Who Stole the American Dream?

by Hedrick Smith

  The 1990s Corporate Killers

  Some in the business community would like to dismiss Al Dunlap as an aberration—an extreme downsizer. But while it is true that Dunlap overplayed his hand at Sunbeam and that his Rambo posturing offended some CEOs, other corporate chiefs wielded the ax much as Dunlap did—and often more brutally.

  “Once upon a time, it was a mark of shame to fire your workers en masse. It meant you had messed up your business,” Newsweek’s business columnist Allan Sloan commented in early 1996. “Today, the more people a company fires, the more Wall Street loves it, and the higher its stock price goes.”

  In a cover story titled “The Hit Men,” Newsweek listed the big guns of corporate cost cutting in 1990. They represented some of America’s most profitable blue-chip companies: IBM CEO Lou Gerstner with 60,000 layoffs; Sears, Roebuck CEO Ed Brennan with 50,000 layoffs; AT&T CEO Robert Allen with 40,000 layoffs; Boeing CEO Frank Shrontz with 28,000 layoffs; Digital Equipment CEO Robert Palmer with 20,000 layoffs; and General Motors CEO Robert Stempel with 74,000 layoffs.

  By the mid-1990s, structural layoffs—not temporary layoffs, but jobs that would never come back—were a fixture of America’s economic landscape. What caught Newsweek’s eye in its 1996 cover story was that large-scale firings had moved from the factory floor to the office suites of white-collar professionals and middle managers at firms such as IBM and Chase Manhattan Bank.

  The Gold Standard: Jack Welch

  Probably more than any other U.S. business leader in the past three decades, Jack Welch, who headed General Electric from 1981 to 2001, personified the Darwinian New Economy CEO. BusinessWeek called Welch “the gold standard against which other CEOs are measured,” and Fortune named him “the Ultimate Manager” of the twentieth century. Welch gained that reputation by drastically streamlining General Electric, imposing change from within, and boosting its stock price.

  Welch’s hallmark was downsizing—slashing 130,000 jobs, 25 percent of GE’s workforce. He claimed that saved GE $6.5 billion. Welch not only cut rank-and-file employees on the shop floor and in the back office, but made a point every year of firing GE managers rated in the bottom 10 percent by their bosses. Welch’s demanding, abrasive management style was legendary, Fortune reported, and he ran meetings “so aggressively that people tremble. He attacks almost physically with his intellect—criticizing, demeaning, ridiculing, humiliating.” As one executive put it, “Working for him is like a war—a lot of people get shot up.”

  These tactics made Welch a personal fortune. In one year alone, his final year running GE in 2000, Welch collected $123 million in pay, bonuses, stock, and stock options, plus the guarantee of roughly $2 million a year in perks, lifetime use of a Manhattan apartment (including food, wine, and laundry), access to corporate jets, and a range of other in-kind benefits. All this luxury at stockholder expense for a man so ruthless in cutting GE employees that he was nicknamed “Neutron Jack,” for the modern weapon that kills people but leaves buildings standing.

  Welch was unabashed in rejecting the employee-friendly legacy of the earlier generation of GE executives, including his widely respected predecessor as CEO, Reginald Jones, who talked of loyal employees as the company’s most prized asset. Welch scoffed at the 1950s and ’60s mantra that loyalty was the vital ingredient for high corporate performance. “Loyalty to a company, it’s nonsense,” Welch snorted. “If loyalty means that this company will ignore poor performance, then loyalty is off the table.”

  Payoff for CEOs

  The payoffs for the captains of U.S. industry from wedge economics has been enormous. Average CEO pay has soared since the 1980s compared with earlier, more successful periods of American capitalism. In the 1970s, the Federal Reserve reported that chief executives at 102 major companies were paid $1.2 million on average, adjusted for inflation, or roughly 40 times an average full-time worker’s pay. But by the early 2000s, CEOs at big companies had enjoyed such a meteoric rise that their average compensation topped $9 million a year, or 367 times the pay of the average worker. At Wal-Mart, which bills itself as the friend of the struggling middle class and the working poor, former CEO Lee Scott was paid $17.5 million in 2005, or roughly 900 times the average pay and benefits of the typical Wal-Mart worker.

