Weekly Briefing

Debunking some stubborn economic myths

Reporter/historian identifies the real causes of our shrinking middle class

As was noted in this space last week, there are a lot of powerful insights in reporter/historian Hedrick Smith’s new book, “Who Stole the American Dream?” In the course of chronicling the last four decades of American political and economic history, Smith introduces the reader to a number of critically important and sorely underreported events that abetted (and help explain) the transformation of a once steadily advancing middle class society into today’s troubled banana republic on steroids.

If there is one overarching and supremely important service that Smith provides in the book, however, it is the skillful way in which he debunks some powerful myths about modern American capitalism. In a steady, methodical and utterly compelling way, Smith shows us that the problems of the early 21st Century economy are neither “natural” nor the unintentional byproduct of “the welfare state.” In fact, as he makes plain, it is just the opposite; the central problems in the today’s economy are the results of very intentional acts taken by powerful groups and individuals that were specifically designed to dismantle public structures and shift wealth and power upwards.

Myth #1 – The struggles of the middle class are the natural byproduct of “market forces.”

You know this one – it’s the one favored by market fundamentalists who tell us over and over that there’s nothing to be done about companies that move good, middle class jobs to far off countries except for slashing wages and taxes so we can “compete.” In this particular myth, the problem throughout America is high taxes, high employee costs and government regulation. Companies simply “can’t afford” to stay in the U.S. – much less bargain with unions, provide health insurance and pensions or cut pollution – because of supposedly oppressive costs that make profits intolerably low.

Here are just a few of Smith’s powerful rejoinders:

  1. The demise of the middle class was anything but “natural.” It was, in fact,  the direct byproduct of a huge and well-funded effort by America’s largest corporations (abetted by their toadies in the right-wing “think tanks”) to undermine and alter the things that had made middle class prosperity so widespread: things like union contracts that provided good wages and pensions, tax rates that funded government structures and services adequately, bankruptcy laws that forced CEO’s and other corporate leaders to share in the pain when companies went under and anti-usury laws that gave homeowners a chance to build wealth via their home mortgages.
  2. Worker productivity statistics. If the demise of the middle class were “natural,” it would presumably mirror a decline in the “value” of middle class American workers. But, as Smith notes, the productivity of American workers has continued to rise. Unfortunately, whereas worker productivity and wages both grew dramatically between the end of World War II and the early 1970’s (97% and 95%, respectively) they’ve diverged radically in the years since so that while productivity has risen 80%, wages have risen only a paltry 10%.
  3. Germany. This is one of Smith’s powerful poster children for the proposition that “natural” and global market forces cannot explain the demise of the American middle class. Germany competes on the same international playing field as the United States. It too feels pressure from China and India and other low wage economies. Despite these similar pressures, however, it has somehow managed to preserve a high-wage manufacturing base and a large trade surplus.

 Myth #2 – The only job of corporations is to maximize profits.

This myth has become so ingrained in modern American culture and so oppressively and intensely promoted in every venue – be it our business schools and Wall Street or the entertainment and sports worlds – that anyone who challenges it is quickly dismissed as some kind of modern day Bolshevik.

But as Smith points out quite persuasively, it’s simply not true that capitalism has always been or must always be about extracting the maximum amount of profit at all times. There are, in fact, innumerable examples – both here in America and abroad – of what Smith calls “stakeholder capitalism” in which large corporations and the people who lead them have recognized the long-term benefit to society (and, ultimately, themselves) of paying workers good wages.

Whether it was Henry Ford paying his workers enough so that they could afford to buy his cars or modern German corporations that have survived the in the new economy by building partnerships between corporate heads and labor leaders, there are countless instances in which corporate leaders have sacrificed some of what they might extract from their companies in order to benefit the health of society.

It’s really as simple, Smith argues, as the difference between the retail competitors Wal-Mart (a company that symbolizes modern, extractive, CEO-enriching capitalism) and Costco (a company that makes real efforts to treat its workers fairly while rewarding its leadership team with extremely generous but not obscene compensation).

Myth #3 – We must enrich investors and business leaders to stimulate the private sector.

This is one of the most frustrating myths of modern-day capitalism because it is the kind that causes misled and misinformed average citizens to support policies that run counter to their own best interests. As Smith points out, however, the notion that America’s present-day economy suffers for a lack of investment resources and that we must, therefore, cut taxes on the wealthy and corporations further in order to “unleash the private sector” is, in a word, baloney. As Smith notes there are multiple venture capital enterprises these days that have hundreds of billions of dollars to invest but that literally can’t fund companies in which to do it. The problem is not a lack of investors with money to invest, it’s the lack of demand for the products that companies produce and could produce. And this problem is a byproduct of one, obvious phenomenon—a lack of consumer spending.

To see confirmation of this truth, Smith urges us to look back to the Eisenhower era of the 1950’s when national economic growth was ticking along at a robust rate even though the top, marginal federal income tax rate was as high as 92%. The driver of the economy, of course, was the demand generated by the nation’s burgeoning middle class.

Today, Smith reports, investors on Wall Street are regularly counseled by “experts” to eschew companies that make everyday consumer products and instead look to “luxury firms” that produce products designed for the top 1%.

Going forward

So what to do? Is there any hope for getting beyond the plutocratic capitalism that currently holds sway in the country so that we can promote a widespread revival of stakeholder capitalism? On this front, Smith remains optimistic – at least in the long run. The key, he says, is to reawaken Americans to the reality that they need not be held captive by the “rules” and the powers-that-be of the current system.

We can change things, he says, if we simply recognize that, like our mid-20th Century forebears, we have the power to organize and fight back to build a better, fairer economy. On this front, Smith’s myth-busting book should provide an extremely helpful opening volley.

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