America: Whole Stole the Dream? The Have-Mores and Have-Lesses (Part 1)

September 22, 1996

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Jim Rude learned about the bottom-line society the hard way. Married and the father of two children, one in college, Rude is a computer programmer. A native of northern New Jersey, he earned his bachelor's degree in computer science at Montclair State University. After 18 years at Blue Cross of New Jersey, Rude went to work in 1989 at American International Group Inc. (AIG), one of the world's largest, richest and most influential insurance companies.

Working out of AIG's Livingston, N.J., offices, Rude was one of several hundred programmers. With worldwide operations, the data-processing unit was a booming enterprise for computer programmers, a case where global business generated jobs for Americans. The pay and benefits were good, and Rude, at the encouragement of his superiors, enrolled in a program under which the company would pay part of his tuition toward a master's degree in computer science.

"Everybody says you need more education and I decided to make the effort and go for an advanced degree," Rude said. He did it for "the self-satisfaction" and to expand his opportunities at the company. By the fall of 1994, Rude was only a few credits away from earning his degree when his continuing education — and his job — suddenly came to an end.

To the astonishment of Rude and the 325 others in AIG's computer operations, the company announced it was dismissing them in two months. AIG had hired a subcontractor who would employ programmers from India, then streaming into the United States by the thousands to fill high-tech jobs. Suddenly, professional workers were losing their jobs just like blue-collar workers before them — but with one notable difference. The blue-collar jobs disappeared when production work was moved offshore. Now, white-collar workers were being replaced by foreign nationals brought here to do the work.

It was all part of a U.S. government immigration policy engineered in 1990 by the Republican Bush administration, a Democratic-controlled Congress and businesses with ties to both parties. The companies had used the threat of global competition to extract government approval to bring in foreign workers for high-tech occupations. Next to losing his $64,000 salary, the worst part for Rude and the others was having to train the people who were taking their jobs.

"We were told two months before our last day that we were leaving as of a certain day because we were going to be terminated," Rude said. "And for that two months, we had all these people coming over from India and we had to train them. And we were told, `If you don't train these people, you will be terminated on the spot and you won't get your severance package.'"

In December 1994, Rude and his fellow programmers were out of a job. As incomes fell, so did their standard of living. Rude was unemployed nearly two months. When he landed a job, it was at roughly half his AIG salary.

He became a recruiter placing programmers with companies. Since starting the new job, he has increased his income to $37,000 a year — or $27,000 less than he made before. Rude says AIG did what all large corporations are doing.

"Big business today, if it can find a way to save a few bucks, they'll do it," he said. "The bean counters are running these companies anymore. Anything they can do to make their quarterly projections, they do."

Not everyone at AIG has fared badly under the new economic rules. Some have profited handsomely from such bottom-line decisions: Maurice R. (Hank) Greenberg, for one. At age 71, he represents both the present and the future. Greenberg is chairman and chief executive officer of AIG. From an office near Wall Street, he presides over a business empire of 32,000 employees in more than 100 countries, with revenue of $25.9 billion in 1995 — more than the gross domestic product of entire countries such as Bolivia, Ecuador, Guatemala, Panama or Uruguay.

Greenberg is one of the 100 richest men in America, with a net worth estimated by Forbes magazine at $1 billion. He has an apartment bordering Central Park in New York City and an ocean-front condominium on Buccaneer Lane on Key Largo in Florida. Greenberg has headed AIG since 1969, during which time he has earned a reputation as one of America's most abrasive, cocky and aggressive corporate executives. Once asked to sum up his business philosophy, Greenberg answered: "All I want in life is an unfair advantage."

Among his advantages has been instant access in Washington. In contrast to Jim Rude, who lost his job thanks to an immigration policy made by Congress, AIG has profited from its close ties to Washington policymakers. In 1986, for example, the company lobbied for a special provision in the tax reform act of that year exempting certain of its operations from a crackdown on foreign tax shelters. If you pick up a copy of the Internal Revenue Code, you can read the custom-tailored tax law written for AIG.

