthy, was underway. The results began to manifest most dramatically during the Congress of 1978-79, which introduced the 401k (leading to the end of most lifetime pensions), weakened labor unions, lifted interest rate ceilings, and dramatically cut taxes on the wealthy. The capital gains tax rate was lowered from 48% to 28% (50% of capital gains are realized by those with incomes in the top 1%), and corporate tax rates also were reduced. This was all during the Carter administration. It wasn’t until 1981 that the better known Reagan tax cuts initially took hold, which were followed in 2001 and 2003 by the even deeper Bush tax cuts, which were only allowed to expire, in part, at the end of last year.
Instead of the virtuous cycle, we now have what Smith refers to as “wedge economics”. He warns that prior periods of great wealth concentration in the US, specifically the 1880’s and the 1920’s, were each followed by economic depressions.
While as a journalist, he prefers to “just call balls and strikes”, i.e. to report the facts, in his new book, Who Stole the American Dream, he does lay out a 10 point plan for how to turn the country around. The statistics cited above are all from his presentation.
Steve Ellis is enjoying a stint as an emerging freelance reporter. In real life, he is the founder and president of Colorado Capital Management.