IS THE SUCCESS OF MAJOR CORPORATIONS THE KEY TO SUCCESS FOR THE US ECONOMY?
THIS COMMENTARY WAS DELIVERED OVER WAMC RADIO BY PROFESSOR MICHAEL MEEROPOL in JANUARY of 2006.
Back in the 1950s Charles Wilson, head of General Motors (also President Eisenhower’s Secretary of Defense) was quoted as saying”What’s good for General Motors is good for America.”
Often ridiculed for displaying such corporate self-centeredness, Mr. Wilson was misquoted. What he actually said was. “What’s good for the country is good for General Motors and vice versa.”[1]
His point was that GM, which made most of its income selling to Americans while employing American workers (remember we’re talking the early1950s), depended for its success on the health of the American economy. He added “vice versa” to demonstrate that a healthy GM helps create a healthy US economy. If GM made profits, invested in new plant and equipment, hired more workers, and paid them well that was good for the American economy as a whole.
This prompts a question. Is it true that the profitability and success of major American corporations is the key to the health and success of the US economy?[2]
Between 1945 and 1973 the answer was yes. As President Kennedy put it, “a rising tide lifts all boats.” This understanding of how the world works led and indeed still leads to support for tax cuts to encourage savings and investment – much of the benefit of which goes to the people likely to have high enough incomes to save and invest.[3]
Unfortunately, since 1973 things have been very different. Economic growth has been slower and the benefits of that growth have been much more unequally shared.[4] The industrial corporations of the 1950s and 60s within which workers anticipated good wages and benefits for their entire working lives with the probability that their children would be able to do the same NOW employ a much smaller fraction of the work force.[5]
Today, Wal-Mart is the nation’s biggest employer -- its average wages are lower in real terms than the wages of industrial workers in the 60s.[6] Except for a brief blip upwards in the late 1990s, the typical worker’s hourly wage has fallen in purchasing power over the past 25 years.
Meanwhile, job security exists for very few workers.
Let’s revise Mr. Wilson’s statement. How about “what’s good for average wage earners is good for America AND VICE VERSA”?
Why is the economic health of the American worker good for America?
First and foremost -- American businesses profit from the consumption spending of American citizens, the vast majority of whom work for a living and earn most of their incomes from wages and salaries. When American workers’ wages are not rising it is difficult for them to consume more.[7] Also, productivity depends on more than the machines that businesses buy. The workers’ knowledge, care and commitment to doing the job well are crucial for the successful introduction of new technology into the work place. Thus, economic growth has often been fostered not by new equipment but by increasing the capability of workers – “getting better” at what they are doing.
Clearly, “getting better” only happens if the workers want it to happen…and that requires that they be RELATIVELY CONTENTED on their jobs. It is this last point that strongly supports the idea that the key to American economic health is the economic health of American workers. When wage earners do well, we all do well, when they don’t, we’re all in trouble.
Since 1973, the economy as a whole has grown sluggishly.[8] While corporate America’s bottom line has done quite well, the rest of us are not doing so well – especially American wage workers.
I believe corporate profits will not cause President Kennedy’s tide to rise anymore. Instead, rising wages will be necessary to lift all boats.
[1] In fact the full statement was, “I’ve always thought that what’s good for the country is good for General Motors, and vice versa.” It was the “vice versa” part which of course means “What’s good for General Motors is good for the country” that got quoted. Clearly from context, Mr. Wilson was emphasizing the importance for General Motors of a healthy American economy in general. Here is the entry from “Charles E. Wilson” available on www.nndb.com/people/098/000057924: “He [Wilson] was still head of General Motors when President Eisenhower selected him as secretary of defense in January 1953.
Wilson's nomination sparked a major controversy during his confirmation hearings before the Senate Armed Services Committee, specifically over his large stockholdings in General Motors. Reluctant to sell the stock, valued at more than $2.5 million, Wilson agreed to do so under committee pressure. During the hearings, when asked if as secretary of defense he could make a decision adverse to the interests of General Motors, Wilson answered affirmatively but added that he could not conceive of such a situation "because for years I thought what was good for the country was good for General Motors and vice versa." Later this statement was often garbled when quoted, suggesting that Wilson had said simply, "What's good for General Motors is good for the country."
