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Chapter Five: Poor-Quality Leaders (a.k.a. My Leftist Critique)

 

Ever since Time Magazine ran a cover story in the early 1970s proclaiming that Minnesota was “the state that works”, people have had the idea that life was better here in Minnesota. We have a Scandinavian heritage that encourages us to be both hard-working and compassionate, tolerant and relaxed. The Time cover had a picture of then Governor Wendell Anderson in plaid shirt holding up a string of fish. The story suggested that, when working Minnesotans have nothing better to do in the summer, they simply take off from work and go fishing. That would never happen in New York City, of course. Garrison Keillor, too, has contributed to this “myth of Minnesota”, while betraying a darker and more gender-bending side of the Scandinavian temperament. He calls this place Lake Wobegon, “where all the men are good-looking, all the women are strong, and all the children are above average.”

The reality is different from the myth. When a Time columnist and reporter, Barbara Ehrenreich, came to Minnesota to find out how the average low-income worker lived, she expected to find a progressive community reasonably congenial to this type of person. The result was a chapter in a book titled “Nickel and Dimed” and subtitled “On (not) getting by in America.” In Minnesota, she found the worst situation of any of the three locations where she had lived and worked while writing her book. Ehrenreich worked at a Wal-mart store in an unnamed suburb of Minneapolis. Her starting wage was $7.00 an hour. The book was written to gain insights into the daily experience of low-wage workers, some of whom might have recently been forced off welfare by workfare legislation.

Being a Minneapolis landlord, I am sorry to report that Ehrenreich’s chief problem in Minnesota was finding rental housing at a reasonable price. She was forced to live in an $800-a-month motel without screens or deadbolt lock. (My rents for efficiency apartments, which do have screens and deadbolts, are $415 per month.) Rent alone ate up much of her income - and she did not have children to support. She did have a car. Many who did not were forced to endure long bus rides to work each day and long waits at the bus stops. Becoming an employee of Wal-mart subjected one to personally intrusive employment questionnaires, drug testing, and, once hired, a physically demanding routine which might be extended by an hour each day without commensurate pay. In short, even simple, low-paid entry-level jobs are no picnic. Ehrenreich concluded that few persons in these jobs could make ends meet without careful planning and resourceful use of cost-saving techniques. After a few months, she could return from such work to her normal job as a writer for Time magazine and Harper’s. Most of her co-workers were trapped in this type of career.

I think Ehrenreich’s book has a message for America’s political leaders. Public policy needs to pay much more attention to the millions of honest, hard-working Americans whose wages have not kept pace with expenses in recent years. What political “issue” raised during the last several election campaigns addresses their situation? Neither the Democrats nor Republicans talk of “living standards” any more, perhaps because it would be difficult to put a positive spin on their lackluster record.

Statistically, the U.S. economy has shown impressive growth. Its gross national product has risen from $527 billion in 1960 to $9,963 billion in 2000; and, in constant 1996 dollars, from $2,377 billion to $9,319 billion. Total employment in the United States has grown from 54.2 million to 131.8 million workers. The average wage for production or nonsupervisory employees in the private economy has increased from $2.09 per hour to $13.75 per hour while the average workweek has dropped from 38.6 hours to 34.5 hours.

This record of progress is deceiving. Dollar-denominated wages and GNP must be adjusted for inflation. To achieve such striking gains in employment and GNP, it was necessary to lure numerous married women into the work force. The statistical decline in average hours is the result of a massive influx of part-time retail workers into the employment mix. The economic output upon which GNP is based consists increasingly of goods and services - mostly services - which have little connection with human happiness or material well-being. Either the growth feeds unproductive bureaucracies or it goes into functions regarded as “necessary evils.” Intuitively, most Americans know that the economy is not delivering long-term improvements in living standards as it did in past generations.

Are people today better off than their parents or grandparents? Some are; many are not. Wal-mart may call their employees “associates” but that does not necessarily mean they are paid a living wage. While the 1980s and 1990s were “boom times” for the U.S. economy, the record shows that, in constant 1999 dollars, the median annual after-tax income for U.S. households rose from $29,456 to $33,676 between 1980 and 1999. Considering that the median annual income of married couples is $66,529 (in 1999 dollars) when the wife works but only $38,626 when she stays at home, it’s clear that the increase of married women into the work force was responsible for much of this gain. The unintended result was more latch-key kids and more paid services which pump up GNP with functions that housewives used to handle for free.

A recent study shows that low-income, unskilled workers, especially males over 40, have increasingly turned to Social Security disability as their primary source of income. As the number of recipients grew from 3 million in 1990 to 5.42 million in 2001, outlays for the Social Security disability program have risen to $60 billion a year, making this by far the government’s largest income-support program. Evidently, poverty must be medicalized for it to be treated. The share of national income going to the lowest fifth of Americans in terms of income dropped from 5.5% in 1980 to 4.3% in 1999. The share of the 60% in the middle brackets of income distribution also declined during that time. Meanwhile, the share going to the fifth of Americans having the highest incomes, rose from 41.1% to 47.2%; and, of the top 5%,from 14.6% to 20.3% in the years between 1980 and 1999. “The rich are getting richer and the poor poorer,” the saying goes. In 1979, Americans in the top 5 % with respect to income earned, on average, ten times more than those in the bottom 20%. By 1999, the income ratio had widened to nineteen-to-one.