  With America’s changing political climate and the rising influence of pro-business conservatism, CEOs went from being under fire in the 1960s and 1970s, as Lewis Powell observed, to being lionized as superstars in the 1990s and 2000s, supposedly entitling them to pay on a par with Hollywood celebrities and star athletes.

  Paul Volcker: The Lake Wobegon Syndrome

  CEOs and their corporate boards boldly argued that rising CEO pay was merited because CEOs increased shareholder value; moreover, they said, the rise was dictated by the invisible hand of the market. Shareholder activists and scholars dispute this. Princeton economist Paul Krugman suggested that the seedbed for CEO fortunes was the cozy fraternity inside corporate boards of directors. “The key reason executives are paid so much now is that they appoint the members of the corporate board that determines their compensation …,” Krugman said. “So it’s not the invisible hand of the market that leads to those monumental executive incomes; it’s the invisible handshake in the boardroom.”

  As Krugman was suggesting, a large proportion of corporate board members in recent decades have been other CEOs, former CEOs, or business colleagues with ties to the CEO whose pay they were setting. In one poll of 350 corporations over a fifteen-year period, CEOs said they considered one-third of board directors as their “friends,” not just acquaintances, and an even higher proportion—50 percent—of the compensation committee members as “friends.” In short, corporate boards are a club, and CEOs as a group have been ratcheting up their own collective pay scales.

  Somewhat puckishly, former Federal Reserve Board chairman Paul Volcker suggested that this was “the Lake Wobegon syndrome” at work, alluding to humorist Garrison Keillor’s fictional town where “all the women are strong, all the men are good looking, and all the children are above average.” As Volcker quipped to Congress, “Everybody wants to be in the top quintile.”

  In short, every company believes its CEO deserves higher pay than his peers. No company wants to give its CEO below average pay, because as Harvard Business School professors Jay Lorsch and Rakesh Khurana put it, “that would imply that the board of the company … believe its performance is below average.” In fact, corporate boards, forced by the SEC to disclose how they set pay, have admitted that “peer” comparisons drive CEO pay, and they typically assume their CEO is “above average” and deserves to keep ahead of the pack. Moreover, some companies stack peer comparisons by matching themselves against bigger companies with higher CEO pay.

  It irks some former CEOs that peer benchmarking has become more important in setting CEO pay than a company’s performance, which is supposed to be the yardstick—pay for performance. DuPont CEO Edward S. Woolard, Jr., said that corporate boards keep pushing up their CEOs’ pay “because they think it makes the company look strong. So when Tom, Dick, and Harry receive compensation increases,… I get one, too, even if I had a bad year,” with the result that CEO pay spirals ever upward.

  The New CEO Mind-Set

  In sum, what lies behind the widening gulf between CEOs and middle-class employees in the New Economy is not only changes in the marketplace, but a fundamental shift in the collective attitudes of American CEOs, the corporate ethos that sets the norms for what constitutes fair and reasonable pay for CEOs and for employees.

  America’s business leaders have a different explanation. They tell us that the meteoric rise in CEO pay and the wage freezes and job cutbacks of the 1990s and 2000s that have cost average Americans so dearly reflect impersonal market forces, emerging new technologies, and the pressures of low-cost global competition. And while it is undeniable that technological change and globalization have forced major changes, that is at best only part of the story. The American business
response to those challenges created a more Darwinian form of capitalism than elsewhere.

  Those same forces of change have swept through other advanced countries, such as Germany, Japan, France, Australia, and Scandinavian Europe, yet the Organisation for Economic Co-operation and Development (OECD) reported in 2011 that none of those countries shows the huge disparities in income between the executive class and rank-and-file employees that have developed in the United States.

