Journalism

September 22, 1996

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WHO REVOKED THE DREAM

Let's suppose, for a moment, there was a country where the people in charge charted a course that eliminated millions of good-paying jobs.

Suppose they gave away several million more jobs to other nations.

Finally, imagine that the people running this country implemented economic policies that enabled those at the very top to grow ever richer while most others grew poorer.

You wouldn't want to live in such a place, would you?

Too bad.

You already do.

These are some of the consequences of failed U.S. government policies that have been building over the last three decades — the same policies that people in Washington today are intent on keeping or expanding. Under them, 140 million Americans, mostly working families and individuals — blue-collar, white-collar and professional — are being treated as though they were expendable.

Most significant of all, the American dream of the last half-century has been revoked for millions of people — a dream rooted in a secure job, a home in the suburbs, the option for families to live on one income rather than two, a better life than your parents had and a still better life for your children.

U.S. government policies consistently have failed to protect that dream in the face of growing international competition. Instead they've favored the very forces that shift jobs, money and influence abroad.

As a result, the United States is about to enter the 21st century much the same way it left the 19th century:

With a two-class society.

Both government and big business are encouraging the shift — dividing America into have-mores and have-lesses.

While the nation's richest one percent is accumulating wealth not seen since the Robber-Baron era of the last century, the middle class is shrinking.

There are, to be sure, some notable differences from a century ago. In the 1890s, most Americans were struggling to reach a middle-class lifestyle. By the 1990s, an overwhelming majority, having achieved it, were either losing it or struggling to hold on to it.

In the 1890s, government responded to the prodding of reform-minded citizens and began to slowly create a framework of rules to guide the economy, control the excesses of giant business trusts and their allies, and generally to protect the interests of the average citizen.

By the 1990s, that framework was being dismantled.

Who is responsible?

In a word: Washington.

Or, more specifically, members of Congress and presidents of the last three decades, Democrats and Republicans alike. Of course, they've had a lot of help — from lobbyists, special-interest groups, executives of multinational corporations, bankers, economists, think-tank strategists, and the wheelers and dealers of Wall Street.

These are some of the emerging winners in this changing America.

The losers? Working Americans who have been forced to live in fear — fear of losing their jobs and benefits, fear of the inability to pay for their children's education, fear of what will happen to their aging parents, fear of losing everything they've struggled to achieve.

The winners say if you're not a part of this new America, you have no one to blame but yourself. They say the country is undergoing a massive structural change comparable to the Industrial Revolution of the 1800s, when Americans moved off the farms and into factories. They say you have failed to retrain yourselves for the new emerging economy. That you don't have enough education. That you're not working smarter. That you failed to grasp the fact that companies aren't in the business of providing lifetime employment. And, they say, it's all inevitable anyway.

It is inevitable that factories and offices will close, that jobs will move overseas or be taken by newly arriving immigrants, that people's living standards will fall, that you may have to work two or three part-time jobs instead of one full-time job.

These things are inevitable, they say, because they are the product of a market economy, and thus beyond the control of ordinary human beings and, most especially, beyond the control of government.

Don't believe it. They are, in fact, the product of the interaction between market forces and government policies — laws and regulations enacted or not enacted, of people finding ways to turn government to their advantage.

The policies that are driving these changes range across the breadth of government — from international trade to immigration, from antitrust enforcement to deregulation, from lobbying laws to tax laws.

Because of these changes, American society is being recast, as the bottom-line mentality of the global business world is transferred to the country at large. Along the way, workers, entire communities and a way of life once the envy of people around the world have become dispensable.

Michael Rothbaum and Darlene Speer are at opposite ends of this new two-class society.

Rothbaum, a corporate executive, lives in an exclusive gated community called St. Andrews Country Club in Boca Raton, Fla. Set amid 718 acres of lakes, fairways and landscaped grounds, St. Andrews is typical of the luxury communities that many wealthy Americans now inhabit — self-contained enclaves sealed off from everyone else.  St. Andrews has its own 24-hour security patrol, shopping complex, sports pavilion, restaurants and two championship 18-hole golf courses where residents can play after paying a $75,000 membership fee.

