What Election '96 Should Be About

FAT AND MEAN:
The Corporate Squeeze
of Working Americans
and the Myth of Managerial
"Downsizing"

AS an editor of Basic Books in the 1970s and 1980s, Martin Kessler, a political economist by training, who died earlier this year, published the two most influential public-policy books of that era: Lester Thurow's seminal analysis of the stagflation economy, The Zero-Sum Society (1981), the most resonantly titled book since Catch-22, and George Gilder's Wealth and Poverty (1981), which became the bible of supply-side economics. How fitting that one of Kessler's last books should be David Gordon's Fat and Mean, which analyzes the overriding economic problem of the 1990s--falling wages and living standards--with Thurowlike brilliance and scholarship and Gilderlike vigor, originality, and optimism. Yes, optimism, for notwithstanding all the bad news it purveys, Fat and Mean shows how the American Dream can be recovered.

The Dorothy H. Hirshon Professor of Economics at Manhattan's New School for Social Research, David Gordon (a valued contributor to The Atlantic who, sadly, died in March, at the age of fifty-one) was conceived in economics. His parents were both economists: Robert Aaron Gordon served as president of the American Economic Association, and Margaret Gordon was an expert on trade and migration. With Samuel Bowles, of the University of Massachusetts at Amherst, and Thomas E. Weisskopf, of the University of Michigan, David Gordon was a co-author of Beyond the Waste Land: A Democratic Alternative to Economic Decline (1983) and After the Waste Land: A Democratic Economics for the Year 2000 (1990), and of a number of highly influential technical papers in professional journals. On this reader, at any rate, After the Waste Land made algebraic demands; its complexity got in the way of its prescient theme (the wasteful reality of the vauntedly efficient private sector). Fat and Mean is no less indebted to the newest and most sophisticated research in economics, but it assumes its debts much more lightly. The book is a model not just of social-science research but of economic thinking. Testing hypotheses logically and empirically, setting arguments against counterarguments, Gordon vindicated his discipline.

"The American economy has been failing most of its people. Why?" Gordon's answer is the crux of his book, but for those who still doubt the truth of his assertion, one chart is worth a thousand words. It shows what has happened to real spendable hourly earnings for "production/nonsupervisory employees in the private nonfarm sector"--average workers.

"The bottom line is clear," Gordon wrote.

. . . over the past twenty years, real hourly take-home pay for production and nonsupervisory workers--representing more than 80 percent of all wage-and-salary employees--has declined by more than 10 percent. The economy has grown massively since the mid-1960s, but workers' real spendable wages are no higher now than they were almost thirty years ago [emphasis added].

Since 1979 only two categories of workers have seen their real hourly earnings increase: college graduates, who make up just 20 percent of the work force, by 3.5 percent; and those with postgraduate degrees, by 8.8 percent. People with only "some college education" lost 15.9 percent of their hourly earnings, while high school dropouts lost 20.6 percent. Of production and nonsupervisory workers in major industry sectors, construction workers lost 20.7 percent, manufacturing workers 10.1 percent, transportation and public utilities workers 15.2 percent, and retail workers 17.4 percent. Only workers in finance, insurance, real estate, and other services (with or without college degrees) saw any increase in their real hourly wages.

It is often said that wages are falling in all the industrial countries, not just in the United States. That is a counsel of pernicious complacency. Besides, it's not true, and this Bureau of Labor Statistics chart proves it.

The chart--which, because it includes supervisory employees in manufacturing and not just ordinary workers, shows an anemic gain in wages--returns us to Gordon's question: Why?

There are two standard answers. One is globalization. U.S. wages are falling because the new world market for goods and labor is forcing them down. But to judge by the chart, the same new world market has not kept wages as flat in the other industrial countries. So, while globalization may have made its contribution, it can hardly be the major cause of the collapse in American wages. Moreover, the "trade-and-wages argument"--imports from low-wage countries caused U.S. wages, especially in manufacturing, to fall--has an elementary flaw. Gordon wrote that "the bulk of our trade deficit in merchandise exports and imports, which consists almost entirely of manufactured goods" is with countries whose manufacturing wages are higher than ours.

The second standard answer is what Gordon called the "skills-mismatch" or "technology" argument. Secretary of Labor Robert Reich is the leading proponent of this argument, which according to Gordon is the only serious explanation other than global trade which economics offers for the wage crisis. To quote Reich: "[There is a] mismatch between the skills Americans have and the skills the economy requires." This certainly fits with the fact that Americans with college or postgraduate degrees are doing much better than those without them. Thus the answer to the wage crisis is to raise the skill level of the nonsupervisory work force.

