Hedrick Smith, who served as a New York Times editor and reporter for 26 years, recently visited St. John’s University in Collegeville, Minn., to discuss his book “Who Stole the American Dream?” Smith has been engaging U.S. citizens about changes in government policies and business practices that have weakened the middle class. Liz Fedor, an editor at Twin Cities Business, interviewed Smith and moderated a discussion with him in October on the St. John’s campus. The event was sponsored by the McCarthy Center for Public Policy and Civic Engagement. What follows are edited excerpts.
Twin Cities Business: In your book, you state, “The gravest challenge and the most corrosive fault line in our society is the gross inequality of income and wealth in America.” Why is this such a serious problem?
Hedrick Smith: Our economy is based on the notion of equal opportunity and that people can rise up and do whatever their talents and their hard work enables them to do. When you have built-in inequalities of income that we now have in this country, that opportunity is not working. The market is not working when you have a situation where for the average American family today, median family income is lower than it was in 1999.
We have so much concentration of wealth in the top 1 percent, and the middle class is not doing well. That’s an unhealthy economy. When we have high inequality of income, we actually have slow growth. If the middle class makes more money, it spends it. It is consumption that drives growth.
TCB: We did have broad middle-class prosperity in the ’50s, ’60s and ’70s. Explain the shift from stakeholder capitalism to shareholder capitalism.
HS: Big companies used to pay better salaries and better benefits, and they used to think about all of the stakeholders. They moved over time to focus much more on the shareholders, mainly concentrated in Wall Street.
The philosophy at Costco is that we are a stakeholder company. Our employees and our customers have a stake in the company. The communities in which we operate have a stake in the company. The banks that loan us money, the suppliers that give us goods, we all have a stake in the company. And we run the company thinking about balancing all the economic interests of these different groups of people.
TCB: Do you think the pendulum will swing back and large businesses will place greater importance on serving multiple stakeholders?
HS: This issue is being vigorously debated within business leadership, at the Brookings Institution, within the Business Roundtable. Any number of leading business organizations now have arguments between CEOs and others about how they should run their companies.
Larry Fink is the head of Blackrock Investments, one of the largest investment companies on Wall Street. Fink wrote a letter last spring to 500 American CEOs and he said, point blank, you are giving too much of your profits to your shareholders; you are not investing enough in company growth, research and development, and new products. You are not investing enough in worker training; you are not investing enough in paying your workers more. It is damaging to your company’s long run and it is damaging to the American economy. This is Larry Fink, at the very pinnacle of the American financial system. This is not a liberal economist.
TCB: Some business people cite technological changes and globalization and say, “This is why American companies have evolved the way they have.”
HS: One of the former vice presidents of the Federal Reserve Board said that 30 percent of the jobs in America are vulnerable to being exported overseas. Jobs that are being shipped overseas in America today include many knowledge economy jobs, jobs that are filled by people with college degrees.
Why is that going on? Is it a matter of technology? Is it a matter of education? The standard story from American business is that this is a matter of globalization, these are market forces, and that you can’t do anything about it. And this is modern technology. And so get over it, American middle class, this is the way it’s going to be.
TCB: You’ve raised a counterargument by holding up Germany as an example of a developed country that retains high-wage jobs.
HS: Germany has taken a different fork in the road. It has not tried to hold wages down and shift jobs overseas. What’s happened in Germany is they have maintained a large manufacturing workforce. The American manufacturing workforce has dropped from about 20 percent of the population in 1999 to about 8 or 9 percent today.
In Germany, the manufacturing workforce is 21 percent. That’s important, because companies like Mercedes and BMW, which make some of the best cars in the world, and like Siemens, which makes electronics and heavy electrical equipment, they have raised the pay of their workforces.
They have spent enormous amounts of money retraining their workers for the new technologies so that jobs don’t wind up going overseas. They keep the high-skilled jobs in Germany.
TCB: How is Germany faring in the world economy?
HS: The United States had a $6 trillion trade deficit with the world during the decade of the 2000s. America bought $6 trillion more stuff from the rest of the world than we sold, and most of it from China.
At the same time, Germany had a $2 trillion trade surplus. The Germans are competing in the same global market as we are. What we better do is understand what it is about Germany that enables them to do this.
Liz Fedor is the Trending editor of Twin Cities Business.
This article is reprinted in partnership with Twin Cities Business.
Germany has a corporate tax rate of 15%. If you want to bring businesses back, lower our corporate tax rate to a flat tax rate of 15% or lower, no exceptions for politicians to sell to biggest spender. Become a country that attracts businesses, not chasing them out. Businesses have not written one law, our politicians wrote every one of them and have been bought off for years, as the American worker got the shaft. Have a 2 year tax hiatus for businesses that have money stashed off shore (trillions), monitor the money coming back and put a % of it that has to be used to help manufacturing or job growth inside that company. Our politicians have ruined the American dream of upward mobility with crony capitalism…. Both parties…… and it is getting worse with every new law thrown on top of a corrupted system that drives up Wall Street but hammers main street.
German Tax Rate
According to https://www2.deloitte.com/content/dam/Deloitte/global/Documents/Tax/dttl-tax-corporate-tax-rates-2015.pdf, in Germany there is also “Solidarity surcharge of 5.5% also levied on corporate income
tax. Municipal trade tax imposed at rates between 14% and 17%, Germany 15% 14%-17% 15% with rates determined by municipalities. Combined rate (i.e.corporate income tax, trade tax, solidarity surcharge) approximately 30% to 33%”.
I don’t think the statement that “Businesses have not written one law, our politicians wrote every one of them”. is accurate. A lot of laws are written by lobbyists, most of whom work for and are paid for by big business. Here’s an NPR story about how the House passed a measure that would roll back some of the Dodd-Frank reforms, and the language was nearly identical to the language suggested by lobbyists: http://www.npr.org/sections/itsallpolitics/2013/11/11/243973620/when-lobbyists-literally-write-the-bill But I think that is exactly what you mean by “crony capitalism”, bought off politicians.
It is interesting to note that Germany has a strong union culture. A 2010 Forbes article on German Auto companies points out that the average German worker makes $67.14 per hour wages and benefits while the American Auto Worker makes about $33.77 (again combined wages and benefits). Horst Mundt, the head of IG Metall (German equivalent to the UAW) points out that the German constitution provides for work councils in each factory, and as a result it is common to have direct contact of workers with all levels of management, including senior management. Talk about government interference!
But my real point here is that there are more factors than tax rate driving corporate behavior.
In this interview, Germany is held up as a good example of what works for the middle class in the world today.
What is the role of the German governent in supporting these businesses?
At the same time Germans opened an auto plant here in the US?
Does the American worker make the same as his German counterpart?
Germany faring in the world economy
Germany can pay its workers more and afford benefits such as free tuition for higher education in large part because of the U.S. nuclear and military umbrella. Yet to confront an increasingly belligerent Russia and China along with increasing Islamic terrorism, our major NATO allies must join the U.S. in taxing its citizens enough to strengthen their respective military and foreign aid capabilities. The U.S. would welcome mature partners who realize that contributing their fair share to the defense of the free world is a necessity not a luxury.