Rothbaum lives in a 5,000-square-foot home, with pool and spa, built in 1991. According to the Palm Beach County Assessor's office, the property is valued at $636,000.

Darlene Speer, on the other hand, works two jobs. She is a full-time office worker for a furniture manufacturer and a part-time clerk at a video store in Marion, Va. She lives in a one-bedroom unit in an apartment complex in Marion, a community of 8,500 in the mountains of southwestern Virginia.

Until 1992, Speer worked in the sewing department of Harwood Industries, a clothing manufacturer that was one of Marion's largest private employers. But in August 1992, Harwood Industries, whose principal owner was Michael Rothbaum, announced it would close the department and move all the company's apparel production to Honduras and Costa Rica, where labor costs are much cheaper. The company said it was under pressure from retailers to cut costs.

Not that Darlene Speer and her co-workers drove Harwood Industries to Central America with their bloated salaries. After 13 years, Speer was earning less than $9 an hour. But women in Honduras work for a lot less — about 48 cents an hour. Before leaving town, Rothbaum's company agreed to pay severance of about $1,200 to each employee. The total for 120 women, who had collectively worked more than 1,500 years in the sewing department, amounted to less than one-quarter of the value of Rothbaum's home. Take a glimpse into the new America of Michael Rothbaum and Darlene Speer.

THE WIDENING DIVIDE

THE TOP 1 PERCENTERS—GROWING RICHER. These are the families and individuals with incomes that begin at about $190,000 and go all the way up into the tens of millions of dollars — the top 1 percent of all tax-filers. There are 1.1 million of them.Most are doing quite well. Some spectacularly well.

The average income in this top group, according to IRS tax return statistics, ballooned from $147,700 in 1980 to $464,800 in 1992 — a jump of 215 percent. That was three times the growth recorded by the bottom 90 percent of tax filers, the 101.4 million families and individuals whose incomes begin at the minimum wage and go up to about $65,000. Their average income rose just 67 percent, from $13,200 in 1980 to $22,100 in 1992.  While the increase in incomes of the overwhelming majority of American lagged behind the 70 percent increase in the cost of living, the income of the top 1 percenters went up three times as fast as the inflation rate.

THE BOTTOM 90 PERCENTERS—GROWING POORER. In 1980, the bottom 90 percenters accounted for 68 percent of all income reported on tax returns. By 1992, their share had fallen to 61 percent.

Meanwhile, the top 1 percent of tax filers saw their share of all income rise from 8 percent in 1980 to 14 percent in 1992. Looked at another way, the 90 percent of the people at the bottom transferred 6 percent of their income to the people at the very top. They transferred another 1 percent to those tax filers in the 90 to 99 percent range, the 10.1 million families and individuals with incomes between about $65,000 and $190,000. Their share of all income edged up from 23.7 percent in 1980 to 25 percent in 1992.

CONCENTRATION OF WEALTH. The United States has the widest gap between rich and poor of any industrialized nation. The inequality is reversing the gains that carried millions to middle-class prosperity following World War II. How bad is it? Picture a town called Inequityville that is a perfect miniature version of the United States, a true microcosm of the nation's population and wealth. And suppose that all the wealth in this town amounted to $55 million and consisted of the houses of the 300 families living there. Here's how it would divide up: Three families would live in mansions worth $5.6 million each, and 27 families would live in very nice $750,000 houses. The remaining 270 families would live in rowhouses averaging $67,000 each.

In the real U.S.A., the top 1 percent of households controls almost one-third (30.4 percent) of the nation's net worth — that's total wealth, not income. The next 9 percent holds another third (36.8 percent) of the nation's wealth. Put the two together and the top 10 percent of households owns two-thirds (67.2 percent) of the wealth. The remaining 90 percent accounts for 32.8 percent of the wealth.

