Who Stole the American Dream? (8 page)

HENRY FORD
, the pioneering automaker, was the godfather of a central economic idea that powered the great era of American growth and middle-class prosperity in the 1950s, ’60s, and ’70s, before the New Economy began unraveling the American Dream for millions of average people. Ford’s idea was what economists call “the virtuous circle of growth.”

Henry Ford gave that idea popular currency when he brought out
the famous Model T car and announced in 1914 that he would pay his workers the then unheard-of
wage of $5 a day. Not only was it a matter of social justice, Ford later wrote, but it was smart business. When wages are low, Ford argued, business and the economy are at risk. But when pay is high and steady, Ford reasoned, business is more secure because workers earn enough to be good customers and eventually to be able to afford to buy Model Ts.

That was Ford’s shorthand formula for the analysis of modern economists that high wages paid to tens of millions of middle-class Americans in the postwar era were the engine of economic growth. Good, steady pay, and job security, they say, are the drivers of strong consumer demand, and strong demand stimulates economic growth. Business is moved to expand production and invest in new plants. Each expansion generates a new round of consumer demand. The
virtuous circle keeps on generating growth, unless someone breaks the chain reaction.

With that dynamic at work, the postwar era enjoyed “the best economy America has ever had,” asserted economist Paul Krugman of Princeton. “
It was an economy that seemingly provided jobs for everyone. What’s more those abundant jobs came with wages that were higher than ever, and rising every year. At the bottom end, workers were much better off than they would ever be again….”

People often overlook the critical importance of the mind-set of business leaders to the economic fortunes of the middle class. During the long postwar era of shared prosperity, from the mid-1940s to the mid-1970s, the prevailing ethos of business leaders was radically different from the prevailing mind-set of today’s CEOs, just as Richard Nixon’s “share the wealth” ideas on taxes and on business regulation were radically different from the prevailing philosophy of the Republican Party today.

During the postwar middle-class boom, good corporate leaders
saw a competitive advantage in caring for their workforce. If they wanted to succeed, to expand, and to generate steady profits, they needed to keep well-motivated, high-skilled employees on their payroll, and the key, they felt, was assuring good steady jobs with rising pay and benefits.

No less a figure than Frank Abrams, chairman of Standard Oil of New Jersey, voiced the corporate mantra of “stakeholder capitalism”—namely, balancing the needs and interests of all the stakeholders in the corporate family. “
The job of management,” asserted Abrams, “is to maintain an equitable and working balance among the claims of the various directly affected interest groups … stockholders, employees, customers, and the public at large.”

General Electric’s manager of employee benefits, Earl Willis, explicitly linked corporate success to worker security. “
Maximizing employment security is a prime company goal,” Willis declared. “The employee who can plan his economic future with reasonable certainty is an employer’s most productive asset.”

In a bible for corporate managers in the early 1980s,
In Search of Excellence
, Thomas Peters and Robert Waterman, Jr., preached the virtues of keeping employees on the payroll, even during recessions, a far cry from the mass layoffs and hiring freezes of the 2008 recession and recovery. “Only when we look at excellent companies do we see … full employment policies in time of recession,” they wrote. “
Caring runs in the veins of the managers of these institutions.”

But the anchor of middle-class power during the long postwar period and its most consistent and effective advocate was the American labor movement. Union power played a central role in creating the world’s largest middle class by pushing Corporate America to share the economic gains from rising industrial productivity and efficiency with average Americans. Shared labor-management power delivered shared prosperity.

Organized labor’s impact extended far beyond bread-and-butter gains for its own members. The trade union movement fought for and won the eight-hour day, the five-day week, child labor laws, and labor safety laws. Not only did unions bargain with America’s biggest corporations for a better middle-class standard of living, but the AFL-CIO, the labor federation, vigorously supported consumer activists, environmentalists, and the drive to strengthen regulatory agencies. It backed political candidates—mostly Democrats, but some moderate and liberal Republicans, too—who voted in Congress for a more level economic playing field. What’s more, by establishing a social contract and economic benchmarks that many non-union employers felt compelled to match, labor’s tough bargaining with big business gained higher pay levels and better benefits for non-union workers as well as union members.

