Who Stole the American Dream?

by Hedrick Smith

  But the first bend in the path of American history came in the late 1970s—while the Democrats were firmly in control of Congress and the White House.

  CHAPTER 2

  THE PIVOTAL CONGRESS

  JIMMY CARTER AND 1977–78 DEMOCRATS

  Fifteen years ago, the businessman was told that politics is dirty, you shouldn’t get involved. Now they know if you want to have a say, you’ve got to get in the pit.

  —ALBERT ABRAHAMS, LOBBYIST,

  National Association of Realtors

  Business’s new lobbying weapon combines the power of new coalitions in Washington with grassroots organizations that reach into virtually every congressman’s home district.

  —Business Week,

  May 1978

  1978 IS A YEAR LARGELY FORGOTTEN or overlooked by many political commentators, but the legislative session of the Ninety-fifth Congress that year was one of the most pivotal in our modern political history.

  The power shift in favor of pro-business policies began not under Ronald Reagan and the Republicans in the 1980s, but earlier—under Jimmy Carter, in the Democratic-controlled Congress of the late 1970s.

  In part, that was because Jimmy Carter came to Washington in 1976 with a reform agenda to help the middle class, but as a one-term governor of Georgia, he was unprepared for the rough-and-tumble of the Washington power game. But Carter was also confronting a hidden new reality: The newly organized legions of business, energized by the Powell memo, were ready to play hardball.

  As Thomas Edsall wrote in The New Politics of Inequality, the anti-business Congress of the early 1970s became the pro-business Congress of the late 1970s.

  Time magazine commented that in 1978 the decisive force blocking much of the Carter and liberal agenda was “the startling increase in the influence of special-interest lobbies…. Partly because of this influence, Congress itself is becoming increasingly balky and unmanageable.”

  Target #1—Ralph Nader

  Consumer activist Ralph Nader was the first target to feel the potent new challenge of the corporate mutiny against the political status quo. For several years, Nader’s chief ambition, and the primary goal of the consumer movement, was to have Congress create a consumer protection agency that would give average American consumers an advocate within the federal bureaucracy and that would consolidate pro-consumer rule making in one place.

  Several efforts had been mounted in the early 1970s, but each time a consumer bill would pass in one house, it would fail in the other chamber, or it would be vetoed by Republican president Gerald Ford. With a Democrat in the White House, Nader and other consumer advocates saw their opportunity.

  But they were ambushed by the new business lobbying army. Taking House Democratic leaders and Nader’s supporters by surprise, corporate forces simply overwhelmed the consumer movement with an unprecedented lobbying blitz that House Speaker Tip O’Neill described as the most potent he had ever seen. “I have been around here for 25 years,” O’Neill remarked. “I have never seen such extensive lobbying.” The corporate forces, charging that a new $15 million consumer protection agency would mark a massive expansion of the federal bureaucracy, mobilized small business and other supporters across the nation to inundate Congress with mail and phone calls.

  Shrewdly, the business lobbying campaign targeted moderate Democratic congressmen who had ridden Nixon’s Watergate scandal to victory in 1974 and 1976 in traditionally Republican districts. Their surprise victories left them feeling vulnerable as they faced the 1978 elections. Business played heavily on their fears of a voter backlash against them. When Speaker O’Neill pushed the Carter consumer agency bill to a vote, most of the newly elected Democrats bolted against party discipline and rejected the bill.

  The business strategy worked. What the White House and Ralph Nader had expected to be an easy win turned into a disastrous defeat in the House. The idea of a powerful consumer agency was buried for the next three decades.

  Target #2—Organized Labor

  Having beaten President Carter and Ralph Nader on their first big showdown, the business forces were ready for a test of strength against a politically more organized and more formidable foe, organized labor.

  Since the early 1960s, the AFL-CIO labor federation had been itching to roll back the tough anti-union provisions of the Taft-Hartley Act of 1947 and the Landrum-Griffin Act of 1959, with little success, and to win more favorable conditions for union organizing. With a Democrat in the White House for the first time in eight years, the union movement saw a chance finally to achieve victory on three top union priorities—“labor law reform,” to make it easier for unions to organize and to curb the most aggressive anti-union activities of business; “common situs picketing,” to allow multiple unions to picket a construction site on a grievance from a single union; and legislation to generate automatic increases in the minimum wage, tied to inflation and rising wage scales generally.

  Previously, American business had been divided on such issues. Major corporations, which were used to dealing with unions, were inclined to go along with some labor demands to keep peace in their own backyards. But there was a growing sentiment among medium-sized corporations, small businesses, and retailers that labor had gone too far and had gotten too strong. Anti-union feeling was particularly on the rise among the Sun Belt business community, some of it stirred up by the blazingly anti-union rhetoric of Barry Goldwater, the right-wing Republican presidential candidate in 1964, and by Ronald Reagan’s run for the presidency in 1976.