[2] On one level it appears obvious. Our economy grows as a result of improvements in the productivity of our work force and much of that productivity depends on businesses investing in new technology. Though they do this to increase their profits, economists assert that the result benefits all of us. The new technology reduces costs and thus businesses charge us less. At the same time, as the reduced costs increase their potential profit margins, they can also afford to raise their workers’ wages. In fact, this is a story that accurately describes the US economy between World War II and approximately 1973.
Those years of successful American corporations and a rising standard of living for average Americans resulted in the creation of the great working American middle class. Steel workers, auto workers, miners, police officers, firefighters, teachers, even retail and clerical workers all shared in the rising incomes that were generated by rising productivity – and of course corporate America did very well. “[S]tarting in 1953, median family income doubled.” J. Madrick “The Way to a Fair Deal” The New York Review of Books, Jan 12, 2006: 37. Average hourly wages corrected for inflation peaked in 1972 and 1973 at $8.99 in 1982 dollars and fell to $7.52 in real terms in 1994. After that, average hourly wages rose but were still only $8.29 in 2003. (Economic Report of the President, 2004: 340). For some data covering 1960 through 1979, see Surrender (Meeropol): 26-27. Median income identifies the typical income-receiver because half the population makes more while the other half makes less. The “average” income is not typical because it is pulled upwards when there is unequal distribution of income and a small percentage of the population has very high incomes. Thus, the data on “average” wages overstates what was happening to the typical wage earner.
[3]Until about 1970, tax cutting was focused for the most part on putting more income into the hands of consumers so they would spend more, thereby raising total income. You can see this argument developed in the justifications of President Kennedy’s Council of Economic Advisers in 1962 and 63 for what was passed in 1964 as the “Kennedy” tax cut (even though Lyndon Johnson was President at the time). However, even as early as 1962, there was a targeted tax cut which reduced taxes on all businesses that invested in new equipment. This benefit, called the investment tax credit, actually existed in one form or another until 1986. Beginning in 1978, there was an explicit emphasis on using tax cuts to stimulate savings and investment. In addition to stimulating aggregate demand by putting more money into people’s pockets, these tax cuts were supposed to stimulate increased “aggregate supply” by improving incentives to in the words of their supporters “work, save and invest.” This type of tax cut was exemplified by the Economic Recovery Tax Act passed in the first year of the Reagan Administration and has been the basis of all the tax cuts passed under the current Bush administration. It is important to understand that one result of such an emphasis is that the benefits of the tax cuts accrue disproportionately to those with the highest incomes. A most obvious example is the Bush Administration’s successful push to abolish the Estate Tax which is only paid by the top 2% of all estates. One can make similar (though not as stark) judgments about the effort to abolish taxes on dividends and increase preferences for income derived from the sale of existing assets (capital gains). On the Reagan tax cut and its underlying philosophy, see Surrender (Meeropol): 46-48, 79-81. On the Bush tax cuts, see Robert Pollin Contours of Descent (NY: Verso, 2003): 94-102. For a comprehensive treatment, see C. Eugene Steuerle, Contemporary U. S. Tax Policy. (Washington: Urban Institute Press, 2004).
[4] For details of the difference between the period before 1973 and after, check out Lawrence Michel, Jared Bernstein and Sylvia Allegretto, The State of Working America, 2004/2005 An Economic Policy Institute Book (Ithaca, NY: ILR Press, an imprint of Cornell University Press, 2005): 58-76.
[5] Total employment in manufacturing peaked in 1979 at 19.4 million workers which represented 21.6% of the total non-agricultural labor force. In 2000 at the peak of the last business cycle, manufacturing employment had fallen to 17.3 million which represented only 13.1% of the non-agricultural labor force. See Economic Report of the President, 2004: 338.
