One Economy, Two Americas

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A typical street scene in a neighborhood in Cleveland, Friday, Jan. 25, 2008. A report commissioned last November by the U.S. Conference of Mayors projected that 361 metropolitan areas would take an economic hit of $166 billion in 2008. Cuyahoga County, which includes Cleveland, has about 17,000 vacant foreclosed properties,roughly 4 percent of its 395,000 houses. (AP Photo/Jamie-Andrea Yanak)
Cleveland is one of the cities hit hardest by the foreclosure crisis. (AP Photo/Jamie-Andrea Yanak)

Hedrick Smith

Hedrick Smith

Before you gulp down your favorite champagne to celebrate Wall Street’s new stock market highs, remember that we are two Americas: The nation’s economic divide is costing us all dearly in terms of lost jobs and growth and is fueling the angry, gridlocked politics in Washington.

As The New York Times reported Monday, corporate profits have been skyrocketing ever since 2008 -– rising an average of 20.1 percent a year for four years in a row. But out on Main Street, average household incomes have risen only 1.4 percent a year. CEOs and big investors have been hogging the profits.

And while the stock market is roaring upward thanks largely to corporate profits earned overseas, 24 million Americans are still out there hunting for full-time jobs, month after month. But our economy is not generating many new jobs. In fact, Congress has just added to unemployment. With the sequester in force, we are going to lose a net of 750,000 jobs this year, according to the Congressional Budget Office.

This disconnect between Wall Street and Main Street, between profits and wages, between the winnings of the 1% and the stagnation of the 99% — what I call “wedge economics” — has been the prevailing pattern in the American economy for the past three decades. And it has been financially killing the American middle class and stealing the American Dream from average people.

Right now, “wedge economics” is mangling America’s economic recovery. Anyone who has taken Economics 101 knows that what drives growth is not high stock gains for the 1% (who capture more than half of the capital gains from the market) but the power of mass consumer demand.

Economists call that the “virtuous circle of growth.” What they mean is that when CEOs share more of corporate profits with their workers and pay higher wages instead of imposing wage freezes, tens of millions of Americans head for Costco or Home Depot or the local car dealer to buy. Their purchases, multiplied by the millions, is what creates the incentives for business to expand, to build new plants, buy new equipment and hire more workers.

Consumer demand is the essential job creator in the American free enterprise system. Without strong demand, built on an ample supply of good jobs and good pay, businesses simply sit on their money, as they have done for most of the past four years, hoarding $2 trillion in accumulated cash.

Old-time CEOs like Charlie Wilson, the former head of General Motors, Reginald Jones, the former chief of General Electric, or Frank Abrams, the former boss of Standard Oil of New Jersey, understood that they could drive economic growth by sharing more of the wealth. They considered it their job to take care of all the stakeholders in the corporation, not just shareholders but all the groups with a stake in the company’s success.

It was the sacred trust of corporate management, as Abrams put it, “to maintain an equitable and working balance among the claims of the various directly affected interest groups…stockholders, employees, customers, and the public at large.” In others words, some profits go to shareholders but another big chunk goes to employees.

But U.S. business leaders moved away from that idea starting in the 1980s and turned to cutting jobs, holding down wages, and focusing on high profits and even higher CEO pay. In 2011, the top 1% got all the gains from U.S. economic growth and the bottom 99% literally went backwards – they saw their collective incomes fall.

More broadly, “wedge economics” have brought us very slow economic growth, much slower than under the old business philosophy. We’ve seen ever-deeper recessions, ever-longer jobless recoveries. With lopsided winnings to the top 1%, dominated by CEOs, the drive has gone out of economic growth.

In fact, economists like Nobel laureate Joseph Stiglitz of Columbia University tell us bluntly that America’s current gaping inequalities of income are bad for economic growth. ”Inequality stifles, restrains and holds back our growth,” Stiglitz asserts. Others agree. The International Monetary Fund has documented that high levels of income inequality can be “destructive” to sustained growth and that the best condition for long-term growth is “more equality in the income distribution.”

In short, what Wall Street is celebrating today may cause joy among the 1%, but unless business shares more of its gains, a booming market spells bad news for average Americans.


"Who Stole the American Dream?" book jacket by Hedrick SmithHedrick Smith is a Pulitzer prize winning journalist and the former Washington bureau chief of The New York Times. Today’s record stock prices and roaring corporate profits reflect the trends of the past three decades captured in his current bestseller, Who Stole the American Dream?

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  • rockvillejake

    In the age-old contest between labor and capital, labor in the U,S, is getting creamed. Washington keeps on approving programs–from financial deregulation to large-scale immigration of low-skilled immigrants–that concentrate benefits in the hands of a few and disperse costs to the American public.