EXPLODING DISPARITY IN INCOME

Over 20 years on the job, how would you like to see your salary go up by, say, 950 percent? If you had a job in the retail trade, as a sales clerk in a department store making $6,250 a year two decades ago, today you'd be earning $59,400. Or if you were in manufacturing, perhaps turning out switch gears and earning $9,921 then, you'd be making $104,200 now. And if you were in a minimum-wage job 20 years ago, making $2.10 an hour, your hourly pay today would be $22.

Where can you find such lucrative work? You can't. But that's what those jobs would pay if they'd gone up at the same rate as the salary and bonuses paid by General Electric Co. to its top executive between 1975 and 1995. When it comes to pay increases, executives of America's largest companies have left their workers far, far behind.

A Philadelphia Inquirer survey of 20 Fortune 500 corporations — in industries ranging from tractors to computers, from soft drinks to soap — shows that the salaries and bonuses of the highest-paid executives ballooned an average of 906 percent between 1975 and 1995, or five times the inflation rate.

By comparison, the average earnings of more than 73 million blue-collar and white-collar workers across all private industry — from shipping clerks to nurses, from truck drivers to musicians — went up just 142 percent, not even keeping up with the inflation rate of 183 percent.  Their average annual salary in 1995 was $20,559 — down $3,529 from their inflation-adjusted earnings of $24,088 in 1975. Because of growing tax burdens, these workers were even worse off than that decline suggests.

Contrast that with GE's top bosses. In 1975, Reginald H. Jones earned $500,000 in salary and bonuses. By 1995, GE's chief operating officer, John F. Welch Jr., received $5.25 million.  While the top executive's pay rose 950 percent, the number of GE employees plunged 41 percent, dropping from 375,000 to 222,000. Actually, that jobs reduction was even greater than it seems. For in 1985, GE bought RCA, which had 119,000 employees.

When those workers are added in, over the 20 years GE eliminated 272,000 jobs — the equivalent of the entire RCA workforce, plus another 153,000 GE employees. The layoffs helped Welch earn the less-than-reverent nickname "Neutron Jack." Oh, a footnote: In addition to a salary and bonus of $5.25 million, Welch also had GE stock options worth $35.4 million at the end of 1995.

MORE EXECUTIVE EXCESS. America's corporations paid their top officers $221 billion in compensation in 1992, the latest year for which complete statistics are available from the Internal Revenue Service.

That exceeded the combined incomes of every working individual and family earning less than $50,000 a year in Arkansas, Kansas, Missouri, Oregon, Pennsylvania and Wisconsin — more than 12 million individuals and families.

To better understand those numbers, consider this: In 1975, Alden W. Clausen, then the Bank of America's top executive, earned $348,018. That was the equivalent of the pay of 53 bank employees, from janitors to tellers.In 1995, Richard M. Rosenberg, chairman and chief executive officer of Bank of America, earned $4,541,666 in salary and bonuses. That was the equivalent of the salaries of 116 more bank employees than for Clausen — or a total of 169.

Or compare salaries of people who provide services to corporate executives—like service station attendants. In 1995, Louis V. Gerstner Jr., chairman and CEO of IBM, earned $4.8 million in salary and bonuses. That was the equivalent of 407 gas station attendants' pay. Gerstner's salary was worth 320 more gas station attendants than his predecessor's pay was worth.

THE GREAT TAX BURDEN: FEDERAL. At the same time that middle-class family incomes have stagnated or fallen behind, local, state and federal tax burdens have soared, leaving families with less after-tax money to spend on food, housing and clothing.

Take a look at what Washington has done for you on the federal level. In 1955, the personal exemption was $600. For a family of four, that added up to $2,400. Median family income that year amounted to $4,418. So the personal exemption shielded 54 percent of family income from tax.

By 1995, when median family income reached an estimated $39,500, the personal exemption was $2,500, or $10,000 for a family of four. Now the personal exemption shielded only 25 percent of family income from tax. And there is the matter of rates. In 1955, the top tax rate was 91 percent. It applied to all taxable income over $400,000. By 1995, the top rate had been slashed to 39.6 percent, which applied to taxable income over $256,500.