  With employee health and pension costs rising sharply and a growing gap between union and non-union wages, even employers accustomed to unions were taking a harder line. Some business leaders were determined to roll back union power. The National Association of Manufacturers, with thirteen thousand member companies, set up its own Council on Union-Free Environment to try to get rid of unions as the go-between for management’s dealings with employees. So in 1977, the business community was responsive to Powell’s call for confrontation politics against organized labor.

  With a heavy mail campaign, business lobbying killed the picketing bill in the House. But AFL-CIO president George Meany vowed a tougher fight for the labor law reform bill, and it passed the House by a solid 257–163 vote margin. It was in the Senate, where the rules made it easier to block legislation, that business lobbying paid off. Major corporate leaders from the Business Roundtable joined the lobbying campaign of the U.S. Chamber of Commerce and the National Association of Manufacturers.

  A Senate filibuster, led by Utah’s junior Republican senator, Orrin Hatch, tied up the labor bill for five weeks. “What the filibuster does is give the right wing and business groups enormous power,” complained Ray Marshall, Carter’s secretary of labor. “What it does is make it possible for senators who represent about 10 percent of the population to block the will of 90 percent of the population.” To try to eke out enough votes, pro-labor Democrats offered some compromises to exempt small businesses from the bill’s provisions. But the best they could do was to muster fifty-eight votes, two short of the sixty votes needed to end the filibuster. The bill died without getting a vote—a major triumph for business and a grievous setback for labor.

  In frustration over the solid business opposition to the labor bill and what he saw as the political ineptitude of the Carter White House, Douglas Fraser, president of the United Auto Workers union, resigned from Carter’s labor-management advisory council. “I believe leaders of the business community, with few exceptions, have chosen to wage a one-sided class war today in this country,” Fraser declared, “a war against working people, the unemployed, the poor … and even many in the middle class of our society.”

  Carter did manage some wins for labor, including a good job-training bill and an increase of the minimum wage from $2.30 to $3.35 an hour in four annual steps. But small and independent business interests lobbied hard to block labor’s appeal for automatic future increases in the minimum wage. Carter, Marshall
, and labor’s allies in Congress argued that the minimum wage should be treated the same as Social Security—that is, either indexing it to inflation or pegging it to the nation’s average wage. If the average wage went up, they reasoned, the minimum should rise, too.

  Business lobbies were adamantly opposed to that, and they successfully bottled up the proposal in Congress. Once again, the political success of business had major long-term impact. In the 1970s, the minimum wage was about 46 percent of the average wage. By 2006, without any legally fixed ratio between the minimum wage and average wages, the federal minimum wage fell to under 31 percent of the average hourly wage in 2006 and recovered to 37 percent in 2009. This wider gap has sharpened income inequality at the lower rungs of the economic ladder.

  The Pivotal Year—1978

  But the corporate political rebellion was intent on more than blocking its opponents. Business was bent on gains of its own.

  In 1978, the corporate political machine went on the offensive and achieved a legislative agenda that would have profound and far-reaching impact. Over the next couple of decades, it would dramatically affect the standard of living of tens of millions of middle-class Americans and the American middle-class dream of winning a fair share of the prosperity generated by the nation’s economic growth. Virtually every economic bill that passed in 1978 had a policy tilt in favor of business and the wealthy, often at the expense of the middle class, even if that impact was not immediately apparent.

  The first priority for the new corporate lobbying army was to repeal the regulatory regime instituted by Richard Nixon and his predecessors. Business lobbies pushed Congress in 1978 to pass bills deregulating the trucking, railroad, and airline industries. Congress was more than willing. Even liberal Democrats like Senator Edward Kennedy of Massachusetts shared the fervor of Republicans for deregulating various industries to get the economy moving better. They anticipated, correctly, that deregulation would add to business bottom-line profits, and they assumed, incorrectly, that bigger earnings would be shared with rank-and-file employees as they had been in the past and not used just to fatten the bonuses of corporate CEOs and to increase the stock market returns of wealthy investors in the New Economy of the 1980s and 1990s.

  A New Bankruptcy Law

  Another piece of legislation that came to have broad practical impact on the economic balance of power between corporations and their employees was the little-noticed bankruptcy law passed in 1978 by the pivotal Ninety-fifth Congress.

  That law, the first major bankruptcy reform in forty years, put corporate management in solid control of restructuring a company during bankruptcy. Instead of ousting the old CEO and replacing the old corporate leadership with an outside bankruptcy trustee, as in the past, the new law not only left the old management in place, but let it mastermind the whole process. Also, by making bankruptcy courts more efficient and financing easier, and by allowing much more handsome pay for a new generation of bankruptcy lawyers, the 1978 law made bankruptcy more attractive for big companies. Instead of facing the old stigma of failure, corporate leaders increasingly saw that the new bankruptcy law, as interpreted by the courts, offered them a legal way to shed old debts and to abrogate long-standing labor union contracts that had guaranteed wages, health benefits, and lifetime pensions. As in the past, banks got top priority for repayment, and management was empowered to deprive rank-and-file employees of billions of dollars in hard-won economic gains.

  But that is not how the bill was sold to the public.