  • http://www.MajorityRules.org/blog Steve Zemke MajorityRulesBlog

    This inequality will only continue as long as Republicans and corporate America run our country. The roadblock remains a Republican right wing dominated House of Representatives and a Senate that works with filibuster rules limiting Democratic action. Money follows money – Citizens United and its erronous equating of paid speech as free speech helps keep the right wing in charge. This has to change to regain control of our representative government.

  • Kathy

    Sending our jobs overseas is what I call Economic Treason.

  • jcaimbridge

    I highly recommend people read Smith’s “Who Stole the American Dream?” It chronicles just about everything that has gone wrong with this country since the 1970s. It is an infuriating but enlightening book.

  • shackledanddrawn

    Working for an airline , our current CEO is the exact opposite of its founder. Seeking higher profits and pay at the top, he’s bankrupted the workers who for years had benefitted from a working balance which the company was originally based upon. I’m 37 and it seems like somehow as country we’ve reverted back to personal and media images of my childhood in the 80′s.

  • http://twitter.com/Balkingpoints Balkingpoints.com

    #p2 #sequester #news ; Well done Hedrick. Incredibly, some disinformed by commercial #media, still think the Reagan / Bush era was a success. Here is another chart that spells it out very clearly. Top 20% now hold aprox 84% of USA wealth > http://www.motherjones.com/files/outofbalance.jpg

  • http://www.facebook.com/robert.j.mcguire.7 Robert John McGuire

    when we play monopoly everyone makes $200 passing go but in the end only one person makes $200 and never receives rents on homes or hotels, nor fees from owning railroads, Nor is there any negative impact from jails. The tax rates are low enough to be a joke. Eventually the bank runs out of money and circling the board becomes pointless as the economy dies. Investments in home building stops.

    i swear america has been playing monopoly for the past 30 years.

  • JennaRose

    It eventually will catch up with the rich when on one has money to buy

  • Anonymous

    There have been two economies at least since Reagan.

  • Anonymous

    The entire world has been on a fiat (Monopoly) money economy for 40 years. “Money” is not a store of value.

  • Anonymous

    Both parties are owned by the same international corporations.

  • Mikeguru

    I have stock, as one of the 20% wealthiest who own 92% of ALL stock on Wall Street.
    While the bottom 80% own about 8% of all Stock (you have to make enough money
    above paying for housing, food, and transportation to have enough left over to
    buy a share of stock). Wage Suppression for 30 years has lessened the 80% from
    buying stock or save money).

    I read annual reports of Corporations and noticed that the Executive Compensation
    listed in the Corporations annual report did Not match what other sources like
    Forbes and Fortune listed. Only the CEO and Five Executive Vice Presidents were
    listed by law but the Corporation had 1% of the Company under the same
    standard, paid 90% annually with Stock Awards and Options that they
    “cashed in for greenbacks” as soon as the 15% tax rate qualified for
    the stock sale.

    I will give you an example.

    IBM listed their CEO as having $2 million in Salary in their annual report to
    shareholders. However, Forbes and Fortune listed the CEO at $20 million. So
    where was the $18 million coming from? I tried to figure out in the Annual
    Report, where the $18 million was being paid to the CEO. It was not apparent
    except for “Stock Awards and Stock Options” with no “cash value” estimated.

    The CEO and the 1% of the total employee workforce (Executives) were being paid 90% in Stock, taxed at 15%. Only $2 million was paid and taxed at Ordinary Income. The Stock Compensation applied to the 1% of the Company or 4,000 Executives at IBM.

    A typical Corporate Executive would Sell the Stock under the guise of
    “Capital Gains” and receive the Special Treatment of a 15% Tax Rate.
    I think this “Trick” of paying in stock to the 1% of all major Corporations started around 1980.

    Over the years, I noticed that employees of Companies, the 99%, were Not receiving
    increases in compensation matching Productivity improvements with their hours
    increasing and benefits grew less and less. In fact, over 30 years the increase
    of employees not paid with Stock Awards was a measily 3% compared to 400% of
    Corporate Executives. The Corporate Board of Directors(who are the Executives
    tools) were using Cash from Profit to “:Buy Back Shares of Stock” that resulted in “Boosting the Stock Share Price, artificially” that would not have occurred had the Executives not being paid 90% in stock.