It states, in part, that this section of the new tax law will apply to everyone except "any controlled foreign corporation which on August 16, 1986, was a member of an affiliated group (as defined in section 1504(a) of the Internal Revenue Code of 1986 without regard to subsection (b)(3) thereof, which had as its common parent a corporation incorporated in Delaware on July 9, 1967, with executive offices in New York, New York..."

AIG was incorporated in Delaware on July 9, 1967, and has its executive offices in New York. That little provision and a similarly arcane clause written for another big insurer — Cigna — were worth an estimated $20 million to the two companies. They would have been obliged to pay that much in taxes had not a friendly, but anonymous, member of Congress' tax-writing committees inserted the exemption into law.

You, of course, can't obtain such a tax break, since they go only to the politically well-connected. But if you could secure your own tax law, it might read like this: "This section of the Internal Revenue Code does not apply to a resident of West Virginia born on Jan. 31, 1949, who incorporated a business in Delaware on Feb. 23, 1968."

Not possible, you think? Think again.

If you believe that's preposterous, ponder yet another provision in the Internal Revenue Code that excused the still-unidentified beneficiaries from paying taxes that others in a similar situation were obliged to pay: "(E) Application of old rules to certain acquisitions. — In the case of a Texas resident whose birthdate is May 16, 1931, and a Michigan resident whose birthdate is November 16, 1941, in connection with a corporation incorporated in Texas on February 4, 1971, and a corporation incorporated in Florida on August 24, 1979..."

Convinced? In any event, 1986 was not the first time that AIG helped to write the tax laws. In 1976, the company was the prime beneficiary of a section in the tax reform act of that year entitled "Exclusion From Subpart F of Certain Earnings of Insurance Companies."

That section exempted AIG and other large insurers from taxes on some of their offshore operations, saving the companies millions of dollars. In addition to securing preferential tax breaks, AIG's tax lawyers, recruited from the ranks of former staff members of the congressional tax-writing committees, have succeeded in fending off other potentially harmful tax measures.

One of the company's principal tax lawyers has been Robert E. Lighthizer, who was chief counsel and staff director of the Senate Finance Committee from 1981 to 1983, and is a partner in the Washington office of Skadden, Arps, Slate, Meagher & Flom. Greenberg also has packed AIG's board of directors with political powerbrokers. Among them:

* Lloyd M. Bentsen, secretary of the Treasury under President Clinton from 1993 to 1994 and former chairman of the Senate Finance Committee, which oversees tax legislation.

* Barber B. Conable Jr., former ranking Republican on the tax-writing House Ways and Means Committee and former president of the World Bank.

* Martin S. Feldstein, chairman of President Reagan's Council of Economic Advisers from 1982 to 1984.

* Carla A. Hills, former U.S. Trade Representative in the Bush administration, now one of Washington's premiere consultants on international trade matters.

Those who know Greenberg say his strongest characteristic is his single-minded devotion to improving AIG's bottom line. It has propelled him into the ranks of the richest Americans. In the wake of AIG's replacing its U.S. computer programmers, 1995 proved an especially good year for Greenberg. His salary and bonus totaled $4.15 million. That worked out to $80,000 a week, or more than the average AIG programmer earned in a year. Greenberg also held unexercised stock options valued at $23.6 million and owned 10.2 million shares of AIG stock worth $1 billion or so.

Let's review: In 1995 Jim Rude, a certified member of America's solid middle class, saw his earnings fall 42 percent. Maurice Greenberg saw the value of his AIG stock more than double, as he solidified his membership in America's Top 1 Percent Club.


What has complicated the debate about the nation's economic course is that most policy issues are cast in either/or terms. Either you're for free trade, or you're a raving protectionist. Either you want to throw open the doors to immigrants, or you'd erect walls to keep out foreigners. Either you want government off business' back, or you favor shackling American companies with onerous regulations. Either you're for lowering taxes, or you believe in soaking the rich.

Absent from the debate is serious talk about the need for a middle ground — of a balance between the interests of corporations and of employees, between unrestricted trade and controlled trade, between preserving the nation's historic tolerance of immigrants and protecting American workers from a glut in the labor force.

