On Saturday morning, Hedrick Smith ’55 spoke to an overflowing Brooks-Rogers Recital Hall about his new book Who Stole the American Dream?, which came out on Sept.11. Smith is a Pulitzer Prize-winning former New York Times reporter and editor and an Emmy Award-winning producer and correspondent. Who Stole the American Dream? is his seventh book; Smith has also created 20 award-winning PBS specials and miniseries, on subjects ranging from Soviet perestroika to the Washington power game. The lecture was part of the Class of ’71 Public Affairs Forum on the 2012 presidential election. The lecture was followed by a Q-and-A period, a book signing and refreshments.
Smith’s book traces the current economic and political imbalances in the U.S. “We can remember an era of middle class prosperity,” Smith said, but at the rate at which the economy is hemorrhaging jobs, it is hard for us to also imagine returning to that era of prosperity, he stated.
Reporting is “history on the fly,” according to Smith, so there are always gaps. This book was an attempt to fill in such gaps in our recent historical accounting and see the patterns that emerge. One gap Smith filled in the process of researching this book and wanted to underscore was that “the main victims of subprime mortgages are people who deserved prime mortgages.”
Smith then turned to the era of middle class prosperity. Firstly, he discussed the connection between growth and tax rates. “[Under Eisenhower], we had the highest growth rates with the highest tax bracket’s tax rate at 92.5 percent,” Smith said. He claimed that economists call this “the great convergence,” wherein the best growth rates are those that generate convergence. From 1947 to 1973, productivity rose 97 percent and median wages grew 95 percent, showing that “returns of growth were being shared widely.” This was because “business leaders believed in sharing the wealth,” which Smith called “stakeholder capitalism” as opposed to “shareholder capitalism.”
This was also “a period of enormous influence for the people,” Smith claimed. He cited the environmental movement, which at its climax resulted in seven major bills in one year, as well as the Civil Rights Movement and the Labor, Consumer and Women’s Rights Movements. He called the March on Washington “one of the great festivals of democracy of [his] lifetime” and emphasized that the labor movement’s climactic Treaty of Detroit was copied by many non-labor employers and became “the basis of middle-class prosperity.” All of these movements, he said, were examples of civic activism.
Smith then began the story of how this middle class power was lost. The distribution of power and wealth go together, he claimed, and so were also lost together. The story started with the Powell Memorandum, which he called the “corporate manifesto.” Shortly before he was appointed to the Supreme Court in 1971, Lewis Powell wrote a call to arms to companies out of the belief that “the system was in trouble” due to all the regulations being created in response to the popular movements of the day. The Powell Memorandum was passed around by business leaders without being exposed to the media, and even when historians found it later, they “didn’t realize how dramatic its impact was.”
When the 401(k) was created, it was initially a small provision in a larger law made as a favor to a congressman’s constituents, Smith said. It quickly mushroomed, however, and “shifted hundreds of billions of dollars off the corporate books and put them on the consumers’.” Bankruptcy law was changed so the existing managers of a bankrupt corporation managed the process rather than outsiders. A federal law overriding state anti-usury laws “blew the lid off interest rates,” setting the stage for subprime mortgages. Finally, the trend in tax law, “the most political law in America,” was reversed. This was altogether “a psychological game change.”
What happened in Congress was reflected in the economy in what Smith called “wedge economics,” where a wedge was driven into the economy between the growth of productivity and the growth of wealth, so “the growth didn’t get shared.” From 1973 to 2011, productivity grew 80 percent, but the wages of the median male worker did not change. According to Smith, this was due to a “tremendous change in the business ethos,” which is now one of shareholder capitalism. For a while, said Smith, he thought this was an inevitable result of globalization, “but there was no other country with the inequality issues we have.” We have a “plutonomy,” he told the audience, a situation in which the wealthiest people control the economy.
Implementation of strategic legislation could fix this, according to Smith. He recommends changing the current tax code, which “encourages off-shoring,” making sure that banks refinance underwater mortgage loans and rebuilding American infrastructure. “Most of us want Washington to change,” he said, but “it won’t if we leave it to them.”
“We have to change the pronoun from ‘them’ to ‘us,’” Smith said. “Powerlessness corrupts democracy at its core.” Smith went on to urge individuals not to be depressed by the contents of his book, instead saying, “You should be outraged.”