The change in income brackets means that Washington has pushed lower- and middle-income people closer to the top tax rate, and pushed those at the top closer to the middle rates. Thus, 71 percentage points separated the bottom from the top tax rates in 1955. Today, it's just 24.6 points.

Finally, Social Security and Medicare taxes. Those taxes paid by a median-income family spiraled 3,497 percent between 1955 and 1995. The amount deducted from paychecks rose from $84 in 1955, when only Social Security was withheld, to $3,022 in 1995, when both Social Security and Medicare taxes were deducted. The Social Security tax is the most regressive levy of all. Because the amount of income subject to tax is capped at a specific figure — $62,700 in 1996 — the more money you make, the lower your effective tax rate.

Taking all these taxes into account, the people in Washington have effectively canceled the progressive tax system. That system, built on the principle that tax rates go up as income rises, was in place during the great growth years of the middle class.

THE STILL GREATER TAX BURDEN: STATE AND LOCAL. While the people in Washington have been easing the tax burden on the wealthiest citizens, they have been shifting more responsibilities — and therefore taxes — to state and local governments. These taxes fall hardest on middle-income taxpayers. That's true whether it's state income and sales taxes or local real estate and excise taxes.

Overall, the local and state tax burdens have doubled in the last 40 years. In 1955, they consumed 12 percent of wage and salary income. By 1995, it was 23 percent. Put another way, if median family income had gone up at the same pace as state and local taxes, 50 percent of all families today would earn more than $95,000 a year. In reality, only 4 percent do.

SOME OF THE RICH ARE DIFFERENT FROM YOU. In 1980, a total of 198 individuals and families with incomes above $200,000 filed U.S. tax returns reporting that they owed not one cent in federal income tax. By 1992, the number had swelled to 1,896.

The tax-free returns were perfectly legal, since filers took advantage of a variety of writeoffs and tax shelters that one Congress after another inserted or preserved in the tax code. Those provisions also allowed tens of thousands of affluent people who did pay income taxes to enjoy an effective rate below that of many middle-income families and individuals. For example, if your adjusted gross income was between $25,000 and $30,000 in 1992, you paid federal income tax at around double the rate paid by 5,598 families and individuals with incomes over $200,000. Their effective rate: Less than 5 percent.

MERICA'S NOT-SO-GLOBAL WAGES. The image of the highly paid American production worker exists more in talk-show rhetoric than in reality. Twenty years ago, the average hourly compensation — wages and benefits combined — of workers employed in U.S. manufacturing plants was higher than that of workers across most of the industrialized world.

No more. In 1975, the compensation of U.S. production workers averaged $6.36 an hour, compared with $6.35 for Germany, $6.09 for Switzerland, $4.51 for Austria, and $3 for Japan, according to a study by the Bureau of Labor Statistics. By 1993, the last year for which figures are available, the U.S. average compensation of $16.79 an hour had been eclipsed by Germany, where wages and benefits reached $25.56; Switzerland, $22.66; Austria,$20.20; and Japan $19.20. For the European Union as a whole, hourly compensation in 1993 averaged $18.48 — or $1.69 above the U.S. rate.

THE NEW AMERICAN DREAM—FORTRESS HOMES. The decline of America's middle class has been accompanied by the rise of a new generation of wealth. And many owners of that new wealth live in a way that is quite different from everyone else. They live in private preserves, so-called gated communities, where estate homes—the size of two or three typical suburban houses—are ringed by walls and protected by security guards 24 hours a day, where admittance to the neighborhood is by invitation only.

A brochure for The Reserve at Tampa Palms in Tampa, Fla., an exclusive enclave with its own championship golf course and lakes, says it offers "a sense of unequalled privacy and security (that) is enhanced by a tall, elegantly landscaped brick wall, creating a distinctive approach leading to the gatehouse entrance, which is staffed around the clock for your peace of mind."