    Recently I read a book, that listed the Richest Point 1% of the USA. About
    140,000 Households. About 49% of those Richest 140,000 Households are Former
    and Current Corporate Executives. The figure varies from 35% to 49% depending.
    However, it is apparent, Paying Executives in Stock, taxed at 15% made
    Corporate Executives very, very, wealthy while 99% were carrying the taxation
    load taxed at 39% ordinary income rates for the Country, not only with Revenue,
    but with their kids as the Corporate Executives kids escaped Military Service
    with no mandatory Military Service for all. (As a Veteran, the “Thanks for
    your Service comment from a Corporate Executive is insulting as his kids, never
    serve, only the Middle Class and Poor”.

    The next highest of the 140,000 wealthiest households were 19% Financial – Wall Street
    and Hedge Fund Managers, again – paid in Stock taxed at 15%.

    I chuckle when I hear “We are making this buyback, not giving employees
    raises” to “return value to Shareholders” at the Corporate Boards reports at Annual meetings (they loath to hold public meetings) where the “Shareholders they are speaking of are Them, the 1% Executives, the managers paid 90% at a 15% tax rate”.

    Another fact is the employees are “Contributing to their 401K” taxed at 39%
    when withdrawn and at least 75% are being poured into Stock that the 1%
    Corporate Executives “sell for Cash” taxed at 15% every year.

    With the
    “Hyper Computer buy and sell stock every “microsecond” and no
    Transaction fee, Wall Street, Corporate Executives, and the Wealthy are
    “skimming the 401K and IRA;s” of employees and retirees every year
    and also benefit from 15% tax rates while returns overall a decade are
    “lost” (the Recent returns can be “washed away” in a few
    days with a “pull the trigger” of those “in the Know”.
    Remember the 1000 point drop of the Dow in less than an hour a few years ago?

    The Billions paid to Wall Street firms like Goldman Sachs are with schemes like
    “hyper Stock Trading” and with Compensation being taxed at 15%.

    As Leona Helmsly stated “Only the Little People pay Taxes”.

    So, Look no further than Washington, DC for how the Wealth Disparity
    happened. Wall Street (paid at a 15% tax rate), Corporate Executives (paid at a
    15% tax rate) and the “Investment in Bribery from Lobbyists from Wall
    Street and Corporations” pulled off the greatest “Financial Coup” in the history of the World that caused this disparity of wealth.
    Check out the disclosure of long term US Senators, stock investments on http://www.opensecrets.org .

    How do we fix it? It is certainly Not keeping this Corporate “Compensation
    Loophole” in place of Corporate Executives and the “the Loophole
    Scheme of being paid in Stock taxed at 15% must be addressed” and the
    Republicans are Not the solution, they are enablers of this huge tax revenue
    loss to run the country unless, of course, they are pressured by the 99% who
    pay taxes at ordinary income rates of 39% and more.

    Remember, just becasue you have a 401K that is comprised of Stock, when you
    cash in the 401K the tax rate is 39%, Not 15%.

    Our Country is in trouble tax wise from the shift of paying Corporate Executives
    and Wall Street Bankers with the “Pseudo Cash of Stock” taxed at 15%.
    This “Loophole” needs to be plugged.

    THINK about it.

  • Anonymous

    That’s the catch! When the top 1% own 90% of everything worth owning there will be nothing to buy except food. 90% of us will be renters. Our owners will not care if we have jobs. Think “Maslow’s Hierarchy.” as the human food chain.

  • Anonymous

    Not all of the liberals are owned: Elizabeth warren, Bernie sanders, & Allan Grayson come to mind. Lets hope & work toward getting more reps of the people in office in 2014!

  • alamode

    Thank you for this post.

  • Anonymous

    Aside from the tax avoidance that has come with the practice of giving executives stock options, there is another serious downside and it is a downside that especially affects investors. The problem is that this is exactly what causes so many executives to become so short-sighted when it comes to making decisions for the company. And it is what causes so much turn-over in the executive suites.

    What happens when a new CEO is hired and a major part of that CEO’s compensation is in stock options? The CEO starts to be very focused on making the stock price go up quickly; that way the CEO can exercise the options and retire or perhaps then move on to some other company and another round of stock options.

    It is always possible to borrow from future profits to improve profits today – for one thing, just forget about R&D; R&D will produce nothing this year. Forget about expansion that will cost now and pay back later – instead, lay off workers to cut payroll costs; sure that will cost in the long run when new employees have to be hired and trained but it will magnify profits this quarter and that is what really matters when you want to cash out.

  • Anonymous

    I just finished reading an article where Naomi Klein interviewed Leanne Simpson, a Native Canadian who was commenting on the Keystone pipeline. Leanne talked of things most sophisticated Americans would pooh, pooh or give lip service to such as loving Children. It made me wonder how humans were so enamored of “stuff they could buy” that humane thinking is not even a part of their thought process anymore. But hey, look at that stock market!!!

