PROLOGUE: THE CHANGING FACE OF AMERICA..................................x
1. DISMANTLING THE MIDDLE CLASS......................................................1
2. LOSING OUT TO MEXICO......................................................................31
3. SHIFTING TAXES--FROM THEM TO YOU............................................40
4. THE LUCRATIVE BUSINESS OF BANKRUPTCY.................................66
5. THE FOREIGN CONNECTION................................................................88
6. THE HIGH COST OF DEREGULATION...............................................105
7. PLAYING RUSSIAN ROULETTE WITH HEALTH INSURANCE.......124
8. SIMPLICITY PATTERN-IRRESISTIBLE TO RAIDERS.....................143
9. THE DISAPPEARING PENSIONS..........................................................162
10. THE POLITICAL CONNECTION.........................................................189
EPILOGUE.- REWRITING THE GOVERNMENT RULE BOOK..........................................212
NOTE ON SOURCES.............................................................................................................220
HOW TO WRITE OR TELEPHONE RULE-MAKERS............................................................221
America: What Went Wrong? is an expanded version of a nine-part series originally published by the Philadelphia Inquirer in October 1991. The series generated the largest response from readers in the newspaper's history-some 20,000 letters, notes, telephone calls, and requests for reprints.
Of all the debts we incurred in researching and writing this project, the largest is to the institution where we have worked for the last twenty-one years-the Philadelphia Inquirer. In an age in which many newspapers are advocating short news stories, the Inquirer continues to swim vigorously and successfully against the tide, believing, as we do, that readers want detailed information they can get nowhere else, that they will read long stories if the material is interestingly written and appropriately presented.
"America: What Went Wrong." " filled twenty-five pages and was typical of what readers have come to expect from the newspaper. It is a tradition that began for us in 1971 under John McMullan, who brought us together in a temporary partnership that is now in its twenty-second year. It continued under his successor, Gene Roberts, who expanded the horizons of investigative reporting and made the newspaper's name synonymous with the best of the investigative genre. And it flourishes under Robert's successor, Maxwell King, who became Editor of the Inquirer when Roberts retired in 1990. King not only brought enthusiasm and commitment to this project, but he also helped shape the research into some of the broad themes that have had a powerful impact on readers. To all of them, we are deeply appreciative of their support and belief in us.
In addition, we would also like to thank all those we interviewed, many of whom are quoted in the book, as well as many others who are not yet observations and insights were of equal value to us in understanding the nuances of everything from defined-benefit pension plans to junk bonds.
We would also like to express our appreciation to employees of state, local and federal agencies and of state and federal courts throughout the country who patiently assisted in the difficult task of locating records and documents. A special word of thanks must go to Lela Young, in the public reading room of the Securities and Exchange Commission in Washington. An island of serenity in the most chaotic workplace imaginable, Mrs. Young has been a help for many years and this is a small way to say thanks.
As always, we are indebted to librarians at public, private and university libraries across the country, including those at Lippincott Library of the University of Pennsylvania, in the government-publications room of the Free Library of Philadelphia and at the Niles (Michigan) Commry. We owe special thanks to the library staff of the Inquirer for hours spent assisting us in ferreting out information from electronic data bases.
We would also like to thank all those who edited the original Inquirer series on which this book is based. They are an exceptional group who did much to make this subject come alive for readers: Managing Editor Steve Lovelady, with whom we have enjoyed what may be the longest, and certainly for us, the most rewarding editing-reporting association in newspapers. That association is now in its twentieth year. We also profited greatly from the editing skills of Assistant Managing Editor Lois Wark, and Deputy Features Editor Marietta Dunn. We also had the benefit of the expert copy-editing skills of Julie Stoiber and Hope Keller. We also want to thank Inquirer graphic artist Bill Marsh for the splendid graphics that grace each chapter and the guidance of David Milne, the newspaper's talented graphic-arts director. A special note of thanks is also due Bing Mark, an Inquirer editorial assistant, who performed invaluable research for us in the final moments of the project. Finally, we are indebted to Rick Bowmer, an extraordinarily gifted Inquirer photographer who accompanied us on many of the reporting trips and shared many of the experiences that are recounted in the book.
At Andrews and McMeel, we want to thank Editorial Director Donna Martin, whose enthusiasm and support for this book were so helpful from the start; Barrie Maguire for his outstanding design; Tom Stites, whose careful reading of the original articles helped us immeasurably in converting the material to book form; and Bill Robbins, whose gifted editing skills made this a better book.
Where Are the Referees?
Listen to the people in charge of the American economy tell how well the recovery was going in 1991. Listen to them explain, month after month, how economic conditions were improving for you.