  “A big part of the selling point on this bankruptcy law was it will preserve jobs, and it will preserve assets for employees—go back and read the legislative history,” Elizabeth Warren, then a bankruptcy law professor at Harvard, told me in 2006. “But what happened was that the text of the law clearly gives a priority to the banks and the other creditors who protect themselves by contract. They come ahead of all of the employees and all the pensioners…. The sophisticated guys will walk out with everything and the employees and pensioners will be left with nothing.”

  The 401(k)

  That same 1978 Congress tucked into the omnibus tax bill a small-print provision with enormous consequences for the overwhelming majority of American families. It was the antiseptically titled 401(k) subparagraph that eventually became a vehicle for many corporations to off-load hundreds of billions of dollars in pension expenditures onto their employees, a major step that increased company profits and CEO bonuses and left most of the middle class with the job of financing their own retirement.

  The 401(k) provision was originally introduced as a tax break for deferred compensation for corporate executives at Xerox and Kodak by Representative Barber Conable of New York, the ranking Republican on the tax-writing House Ways and Means Committee, whose district included head offices of both Kodak and Xerox. Then in 1981, the Reagan Treasury Department, under some ingenious prodding from corporate tax consultants, decided that the 401(k) clause could also apply to rank-and-file employees. Suddenly, visions of a vast new market attracted mutual fund managers and they rolled out the 401(k) red carpet at company after company, promoting the virtues of the new tax shelter to millions of middle-class Americans.

  The result was a financial upheaval that revamped most of the old corporate system of providing lifetime pensions to rank-and-file employees and left the middle and lower middle class constantly scrambling to scrape together enough savings for their supposedly golden years. Under the old lifetime pension system, companies guaranteed monthly retirement checks to employees for as long as they lived. Under the new 401(k) system, those monthly company checks were gone. It was now up to employees to provide for their own retirement savings and to manage their money for long-term security, a task beyond the capability of millions, as the record now shows.

  Rolling Carter on Taxes

  Finally, business felt powerful enough to challenge President Carter on taxes. In his 1976 campaign, Carter had derided the U.S. tax code as “a disgrace to the human race” because it had so many loopholes for the wealthy and for corporations, enabling them to reduce or escape taxes. So Carter sent Congress a tax bill that would close many of these loopholes and end tax breaks for the affluent while cutting taxes for lower-income families.

  Congress, by now under the sway of the strong business lobby, balked at Carter’s bill and then started rewriting it to tilt it—not against, but in favor of business and the wealthy.

  Instead of tax increases, the bill came out with $18.7 billion in tax cuts, including a deep cut in the maximum capital gains tax rate for investors from 49 to 28 percent, a cut in the top corporate tax rate from 48 to 46 percent, and even more generous write-offs for small businesses. Although the size of the tax cuts was relatively small, it marked a watershed in Washington’s tax and economic policies. Instead of following the traditional pattern of using the tax system to redistribute income from the affluent and from corporations to the less well-off, the 1978 tax bill charted the opposite course, a course that would be pursued by Ronald Reagan and George W. Bush. It gave the economic benefits of tax law primarily to the economic elites that were now exercising increased political power.

  For business, the successful mutiny against Carter’s tax bill was a political turning point. It had an electrifying effect in the corporate world, according to Arthur Levitt, who was then chairman of the American Stock Exchange.

  “After that,” Levitt told me, “business began to see they could get … the things they wanted.”

  With that victory, coming on the heels of the earlier triumphs over labor and consumer groups, Corporate America tasted its own political power and warmed to the Washington power game. Corporate leaders suddenly saw the multibillion-dollar benefits they could reap, both for their companies and for themselves personally, by investing mere millions in the high-stakes competition for political influence. With their string of victories, especially on the tax bill, they sharpened their focus on Washington and how it eases or tightens or tilts the rul
es for the American economy.

  The tax victory was one of those pivotal moments in politics, just as in sports, when the lead changes hands and the dynamics of the game change—not just in terms of power, but substantively as well. For the victories that business won in the Carter Congress dramatically shifted the thrust and direction of America’s economic policies to suit the agenda of the business elite. Those victories set a pattern pursued to this day.

  Years later, economists and historians would identify the late 1970s as the watershed period when an economic wedge started to be driven into the American workforce, beginning to divide the nation into Two Americas—corporate CEOs and the financial elite put on a sharp upswing, and average Americans left stuck in a rut.

  CHAPTER 3

  MIDDLE-CLASS POWER

  HOW CITIZEN ACTION WORKED BEFORE THE POWER SHIFT

  We have also come to this hallowed spot to remind America of the fierce urgency of now. This is no time to engage in the luxury of cooling off or to take the tranquilizing drug of gradualism. Now is the time to make real the promise of democracy.

  —MARTIN LUTHER KING, JR.,

  March on Washington

  There was deep public concern [about the environment]—so deep that the president felt forced to deal with it. It’s the way democracy is supposed to work. The public says there’s some terrible problem out there and the government responds.