And there is a middle ground — just as there is a middle ground for all human behavior. For example, children may eat an occasional ice cream cone for a treat. But eating ice cream for dinner every night would be harmful. Families may enjoy several hours of television each week. But staying glued to the television set 12 hours a day, 7 days a week, would be disastrous for the family and all its members.

And so it is with trade, immigration, taxes, protectionism and government regulatory policies. Yet for a variety of reasons, special interests, Washington, Wall Street and the news media have cast these and other issues as an either-or proposition: Either it's ice cream for the main meal every night and 12 hours of daily television. Or its no ice cream. No television. If that sounds simplistic, it is — and so are government policies set at the edge, rather than in the middle.

Yet for their own reasons, partisans in Washington and on Wall Street have defined these issues in either/or terms, and that is how they're portrayed in the news media. Because there's no middle ground, the doors have been flung open to products made around the world — often by workers whose wages are counted in pennies — eliminating American jobs.

Because there's no middle ground, the progressive income tax — designed so that the very rich would pay their appropriate share of the cost of government — has been gutted. And because there's no middle ground, the notion that government has a vital role in the economic direction of the country has been shoved aside. Either you believe in unfettered private enterprise or that the government should run the economy. But putting the issues in such a rigid way ignores what the federal government can do and has done in the past to bolster the economic well-being of average Americans.

Throughout much of this century, government played a critical role in development of American society — protecting the powerless, curbing the excesses of business and creating a regulatory framework to safeguard the health and welfare of its citizens. Equally important, the federal government has assured opportunities, evened out the economic playing field and tackled issues that neither Wall Street nor the market deemed significant.

It was the federal government — not Wall Street or the market — that spurred the greatest wave of homebuilding in American history after World War II with the Federal Housing Administration (FHA) program to insure mortgages for emerging middle-class families. It was the federal government — not Wall Street or the market — that created the student loan program after World War II, enabling millions of servicemen and women to attend college. It was the federal government — not Wall Street or the market — that built the interstate highway system, linking small towns, rural areas and the nation's cities. It was the federal government — not Wall Street or the market — that initiated development of the computer, the machine that has transformed everyone's life.

And it was the federal government — not Wall Street or the market — that financed the technology and underwrote the early costs of the Internet, the global information superhighway that is projected to become a $79 billion-a-year business by the turn of the century, generating enough revenue to place it among the 20 largest U.S. industrial and service corporations.


All of which brings us full-circle to Marion, Va., and the men and women who once worked for Harwood Industries and who lost their jobs, thanks to U.S. government trade policies. Marion is in the heart of what Virginians call the Mountain Empire, a region of lovely rolling hills, pleasant valleys and gentle streams. It is a place where jobs have never been plentiful. But small manufacturing facilities, especially clothing plants, have dotted stretches of the countryside along Interstate 81, providing jobs for area women.

For more than half a century Harwood Industries, a maker of men's pajamas, robes and casual clothing, was one of the fixtures of the Marion economy. At its plant on the outskirts of town, Harwood employed several hundred seamstresses, cutters, warehousemen, packers, mechanics and office workers. By national standards, the pay was never good. In 1992, the average wage for women in the sewing department was $6.75 an hour, or roughly $14,000 a year. But Harwood did have a health plan, the women were close to family and friends, and at least it provided steady work.

Until Aug. 31, 1992. On that day, Harwood announced it was closing the sewing operation, eliminating 120 women's jobs. In a statement all too familiar to American workers, Harwood officials said they regretted the decision but that it was "necessary because we were not competitive on most of the products we were producing." The company said it planned to keep open a distribution center and office "to maintain a substantial presence in Marion." But they, too, were phased out over the next 18 months.

For years, Harwood had been shuttering plants in the United States and, under pressure from retailers to cut costs, shifting production offshore — first to Puerto Rico, then Nicaragua, and finally to Honduras and Costa Rica. The employees at Marion had watched as the company closed other plants, and had seen other manufacturers in their area shut down. They knew the signs did not look good. Yet the layoff still came as a shock.