[6] Though there is dispute as to how much the “typical” Wal-Mart “associate” earns, a figure close to $8.50 has been mentioned in some of the “pro” Wal-Mart literature. Let’s grant that Wal-Mart wages were approximately $9 an hour in 2003. This gives us an excellent basis for comparison. Even in 1947, real average hourly earnings (in 2003 dollars so they compare with the hypothetical Wal-Mart wage in that same year) for the entire economy were at $8.47 an hour. By 1967, they had jumped to $13.30 an hour and despite falling from 1973 to 1995, were still at $13.95 an hour in the latter year. (Data from Lawrence Michel, Jared Bernstein and Sylvia Allegretto, The State of Working America, 2004/2005 An Economic Policy Institute Book (Ithaca, NY: ILR Press, an imprint of Cornell University Press, 2005): 119.) Clearly as Wal-Mart becomes a more significant employer, its lower wages act to bring down the average wage.
[7] Note I said difficult. In fact it is not impossible for their consumption to rise because of a number of things that workers can do if their hourly wages do not rise. First, they can put in more hours. As documented over a decade ago by Juliet Schor in The Overworked American (NY: Basic Books, 1992), the average number of hours worked per year by American workers had risen from the 1940s through the 1980s. Second, they can send more family members out into the work force. This is the well known transformation of the 1950s American family with a stay at home mom into the two earner family of the 1970s and since. Finally, they can borrow to spend. The amount of personal credit taken on by Americans in the past 20 years has been increasing. In 1973, combining consumer and real estate credit Americans borrowed $217.4 billion and that was almost 20% of personal income (15.7% of GDP). By 2000, that borrowing had reached $2.2 trillion which was a bit over 26% of personal income (22.3% of GDP). Note this is for the entire economy so one can imagine that the middle class was borrowing much higher percentages of their incomes. Every so often the experts tell us that a LIMIT has been reached and Americans cannot continue to borrow an even higher percentage of their incomes. So far it hasn’t happened and the recent bubble in housing prices has given more and more middle class Americans greater opportunities to borrow to expand their consumption. However, even though we don’t know what that limit is, there definitely is some kind of limit. (In this context the rise in personal bankruptcies and the “reform” of bankruptcy law to make it more difficult for individuals to protect themselves is significant.)
[8] For details, see Madrick’s article in the New York Review of Books.
Back in the 1950s Charles Wilson, head of General Motors (also President Eisenhower’s Secretary of Defense) was quoted as saying”What’s good for General Motors is good for America.”
Often ridiculed for displaying such corporate self-centeredness, Mr. Wilson was misquoted. What he actually said was. “What’s good for the country is good for General Motors and vice versa.”[1]
His point was that GM, which made most of its income selling to Americans while employing American workers (remember we’re talking the early1950s), depended for its success on the health of the American economy. He added “vice versa” to demonstrate that a healthy GM helps create a healthy US economy. If GM made profits, invested in new plant and equipment, hired more workers, and paid them well that was good for the American economy as a whole.
This prompts a question. Is it true that the profitability and success of major American corporations is the key to the health and success of the US economy?[2]
Between 1945 and 1973 the answer was yes. As President Kennedy put it, “a rising tide lifts all boats.” This understanding of how the world works led and indeed still leads to support for tax cuts to encourage savings and investment – much of the benefit of which goes to the people likely to have high enough incomes to save and invest.[3]
Unfortunately, since 1973 things have been very different. Economic growth has been slower and the benefits of that growth have been much more unequally shared.[4] The industrial corporations of the 1950s and 60s within which workers anticipated good wages and benefits for their entire working lives with the probability that their children would be able to do the same NOW employ a much smaller fraction of the work force.[5]
Today, Wal-Mart is the nation’s biggest employer -- its average wages are lower in real terms than the wages of industrial workers in the 60s.[6] Except for a brief blip upwards in the late 1990s, the typical worker’s hourly wage has fallen in purchasing power over the past 25 years.
Meanwhile, job security exists for very few workers.
Let’s revise Mr. Wilson’s statement. How about “what’s good for average wage earners is good for America AND VICE VERSA”?
Why is the economic health of the American worker good for America?
