America: What Went Wrong? Rigging the Game (Part 1)

October 20, 1991

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Worried that you're falling behind, not living as well as you once did? Or expected to?

That you're going to have to work extra hours, or take a second job, just to stay even with your bills?

That the company you've worked for all these years may dump you for a younger person?

Or that the pension you've been promised may not be there when you retire?

Worried, if you're on the bottom rung of the economic ladder, that you'll never see a middle-class lifestyle?

Or, if you're a single parent or part of a young working family, that you'll never be able to save enough to buy a home?

That you're paying more than your fair share of taxes?

Worried that the people who represent you in Congress are taking care of themselves and their friends at your expense?

You're right.

Keep worrying.

For those people in Washington who write the complex tangle of rules by which the economy operates have, over the last 20 years, rigged the game--by design and default--to favor the privileged, the powerful and the influential. At the expense of everyone else.

Seizing on that opportunity, an army of business buccaneers began buying, selling and trading companies the way most Americans buy, sell and trade knickknacks at a yard sale. They borrowed money to destroy, not to build. They constructed financial houses of cards, then vanished before they collapsed.

Caught between the lawmakers in Washington and the dealmakers on Wall Street have been millions of American workers forced to move from jobs that once paid $15 an hour into jobs that now pay $7. If, that is, they aren't already the victims of mass layoffs, production halts, shuttered factories and owners who enrich themselves by doing that damage and then walking away.

As a result, the already-rich are richer than ever; there has been an explosion in overnight new rich; life for the working class is deteriorating, and those at the bottom are trapped.

For the first time in this century, members of a generation entering adulthood will find it impossible to achieve a better lifestyle than their parents. Most will be unable to even match their parents' middle-class status.

Indeed, the growth of the middle class--one of the underpinnings of democracy in this country--has been reversed. By government action.

Taken as a whole, the rules that govern the game have:

* Created a tax system that is firmly weighted against the middle class.

* Enabled companies to trim or cancel health-care and pension benefits for employees.

* Granted subsidies to businesses that create low-wage jobs that are eroding living standards.

* Undermined longtime stable businesses and communities.

* Rewarded companies that transfer jobs abroad and eliminate jobs in this country.

* Placed home ownership out of reach of a growing number of Americans and made the financing of a college education impossible without incurring a hefty debt.

Look upon it as the dismantling of the middle class.

And understand that, barring some unexpected intervention by the federal government, the worst is yet to come.

For we are in the midst of the largest transfer of wealth in the nation's history. It is a transfer from the middle class to the rich, and from the middle class to the poor--courtesy of the people in Washington who rewrote the rules.

Those who have taken advantage of the changed rules are beneficiaries of the transfer. People like Andrew G. Galef, an art collector, millionaire investor and resident of one of the nation's wealthiest enclaves, Bel Air, Calif.

While those who have played by the old rules are victims of the transfer. People like Mollie James, a 59-year-old factory worker, mother of four, grandmother of six, who lives in a working-class neighborhood in Paterson, N. J.

Andrew Galef never met Mollie James, but a decision he made in 1989 had a profound effect on her life.

Galef eliminated Mollie James' job.

For more than three decades, James worked at the Universal Manufacturing Co. in Paterson, rising from assembly-line worker to become the only female operator of a large metal-stamping machine.

In the process, she prospered to a wage of $7.91 an hour, or more than $16,000 a year.

On June 30, 1989, MagneTek Inc., a Galef company that had bought Universal, halted manufacturing in New Jersey--terminating James' job, along with the jobs of 500 others.

The manufacturing operation was transferred to Blytheville, Ark., where wages were lower, and part of the existing manufacturing operation in Blytheville was moved to Mexico, where the wages were even lower--less than $1.50 an hour.

For her 33 years of service, Mollie James received a severance check that, after deductions, came to $3,171.66--or a little less than $100 for each year she had worked.

When she reaches age 65 in 1996, she will qualify for a monthly pension of $101.76.

That is about half the $2,400 that Andrew Galef spent in a single year to feed, groom and care for the family dog, according to his second of three wives.

The extreme differences between the lifestyles of the rich and those of ordinary working people have existed always. But there is a notable difference today:

The ranks of the Andrew Galefs are growing by the thousands.

The ranks of the Mollie Jameses are swelling by the millions.

And the ranks of those in between are shrinking.

Once upon a time, membership in the middle class was open to everyone. Now it is severely restricted. And existing memberships are being revoked.

A few statistics, drawn from an analysis of a half-century of tax and economic data, tell part of the story.