A few lots remain. They range in price from $137,500 for a standard 21,875-square-foot lot, with no special amenities, to $249,000 for a 43,349-square-foot lot on the golf course. That's for the land. The house is extra. Many are in the million-dollar-plus range. Even at the peak of the Robber Baron era, the very richest industrialists lived in their communities. Andrew Carnegie in Pittsburgh. John D. Rockefeller in New York. Indeed, on many winter mornings, Rockefeller could be found skating on the outdoor rink he built next to his town house on West 54th Street. Today, even senior-level corporate managers have sealed themselves and their families off from the communities where they earn their living.

THE FADING AMERICAN DREAM: A NICE HOME. Beginning after World War II and continuing through the 1950s, '60s and '70s, successive generations achieved the American dream of owning their own home. During the decade of the 1980s, home-ownership among those 34 and younger, when people traditionally buy their first house, declined. It fell from 43.8 percent in 1980 to 39.6 percent in 1990.  In the 1950s, the largest home builder in the Philadelphia area — indeed, in the country — was Levitt & Sons Inc., which created Levittown, a planned community of 17,000 homes in Bucks County. Built for an emerging middle class, the homes were priced so that half the families in the area could afford to buy one.

In the 1990s, the largest home builder in the region is Toll Brothers Inc., which builds houses that sell for $210,000 to $400,000, a price range that excludes most families earning less than $65,000 a year. Based on the latest state income tax data, about 10 percent of working families in Philadelphia and the four surrounding Pennsylvania counties can afford to buy a Toll Brothers house; 90 percent are priced out of the market.

NOWHERE TO TURN. Over the years, American families have achieved or maintained their standard of living by exercising, one after another, a series of options. Women joined the work force in larger numbers, often to bolster family income. Families had fewer children. College-age children and young adults returned home to live with their parents, saving on costs and sometimes even contributing to household income. And families began to live on credit cards.

Back in the 1950s, Americans, prudently, kept their overall debt loads below the amount of their weekly paychecks. In 1950, total consumer debt—mortage and installment loans—amounted to $96 billion. That represented 65 percent of total wage and salary income of $147 billion. In 1960, consumer debt rose to 98 percent of wage and salary income.  By 1995, that figure had climbed to 166 percent. Americans now are nearly $2 in debt for every $1 they receive in their paychecks.

As might be expected from such rising debt loads, another set of numbers also has shot up smartly — personal bankruptcies. They climbed from an annual average of 183,700 in the 1970s to 373,300 in the 1980s, and then soared to 811,100 so far in the 1990s. Now, families are running out of options.

For this new America of lagging earnings, a widening gap in incomes and wealth, a falling standard of living, and a bleak future for children and grandchildren, you can thank Washington and special interests, who have set the nation's economic agenda for years to come.

On a more personal level, the grim statistics merely reinforce the feelings shared by many working people, but seldom voiced beyond family, friends and co-workers. In interviews the authors conducted over the last two years with scores of white-collar, blue-collar and professional workers, the picture of the new America is decidedly downbeat. From Washington to Los Angeles, Chicago to Biloxi, the moods ranged from mild pessimism to hopelessness.

One after another, they talked about how their standard of living is dropping, how there is little job security, how loyalty to a corporation counts for nothing, how it is impossible to set aside money for their children's education, and how the strain of both parents working — sometimes at multiple jobs — is putting stress on families. These were hard-working people, steeped in traditional American optimism and values, who once believed everything would turn out all right but now have doubts.

People like Jody Meyer of Eden Prairie, Minn. Married and the mother of three children, Meyer helped produce brochures, videos and other promotional items for 17 years for Prudential Insurance Co. in Minneapolis until 1994, when she and 1,500 co-workers were dismissed in a cost-cutting move.

Like anyone who loses a job, Meyer at first experienced what she described as a "sense of loss" and a feeling that the company, which is America's largest insurance firm, just "didn't care." But she soon rebounded and went into business for herself, arranging and catering weddings, parties and other social events. "I do a little bit of everything," she says.

It was difficult getting started but her husband's salary from a courier service carried the family through. Meyer's new business gives her more flexibility to be with her children, a daughter and twin boys. But, in a theme that the authors heard over and over, she said she earns less than she made at Prudential. What worries Jody Meyer most is what's happening to the middle class.

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