Your Call Is Important To Us (8 page)

This increase in participation meant that there was more money frolicking in the market than ever before. According to the SEC’s delightful primer, “The Facts on Saving and Investing,” mutual fund assets alone expanded from $135 billion in 1980 to a staggering $5.6 trillion in 1999. There was way more money in the market than in bank deposits, which stood at $3.7 trillion. More people were interested in spending or investing than they were in doing anything so hopelessly retro as simply saving their money, even though, as “The Facts” repeatedly notes, the vast majority of American investors remained fiscal illiterates. In September 1998, when savings should have been gangbusters on account of everyone doing so well, the personal savings rate was negative for the first time since the Dirty Thirties. For every 100 bucks an American made, he blew that and another 20 cents to boot.

Which brings us to debt. Three-quarters of American households—only slightly more than a decade earlier—carried debt, but their
level
of indebtedness rose sharply. If you made anything less than a hundred grand a year, you could expect debts to eat up approximately 17 to 19 percent of your pretax household income. According to a 2001 study by the Pew Research Center, 28 percent of Americans said they owed more than they could afford to pay back, up from 21 percent in 1992. Bankruptcies have continued to climb, even though Congress passed far stricter—which is to say, more bank-friendly—legislation in 1997. There are at least a million a year, even under the tough new rules. In fact, 2003 was a record-breaking year for bankruptcies in the U.S., with 1,650,279 filings.

Consider one specific type of debt: margin debt, money people borrow to play the markets. People weren’t just trading their kids’ school money, or their retirement funds, during the boom; they were also borrowing to trade. In fact, margin debt was the fastest-growing type of debt in the U.S. from 1993 to 2000. Household and credit debt grew about 60 percent, but margin debt grew six times faster than that, increasing by 362 percent. Hovering below $50 billion until the end of the eighties, it had swollen to $283.5 billion by the turn of the millennium. In January 2000, margin debt comprised 1.4 percent of the value of the stock market—worse than the 1.3 percent just before the crash of 1987. In fact, this is comparable to the margin debt rates before the Securities Act of 1934 was written to regulate borrowing to buy stock and discourage the kind of speculative gambling that caused the 1929 crash.

The increases in market participation and the growth of margin debt are examples of a collective turn away from the actual economy of production and consumption, toward the speculation and fluctuations of the market. Capital rushed into, and then out of, an irrationally exuberant casino economy. When the boom went bust, the biggest losses were in the sectors that were the objects of the most fervent hype, like the tech sector and megacapitalized stocks. While new technologies like the Internet have helped to increase productivity and open up new markets, plenty of tech IPOs were eventually revealed to be little more than Ponzi schemes wrapped in PR. People who got in on Microsoft may have been rewarded several dividends over for their tech savvy, but there is only one Microsoft, and Microsoft has done everything in its considerable powers to ensure that there will only ever be one Microsoft. There are many Pet.coms and lesser WorldComs.

Another sign of this turn away from production toward speculation, from the factory to the casino, are the elephantine bonuses awarded to CEOs throughout the boom. The practice of granting stock options in the company was proposed as a way to ensure that the CEO would act in the interests of that company. By becoming a sort of übershareholder, the CEO would better serve the interests of shareholders. This theory addresses Adam Smith’s criticism of the joint stock company, that its holders did not have the same level of interest in the company’s welfare as a sole proprietor did. But by the end of the boom it was clear that this ostensible bond between the shareholders and the CEO had almost entirely eclipsed the companies themselves and, by extension, the employees who worked for them. CEO pay didn’t just get fat; stock options and other bonuses made pay packages morbidly obese. In 1980, CEOs made 42 times the average worker’s pay; by 1990, it had doubled; by 2000, their compensation had increased to 531 times the average salary. The nice people at the AFL-CIO have a calculator on their website that allows you to plug in your own meager 1996 wages and give yourself a CEO-style raise. Try it with a piffling $25,000, and you end up with almost six figures. Now try it with a wage that started at 85 times the average, and the resulting strings of digits will blow your proletarian mind. And, as was revealed in the cascade of corporate scandals, many of these big fat CEO bonuses and options remained off the company’s books, making for a rosier and rounder bottom line, bloated stock prices, and further engorgement of the bonuses.

