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July 7, 2008 |
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Smart, talented, ambitious people have a lot to offer. They also expect a lot. They expect our society’s best and biggest rewards, and the bigger the reward, the harder they’ll work to grab it. That’s fine — to a point. We certainly do want to see our “best and brightest” putting out, contributing as much as they can to endeavors that create wealth and advance the common good. But if the rewards our society offers the smart and talented become too big, the smart can tend to start doing dumb things. The more outrageously large the reward, the more outrageous the dumb — and socially damaging — behavior. Smart societies understand this dynamic and work, through tax laws and cultural norms, to keep rewards within reason. Here in the United States, we used to have many such laws and norms. We no longer do. And now we’re paying the price. In this week’s Too Much, a look at the latest superstar executive turned scourge of the late great American middle class. |
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The most starkly unequal swatch of real estate in the world today? That just might be the acreage around Hamilton Court, a gated fortress outside the Indian city of Delhi. Residents in Hamilton Court’s 250 apartments have everything they need behind their well-guarded stone walls: a private school, a health clinic, and a fitness club, not to mention, the Sydney Morning-Herald reported last week, “well-groomed lawns and paths for power walks and cricket games.” Meanwhile, the 600 domestic staff who work in Hamilton Court live across the street in a shantytown, “where homes have no running water, children bathe using buckets, and electricity supply is limited to a few hours a day.” Residents of Hamilton Court do occasionally need to leave the premises, to browse, for example, at a nearby Burberry. But the Hamilton Court residents association frowns on unnecessary excursions. Notes association president Madan Mohan Bhalla: “Women and children are not encouraged to go outside. If they want to have a walk, they can walk inside. It's a different world outside the gate.” India now has over 100,000 millionaires — and a quarter of the populace living on less than $1 a day . . . Only a few years ago, notes Women’s Wear Daily, experts “were sounding the death knell” for haute couture, the très expensive handicraft of the great French fashion design houses. Some big names -- Yves Saint Laurent, for one — had even exited couture entirely. But couture has roared back, news reports on last week’s annual Paris fashion shows agreed, thanks to an “expanding” international customer base “flush with wealth” – and immune to global economic turmoil. Explains Christian Dior exec Sidney Toledano: “Very rich people are not suffering from the crisis.” But the very rich do have their fashion worries, Houston socialite Becca Cason Thrash admitted with a laugh at one of last week’s shows. At a recent London party, she and another guest came wearing the same $47,000 outfit . . . Five years ago, the New York Stock Exchange, then a “nonprofit,” agreed to hand its CEO Richard Grasso an exit package worth $187.5 million. News of that Eva Kemeny, the American daughter of a wealthy Pepsi executive, and Hans Kristian Rausing, the son of a packaging material billionaire who fled his native Sweden in the 1980s to take advantage of Britain’s low tax rates on high incomes, haven’t quite constituted a picture-perfect couple. The aimless pair met during an unsuccessful sojourn at a drug rehab clinic. This April, police arrested Eva after she tried to smuggle drugs into London’s U.S. embassy. Last month, the 44-year-old Hans went into hiding from Scotland Yard — and became a British tabloid sensation — after a car crash. Reporters have marveled at the character gap between Hans and his two more sober older sisters, both now respected academics. The root of that difference? The two sisters did all their growing up in Sweden, older sister Lizbet notes, where the family “didn’t have cooks or chauffeurs, or anything.” But that “more classless” lifestyle ended when the family left Sweden to become tax exiles in the UK, where Hans completed his teenage years. Lizbet and her sister Sigrid, the UK Guardian observes, both give the impression they would be “perfectly happy” without their family fortune. Notes sister Sigrid: “I know people who are emotionally crippled by money they inherited. It does not help anyone.” The Heritage Foundation, the Washington, D.C.-based think tank that fashioned the tax breaks for the wealthy enacted during the Reagan era, charged last week that the tax-the-rich plans advanced by Senator Barack Obama would, if enacted, shove the United States into the ranks of “such high-tax nations as Sweden and Denmark.” That charge comes in a new Heritage Foundation paper that offers the post-Reagan faithful what amounts to talking points for opposing the Obama tax proposals. The first tip apologists for inequality will find in the new Heritage Foundation paper: Don’t try to defend tax breaks for the rich. Instead, blast away at Obama’s plan to raise taxes on “the successful.” |
Quote of the Week “What is little understood is that those who accuse others of class warfare as they seek to silence anyone who criticizes America's worsening income inequality are slyly engaging in a form of class warfare themselves — with the aim of defending the interests of those at the very top of the income pyramid.”
