Who Stole the American Dream?

by Hedrick Smith

  Copyright © 2012 by Hedrick Smith

  All rights reserved.

  Published in the United States by Random House, an imprint of The Random House Publishing Group, a division of Random House, Inc., New York.

  RANDOM HOUSE and colophon are registered trademarks of Random House, Inc.

  Grateful acknowledgment is made to the WGBH Educational Foundation for permission to reprint previously broadcast material and excerpts from Frontline interviews as follows: Frontline’s “Poisoned Waters” © 2009 WGBH Educational Foundation, www.pbs.org/frontline, Frontline’s “The Card Game” © 2009 WGBH Educational Foundation, www.pbs.org/frontline, Frontline’s “Can You Afford to Retire?” © 2006 WGBH Educational Foundation, www.pbs.org/frontline, Frontline’s “The Wall Street Fix” © 2003 WGBH Educational Foundation, www.pbs.org/frontline, Frontline’s “Is Wal-Mart Good for America?” © 2004 WGBH Educational Foundation, www.pbs.org/frontline.

  Used by permission.

  Library of Congress Cataloging-in-Publication Data

  Smith, Hedrick.

  Who stole the American dream? / by Hedrick Smith.

  p. cm.

  eISBN: 978-0-679-60464-8

  1. United States—Politics and government—1945–1989. 2. United States—Politics and government—1989– 3. Political culture—United States—History—20th century. 4. Political culture—United States—History—21st century. 5. Polarization (Social sciences)—United States. 6. Middle class—United States—Economic conditions. 7. Middle class—Political activity—United States. 8. Public interest—United States. 9. Income distribution—United States. 10. Divided government—United States. I. Title.

  E839.5.S59 2012 973.91—dc23 2012005865

  www.atrandom.com

  Jacket design: Chris Sergio

  Jacket image: Tooga/Getty Images

  v3.1

  We must make our choice. We may have democracy, or we may have wealth concentrated in the hands of a few, but we can’t have both.

  —LOUIS D. BRANDEIS,

  adviser to President Woodrow Wilson

  PROLOGUE

  THE CHALLENGE FROM WITHIN

  We are treading the edge of a precipice here. Civilizations die of disenchantment. If enough people doubt their society, the whole venture falls apart. We must never let anger, fashionable cynicism, or political partisanship blur our vision on that point. We must not despair of the Republic.

  —JOHN W. GARDNER,

  cabinet secretary to President Lyndon Johnson

  Thus, it is manifest that the best political community is formed by citizens of the middle class, and that those states are likely to be well-administered in which the middle class is large, and stronger if possible than both other classes….

  —ARISTOTLE,

  Politics

  IN HIS MAGISTERIAL WORK A Study of History, British historian Arnold J. Toynbee tells the story of how civilizations rise and fall through the dynamics of challenge and response. After studying twenty-one civilizations across six thousand years, Toynbee found that the fate of each civilization was determined by its response to the challenges it faced.

  Ancient Egypt rose to enduring greatness, Toynbee reported, by overcoming the challenge of a hostile climate with a sophisticated system of agriculture. In South America, the Mayan and Andean civilizations overcame similar environmental hardships but perished before the challenge of more powerful invaders. Other civilizations collapsed from within. The city-states of ancient Greece fell into fierce competition among themselves over trade and spiraled into decline from fratricidal warfare. Ancient Rome fell victim to what Toynbee called a “schism in the body social” and a “schism in the soul”—internal divisions that undermined Rome’s unity at the core.

  In the twentieth century, America met and overcame the military challenge of mortal enemies—Hitler’s Germany and then the prolonged global challenge of Soviet communism.

  Today we face a more complicated and potentially more dangerous challenge—a challenge from within. Like ancient Rome, we are in danger of causing or contributing to our own downfall by having spawned the schisms that Toynbee talked about—schisms in the body politic and in the soul of our society.

  A House Divided: Two Americas

  Over the past three decades, we have become Two Americas. We are no longer one large American family with shared prosperity and shared political and economic power, as we were in the decades following World War II. Today, no common enemy unites us as a nation. No common enterprise like settling the West or rocketing to the moon inspires us as a people.

  We are today a sharply divided country—divided by power, money, and ideology. Our politics have become rancorous and polarized, our political leaders unable to resolve the most basic problems. Constant conflict has replaced a sense of common purpose and the pursuit of the common welfare. Not just in Washington, but across the nation, the fault lines that divide us run deep, and they are profoundly self-destructive, unless we can find our way to some new unity and consensus.

  Abraham Lincoln gave us fair warning. “A house divided against itself,” Lincoln said, “cannot stand.”

  Americans sense that something is profoundly wrong—that we have gone off track as a nation. Many skilled observers write about this, but it is hard to grasp exactly how we arrived at our present predicament or how to respond—how to go about healing America’s dangerous divide. The causes do not lie in the last election or the one before that. They predate the financial collapse of 2008. The timeline to our modern national quagmire lies embedded in the longer arc of our history, and that history, from 1971 to the present, is the focus of this book.