The argument that defenders of inordinate CEO pay make is that you have to pay the big bucks to get the big boys. A top-performing CEO, like Michaels Jackson and Jordan, is a superstar, and should be remunerated as such. The problem with this argument is that it is difficult to draw any direct correlation between CEO pay and actual performance. If either of the Michaels, Jackson or Jordan, can no longer put the bums in seats, then it’s au revoir to the fat checks. Jackson is a good case of this. Now that he is synonymous with noselessness and molestation allegations, his career has evaporated. The boardroom lacks even this modicum of rough justice. There are all too many cases where a CEO screws his company six ways to Sunday and still pulls down the big bucks. The kleptocrats of Enron and WorldCom are the most egregious examples, but the phenomenon is widespread in more legitimate enterprises as well. A report produced by the advocacy group United for a Fair Economy tracked the stock performance of companies with top-paid CEOs over a period of seven years, and its findings give the lie to the link between CEO pay and stock performance. For example, if you invested in Disney the year that Michael Eisner topped the pay charts, your investment actually eroded over the next year. If you kept reinvesting that money in companies represented by each year’s best-paid CEO, your investment continued to decline. According to the United for a Fair Economy estimates, an initial investment of $10,000 in companies with the highest-paid CEOs, would have dwindled to a mere $3,500 over the course of the late nineties. Conversely, the same 10,000 clams, invested in the S&P 500 index of stocks over the same period of time, would have grown to about $32,000.

The pay-for-performance argument also loses some force when you check out the severance packages awarded to outgoing CEOs. After years of overly ambitious, terribly expensive expansion in foreign markets, a high-profile, multimillion-dollar racial discrimination lawsuit, reports of contaminated Coke from European bottlers, and a couple of consecutive quarters of net losses, Coca-Cola CEO Douglas Ivester hit the road with a cool 120 million bucks in his back pocket. My favorite quote from the book of Ivester is his devil-may-care response to the European reports of contaminated Coke: “Where the fuck is Belgium?” Coke stocks finally rebounded when Doug Daft, his successor, took the helm in 2000, but not just because Doug the First took a powder; as soon as Daft was hired, he organized a massive restructuring plan, which is, of course, corporatese for firing, and lots of it. Daft sacked 20 percent of Coke’s payroll the month after he was hired. Nobody mourned the passing of the age of Doug the First. In fact, a middle manager culled in the bulk firings said, “The mood is pretty lousy, but this shake-up was long overdue.” Stockholm syndrome is one way of coping with a pink slip.

The truly disturbing thing about the Coke case is that it is the rule, not the exception. The CEOs with the five fattest paychecks in 1999 all fired more than a thousand people, or at least 5 percent of their employees. Since labor is generally the largest fixed cost for any corporation, CEOs discovered that they could achieve a nice little bounce in their stock prices, and consequently their bonuses, by downsizing aggressively. The speculative economy, once a way of raising capital for productive ventures, began cannibalizing the productive economy.

In the business press, the phrase
a commitment to productivity
has gradually come to mean a commitment to getting rid of the people who produce things. As GE CEO “Neutron” Jack Welch once said, “Strong managers who make tough decisions to cut jobs provide the only job security in today’s world.” It’s not just that people like Welch are willing to slash hundreds of thousands of jobs, export work to countries with nineteenth-century labor laws, and destroy years of union advocacy for well-paid work. They also have the nerve to insist that getting rid of good jobs somehow magically creates job security. If Jack Welch was your boss, how secure would you feel knowing that the grand poobah has nary a qualm about firing tens of thousands of people at a shot? Nevertheless, the business press hails him as a managerial genius, and credits him with GE’s phenomenal market growth.