With strong governmental support during the New Deal period, labor had become a force to be reckoned with during the era of middle-class prosperity.
Trade union strength had tripled in size, reaching 35 percent of the private sector workforce by the mid-1950s. By the late 1970s, unionization of public as well as private sector employees had tapered off to 27 percent of the total workforce. But that was still an army of twenty-one million, by far the largest organized body of middle-class Americans. Every big industry—autos, steel, construction, food, trucking, textiles, garment making—had big, muscular unions pressing for a better standard of living for average Americans.

As the nation’s premier corporation, General Motors became the prime target of big labor and the pace setter for the rest of U.S. industry. The famous 1950 “Treaty of Detroit” between GM and the United Auto Workers union established and codified the social contract of the long postwar era—the economic sharing between labor and management, workers and owners.

Five years earlier, coming out of wartime wage and price controls, GM and the autoworkers union had clashed in a titanic showdown, with 175,000 workers walking off the job at fifty GM assembly facilities. Walter Reuther, the smart, fiery leader of the United Auto Workers, was demanding a 30 percent pay raise plus health benefits. “Engine” Charlie Wilson, GM’s chief executive, scoffed at those terms and decided to wait out Reuther. The strike lasted 113 days. In the meantime, the United Steelworkers and the United Electrical Workers settled for considerably less in other industries. Reuther had to back down. But labor unrest continued at GM, and Reuther kept pressing General Motors to provide its workers with corporate welfare—steady pay raises plus health benefits and guaranteed retirement pay.

Finally, Wilson tired of industrial warfare and periodic disruptions of GM’s output, and he offered Reuther a grand bargain: shared prosperity for workers in return for labor peace. No more wildcat strikes unpredictably shutting down plants. Reuther seized the moment. The two men reached a monumentally important agreement. GM agreed to give its autoworkers annual pay raises that would increase their living standard roughly 20 percent over five years. It agreed to pay half the cost of worker health insurance. And it promised to provide its longest-term employees with an unprecedented pension of $125 a month. The union eagerly accepted the deal and promised a strike-free contract period. GM got peace on the assembly lines. Hence the name “Treaty of Detroit.”

That contract had sweeping impact all across the nation’s economy. Its escalator provisions set in motion a steadily rising standard of living for the broad American middle class. Because the deal had the imprimatur of General Motors, it had a powerful ripple effect. It was soon matched by other carmakers and then by major companies in other industries. The pattern set in key industries, such as autos and steel, became a model for the rest of big business, even for non-unionized workers. By the early 1960s, as
New York Times
economics writer Steven Greenhouse reported, “
more than half the union contracts in the nation had copycat provisions calling for annual
improvement factors and cost-of-living adjustments…. With labor unions representing one in three workers and threatening to unionize millions more, many nonunion companies adopted a me-too approach, providing cost-of-living adjustments and annual improvement factors, both to keep their workers happy and to keep them from unionizing.”

In Washington, a bipartisan political consensus gave its blessing to sharing America’s wealth democratically and to linking corporate profits to the American Dream of steady work, rising pay, and generous benefits.

In 1959, at the heart of the Cold War, Richard Nixon, as vice president under Dwight Eisenhower, bragged about America’s shared prosperity in his “kitchen debate” with Soviet premier Nikita Khrushchev at the U.S. exhibition in Moscow. Nixon rattled off to his Communist adversary the bounty enjoyed by the American middle class—three-fourths of America’s 44 million families owned their own homes, and collectively they owned 56 million cars, 50 million television sets, and 143 million radios. In a classic rejoinder mocking Soviet claims of a classless Communist society, Nixon taunted Khrushchev: “The United States comes closest to the ideal of prosperity for all in a classless society.”

Nixon was right. To a far greater degree than most Americans today realize, our economic boom in the three decades after World War II delivered solid middle-class prosperity to a large majority of Americans.

Of course, the economy had plenty of problems. There were ups and downs in the business cycle, periodic surges of unemployment, and too much poverty. People lived in smaller homes than today, with fewer appliances and gadgets. Families had one car, not two.
And despite the model of the Treaty of Detroit, there were strikes, occasional violence, and stormy labor-management confrontations.