  • http://www.facebook.com/dh.branski DH Branski

    A piece of the story of this generation is especially powerful because it is ignored. This isn’t the first time in our history when the richest few gained a dangerous degree of power over our politics and policies, using govt as a tool to facilitate the upward redistribution of the nation’s wealth. In the past, the poor and middle class joined forces to push back, to the benefit of both. Since Reagan, the poor and middle were deeply divided — divide and conquer (the masses). Today, “liberal” media disregards the post-middle class/poor, ignoring how/why conditions of our poor directly determine the fate of the middle. It isn’t possible to save (much less, rebuild) the middle class without shoring up the poor. Instead of legitimately addressing the issues that created today’s deep US poverty, media has (with rare exception) simply been on a long, middle class Panderfest.

  • http://www.facebook.com/dh.branski DH Branski

    Unfortunately, today’s middle class responds to such corporate corruption by demanding cuts to what little aid is left for those who were already pushed out of our economic system.

  • http://www.facebook.com/dh.branski DH Branski

    Yes, our economic agenda, from shredding the “safety net” to redistributing ther nation’s wealth to the richest few, is treason — knowingly and directly destroying the US economy, ensuring the collapse of the US. Our political leadership since the 1980s has done more harm to the US than any foreign country could hope to achieve. Govt responded to this growing crisis by imposing an economic embargo — not on a foreign enemy, but on America’s poor, ensuring the continued decline of the US.

  • Gyrogearloose

    The problem, IMHO, isn’t CEO salaries, but is globalization. Those middle class jobs that used to be in US factories have gone to China and India because wages there are lower. Until the American blue collar worker and the Chinese or Indian blue collar worker are paid comparably, the jobs will stay in China and India. This either means US wages must drop, or Chinese and Indian wages must go up, or both. This is Economics 101 at work.

  • Richard Elder

    Headlines: “Dow Jones reaches a new all time high” Um– compared to what? Actually the Dow has gone down 50% since its previous “all time high” in 2007 against gold– the world’s oldest currency.

    Let me fix that headline for you.

    “Casino Chip Printing by FED reaches new all time high” Free for all banksters who have demonstrated the ability to securitize thin air.

  • davidp

    Reading F Dostoyevky`s “The Gambler”, and wonder now if the Wall St profits that they glowing over will turn out to be like the many characters in Dostoyevky´s story….wanting to be rich for one time or more rich and if they lose how to save face.

  • http://www.facebook.com/profile.php?id=100000548733287 Rob Graham

    What I think of when I hear the phrase ‘The American Dream’.

  • http://twitter.com/talktowolf Wolf Braun

    Yup ! “We the people” need to once again demand that the sole PURPOSE and main task of politicians is to serve “ALL” citizens and to fight injustice ! Along with PURPOSE is the need to articulate and demand that our elected officials and bureaucrats follow a clear set of PRINCIPLES.

  • Patrick David

    The corporations want to be treated like people, but they don’t want to act like people. I’m a middle manager at a very large corporation. The CEO takes home enough money for generations of his family to be secure while the front line employee can’t afford a home. Over the years downsizing and low raises under the titles of competition and a poor economy add to the overall income gap while the stock price rises. Internships have been eliminated. Its clear their purpose is not about customers or employees, their purpose is about their own pockets. Where are the men with the white hats ?? Certainly not running our corporations.

  • Anonymous

    This mess all begins with the Fed, accelerated under repeal of the Gold Standard, became exacerbated by global wage arbitrage and was finally written into the economic DNA gene code by the repeal of Glass-Steagall and passage of NAFTA and the CFMA.

    The unholy alliance of the Fed, Big Government, and Corporate America has become an inflationary kleptocracy designed to steal from the masses to the benefit of the few.

    Democrat or Republican makes no difference, they all play the game,

  • http://www.facebook.com/dh.branski DH Branski

    Elizabeth Warren and Alan Grayson started out as powerful advocates for the poor. Both quite abruptly dropped the poverty issue to embrace the Middle Class Only campaign that has powerfully divided the “masses.” Whatever sells, I guess.

  • Steve

    I think there’s a typo re: has documented that high levels of income equality , should it read inequality?