New Wisdom Peter Macdiarmid, As CEO pay in Europe rises, so does talk of curbing it. USA Today, June 30, 2008. Why “French President Nicolas Sarkozy is urging debate on European-wide pay limits.” Kathleen Vinehout, Gap between rich and poor continues to grow. Tomah Journal, July 2, 2008. A Wisconsin state senator examines why her constituents "just can't make it" economically any more.
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Super-Sized Incentives: Behold and Beware Richard E. Dauch currently serves as the CEO of American Axle and Manufacturing, an auto parts giant carved out of General Motors 14 years ago. Late this past May, after threatening to outsource “all of our business to other locations around the world,” Dauch forced 3,600 striking workers at his company’s five original American plants to accept a contract that cuts wages from $28 an hour down to as low as $14.35 and slices the company’s U.S. workforce by half.
Dauch has now collected, over the last decade, over $258 million in compensation from American Axle — and, in the process, tossed thousands of U.S. worker families out of the middle class. Auto workers, ironically, once symbolized that middle class, and for good reason. Precedent-setting union contracts at GM and other U.S. automakers after World War II helped give birth to the first mass middle class in world history. And the executives who signed those contracts? They did well, too, but not too well. In 1950, for instance, GM president Charlie Wilson pulled in $586,100, a bit over $5 million in current dollars. Today, someone at that $5 million level will usually clear, after taxes, around $4 million. Wilson cleared the equivalent of only $1.25 million. He paid nearly three-quarters of his income in taxes. Mid-20th century America. in effect, frowned on excessive incomes at the nation’s economic summit. The result: America’s biggest companies, back then, manufactured cars, not mega millionaires. A young Richard Dauch would start his auto industry career in this mid-20th century manufacturing culture — and thrive in it. The talented Dauch shot up the GM organizational charts. In 1965, GM named him a production foreman at the company’s Flint plant. Three years later, he was supervising all the plant’s production. By 1976, Dauch was running all manufacturing for VW of America. The rising young executive would go to similar heavy-duty responsibilities at Chrysler. By the mid-1980s, Dauch had established a reputation as one of the top managers in the entire American auto industry. But that industry was now operating within an economy that had fundamentally changed. By the 1980s, the restraints on the size of the rewards the economy had to offer had begun eroding. The top tax on income over $400,000 — 91 percent in the Eisenhower years — would be 28 percent by 1986. Big money could now be made — and kept — and Corporate America’s smart, talented, and ambitious were pushing the envelope to make it. Corporate America's most ambitious operators were soon raking in more millions in a year than old-time executives like Charlie Wilson ever made in a career. And they were raking in these millions not by making and selling goods, but by making and selling companies. The action — and the rewards — had shifted. Dauch would shift, too. In 1994. Dauch and another former General Motors executive rounded up a group of investors, bought up five mismanaged GM parts plans, and started up shop as a privately held company known as American Axle and Manufacturing. Typically, in a buyout situation like this, the new owners follow some variation on what has come to be called the strip-and-flip script. They proceed to gin up profits by any means necessary, then take their plaything public on the stock exchange and make a killing selling shares of their new company’s stock. That by-any-means-necessary could include anything from squeezing worker wages, benefits, and pensions to slashing jobs and outlays for R & D. At American Axle, Dauch would go a different route, at least at first. He would stay true to his mid-20th century auto industry roots. Dauch would pay standard auto industry union wages. He would invest in improving the company. And the company would prosper, helped along by the “guaranteed market for American Axle products” that General Motors so thoughtfully provided. Dauch prospered, too, professionally and financially. In 1997, the National Association of Manufacturers named him America’s “manufacturer of the year.” By 2003, American Axle had become big enough the enter the Fortune 500, and Dauch was cashing in big-time on stock options. He would end up that year as the highest-paid executive in the entire auto industry, at $30.1 million. Dauch was now making six times more, in inflation-adjusted dollars, than GM’s top exec made in 1950 — and paying taxes at less than one-third the rate. He would be in no hurry to see these good times end. To keep them going, he would start doing dumb things. Dauch the smart and experienced manufacturing executive knew that enterprises only deliver quality when workers feel committed to their work. In American Axle’s early years, Dauch had worked to build that commitment. He didn’t just pay decent wages. He respected line workers enough, notes the Automotive News, to make the effort to remember the names of their kids. And he held his managers “to the same demanding standards as laborers.” All that made Dauch “a local workingman's folk hero” and generated “stellar quality and delivery records,” according to the executive in charge of GM's purchasing and supply chain. But by 2004 this commitment to