"It does something to your self-esteem," said Ann Williams, who closed out her 20 years at Harwood working in the office. "You don't get over it. I don't know anyone who has really gotten over it. Even those of us who have gone on and been fortunate enough to find work, feel that way. We all knew we hadn't been singled out. Everybody had been let go. But you still take it personally. I don't think there is any one of us who didn't take it personally."

For Darlene Speer, the shutdown hurt, both personally and financially. "I loved my job, but after the way they treated us at the end, I was almost glad to get out of there," she said. "We all worked so hard. They didn't close it because of our work. I don't think there's any one of us now who is not glad to be away from there, even though we might not be making the same money."

Speer, who is divorced and the mother of two grown children, ultimately wound up with two jobs, with the furniture maker and the video store, and together, she said, the two equal roughly what she earned annually at Harwood. "But you can't look back," she said. "I've gone ahead with my life. And, for the most part, I'm happy. But I'll tell you it's hard to start over."

One of her co-workers, Nancy Anders, who worked in the sewing department for 25 years, recalled how she'd felt such a sense of responsibility toward the job. She went to work regardless — "when I was sick, when my family was sick," she said. At the company's request, she even went to Nicaragua in the late 1970s to help train new employees at a plant Harwood had built there.

Anders spent six weeks showing Nicaraguan women how to operate sewing machines. At the time, she didn't think much about it. She felt sorry for the people, who were so poor. It was only years later, reflecting on the trip, that she realized she'd been "training them to take our jobs but didn't know it." She did everything she was asked because that was her nature. "When I worked there, I thought this company can't get by without me," Anders said. "And when I found out they could, it hurt. I was bitter at first," she said. "It seemed like they shouldn't have closed it. But the more I thought about it, I thought, 'If they don't want me, then I can find a job somewhere.'"

Eventually, Anders did find one, for less money. "I have a good job now," she said. "It's a part-time job. I'm Wal-Mart's people-greeter, and I love it. And I think I'm the best people-greeter Wal-Mart's got." Smiling and upbeat, Nancy Anders has gone on with her life, even though she earns less and must pay for her health coverage.

Yet for her, the greatest loss can't be measured in dollars and cents. Harwood's closing cheated her out of a chapter of her life. For 25 years, she had gone to festive dinners sponsored by the employees when fellow workers retired. On these occasions, employees chipped in to buy the retiree a finely crafted oak rocking chair made at a nearby furniture factory. It was a lasting gesture of affection from those who stayed to those who were departing, and the rocking chair came to symbolize not only a life of leisure but also a kind of closure to a life of working at the Harwood plant.

"I went to the retirement dinners for 25 years and I couldn't wait to retire so I could get one of those great big rocking chairs," she said. "I just dreamed about that day. That was my goal, getting that rocking chair."

When Harwood announced the shutdown in 1992, Nancy Anders knew there would be no retirement dinner, no rocking chair. "I went home that night and I cried," she said. "My husband thought I was crazy being so upset over a rocking chair. He said, `Go get one.' I could have bought the rocking chair. But it wouldn't have meant the same after all those years. I missed getting that rocking chair almost as much as I hated to lose my job."

Wendell Watkins, a Harwood vice-president and the last manager of the Marion plant, said the company regretted the closing but had no choice if it wanted to remain competitive. "We have always manufactured private-label goods for big firms (department stores) who can shop the world and get the best price they can," Watkins said. "Now, that's great for the U.S. consumer and they are the real beneficiaries. Our major customers always insist on having the lowest price. They tell us, `We'll bring it in from the Orient if you can't do something to match the cost.' I think we did a great job of keeping it open as long as we did and we would have loved to have continued to operate it, but we just could not compete with the competition we had to meet and pay U.S. labor prices."