First and foremost -- American businesses profit from the consumption spending of American citizens, the vast majority of whom work for a living and earn most of their incomes from wages and salaries. When American workers’ wages are not rising it is difficult for them to consume more.[7] Also, productivity depends on more than the machines that businesses buy. The workers’ knowledge, care and commitment to doing the job well are crucial for the successful introduction of new technology into the work place. Thus, economic growth has often been fostered not by new equipment but by increasing the capability of workers – “getting better” at what they are doing.
Clearly, “getting better” only happens if the workers want it to happen…and that requires that they be RELATIVELY CONTENTED on their jobs. It is this last point that strongly supports the idea that the key to American economic health is the economic health of American workers. When wage earners do well, we all do well, when they don’t, we’re all in trouble.
Since 1973, the economy as a whole has grown sluggishly.[8] While corporate America’s bottom line has done quite well, the rest of us are not doing so well – especially American wage workers.
I believe corporate profits will not cause President Kennedy’s tide to rise anymore. Instead, rising wages will be necessary to lift all boats.
[1] In fact the full statement was, “I’ve always thought that what’s good for the country is good for General Motors, and vice versa.” It was the “vice versa” part which of course means “What’s good for General Motors is good for the country” that got quoted. Clearly from context, Mr. Wilson was emphasizing the importance for General Motors of a healthy American economy in general. Here is the entry from “Charles E. Wilson” available on www.nndb.com/people/098/000057924: “He [Wilson] was still head of General Motors when President Eisenhower selected him as secretary of defense in January 1953.
Wilson's nomination sparked a major controversy during his confirmation hearings before the Senate Armed Services Committee, specifically over his large stockholdings in General Motors. Reluctant to sell the stock, valued at more than $2.5 million, Wilson agreed to do so under committee pressure. During the hearings, when asked if as secretary of defense he could make a decision adverse to the interests of General Motors, Wilson answered affirmatively but added that he could not conceive of such a situation "because for years I thought what was good for the country was good for General Motors and vice versa." Later this statement was often garbled when quoted, suggesting that Wilson had said simply, "What's good for General Motors is good for the country."
[2] On one level it appears obvious. Our economy grows as a result of improvements in the productivity of our work force and much of that productivity depends on businesses investing in new technology. Though they do this to increase their profits, economists assert that the result benefits all of us. The new technology reduces costs and thus businesses charge us less. At the same time, as the reduced costs increase their potential profit margins, they can also afford to raise their workers’ wages. In fact, this is a story that accurately describes the US economy between World War II and approximately 1973.
Those years of successful American corporations and a rising standard of living for average Americans resulted in the creation of the great working American middle class. Steel workers, auto workers, miners, police officers, firefighters, teachers, even retail and clerical workers all shared in the rising incomes that were generated by rising productivity – and of course corporate America did very well. “[S]tarting in 1953, median family income doubled.” J. Madrick “The Way to a Fair Deal” The New York Review of Books, Jan 12, 2006: 37. Average hourly wages corrected for inflation peaked in 1972 and 1973 at $8.99 in 1982 dollars and fell to $7.52 in real terms in 1994. After that, average hourly wages rose but were still only $8.29 in 2003. (Economic Report of the President, 2004: 340). For some data covering 1960 through 1979, see Surrender (Meeropol): 26-27. Median income identifies the typical income-receiver because half the population makes more while the other half makes less. The “average” income is not typical because it is pulled upwards when there is unequal distribution of income and a small percentage of the population has very high incomes. Thus, the data on “average” wages overstates what was happening to the typical wage earner.