SHRINKING MIDDLE CLASS. Nearly 34 million individuals and families who earned salaries filed federal tax returns for 1989 reporting adjusted gross incomes between $20,000 and $50,000.

They represented the heart of America's working middle class. Median family income that year amounted to $34,213--meaning half of all families earned more, half earned less.

But the middle is shrinking when measured against comparable income groups of earlier years.

The middle-income group accounted for 35 percent of all tax returns showing income from a job in 1989. That was down from 39 percent in 1980.

THE GREAT SALARY GAP. Between 1980 and 1989, the combined salaries of people in the $20,000-to-$50,000 income group increased 44 percent.

During the same period, the combined salaries of people earning $1 million or more a year increased 2,184 percent.

Viewed more broadly, the total wages of all people who earned less than $50,000 a year--85 percent of all Americans--increased an average of just 2 percent a year over those 10 years.

At the same time, the total wages of all millionaires shot up 243 percent a year.

Those figures are not adjusted for inflation, which cuts across all income groups but hits the lower and middle classes hardest.

THE BULGING RANKS OF THE RICH. Between 1980 and 1989, the number of people reporting incomes of more than a half-million dollars rocketed from 16,881 to 183,240--an increase of 985 percent.

That represented the largest percentage increase in this century. It even exceeded America's other era of excess, the 1920s.

During that decade, the number of people reporting incomes of more than a half-million dollars rose from 156 in 1920 to 1,489 in 1929--a jump of 854 percent. The 1920s, like the 1980s, were marked by an uncontrolled financial frenzy on Wall Street and a government responsive to special interests.

More significant for most people is a comparison with the 1950s, the decade that saw the largest expansion of the country's middle class. It was a time when ever more Americans climbed the economic ladder and substantially improved their living standard.

It was also a time when the number of people reporting more than a half-million dollars in income barely rose, from 842 in 1950 to 1,002 in 1959, a gain of 19 percent.

The decade began and ended with fewer people reporting such incomes than had during the 1920s, even though the population had increased by more than 50 percent and a 1950s dollar did not have as much buying power as a 1920s dollar.

One reason for the slow growth: In the 1950s, taxable income above $400,000 was taxed at a rate of 91 percent. In 1991, the maximum tax rate for individuals was 31 percent. That's a tax-rate reduction of 66 percent. In both the 1920s and the 1980s, Congress enacted large tax cuts for the wealthy.

Because of the dramatic increase in their numbers, the over-$500,000 group is accounting for a larger share of overall income tax collections at the same time their individual payments have fallen off sharply.

In 1980, they paid $2.8 billion in taxes, or 10 percent of total individual income taxes. In 1989, they paid $59.4 billion, or 14 percent of the total.

If this trend continues, those at the top will pay an ever-mounting share of the taxes. But that's because everyone else will be falling further behind. Consequently, they will have less income to be taxed.

RISING TAXES OF MIDDLE CLASS. In 1970, a Philadelphia family with income of $9,000 to $10,000--median family income that year was $9,867--paid a total of $1,689 in combined local, state and federal income and Social Security taxes.

In 1989, a Philadelphia family with income of $30,000 to $40,000--median family income that year was $34,213--paid $8,491 in combined local, state and federal income and Social Security taxes.

Thus, while these taxes consumed 17.8 percent of a middle-class family's earnings in 1970, by 1989 they took 24.3 percent of the family's income.

When real estate taxes, sales taxes, gasoline taxes and other excise taxes and local levies that have gone up are added in, the middle-class family's overall tax burden rises to about one-third of family income.

ILLUSORY TAX ON THE WEALTHY. When Congress enacted the Tax Reform Act of 1986, lawmakers hailed its alternative minimum tax provision as the most stringent ever, guaranteeing that nobody would escape paying at least some tax.

Financial publications sounded warnings to their readers. The Wall Street Journal said the new law "would toughen the alternative minimum tax" and Fortune magazine predicted that "a lot more taxpayers are likely to be hit."

Congress' Joint Committee on Taxation, declaring the alternative minimum tax was necessary "to ensure that no taxpayer with substantial economic income can avoid significant tax liability," estimated the amended provision would generate an additional $8.2 billion in revenue from 1987 to 1991.

Representative Marty Russo, the Illinois Democrat who was a member of the tax-writing House Ways and Means Committee and an architect of the alternative minimum tax, said during debate on the bill:

"I take particular pride when I hear my colleagues...say that this bill has the toughest minimum tax they have ever seen. It makes sure everybody pays a fair share."

It did not.