Watkins said he knew the closing was hard on many employees, but he felt it was the right decision — not just for Harwood but for the nation as a whole. "As much as this has hurt my industry, it is my belief and feeling that our government is going about this in the correct manner," Watkins said. "I think that they have to write the industry off and go for high-tech and let the less-expensive labor countries produce the apparel and other things. I have lived in the industry all my life and it has been good to me, and as much as I hate to admit it, I think we are taking the proper approach. I know it has hurt a lot of people, but it is also helping a lot of people in the long run, the consumers."

When Harwood shut Marion, the company ceased to manufacture in the United States. The gradual move of its plants offshore was complete to three new facilities — two in Honduras and one in Costa Rica. For many American apparel-makers, Honduras has become the country of choice in recent years. The Central American nation of 5.3 million people has been highly successful in attracting U.S. plants because of cheap labor, no taxes and a solicitous government.

American companies that manufacture products in specially created export zones are exempt from all import and export duties, from currency charges when they ship profits back to the United States, and from all Honduran taxes — a "Permanent Tax Holiday," as the Honduran government describes it. Best of all, they are exempt from U.S.-style wages. The minimum wage of the Honduran factory worker, according to that government's statistics, is 48 cents an hour, including benefits — or less than $20 a week in take-home pay. Even by Latin American standards, that's low.

Mexicans who work in American plants in the north of Mexico now earn, on average, $60 a week — three times the average pay of Hondurans. And Mexican wages, of course, are only a fraction of the $7 to $8 an hour that a U.S. worker would be paid. In short, for all the talk about the need to be "competitive," there is no way a plant in the United States paying minimum wages and no benefits could compete with a Honduran plant that pays 48 cents an hour and where profits are exempt from taxes.

Not surprisingly, many American companies have moved some operations to Honduras in recent years. The list includes such familiar names as Sara Lee, Bestform, U.S. Shoe, Fruit of the Loom, and Wrangler. One of those companies, Sara Lee, in turn announced plans in the summer of 1996 to acquire Harwood. "Harwood's manufacturing expertise complements Sara Lee's knowledge of the underwear (industry)," said Donald J. Franceschini, executive vice-president of Sara Lee.

Harwood was one of the first to capitalize on Honduran incentives; its first plant was built there in 1980. When Harwood's Watkins was asked if labor was the main reason for going to Central America, he answered: "It's the only benefit. And you do it only so you can compete, not because you want to." Having successfully transferred all of Harwood's operations abroad, the company's chief executive officer and principal owner, Michael Rothbaum, subsequently offered some words of advice to American manufacturers who might be considering a Caribbean operation.

After first warning that the process was not easy — think of it "as if you were starting a plant on the moon," he wrote in a trade journal — he then assured them it was worth it. If "approached correctly, the savings in labor costs can be significant." Rothbaum went on to paint a picture of the average worker:

"Caribbean employees work longer hours, from 44 to 48 per week, and they travel further to work, sometimes two hours by bus each way. Some also attend school at night. For many, the only decent meal they get each day is the one served in your cafeteria. Also remember that Caribbean employees are younger than your domestic workforce. The average age in a Caribbean plant may be 19 to 20.

"Medical care as we know it is not available, and people come to work when they're sick — because that is where they may find a doctor or nurse. To a great extent, you, the employer, must compensate for these differences in conditions through the social contract you make with your employees in order to achieve acceptable performance."

If Rothbaum believes U.S. employers must enter into a social contract with their Caribbean employees, it is just such a contract that their abandoned employees in the United States believe has been broken — by cutting off jobs, wiping out benefits, lowering their standard of living.

And the outlook for a long-term social contract in countries such as Honduras is not good, either, if history is any guide. Harwood's first offshore plant was in Puerto Rico. When wage rates rose there, the company moved its apparel production to a lower-wage country, Nicaragua. But after political upheaval there in the late 1970s, Harwood relocated to Honduras and Costa Rica.

One longtime Harwood employee at Marion, Garney Powers, after noticing how the company kept moving its operations from one developing country to the next to cut costs, said he once asked a Harwood manager if there was any chance, as wages rose in developing countries, that Harwood might shift some of its manufacturing back to the States. No way, he said the manager told him.

"There's too many countries out there."

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