  So disproportionate has America’s ratio of incomes become that in late 2011, the OECD ranked the United States thirty-first—fourth from the bottom—among its thirty-four member countries. Only Mexico, Chile, and Turkey did worse. All of the advanced countries of Europe and Asia—the ones whose economies were most affected by globalization and new technology—rank better than America in sharing the wealth. So globalization and technology do not explain the U.S. wealth gap.

  Something happened in the United States that was different—a new CEO mind-set. Middle-income Americans, from the assembly line workers to bank tellers, have largely been victims of a U-turn in the ethos of U.S. business leaders.

  By the mid-1990s, most CEOs had junked the Old Economy notion that the destinies of labor and management should be linked and that they should share roughly equally in economic and productivity gains. They had torn up the old social contract embodied in the Treaty of Detroit between GM and the United Auto Workers. They had turned their backs on the Great Compression concept of shared prosperity, on the idea of the virtuous circle of growth. Instead, New Economy CEOs were guided by the cold calculus of corporate downsizing and offshoring, a calculus that is guided by one yardstick—short-term profits.

  No Countervailing Power

  Corporate leaders like Al Dunlap and Jack Welch were able largely to dictate the terms of work and pay to their employees because economic power had shifted so dramatically in favor of management against labor by the 1980s and 1990s. Unlike CEOs in other advanced countries, American CEOs have faced no serious countervailing power to their claim for a growing personal share of company profits.

  Inside the corporate family, CEOs and corporate boards have fairly consistently denied shareholders a meaningful role in setting executive pay. With rare exceptions, such as shareholder disapproval of the $15 million pay package of Citigroup CEO Vikram Pandit in April 2012, corporate boards have mostly ignored or rebuffed shareholders’ views on the issue of CEO pay. For all their proclamations about serving shareholders, business leaders and organizations like the Business Roundtable and the U.S. Chamber of Commerce have lobbied repeatedly against bills in Congress that have sought to give real power to shareholders by making their votes on company proxies legally binding. Even though the financial reform bill passed in 2010 contained a requirement for shareholder votes on executive pay, business lobbyists succeeded in watering down that measure so that the shareholder votes were not binding, but only advisory to corporate boards.

  More broadly, the American trade union movement has been in retreat since the 1970s and has increasingly had to bow to terms set by management. Union membership has declined from 27 percent of the private sector labor force in 1979 to roughly 7 percent today. The nation’s most powerful unions in the auto, steel, electrical, and rubber industries saw hundreds of thousands of their jobs exported overseas, massively shrinking their rolls. “Right to work” states in the Sun Belt lured industrial plants to move from the pro-union North and Midwest to the anti-union South, with the promise of laws, regulations, and regional attitudes that were often hostile to union organizing.

  Some corporate leaders became aggressive union busters, fighting to weaken and decertify unions, sometimes illegally harassing labor organizers. The number of illegally fired workers ordered reinstated by the National Labor Relations Board more than tripled from 1970 to 1980. Unions were hurt, too, by determined anti-union campaigns of big employers like Wal-Mart. Republican administrations, in power twenty of the past thirty-two years, have been unfriendly to unions, and over this same period, Supreme Court decisions have increasingly sided with business.

  These trends have left not only union members, but the middle class in general without a voice with sufficient clout to negotiate for moderate, gradual adjustments to technology and globalization rather than instant slashing by Corporate America.

  “The Scariest S.O.B. on Wall Street”

  The voice heard and heeded most by business leaders since the 1980s has been that of Wall Street. Big-time investors and Wall Street money managers like Michael Price, who put Al Dunlap in charge of Sunbeam, emerged in the 1990s as the “terrors” of the corporate boardroom, as Fortune put it. In a cover story reporting on the power of money managers, Fortune ran a close-up photo of Price captioned “The Scariest S.O.B. on Wall Street.”

