Story by Andrew Edwards
“Today we are two Americas … We are divided by money and we are divided by power,” said Pulitzer Prize-winning author Hedrick Smith at a Nov. 19 lecture at Whatcom Community College.
Smith, a former reporter and editor for the New York Times, came to Whatcom to discuss his newest book “Who stole the American Dream?” The book examines the growing inequality between rich and poor in the U.S. and ongoing events that have contributed to the shrinking of the American middle class.
Smith said he started writing the book in 2009 in the wake of a financial crisis caused by a large wave of home foreclosures.
While financial institutions lost massive amounts of money in this crisis, Smith said the real victims of the crisis were average American families, who lost roughly $6 billion as a result.
By the end of the financial crisis in 2009, Smith said only 40 percent of homes in the U.S. were owned by American citizens, but in the late ‘80s that number was at 70 percent. This represented a 30 percent shift in home ownership from individual Americans to banks, the largest shift in American history, Smith said.
“It seemed to me there was more wider prosperity when I got out of college” in the ‘50s, Smith said. He added that from the end of World War II to the ‘70s, American productivity doubled and the middle class prospered.
Through writing his most recent book, he sought to explain how the middle class grew so quickly in the past and how it reached its current state of decline, Smith said.
The increase in economic equality after World War II can be explained primarily by two factors, Smith said. These factors were middle class power and the strength of American business leaders.
Smith said a number of positive changes were made in the period after World War II because of strong middle class movements. Among these were the consumers movement which convinced the USDA to regulate food and drugs more stringently and the women’s movement which sought greater equality in the workplace, Smith said.
Environmental regulations were also passed because of a strong push and protests from the middle class, Smith said. Both the Clean Water Act and major amendments to the Clean Air Act were passed under the pro-business conservative Richard Nixon, he said.
“Nixon did this not because he was an environmentalist, but because he was a practical politician,” Smith said. “Middle class power had an impact on government policy.”
Smith also emphasized the importance of labor unions in this period. He said that they convinced large industries to provide for their workers and established a social contract which stated that workers would do their jobs well in return for rising wages and benefits. He also said that during this period of growth, 35 percent of American private industry was unionized, while today that number is roughly eight percent.
As part of the social contract between workers and employers, business leaders incorporated a “virtuous circle of growth” into their business models, Smith said. The virtuous circle was a philosophy which stated that well-paid workers could spend more of their income and thus fuel demand and production, so each part of the cycle drove the growth of other parts.
Smith cited Henry Ford as an example of this principle, saying that Ford believed he should pay his workers enough that they could purchase the cars they were producing and help drive the business.
Another important contributor to the strength of the middle class is tax policy, Smith said. The maximum marginal tax rate, the rate applied to the highest earners in the country, was 92 percent. This rate dropped to a low of 32 percent under President Reagan, and today sits at 39.6 percent. Smith said that tax rates tend to correlate with growth in the economy.
“High taxes, high growth, low taxes, low growth,” Smith said. Inequality in wealth contributes to economic decline, he said, and current tax policy contributes to growing inequality.
“The tax rates on the top have been coming down… payroll taxes that everyone has to pay” have been going up, Smith said.
“Every time we’ve had a recession since the 1990s it has taken us longer to get out of the recession,” Smith said. “It isn’t one administration or the other, it’s an inequality in wealth.”
Smith said the trend towards the decline of the American middle class can be traced back to “the Powell memorandum” written in 1971by Lewis Powell as a “Newtonian reaction” in politics to the growth of the middle class.
Powell was a Supreme Court Justice appointed by President Nixon who served from 1972 to 1987. Before his time on the Supreme Court, he worked as a corporate attorney and tobacco industry representative in Virginia. Just before accepting his nomination to the Supreme Court he wrote a memo to the U.S. chamber of commerce that called for corporate America to become more active in politics.
Smith said that the “Powell memo” claimed the American system of free enterprise was under threat by middle class movements, such as the environmental or labor movements, and that large corporations and companies needed to oppose them politically to survive.
There were less than 200 corporate offices in Washington D.C. before the “Powell memo,” Smith said, but that number rose steadily in the years after the memo and there are now more than 4,000 companies registered in the capitol.
After the memo was released, most top business leaders felt that their job was to “maximize the return to shareholders,” Smith said, so maximizing profits by any means became standard.
Through lobbying, corporations have been able to manipulate government policy in their favor and against the interests of the middle class, Smith said, using the tax code as an example.
Smith said the 2011 median hourly wage was about the same as the wage in 1967 when adjusted for inflation, and remains that way today, but high cost items like health care and college have greatly increased in price, thus forcing average families to borrow money to pay for them. This creates a sense of insecurity, Smith said, so middle class people become disenfranchised.
“Powerlessness also corrupts,” Smith said. “If we believe we are powerless, we are.”
Despite the current situation for middle class families today, Smith said that it is possible to return to previous levels of prosperity by reinstating the “virtuous circle of growth” and reforming the tax code. He said that these changes can be made if citizens unite to solve local issues and work their way up to the national level.
“Washington’s not going to change unless we push it,” Smith said.