  • http://www.facebook.com/dh.branski DH Branski

    Immigrant labor is more of a distraction than a legitimate issue. One agenda that has served powerfully to pull down wages, shrinking the middle class, is also one that the middle class supports — mandatory workfare (replacement) labor. Americans desperately cling to the notion that people are poor because they’re stupid, uneducated, unskilled, and this simply isn’t true. Corporations know this. Workfare labor can be paid less than minimum wages, and has no workers’ rights or protections. It has largely served as a replacement workforce, saving corporations truckloads of money that would otherwise need to be spent on paying competitive wages. After years of steadily outsourcing US jobs, the jobless who have children sometimes have no choice but to turn to workfare, replacing a worker who had been paid a family-supporting wage. With each round of layoffs, more workers are replaced with workfare labor, and more laid off workers have no choice but to fall into the trap of workfare labor.

  • http://www.facebook.com/dh.branski DH Branski

    The problem is, when our welfare programs were at their most comprehensive, the middle class grew and the economy soared. Wages were at their highest (per the cost of living), consumers purchased more products, more workers were needed to make those products, and class mobility increased. We reversed course in the 1980s, incrementally wiping out welfare, increasing poverty, dramatically decreasing consumer purchases, decreasing the need for production/workers, ultimately tanking the US economy. Turns out, for some 80% of welfare recipients, welfare actually was the ladder out of poverty, providing just enough economic stability to enable workers to get back on their feet.

  • Carolyn Caffrey

    “The first duty of government is to protect the powerless from the powerful.”
    –Code of Hammurabi, 1772 B.C.

  • Carolyn Caffrey

    Stephen Jarislowsky, sometimes referred to as the Warren Buffett of Canada, recognized the vast inequality of wages and the race to the bottom on wages from outsourcing jobs. He proposed a “wage-equalization” tariff on imports, which would not only serve to disincentivize the outsourcing of jobs, but might also raise worker wages in other countries as well, as there would be no financial advantage in dirt wages. Here’s one article of his for consideration:

    http://opinion.financialpost.com/2010/08/11/stephen-jarislowsky-is-this-a-solution-to-the-problem/

  • Gyrogearloose

    That works unless you’re trying to be an exporter of goods, in which case you still have to compete with low wage manufacturers……

  • Carolyn Caffrey

    I know we have lost our moral compass when the Right starts referring to Medicare and Social Security as “generational theft” (regardless of the fact they’ve paid into these social insurance programs). The “thieves” aren’t our elders robbing their children and grandchildren, it’s the nightmare for-profit health system, particularly pharmaceutical companies, who have now managed to overtake the DoD in taxpayer fraud. WE have to be the change we’ve been waiting for if we don’t want this nation devolving into racial, class, gender, and generational warfare being promoted by corporate and political power-junkies.

  • http://www.facebook.com/dan.martin.92351995 Dan Martin

    Outstanding! Last week I just voted against the Executive Compensation Plan for the Walt Disney Company and advisory vote for Executive Compensation. These plans are a wholescale rippoff of shareholder value. Spread the wealth with those who do the work and pay a higher dividend to all the shareholders.

  • Anonymous

    Naomi Klein wrote “Shock Doctrine” where she gives a point by point review of what wild, wild west capitalism, as I call it, has done to societies worldwide. The operation is going much the same way here where the high rollers rape the economy and then make ordinary folks pay further still with cuts to so-called entitlement programs. The whole thing stinks but we are to blame when we participate in a robber baron economy. We dish every native culture saying they are backward. I would rather be backward (though that definition is junk too) than rushing foreword to the death of this good earth.

  • http://www.facebook.com/stephen.blecher Stephen Blecher

    It’s absolutely scandalous how the the top 1% have pocketed nearly all the economic growth in this country. I’m amazed at the number of rank and file Republicans who are barely scraping by, and think that the wealthy shouldn’t pay more income tax. At the same time they even think that half the people pay no tax, because they don’t consider payroll tax, sales tax, or gasoline tax, which are all regressive. There’s no cure for stupidity.

  • Wm. Sweeney

    We will be feeling the economic consequences of this wealth and income disparity for many more decades. But of even greater consequence is the effect that this disparity has on our democracy. The distance between those governing and those governed has paralleled the economic divide — resulting in a broad loss of confidence in our public institutions. Nothing good can come from this circumstance.

  • http://www.facebook.com/texsbill Texsbill Gran

    usa ranks last among top industrialized, developed nations re equality of income distribution. founding fathers largely designed USA in favor of the elite; 2day’s supawealthy & mega-corporations have used political leverage to further existing advantages. since late 1970′s rich & powerful individuals, corporations have enjoyed the rollback of our tax codes – pay less taxes; safety & environmental regulations have been eased; and antitrust legislation has not been enforced. supawealthy ppl & biz’s keep gaining while over 99.99% of U.S. americans work harder for a poorer standard of living – resulting in a declining quality of life :)