  In Wall Street’s new pressure-cooker atmosphere, corporate leaders have been under the gun to shift their sights away from the solid, steady strategies of building long-term value to hot performance in a hurry, and some at the epicenter of the Wall Street maelstrom have worried about its long-term consequences for the middle class.

  Stephen Roach of Morgan Stanley investment bank commented that in the late 1990s, the United States was experiencing an enormous—though unrecognized—shift of wealth from middle-class employees of big U.S. companies to the shareholders, mostly the affluent and the super-rich.

  “If I were to describe the new rules of the ’90s, it would really probably start and finish with the power of the financial markets … to really control the destiny, the strategy of the corporation,” Roach told me. “Shareholders get rewarded beyond their wildest dreams, but there’s a cost—through stagnant wages, through downsizing and layoffs, through widening inequalities. Capital wins but at a cost…. The 1990s is the ultimate triumph of shareholders around the world. The worker is pretty much a pawn in the process.”

  That was how the New Economy worked—the middle class got squeezed.

  CHAPTER 6

  THE STOLEN DREAM

  FROM MIDDLE-CLASS TO THE NEW POOR

  The view that America is the “land of opportunity” doesn’t entirely square with the facts.

  —ISABEL V. SAWHILL,

  economist, Brookings Institution

  America has entered the age of the contingent or temporary worker, of the consultant and subcontractor, of the just-in-time work force—fluid, flexible, disposable. This is the future. Its message is this: You are on your own…. This is the new metaphysics of work. Companies are portable, workers are throwaway.

  —LANCE MORROW,

  Time magazine

  The biggest failure that I’ve had and that Congress has had … is the failure to slow the transfer of income up the income scale, which has left this a two-tiered society…. The economic elite of this country has performed the biggest rip-off of the middle class in the history of the universe.

  —FORMER REPRESENTATIVE DAVID OBEY,

  Wisconsin Democrat

  THE WORLD OF OPPORTUNITIES that greeted Pam Scholl coming out of high school in Chillicothe, Ohio, in 1971 was a universe apart from the tough economic world that lies in wait for average high school graduates today.

  On the Monday after graduation, Pam went to work full-time for the RCA television tube plant that was opening in nearby Circleville. Pam was a well-organized, gregarious teenager, a five-foot-five bundle of energy with a quick smile. In her senior year, she had worked half-time for RCA as a co-op secretarial student. After her graduation, RCA hired Pam for human relations to help build a workforce that grew to fifteen hundred.

  “I got $1.75 an hour,” Pam recalled. “I didn’t have a car my first year. But about a year later, I bought me a Vega, a new little brown Chevrolet. It was cheap—$2,500. My car payment was $50 a month and I could fill it up for $5, and run two weeks on that. I thought I was hot. I had a new car and I had a job. I was in HR and I met all the guys.”

  One guy she helped was her classmate Mike Hughes. One Sunday afternoon, Pam tipped Mike o
ff to apply for a job the next day. “Mike came in, he took a test and got hired,” she said. “We took just about anybody who was healthy and could lift things.”

  Living The American Dream: 1970s–2000

  “The early seventies were a good time around here,” remembered Roy Wunsch, for thirty-five years a chemical engineer at the local DuPont plant and, later, the Republican mayor of Circleville. “Living standards were going up. Everyone was growing or expanding—all the local plants.” High school graduates were in demand.

  Circleville (pop: 12,000) calls itself “the Pumpkin Capital of the World.” It lies at the heart of the Pickaway Plains, the rich farmlands of south-central Ohio honed smooth by prehistoric glaciers. But despite its small-town façade, Circleville was a magnet for brand-name U.S. corporations because it was close to major transportation arteries. RCA, DuPont, General Electric, Pittsburgh Plate Glass, Owens-Illinois, and Container Corporation all had factories there. Purina processed the local crops.