When I first began writing this book, Jack Welch was riding high, with an autobiography,
Straight from the Gut,
on the
New York Times
best-seller list. Granted, he did retire from GE earlier than planned, in September of 2001, after European regulators refused to allow GE to acquire Honeywell, but his retirement elicited heaps of laudatory eulogies. Since then, though, GE has been accused of using overly aggressive accounting measures under Welch’s reign. He also went through a highly publicized divorce in the wake of his highly publicized affair with a former editor from the
Harvard Business Review.
She went to interview him for a profile, and the rest, as they say, is adultery. Though Jack and Jane Welch reached an out-of-court settlement before their divorce went to trial, the court papers provided the press with another peek at the lavish world of CEO perks. After he retired, Welch still had the use of an $80,000-per-month apartment in Manhattan, where his needs for food, flowers, laundry, and wine were tended to by GE. Welch also had the use of company luxury vehicles, season tickets to sporting events, and jaunts on the company Gulfstream. Bear in mind that when Mr. Welch left GE, his personal fortune was an estimated $900 million. I think the dude can spring for his own roses, but these sorts of perks are de rigueur for the imperial CEO, and evidence that we live in an Oscar gift bag world, where those who have the most get the most for free.

The fact that there is a direct correlation between mass firings and gross prosperity for the fortunate few is not just unfair, is not merely bullshit; it’s also unsustainable. There is no cost savings to the company when you follow up your mega-downsizing with obscene bonuses for the people on top. Instead of giving the millions to hundreds of people, to spread around their respective communities, this gives those same millions to a handful of old white guys who already have millions. Down at the economic bottom, job security becomes a distant memory, an artifact or antique. Nobody expects to sign up at Imperial Widgets and stay until retirement with a gold watch and a decent pension anymore. The manufacturing sector in North America has been eviscerated because capital can pull up stakes, relocate to the Third World to sun itself, excrete wherever it pleases, and pay desperately poor people pennies a day to produce the glorious things we so desperately crave.

The death of manufacturing has problematic side effects, inasmuch as manufacturing jobs have a higher economic multiplier effect than the low-paid grunt work of the service industry. The biggest employers in the U.S. used to be manufacturing concerns, like the old GE, which paid people a living wage. Now the biggest bosses are Manpower, provider of temp employment to the masses, and Wal-Mart. And even though the smocks that Wal-Mart employees wear proudly proclaim that “Our People Make the Difference!”, the nice people who work there receive wages just above the legal minimum. Moreover, the behemoths of the service sector are notorious for defining a “full-time” work week as twenty-eight to thirty-five hours, thus disqualifying their employees for goodies that were the rule in old-school manufacturing jobs, like benefits and health coverage. This means some people need to get two shitty jobs, and work fifty or sixty hours a week, to try to approximate a living wage. Herd someone out of their forty hours a week at twenty dollars an hour, and into sixty hours at six bucks an hour, and voilà—increased productivity!

When I was a kid, I had a revelation about that most economical of family entertainments, the board game Monopoly. I realized that they sold packages of Monopoly money at the mall near my house. My brother finally figured out my cunning little scheme after a couple of devastating losses to the Billionaire of Baltic Place. Cheating?
Moi? Au contraire, mon frère!
It takes money to make money, and I had merely invested the capital of my allowance in a speculative venture. Similarly, the CEOs of the boom realized that they were sitting on tons of money in worker pay, money that could be transformed, miraculously, into profits, by cutting labor costs. But firing people to boost a profit margin doesn’t make a CEO a “top performer” any more than an extra pack of brightly colored bills makes me a Monopoly champ.

Stock ideally represents a share of a company’s assets and profits. But the fact that stock rises—and its owners along with it—in the wake of mass firings says more about what corporations consider an asset than a million mealymouthed Human Resources brochures and Wal-Mart smocks. Incomes might have increased over the past twenty years, but real wages for average workers have held steady or declined. The so-called boom served only to exacerbate income inequality trends that have been at work in North America since the eighties. Between 1979 and 2000, the income growth for those in the top 1 percent of income earners increased by 201 percent, while those in the middle quintile enjoyed an increase of 15 percent, and the lowest quintile made a paltry 8 percent gain. Bragging about a substantive increase in the U.S. median income is a case of lies, damned lies, and statistics. When you add up the wildly inflated incomes of the wealthiest percentiles, and everyone else, you get averages that sound nice, but that fail to account for the growing disparity in income. Factor in increased costs for necessities like housing, health care, and education, and the situation looks even grimmer.