building an effective enterprise was becoming increasingly difficult to maintain. American Axle’s competitors were taking the “low road” that Dauch had avoided. They were squeezing workers and quality to inflate their share prices — and keep ample executive rewards flowing. So Dauch faced a choice. American Axle could fall in line and pander to Wall Street. Or Dauch could put his company’s share price — and his personal rewards — at risk by refusing to make the short-term cuts that would leave the company less efficient and effective in the long run. Dauch chose the dark side. In 2004, American Axle began pressing the union to swallow lower pay rates for new workers. Two years later, Dauch tried to bully workers at his Buffalo, New York plant to accept wage concessions. They didn’t, and Dauch would go on to shut the plant down. That set the stage for this year’s contract negotiations. American Axle came to the table with proposals for draconian wage and benefit cuts. Workers balked — and then walked out on strike in late February. “We’re at war defending the middle class and its wage,” Bill Alford Jr., the president of United Auto Workers Local 235, told reporters. “If we lose here, then every other middle-class worker will be next.” The American Axle workers did lose, not on every Dauch demand, but on enough to have Wall Street analysts gushing with investor happy-talk. American Axle, one analyst noted in late June, would likely reap over $300 million in savings from the worker concessions. Dauch, meanwhile, is no longer spending much time talking with American Axle workers about their kids. Instead, the American Axle PR department is sending out news releases about his kids. Early in June, the company announced new career turns for the two Dauch boys at American Axle. The older, an American Axle executive who had been setting up company plants overseas, is leaving his father's side to run his own privately held company. The younger is becoming American Axle’s new president. Rewards for the smart and talented, in a deeply unequal society, certainly do add up quick. |
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Class Conflict for the 21st Century David Kusnet, Love the Work, Hate the Job. John Wiley & Sons, Inc. 2008. 280 pp. Richard Dauch does not appear in David Kusnet’s engrossing new appraisal of the contemporary American workplace. But people just like him do, executives who consider themselves smart, talented, and absolutely deserving of whatever ample rewards may come their way — even if those rewards come at the expense of the long-term health and vitality of the enterprises they run.
With this shortchanging, these “winners” of today's American economy — “corporate chief executives, top managers, hedge fund managers, and other financiers” — are creating what Kusnet calls a “new kind of class conflict.” On the one side: highly skilled professionals and technical workers who love their work and want to do that work well. On the other: corporate executives who are “denying employees the resources, the respect, and the discretion that they need to do their best work.” Kusnet, a politically savvy writer who has spent the last 30 years working on everything from leaflets for union organizing drives to State of the Union addresses for Bill Clinton, makes his case with level-headed statistical and historical analyses of ongoing national workplace trends. But he devotes the heart of his new book to a series of emblematic turn-of-the-21st century struggles at four Seattle area employers. Most readers will be familiar with three of these four — Microsoft, Boeing, and Kaiser Aluminum. The fourth, a major local hospital, illustrates the same health care industry profiteering patterns common to every American metro area. Kusnet has been conducting interviews with workers — and executives — at these Seattle-area empoyers ever since the late 1990s. In Love the Work, Hate the Job, he weaves all their stories with compelling detail and entertaining anecdotal asides. But his stories don’t all have happy endings. That’s fitting. Kusnet, for his part, isn’t ready to predict ultimate victory for either side in the conflict between professionals and technicians and the executive elites who have “managed them, outearned them, and lorded it over them.” He remains sure on just one point. The outcome of this conflict will determine America’s eventual economic well-being. |
Stat of the Week The private-jet manufacturing industry delivered 297 planes to wealthy clients over the first quarter of 2008, a 41 percent increase over last year’s first quarter, Reuters reported last week. The private-jet totals now include personalized versions of regular commercial jets from Boeing and Airbus. The Airbus “Flying Palace” model goes for $300 million.
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Too Much is published by the Council on International and Public Affairs, a nonprofit research and education group founded in 1954. Office: Suite 3C, 777 United Nations Plaza, New York, NY 10017. E-mail: editor@toomuchonline.org. |
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lavish package eventually leaked, and, amid the resulting furor, New York’s attorney general filed suit to get Grasso to cough $100 million back. Last week, after an 
One month later, in June, Dauch 
Throughout Corporate America today, that’s just what’s happening. Top executives fixated on short-term profits — the only category of profits that Wall Street understands and rewards — are, Kusnet shows us, “shortchanging the investments that improve the quality of their products and services.”