Under the existing law that year, 198,688 individuals and families with incomes over $100,000 paid alternative minimum taxes totaling $4.6 billion.

Three years later, in 1989, under the new law praised by Russo and his colleagues, 49,844 individuals and families paid alternative minimum taxes totaling $476 million.

Passage of "the toughest minimum tax ever" resulted in a 75 percent drop in the number of people who paid the tax, and a 90 percent drop in the amount they paid.

On average, a millionaire in 1986 paid an alternative minimum tax of $116,395. Three years later, a millionaire paid $54,758. That amounted to a 53 percent tax cut.

At first glance, the dropoff in alternative minimum tax collections might seem to suggest that the system was working as planned.

After all, the 1986 law eliminated many tax shelter schemes that had triggered the alternative minimum tax in the past.

Thus, it would appear that those at the top were paying more in taxes at the regular rate and were not subject to the more strict alternative minimum tax.

This was certainly true in some individual cases. But for millionaires and other upper-income people as a group, it was not.

From 1986 to 1989, the average tax bill of millionaires--exclusive of the alternative minimum tax--fell 27 percent, dropping from $864,068 to $634,196. At the regular tax rates, that represented a tax savings of $229,873.

A comparison with individuals and families who reported incomes of more than $1 million in 1980 is even more stark.

From 1980 to 1989, their average tax bill--again exclusive of the alternative minimum tax--plunged from $980,869 to $634,196.

That amounted to a 35 percent tax cut, giving those people an extra $346,673 in spending money.

During that same period, the alternative minimum tax payments of the same income group fell from $144,474 to $54,758.

That amounted to a 62 percent tax cut, giving those people another $89,716 in spending money.

TRAPPED AT THE BOTTOM. Almost half of all Americans who had jobs and filed income tax returns in 1989 earned less than $20,000.

Of the 95.9 million tax returns filed that year by people reporting income from a job, 47.2 million came from people in that income group. They represented 49 percent of all such tax filers.

Between 1980 and 1989, the average wage earned by those in the under-$20,000 income category rose $123--from $8,528 to $8,651. That was an increase of 1.4 percent.

Over the decade, the average salaries of people with incomes of more than $1 million rose $255,088--from $515,499 to $770,587--an increase of 49.5 percent.

That, it should be stressed, was their increase in wages and salaries alone.

The figure does not include other types of income, such as dividends and interest, or profits from the sale of stocks, bonds, real estate or other capital assets.

For those at the top, such income far exceeds salaries. In 1989, salaries, on average, amounted to just 29 percent of the total income received by persons earning more than $1 million.

In the case of individuals and families in the $500,000 to $1 million bracket, salaries amounted to 50 percent of their overall income.

The story is different for members of the middle class and lower-income groups. They are dependent on their paychecks to meet daily living expenses.

Take individuals and families who earned between $30,000 and $40,000 in 1989. Of their total income, 88 percent came from wages and salaries.

It was 86 percent for those in the $50,000 to $75,000 income class, as well as the $10,000 to $20,000 income group.

THE GOOD LIFE--TAX FREE. During 1989, some 37,000 millionaires supplemented their other income with a weekly tax-free check for $2,607. That was $135,548 for the year. No tax owed.

The money came from the return on their investment in bonds issued by local and state governments. The interest on those bonds is exempt from federal income taxes.

All together, some 800,000 persons with income over $100,000 picked up $20.1 billion from their exempt-bond holdings, thereby escaping payment of $5.6 billion in federal income taxes.

That lost revenue, as you might guess, was made up by other taxpayers--among them the 26.5 million persons with income under $20,000 a year who paid taxes on the interest earned from their savings accounts.

All together, these persons paid about $7.1 billion in federal income taxes on savings account interest that averaged $1,782 for the year.

Many of the same millionaires escaped payment of billions of dollars in state income taxes as a result of their investment in U. S. government securities, which are exempt from state and local taxes.

SUBSIDIZING THE AFFLUENT. If you earned $20,000 in 1990, you paid $1,530 in Social Security taxes. Of that figure, $1,240 was earmarked for Old Age and Survivors' Insurance; the remaining $290 for Medicare.

So where, exactly, did your $1,240 go?

Most people think it goes into a special fund that is set aside for their own future retirement.

It does not.

In effect, some of it goes to people like Alan Cranston, the three-term Democratic senator from California now best known for his close association with executives at a failed savings and loan association.

It took your $1,240--and the $1,240 of 15 other people in your income group--to cover the $19,034 in Social Security payments that Cranston collected.