  Hidden Beginnings

  History often has hidden beginnings. There is no blinding flash of light in the sky to mark a turning point, no distinctive mushroom cloud signifying an atomic explosion that will forever alter human destiny. Often a watershed is crossed in some gradual and obscure way so that most people do not realize that an unseen shift has moved them into a new era, reshaping their lives, the lives of their generation, and the lives of their children, too. Only decades later do historians, like detectives, sift through the confusing strands of the past and discover a hitherto unknown pregnant beginning.

  One such hidden beginning, with powerful impact on our lives today, occurred in 1971 with “the Powell Memorandum.” The memo, first unearthed by others many years ago, was written by Lewis Powell, then one of America’s most respected and influential corporate attorneys, two months before he was named to the Supreme Court. But it remains a discovery for many people today to learn that the Powell memo sparked a business and corporate rebellion that would forever change the landscape of power in Washington and would influence our policies and economy even now.

  The Powell memo was a business manifesto, a call to arms to Corporate America, and it triggered a powerful response. The seismic shift of power that it set in motion marked a fault line in our history. Political revolt had been brewing on the right since the presidential candidacy in 1964 of Senator Barry Goldwater, the anti-union, free market conservative from Arizona, but it was the Powell memo that lit the spark of change. It ignited a long period of sweeping transformations both in Washington’s policies and in the mind-set and practices of American business leaders—transformations that reversed the politics and policies of the postwar era and the “virtuous circle” philosophy that had created the broad prosperity of America’s middle class.

  The newly awakened power of business helped propel America into a New Economy and a New Power Game in politics, which largely determine how we live today. Both were strongly tilted in favor of the business, financial, and corporate elites. Trillions were added to the wealth of
America’s super-rich at the expense of the middle class, and the country was left with an unhealthy concentration of political and economic power.

  This book will take you inside that decades-long story of change and show how we have unwittingly dismantled the political and economic infrastructures that underpinned the great era of middle-class prosperity in the 1950s, ’60s, and ’70s.

  The Economic Divide:

  The 1 Percent and the 99 Percent

  Today, the gravest challenge and the most corrosive fault line in our society is the gross inequality of income and wealth in America.

  Not only political liberals but conservative thinkers as well emphasize the danger to American democracy of this great divide. “America is coming apart at the seams—not seams of race or ethnicity, but of class,” writes conservative sociologist Charles Murray of the American Enterprise Institute. Murray voices alarm at what he describes as “the formation of classes that are different in kind and in their degree of separation from anything that the nation has ever known…. The divergence into these separate classes, if it continues, will end what has made America America.”

  Since the era of middle-class prosperity from the mid-1940s to the mid-1970s, the past three decades have produced the third wave of great private wealth in American history, a new Gilded Age comparable to the era of the robber barons in the 1890s, which led to the financial Panic of 1893 and the trust-busting presidency of Theodore Roosevelt; and to the era of great fortunes in the Roaring Twenties, which ended in the stock market crash of 1929 and the Great Depression.

  In our New Economy, America’s super-rich have accumulated trillions in new wealth, far beyond anything in other nations, while the American middle class has stagnated. What separates the Two Americas is far more than a wealth gap. It is a wealth chasm—“mind-boggling” in its magnitude, says Princeton economist Alan Krueger. Wealth has flowed so massively to the top that during the nation’s growth spurt from 2002 to 2007, America’s super-rich, the top 1 percent (3 million people), reaped two-thirds of the nation’s entire economic gains. The other 99 percent were left with only one-third of the gains to divide among 310 million people. In 2010, the first full year of the economic recovery, the top 1 percent captured 93 percent of the nation’s gains.

  Americans, more than people in other countries, accept some inequality as part of our way of life, as inevitable and even desirable—a reward for talent and hard work, an incentive to produce and excel. But wealth begets wealth, especially when reinforced through the influence of money in politics. Then the hyperconcentration of wealth aggravates the political cleavages in our society.

  The danger is that if the extremes become too great, the wealth dichotomy tears the social fabric of the country, undermines our ideal of equal opportunity, and puts the whole economy at risk—and more than the economy, our nation itself. A solid majority of Americans say openly that we have reached that point—that our economy is unfairly tilted in favor of the wealthy, that government should take action to make the economy fairer, and that they’re frustrated that Congress continually blocks such action.

  What’s more, contrary to political arguments put forward for not taxing the rich, an economy of large personal fortunes does not deliver the best economic performance for the country. In fact, concentrated wealth works against economic growth. Several recent studies have shown that America’s wealth gap is a drag on today’s economy. Harvard economist Philippe Aghion cites an accumulation of “impressively unambiguous” evidence from multiple economic studies documenting that “greater inequality reduces the rate of growth.” A recent International Monetary Fund study came to a similar conclusion—that a high level of income inequality can be “destructive” to sustained growth and that the best condition for long-term growth is “more equality in the income distribution.”

