From fast food worker strikes to the SeaTac minimum wage initiative, stagnant wages and rising income inequality have grabbed headlines this year. But getting to the heart of why the middle class is struggling while the top 1 percent continues to prosper is complicated.
Former New York Times reporter Hedrick Smith sets out to provide answers in his book, "Who Stole the American Dream." He’s speaking Thursday evening at the University of Washington Tacoma.
Smith says the seeds were sown back in August 1971, when a lawyer named Lewis Powell penned a little-known memo for the U.S. Chamber of Commerce that became a call to arms for business leaders. President Richard Nixon nominated Powell as a justice on the U.S. Supreme Court in 1972.
"Basically what he said was, 'You're getting killed by the consumer movement, by the labor movement, by the environmental movement, by all these movements hemming in American business and pushing for more regulation of business, and you need to fight back,'" Smith said. "And what's surprising is the business leaders responded incredibly."
Smith says at the time Powell wrote his memo, there were only 175 companies that had even offices in Washington, D.C. Within eight years, that number had ballooned to 2,425. The number of registered corporate lobbyists jumped to 9,000.
"They became powerful and began to defeat the things that had been promoting a widely shared prosperity when the middle class was doing much better in the 40s, 50s, 60s and 70s," Smith said. He says businesses pushed for—and won—big reductions in the corporate tax rate and deregulation.
'Stakeholder' vs. 'Shareholder' Capitalism
But Smith says another thing that changed was the mindset of the top executives of American businesses. He says they used to practice a policy of "stakeholder capitalism" in which executives protect the interests of everyone with a stake in the business—from employees to customers, to shareholders, to management.
He says businesses began to abandon that outlook in favor of "shareholder capitalism" in which the interests of shareholders are most important.
"When you go after maximizing shareholder value, you start imposing wage freezes, you start moving jobs overseas, and under the new system, with sharp divisions and great inequality of income, you have slow growth," Smith said.
Smith concedes that businesses have had to respond to some dramatic shifts in the broader economy, from globalization to automation. But he points to Germany as an example of a different approach. He says German companies have continued to practice stakeholder capitalism and workers there have benefited.
German Example
"German workers have had pay increases over the last 25 years that are five times more than American workers," Smith said. "Now, if it were true that it was globalization and automation and technology that dictated the policies and strategies that American businesses and American multinationals have adopted, then Germany should be busted. What's interesting is exactly the opposite is true."
He says from 2000 to 2010, America's trade deficit was $6 trillion.
"That is, when we went out to compete with the world, we did so badly, we had to buy $6 trillion more stuff than we sold to the world," Smith said. "At the same time, Germany had a $2 trillion trade surplus."
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