But the prevailing pattern was one of rising middle-class living standards. Ordinary Americans felt they were getting their fair share of the country’s economic growth, and the numbers confirmed that. The hourly wage of the average worker essentially kept pace with rising productivity. That hourly wage doubled from 1947 to 1973. Those solid earnings and job security gave average workers enough money to spend and, thus, the ability to power another round of economic growth.

Not only did the middle class enjoy solid prosperity, but the economic playing field was far more level than at other times in American history, especially compared with the last three decades. Government policies, especially the tax code, kept incomes more bunched by easing the economic extremes at both ends. Labor laws put a minimum wage floor under the poorest workers at nearly half the average hourly wage, with the result that
the poorest 20 percent of American families experienced income growth over three decades that was as rapid as the richest 20 percent, and so did everyone else in between. In other words, Americans at all income levels moved up together.

The tax system reduced the extreme wealth of the rich—taxing the top bracket at 92 percent under Republican president Dwight Eisenhower, then 77 percent under Democratic president John Kennedy (vs. 35 percent today).

Contrary to claims of anti-tax conservatives today that high taxes are a drag on the economy, the long postwar period from the mid-1940s to the mid-1970s was an era of strong, steady economic growth—much better growth than the past decade with its low tax rates. However plausible it sounds that high taxes on corporations and wealthy individuals cause them to invest less and take fewer
risks, several decades of solid growth in the postwar period offer incontrovertible evidence to the contrary. “
High taxes did not seem to constrain the economy,” observed University of California political economist Robert Reich.

What’s more, with steep progressive tax policies at work, income inequalities between the rich and the middle class in that postwar era were the narrowest on record.
That phenomenon was so striking that economic historians invented a term for the postwar middle-class boom. They call it “the Great Compression”—meaning that differences in incomes and living standards were compressed back then, with Americans from the top to the bottom of the income scale closer together than ever before or since.

In short, middle-class power, exercised through grassroots movements, through trade union collective bargaining, and through government policies, produced the most democratically shared prosperity in our history—an unparalleled achievement.

“The Great Compression succeeded in equalizing incomes for a long period—more than thirty years,” reported economist Paul Krugman. “And the era of equality was also a
time of unprecedented prosperity, which we have never been able to recapture.”

IN THE LATE
1990s, Al Dunlap was riding the crest of the New Economy, proud of the fortune he’d made at a string of troubled companies such as Scott Paper and Sunbeam. Dunlap exemplified the New Economy breed of CEOs who had emerged in the 1980s and who came to dominate the corporate landscape in the 1990s.

These new business leaders had shed the old philosophy of stakeholder capitalism, where a CEO tried to balance the competing interests of management, employees, and investors and to share the wealth. The new breed chose instead to focus on maximizing returns to shareholders. The interests of employees were subordinated to the goal of delivering gains for wealthy investors.

By the late 1990s, Dunlap was known on Wall Street as a serial downsizer whose mere appearance as CEO of a troubled company would make its stock price shoot up as investors anticipated savings from his drastic cutbacks. And Wall Street had rewarded him richly.

So Dunlap was touring me around his $2 million Florida mansion, showing me his pride and joy—just off his richly furnished living room, with an outdoor pool visible through French doors. His pièce de résistance was a walk-in, temperature-controlled, cedar-paneled wine cellar, fully stocked.

Cases of wine were carefully cradled in floor-to-ceiling racks—all of it world-class vintages, Dunlap assured me. He pulled out a chilled bottle of premier French champagne for me to admire. “
If you’re gonna splurge,” he said, beaming, “Dom Pérignon!”

Dunlap’s office at Sunbeam and the company’s executive suites, like his home, were decorated with portraits, statues, and hunting lodge mountings of lions, tigers, and sharks, the Darwinian kings of the jungle and the sea.

“I’m a great believer in predators,” Dunlap said, “because a predator has to go get its own lunch. It can never call for room service. So I think anybody that has the ability to provide for themselves, it’s a good thing. So you’ll see predators throughout the office.”