That's logical enough--and a good idea in any case. But, Gordon's critical review of the literature demonstrates, the technology argument has only circumstantial evidence to support it--as its more candid proponents concede. Grant, for example, that computerization brought about the relative increase in the earnings of computer-literate college grads. Computerization caught on in the mid-1980s. "But the real earnings of male college graduates actually began to fall in absolute terms after 1987," Gordon wrote, as the wage crisis crept up the income scale. In fact, from 1983 to 1993 real hourly wages fell or stagnated for those workers the Bureau of Labor Statistics identified as "computer operators" and "engineering technicians," while they climbed 31.2 percent for doctors and 29.7 percent for lawyers and judges--hardly high-tech professionals. After raising a cluster of similarly persuasive objections to the skills-mismatch explanation for the wage crisis, Gordon asked, "Have we found a modern version of the story about the emperor with no clothes?"

But if "trade" and "technology" at best only begin to explain the wage crisis, then what really explains it?

THE title of Gordon's first chapter gives the game away: his villain is "corporate bloat." Thus Fat, which was created to implement a corporate strategy--namely, Mean. Since the early 1970s, when wages started their long dip down, American corporations have been following a "Big Stick" strategy toward their production and nonsupervisory employees. Corporate America's response to global competition has been to get tough on unions; to lobby hard and successfully against meaningful increases in the minimum wage; to invent new categories of workers--contingent, part-time, temporary--who typically get no health insurance or other benefits and can be hired and fired as needed. At the same time, it has bulked up with managers and supervisors to monitor employees whose morale has fallen apace with their wages. Gordon explained the logic of the Big Stick this way:

Can't trust your workers when left to their own devices? Peer over their shoulders. Watch behind their backs. Record their movements. Monitor them. Supervise them. Boss them. Above all else, don't leave them alone. As one recent study observed, "American companies tend, fundamentally, to mistrust workers, whether they are salaried employees or blue-collar workers."

There are about 17 million monitors and supervisors, not including their secretaries and assistants. They cost the economy $1.3 trillion in compensation in 1994, or four times the cost of Social Security, and almost exactly what the federal government collected in all taxes in 1994. This "bureaucratic burden" is equivalent to $1.00 of a $5.00 six-pack, or $4,000 of a $20,000 car. Of the industrial economies in Gordon's sample, none, except tragically propinquant Canada's, carries anything like as heavy a burden. Whereas 13 percent of U.S. nonfarm workers are managerial and administrative employees, according to the Yearbook of Labour Statistics, only 4.2 percent of Japanese workers, 3.9 percent of German workers, and 2.6 percent of Swedish workers are in that category. Had we held our bureaucratic burden to the Japanese percentage, Gordon calculated, about 10 million workers would have been freed--none dare call it "downsized"--to do something more valuable in the economy (which almost anything other than implementing a wasteful strategy would be), realizing a possible "corporate bureaucratic dividend" of some half a trillion dollars.

The bureaucratic burden mirrors the decline in wages for the 80 percent of the work force--as it rises, they fall--that is not in the Fat. (To quote Gordon, "Men who worked at least eight out of ten years as managers during the 1980s earned 68 percent more than the average earnings for all male workers.") Since 1947 the number of managers and supervisors has exploded by 360 percent, but it was only in the early 1970s, with the arrival of the Big Stick, that the burden began to get really heavy. "And for this strategy to work, the power of the stick-wielders had to be enhanced," Gordon wrote, noting "a massive income shift, within the total category of wage-and-salary employee compensation, from production and nonsupervisory earnings to nonproduction and supervisory salaries." This income shift, all but ignored in the media, was about seven times as large as the defense buildup of the Carter-Reagan years. Gordon cited observations from Malcolm Baldridge, who was a Secretary of Commerce in the Reagan Administration, and Peter Drucker on what the latter called the "gross overweight around the midriff" of U.S. corporations. On becoming the chief executive officer of General Electric in the early 1980s John Welch said, "We were hiring people [just] to read reports of people who had been hired to write reports."