Like most members of the U. S. Senate, Cranston ranks in the top 1 percent of all income earners. His total income in 1990 was about $300,000. That included $19,034 in Social Security payments, according to his financial disclosure report filed with the Secretary of the Senate.

Of course, your $1,240 didn't necessarily go to Cranston. It could have gone to some other wealthy American receiving Social Security benefits.

In 1989, the top four-tenths of 1 percent of all people filing tax returns with reported incomes of more than $100,000 received $4.9 billion in Social Security payments.

That sum exceeded the Social Security tax withheld from the paychecks of about 2 million workers in Massachusetts earning less than $30,000 a year.

Plus more than 1 million workers in South Carolina in the same income category.

Plus more than 3 million workers in Illinois. And about 1 million workers in Oregon.

Think of it as a simple transfer of money.

Of course, the wealthy pay into Social Security, too. But the $4.9 billion they receive is more than the Social Security taxes paid by about 7 million workers who earn less than $30,000 a year.

And it is turned over to 400,000 people who earned more than $100,000 a year.

Only 14 percent of the over-$100,000 set is collecting Social Security now. But in coming years that number will grow. That means ever more workers in the under-$30,000 set will be tapped to pay the bill.

For all this, you can thank a succession of Congresses and presidents who set the rules for the American economy.

Congress does so when it enacts new laws and amends or rescinds outdated ones, and then provides the resources that determine whether the laws will be enforced.

The president does so through the various departments and regulatory agencies that implement new regulations and amend or rescind outdated ones--and then either enforce or ignore the regulations.

Both the Congress and the president do so when they succumb to pressure from special interests and fail to enact laws or implement regulations that would make the economic playing field level for everyone.

Taken together, the myriad laws and regulations--from antitrust to taxes, from regulatory oversight to bankruptcy, from foreign trade to pensions, from health care to investment practices--form a rule book that governs the way business operates, that determines your place in the overall economy.

Think of it as the U. S. government rule book.

It is a system of rewards and penalties that influences business behavior, which in turn has a wide-ranging impact on your daily life.

From the price you pay for a gallon of gasoline or a quart of milk to the closing of a manufacturing plant and the elimination of your job.

From the number of peanuts in your favorite brand of peanut butter to the amount of money you will collect in unemployment benefits if you are laid off.

From whether the shirt or dress you are wearing is made in Fleetwood, Pa., or Seoul, Korea, to whether the company you work for expands its production facilities in the United States, thereby creating jobs, or opens a new plant in Puerto Rico or Mexico instead.

From whether the grapes you eat are grown in California or Chile, to the amount of money you will receive in your pension check when you retire--or whether you will even receive a pension check.

From the amount of interest you earn on your passbook savings account to whether your weekly paycheck may be cut when your employer sells out to a competitor.

It should be noted that conditions beyond the government rule book also are at work in the economy. They, too, play a part in determining one's fortunes.

There is, for example, an entry-level workforce that increasingly is unable to write a simple sentence or do elementary arithmetic.

There is a preoccupation with resorting to litigation to settle most any type of conflict or slight, real or imagined.

There is a systemic failure in schools to provide the basic technological education required for the business world of the 21st century.

There is a declining work ethic that raises costs and contributes to the production of defective merchandise.

There is a growing inability among workers to communicate adequately, or read and understand the simplest instruction manuals.

There is an unthinking adherence to arcane work rules that breed inefficiency.

Nonetheless, if all these problems were erased over night, the plight of the middle class would remain essentially unchanged.

For it is the rule book that determines who, among the principal players in the economy, is most favored, who is simply ignored and who is penalized. Those players include management, employees, customers, stockholders and the community where a business is located.

The players often have conflicting interests.

Arthur Liman, a prominent New York defense lawyer who represented convicted junk-bond creator Michael R. Milken, once put it this way:

"I don't see how a board, elected by shareholders, can be expected to protect, for example, the interests of the community or the interests and diversity in the economy.

"That, perhaps, has to come from the rules of the game that are established by government, by democratic processes. I think boards have to represent the shareholders."

Indeed so.

But those who establish the rules of the game long ago ceased to represent the middle-class players. As a result, the middle-class casualties of the government rule book already can be counted in the millions. By the dawn of the next century, they will be many times that number.

Here is a summary of what seems likely to come, barring a sweeping reversal in federal policy:

Workers will continue to be forced to move from jobs that once might have paid $8 to $20 an hour into jobs that will pay less. Some will be consigned to part-time employment. Some will lose all or part of their fringe benefits long taken for granted.

Women and blacks will continue to move into the workforce, but they will receive substandard wages, substandard pensions and substandard fringe benefits. For the first time, they will be joined by a new minority--white males in both manufacturing and service jobs.