  The Unraveling

  The opposite has happened in America since the late 1970s. The soaring wealth of the super-rich has brought the unraveling of the American Dream for the middle class—the dream of a steady job with decent pay and health benefits, rising living standards, a home of your own, a secure retirement, and the hope that your children would enjoy a better future.

  As a country, we have declined from an era of middle-class prosperity and middle-class power from the 1940s to the 1970s to an era of vast fortunes and mass economic insecurity. We have fallen from being the envy of the world, with the most widely shared economic prosperity and the most affluent middle class of any place on earth, to losing our title as “the land of opportunity.” It is now easier, in fact, to climb the economic and social ladder in several Western European countries than it is in the United States.

  Globalization has hit us all, of course, but the way we have responded with our New Economy has put the American middle class in an ever-tightening financial squeeze, raising protests from both left and right.

  “The middle class is the key to greatness in this country,” right-wing radio commentator Rush Limbaugh told his audience of millions one sunny fall afternoon in October 2011. “We had the largest middle class in the world, and it’s under assault from practically every direction. Look at the destruction of home values. The family home was the largest asset most people in the middle class have, and it’s being destroyed, and it’s being destroyed after being talked up for generation after generation after generation. The American dream equals owning your own house.”

  “It was the middle class that made America great,” AFL-CIO president Rich Trumka said in a television appearance a few weeks earlier. “We were very, very competitive when the unions were at their heydays. We spread the wealth around to everybody so that the main driver of our economy [was] consumer spending, people [had] money in their pockets to spend.” Now, Trumka went on, the question “is whether we’ll restore the middle class, which is the heart and the soul of the American dream.”

  When such normally clashing political voices as Limbaugh and Trumka sound a common theme, it is worth listening. They are highlighting a critical national problem.

  The Political Divide: Unequal Democracy

  In our political life, too, we have left behind one of the most expansive periods of American democracy, the populist era of the 1960s and 1970s, where much of the dynamism and energy that drove sweeping changes in our laws and policies arose from the belly of the nation. Since then, we have moved from a broad populism to a narrow plutocracy. Instead of a high-visibility, outside political power game of mass movements and public participation, we now have a low-visibility, inside power game dominated by the lobbyists for the American financial and political elite.

  In the middle-class democracy of the 1950s, ’60s, and ’70s, ordinary Americans felt confident of their political power and its impact. They believed that by engaging personally in civic activism, they could help set the nation’s agenda—and they succeeded. They forced action by Congress and the White House. Through grassroots power—the civil rights movement, the environmental movement, the peace movement, the consumer movement, the labor movement, and the women’s movement—citizen power won important political victories that altered the face of our society and enlarged the American Dream. Seeing their own impact on public policy, people felt connected to government instead of feeling powerless and alienated as they do today.

  In the last three decades, except for the organized activism of the Tea Party and the inchoate protests of Occupy Wall Street, Americans at the grass roots have largely retreated from direct citizen action. Our idealism has given way to a sense of futility. That has prompted Ernie Cortes, one of America’s most effective grassroots organizers, to amend Lord Acton’s famous dictum that power corrupts. Cortes notes: “Powerlessness also corrupts.”

  Powerlessness breeds cynicism and passivism, especially between elections, which is the crucial time when policies are forged, the time when the organized money of special interests exerts commanding influence. As Senator John McCain, the conservative Republican presidential nominee in
2008, put it, the flow of money into lobbying and into election campaigns is “nothing less than an elaborate influence-peddling scheme in which both parties conspire to stay in office by selling the country to the highest bidder.”

  Political insiders have always had extra power—more at some times in our history, less at other times. Since the late 1970s, the insiders’ advantage has grown exponentially. Today, the New Power Game in Washington is dominated by well-financed professional lobbyists, many of them former members of Congress and government officials with an inside track, working for special interests like Wall Street banks; the oil, defense, and pharmaceutical industries; and business trade associations.

  Our once healthy clash of interests has become precariously one-sided. In the past decade, business has employed thirty times as many Washington lobbyists as trade unions and sixteen times as many lobbyists as labor, consumer, and public interest lobbyists combined. Spending has been even more lopsided in favor of Corporate America. From 1998 through 2010, business interests and trade groups spent $28.6 billion on lobbying compared with $492 million for labor, nearly a 60-to-1 business advantage.

  Today, no countervailing power matches the political clout of business. Our democracy has become starkly unequal.

  The Interaction of Politics and Economics

  This book sets out to describe how, over the past four decades, we came to this point—how we became two such polarized and dissimilar Americas, how the great economic and political divide affects the lives of individual Americans, and how we might, through changed policies and a revival of citizen action, restore our unity and reclaim the American Dream for average people.

  In my first book, The Russians, I sought to give American readers an intimate human picture of what Russians were like beneath the veneer of Soviet communism and why they behaved the way they did. In The Power Game: How Washington Works, I went inside the American political system and the games politicians played in the era of Ronald Reagan and Jimmy Carter to describe how power really works in Washington and why some leaders succeed and others fail.