Hasn't the "downsizing" scythe of the nineties cut this Fat away? Not yet. Whereas a total of 2.5 million Americans have lost their jobs owing to corporate restructuring since 1991, the percentage of managers among nonfarm employees rose from 12.6 in 1989 to 13.6 in 1995. Although many middle managers have been let go, even more production workers have too, allowing the percentage of managers to grow. Gordon, complementing the view that James Fallows expresses about the out-of-touch media in his new book, Breaking the News, wrote, "The media appear to pay disproportionate attention to downsizing toward the top rungs of the occupational hierarchy because these workers are disproportionately their friends and relatives and readers and listeners." Inconveniently for Gordon's thesis (and for a small city's worth of families), 1996 began with news of AT&T's plans to lay off thousands of mostly managerial employees.

It is as if the downsizing revolution were now devouring its perpetrators. Gordon's thesis made him less sympathetic to their quandary than common humanity warrants. Managers are people too. A capitalism without workers:is that where this destructive madness will end? Better Fat and Mean, say I, than Lean and Mean.

WHY did stockholders and boards of directors of corporate America permit the bureaucratic burden to grow? Is productivity growth higher among our management-light, non-Big-Stick-wielding industrial competitors? (Hint: yes.) Why has computerization fed instead of cut the Fat? How have U.S. corporations that have not used the Big Stick fared relative to their meaner competitors? Haven't quality-of-work-life programs blunted the stick? (Hint: no.) For the answers to questions like these, see Gordon's book.

It ends, as I will, with a list of negative and positive incentives for corporate America to drop the Big Stick and stop the wage squeeze affecting 80 percent of U.S. workers before it triggers bread riots--and causes goods to pile up in stores because wage-challenged consumers are unable to buy them. In a sign that consumer demand is in fact contracting, at least eight major retailers filed for bankruptcy last year, and analysts were predicting more filings this year in the wake of the miserable Christmas shopping season, which saw mainly upscale retailers, who cater to the top 20 percent of the work force, enjoy good sales.

The biggest negative incentive would be to change the law so that unions can fight back against the Big Stick. Union membership tracks the decline in wages. Unions got clobbered in the eighties, when corporate America implemented the Big Stick and the Reagan Administration staffed the National Labor Relations Board with conservatives who rejected unfair-labor-practice complaints against corporations at a record rate. The saddest chart in Gordon's book shows a straight line running down the page--the decline in union membership from 35 percent of the work force forty years ago to less than 15 percent in 1994. The union wage, as a study by David Card and Alan B. Krueger, of Princeton University, has shown, puts upward pressure on all wages, and so all workers have a stake in union expansion. Gordon recommended simple changes in the law that would make it easier for unions to organize and would allow all but the top managerial employees to join.

Among his other recommendations:

• Finance Social Security out of general revenues, as most other advanced countries do, instead of from a separate tax on payrolls, so that employers would not be able to avoid the tax by hiring temps.

• Raise the minimum wage from $4.25 to $6.50 an hour over four years, and index it to increases in the cost of living. This would give a fillip to wages and especially to the wages of women, since 58.8 percent of employed women work at or below the minimum wage. In a numerically surprising analysis, Gordon showed how the wages of more than 20 million workers have been negatively affected by the fall in the real value of the minimum wage.

• Extend a variety of direct subsidies to firms that drop the Big Stick. How would a company demonstrate its reform? Perhaps by sharing the fruits of productivity increases with workers instead of lavishing them on executive pay raises and corporate dividends.

• Mandate vacations of at least three weeks, which, Gordon wrote, would "contribute to breaking down the artificial distinctions . . . between full-time and part-time employees," and make other changes in the Fair Labor Standards Act to enhance the benefits and job security of disposable or contingent workers, who number upwards of nine million and the growth of whose presence in the work force since the 1970s dolefully has coincided with the decline in real wages.

Pat Buchanan doesn't talk this way about corporate downsizing, nor does Massachusetts Governor William Weld, at the other end of Republican politics. Word from inside the Clinton Administration is that Dick Morris, the consultant-guru of Clinton's re-election campaign, who has peddled his versatile counsel to Republicans like Jesse Helms and Trent Lott, is telling Cabinet members to stop talking about economic insecurity. The economy is great, and it's our economy--that's the Morris message that Gore was parroting in New Hampshire. Under Clinton the Democrats have lost any claim to economic populism just when circumstances are giving it a new lease on emotion and plausibility.

We are at a paradoxical moment in economic history, when what is in the broad interest of all U.S. corporations--well-paid worker-customers--may not be in the narrow interest of any one corporation. And government, which should assert the national interest in resolving this paradox, is throwing up its hands. The relative optimism in Gordon's book springs from the economic facts. The political facts warrant despair.