Workers will be compelled to forego wage increases to shoulder a growing percentage of the cost of their own health-care insurance. Some will find their coverage sharply limited. Some will lose their health-care coverage entirely.

The elimination of jobs that once paid middle-class wages will continue uninterrupted, due in part to an ongoing wave of corporate restructurings and bankruptcies, the continuing disappearance of some industries and the transfer of others to foreign countries.

More than a half-million men and women, including many with growing families, will be dumped into this sinking job market as the Defense Department begins to deal with budget cuts by prematurely discharging military personnel--most of whom had planned on a 20-to-30-year career in the armed forces.

Local, state and federal taxes will continue to consume a disproportionate share of the income of ordinary workers. At the same time, the income of wealthy Americans that goes untaxed will continue to grow.

Massive debt loads incurred by corporations and the federal government will require ever growing sums of money for interest payments, meaning less money for new plants and equipment, less money to create jobs, less money to rebuild a collapsing infrastructure--highways, bridges, water and sewer lines.

Men and women, banking on pensions they believe the federal government has insured, will discover at retirement that their pensions are not guaranteed. Some will receive only a fraction of the promised benefits. Some will receive nothing.

For the first time since the Great Depression, a growing number of workers will receive no pension at all. At the other extreme, about 20 percent of the work force will receive hefty pensions--in many cases they will collect more in retirement than they earned while at work.

None of this, it should be underscored, is related to a recession. Because these conditions are structural, built into the economy by the rule book's authors, they will be largely unaffected by any upturn in business.


Larry Weikel and Belinda Schell know all about the future. For them, it arrived in 1990 when they paid the price for Wall Street's excesses--and Congress' failure to curb those excesses.

Weikel is 47 years old and lives with his wife in Boyertown, Pa. Their children are grown. Schell is 33 and lives with her husband and three children, two teenagers and a 7-year-old, in Royersford, Pa.

Both worked at the old Diamond Glass Co. plant that had been a fixture in downtown Royersford for all of this century. Until, that is, the takeover craze of the 1980s led to its closing, the elimination of their jobs and the jobs of 500 co-workers--and profits of tens of millions of dollars for those behind it all.

Their stories are the stories of middle-class jobholders everywhere. In interviews across America, the authors heard a constant refrain. It was a litany sounded in city after city, from Hagerstown, Md., to South Bend, Ind.; from Hermann, Mo., to Martell, Calif.

Over and over, blue-collar and white-collar workers, mid-level managers--middle class all--talked of businesses that once were, but are no more.

Sometimes the business was glass-making. Sometimes it was printing. Or timber. Or shoe-making. Or meat-packing. But always the words were the same.

They talked about owners and managers who had known the employees by name, who had known their families, who had known the equipment on the floor, who had walked through the plants and offices and stopped to chat. They talked about working with--and for--people who were members of an extended corporate family.

And, finally, they talked--some with a sense of bewilderment, some with sadness, some with bitterness--of the takeovers, of the new owners and the new managers who replaced the old.

Sometimes those managers knew the workers' names, but never the people behind the names. The managers had only a nodding acquaintance with the equipment. And they were obsessed with meeting ever-rising production quotas.

Listen to Larry Weikel, who grew up in Spring City, Pa., went to Springford High School, joined the Air Force, spent four years in the service, returned home and, in 1966, went to work at the Diamond Glass Co., a family-owned business that dated to 1874:

"Everybody knew everybody. Everybody was friendly. The supervisors were all nice. The owner would come in and talk to you. It was just a nice place to work. It was a nice family, you know...I loved to go to work."

Belinda Schell, born in Keyser, W. Va., the daughter of a glassmaker, remembers how difficult it was to get a job at Diamond. Everyone, it seemed, wanted to work there. "It took me about two years to get into the plant," she said. That was 1984.

But already the plant was operating under the new economic rules. The company embarked on a course that thousands of other businesses had embarked on and would follow--because the rules by which the American economy operates actually encourage it.

That course went something like this:

Take the company public, borrow a lot of money to expand by acquiring other glass companies, run up the price of the stock and sell it off at a nice profit.

At first, the process moved slowly. The company, which had changed its name to Diamond-Bathurst Inc., following a management buyout, picked up a second glassmaking plant in Vienna, W.Va., from a bankrupt producer in 1981. Two years later, in 1983, it went public.

Then, in April 1985, Diamond-Bathurst purchased Container General Corp., a Chattanooga, Tenn., glass manufacturer with 12 plants.

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