Economists look at low wages in terms of their impact on daily living. Some have calculated the income which families would need to get by. In Minnesota, the JOBS NOW coalition proposes that in a two-parent family with two children and one parent employed, the family would need an annual income of $30,480 to cover life’s necessities. This equates to a wage of $14.65 per hour. In 1998-99, 52 % of male workers in Minnesota earned at least $14.65 per hour; 48% did not. Alternatively, a single-parent family with two children would need an annual income of $34,032 to have an adequate standard of living. This equates to a wage of $16.36 per hour. Only 28% of female workers in Minnesota earn that much money.

Each year, the U.S. Census Bureau calculates the number of Americans who live below the “poverty line”. This is currently defined as having an annual income of less than $18,104 for a family of four; $14,128 for a family of three; $11,569 for a married couple; and $9,039 for individuals. Between 1993 and 2000, Americans living below the poverty line decreased from 15.1% to 11.3%. During the latest recession, it has risen to 11.7%. The Census Bureau reports that this increase was concentrated “in the suburbs, in the South, and among non-Hispanic whites.”

Though I try not to look at these numbers moralistically, I cannot help thinking that they represent much suffering. I am not in favor of large transfers of wealth directed by government or even a revival of the welfare state. Yet, the growing extremes of income distribution indicate a socially unhealthy situation. We are no longer one people but what Americans used to say contemptuously of the socially stratified Central American countries, that they were “Banana Republics”.

The prevailing assumption is that the growing disparities of income and wealth reflect “decisions of the free market”. Some people earn more because they are worth more to the economy. The usual corollary to this argument is that the employees who are worth more are more highly educated or have sought-after computer skills. By implication, it’s the fault of the low-paid workers that they dropped out of school or failed to prepare themselves for work in the computer age. The free market may not be perfect; but, to paraphrase Churchill, it’s the worst system devised except for everything else.

While I agree that specific outcomes should generally be left to the free market, I also think it dishonest to suggest that government does not influence its result. By direct subsidies or tax breaks, government determines that certain industries or business enterprises will be allowed to flourish while others fail. State licensing boards boost incomes by restricting entrance to the professions. George W. Bush became a wealthy man by persuading the Texas legislature to build a new baseball stadium for the Texas Rangers while he was a part owner. Corporate welfare is also a drain on the public purse. Political conservatives want to pretend that the multimillionaires and billionaires became rich by economic “merit”. Some who invented new products or built up businesses from scratch may, indeed, have merited their wealth. But that does not explain the upward creep of CEO compensation in recent years.

Back in the ‘50s, the unions used to scream at company executives who earned, say, $300,000 in a year. Today such a salary, or its inflation-adjusted equivalent, would be an insult to CEOs of large-sized companies. At the 365 largest U.S. corporations, the ratio of CEO pay to the average pay of nonmanagement employees rose from 42-to-1 in 1980 to 691-to-1 in 2000. Was that the result of the free market rewarding them for excellent performance or creating shareholder value?

I will not recite the horror stories of executives at Enron, Tyco, Worldcom, and other businesses in the news today. Instead, look back to the pre-scandal days of 1996 right here in Minnesota. The ten highest-paid corporate executives in our state that year included one retail executive, one computer-firm executive, two airlines executives, and six executives with banks or financial firms. Their total annual compensation ranged from $4.4 million to a whopping $102.4 million. The man in the top position, Lawrence Coss, was CEO of Green Tree Financial Corporation, an offshoot of the old Midwest Federal bank, which went into financing trailer homes, motorcycles, credit-card debt, etc. Mr. Coss was smart enough to merge his firm in time with Conseco Finance which has recently gone into bankruptcy. Northwest Airlines has also lost money, coping with post September 11th cuts in travel.

Another well-paid executive of that era, Michael Bonsignore of Honeywell, closed down the Minneapolis headquarters when Honeywell merged with Allied Signal and then tried to merge with Jack Welch’s General Electric. Booted out after the GE deal fell through, Bonsignore received $9 million in severance pay. He was promised an additional $5 million to $9 million in retirement benefits if he agreed not to work for a competitor within two years or say anything bad about the company.

Does high CEO pay correlate with good job performance and therefore qualify as being the result of an “economic” (as opposed to “political”) decision? A 1998 study by United for a Fair Economy and the Institute for Policy Studies found that “CEOs who downsize workers ... who made bad loans in Asia ... (or) who have shifted jobs to Mexico ... are rewarded.” Apart from the bad Asian loans, one can perhaps argue that these executives helped to improve earnings per share. Corporate scandals of the last year have revealed, however, that many top executives have manipulated earnings per share for personal gain.

The fact is that the “free market” does not pick corporate executives. They are picked by highly political corporate managers and boards of directors. Corporations, while functioning within free markets, are themselves feudal-like organizations where power is arranged hierarchically along the lines of personal loyalty. Executive pay is largely a political decision, influenced by personal ties as well as by ideas of how far the envelope can be pushed without provoking a reaction. Corporate executives, benefiting from this system, would do well to consider that, in the realm of politics, government remains the top dog. Medtronic’s retired CEO, Bill George, has said: “(T)hose of us who are fortunate enough to lead great companies are the stewards of the legacy we inherited from past leaders and the servants of our stake holders ... We do not need celebrities (fetching a big price on the market) to lead our corporations.”

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