[3]Until about 1970, tax cutting was focused for the most part on putting more income into the hands of consumers so they would spend more, thereby raising total income. You can see this argument developed in the justifications of President Kennedy’s Council of Economic Advisers in 1962 and 63 for what was passed in 1964 as the “Kennedy” tax cut (even though Lyndon Johnson was President at the time). However, even as early as 1962, there was a targeted tax cut which reduced taxes on all businesses that invested in new equipment. This benefit, called the investment tax credit, actually existed in one form or another until 1986. Beginning in 1978, there was an explicit emphasis on using tax cuts to stimulate savings and investment. In addition to stimulating aggregate demand by putting more money into people’s pockets, these tax cuts were supposed to stimulate increased “aggregate supply” by improving incentives to in the words of their supporters “work, save and invest.” This type of tax cut was exemplified by the Economic Recovery Tax Act passed in the first year of the Reagan Administration and has been the basis of all the tax cuts passed under the current Bush administration. It is important to understand that one result of such an emphasis is that the benefits of the tax cuts accrue disproportionately to those with the highest incomes. A most obvious example is the Bush Administration’s successful push to abolish the Estate Tax which is only paid by the top 2% of all estates. One can make similar (though not as stark) judgments about the effort to abolish taxes on dividends and increase preferences for income derived from the sale of existing assets (capital gains). On the Reagan tax cut and its underlying philosophy, see Surrender (Meeropol): 46-48, 79-81. On the Bush tax cuts, see Robert Pollin Contours of Descent (NY: Verso, 2003): 94-102. For a comprehensive treatment, see C. Eugene Steuerle, Contemporary U. S. Tax Policy. (Washington: Urban Institute Press, 2004).
[4] For details of the difference between the period before 1973 and after, check out Lawrence Michel, Jared Bernstein and Sylvia Allegretto, The State of Working America, 2004/2005 An Economic Policy Institute Book (Ithaca, NY: ILR Press, an imprint of Cornell University Press, 2005): 58-76.
[5] Total employment in manufacturing peaked in 1979 at 19.4 million workers which represented 21.6% of the total non-agricultural labor force. In 2000 at the peak of the last business cycle, manufacturing employment had fallen to 17.3 million which represented only 13.1% of the non-agricultural labor force. See Economic Report of the President, 2004: 338.
[6] Though there is dispute as to how much the “typical” Wal-Mart “associate” earns, a figure close to $8.50 has been mentioned in some of the “pro” Wal-Mart literature. Let’s grant that Wal-Mart wages were approximately $9 an hour in 2003. This gives us an excellent basis for comparison. Even in 1947, real average hourly earnings (in 2003 dollars so they compare with the hypothetical Wal-Mart wage in that same year) for the entire economy were at $8.47 an hour. By 1967, they had jumped to $13.30 an hour and despite falling from 1973 to 1995, were still at $13.95 an hour in the latter year. (Data from Lawrence Michel, Jared Bernstein and Sylvia Allegretto, The State of Working America, 2004/2005 An Economic Policy Institute Book (Ithaca, NY: ILR Press, an imprint of Cornell University Press, 2005): 119.) Clearly as Wal-Mart becomes a more significant employer, its lower wages act to bring down the average wage.
[7] Note I said difficult. In fact it is not impossible for their consumption to rise because of a number of things that workers can do if their hourly wages do not rise. First, they can put in more hours. As documented over a decade ago by Juliet Schor in The Overworked American (NY: Basic Books, 1992), the average number of hours worked per year by American workers had risen from the 1940s through the 1980s. Second, they can send more family members out into the work force. This is the well known transformation of the 1950s American family with a stay at home mom into the two earner family of the 1970s and since. Finally, they can borrow to spend. The amount of personal credit taken on by Americans in the past 20 years has been increasing. In 1973, combining consumer and real estate credit Americans borrowed $217.4 billion and that was almost 20% of personal income (15.7% of GDP). By 2000, that borrowing had reached $2.2 trillion which was a bit over 26% of personal income (22.3% of GDP). Note this is for the entire economy so one can imagine that the middle class was borrowing much higher percentages of their incomes. Every so often the experts tell us that a LIMIT has been reached and Americans cannot continue to borrow an even higher percentage of their incomes. So far it hasn’t happened and the recent bubble in housing prices has given more and more middle class Americans greater opportunities to borrow to expand their consumption. However, even though we don’t know what that limit is, there definitely is some kind of limit. (In this context the rise in personal bankruptcies and the “reform” of bankruptcy law to make it more difficult for individuals to protect themselves is significant.)
[8] For details, see Madrick’s article in the New York Review of Books.
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