On Dec. 16, 1990, Nicholas Brady, secretary of the United States Treasury, told a television audience: "I have great conviction the American economy is strong. We're in a cyclical downturn. It'll return to a good strong level sometime in 1991. . We'll be back on the growth path, jobs, investment, during that year."
On Feb. 4, 1991, the Council of Economic Advisers, headed by Michael J. Boskin, reported: "The downturn in the U.S. economy in the latter part of 1990 does not signal any decline in its long-run underlying health or basic vitality.... Several factors suggest that the economic downturn is not likely to last long and that a recovery will begin by the middle of 1991."
On June 11, 1991, President Bush told the National Advertising Federation: "If I can borrow a term from Wall Street, I am bullish on the economy.... While some sectors are still sluggish, on the whole, a turnaround in the economy appears to be in the making.... Things are beginning to move forward. And as far as your industry is concerned, I'm optimistic that it, too, will pick up as the rest of the economy gathers steam."
On July, 10, 1991, Alan Greenspan, chairman of the Federal Reserve Board, told a news conference: "I think the evidence is increasing week by week that the bottom is passed and the economy is beginning to move up.... I think it's a pretty safe bet at this stage to conclude that the decline is behind us and the outlook is continuing to improve."
On Oct., 4, 1991, President Bush told a news conference: "I think the economy is recovering. I think it will be more robust as we go along here. Job creation is fast."
Job creation fast?
You might have a different view. Especially if you were one of the 74,000 workers destined to lose their jobs at General Motors Corporation, the world's largest car manufacturer.
Or one of the 2,500 workers whose jobs were eliminated at TRW Inc., the space and defense contractor with interests in information services and automotive equipment.
Or one of the 8,000 workers whose jobs were eliminated at GTE Corporation, the telephone operations and telecommunications company.
Or one of the 4,000 workers whose jobs were eliminated at Westinghouse Electric Corporation, the diversified broadcasting, energy and electronic systems company.
Or one of the 5,000 workers whose jobs were eliminated at Allied-Signal Inc., the aerospace, automotive and engineered-materials (synthetic fibers and plastics) company.
Or one of the 1,000 workers whose jobs were eliminated at First Chicago Corporation, the global corporate bank.
Or one of the 4,000 workers whose jobs were eliminated at J.I. Case, the construction and farm-equipment maker.
Or one of the 20,000 workers destined to lose their jobs at International Business Machines Corporation, the computer company with a decades-old reputation of guaranteeing job security.
You also might have a different view if you are one of the millions of workers competing for a shrinking number of manufacturing jobs. Preliminary figures show that in 1991 about 18.4 million men and women were employed in manufacturing, earning middle-class wages. Ten years earlier, in 1981, there were 20.2 million men and women at work in manufacturing. Between 1981 and 1991, a total of 1.8 million manufacturing jobs vanished in the United States-a decline of 9 percent.
This at the same time the population 16 and older rose from 171.8 million to 191.2 million-an increase of 11 percent. In other words, while the potential work force grew by 19.4 million persons, the number of manufacturing jobs shrank by 1.8 million.
You also might have a different view if you are a member of America's disappearing middle class-whether blue-collar, white-collar, middle-level manager or professional.
And you especially might have a different view if you are one of the millions of Americans seeking to attain a middle-class status that you now find beyond your reach. But that's because you have a skewed vision. You are on the bottom looking up.
Those in charge, on the other hand, are on the top looking down. They see things differently. Call it the view from Washington and Wall Street.
It is a view that can be documented by a mountain of statistics. Such as the amount of money you receive in your weekly paycheck, contrasted with the paychecks of more affluent citizens.
Take 1989, the latest year for which complete data, as compiled from federal income tax returns, are available. That year, the top 4 percent of all wage earners in the country collected as much in wages and salaries as the bottom 51 percent of the population. Mull over the numbers carefully: The top 4 percent of America's work force earned as much as the bottom 51 percent. That is in wages and salaries alone. In more precise numbers, 3.8 million individuals and families at the top earned as much from their jobs as did 49.2 million individuals and families at the bottom.
The view from Washington and Wall Street was not always so dis-
torted. In 1970, the top 4 percent earned as much on the job as the bottom 38 percent. And in 1959, they earned as much as the bottom 35 percent.
Now put the numbers in order, as viewed from the bottom: In 1959-a time of growing middle-class prosperity-the bottom 35 percent of the work force earned as much as the top 4 percent. By 1970, it took the wages of the bottom 38 percent of the work force to match the top 4 percent.
By 1989-a time of middle-class decline-it took the wages and salaries of the lowest 51 percent of the workers to equal the wages and salaries of the 4 percent at the top.
If the trend continues, sometime early in the next century the top 4 percent of individuals and families drawing paychecks will earn as much on the job as 60 percent of the rest of American workers.
Keep in mind these numbers deal only with wages and salaries. They do not include interest and dividends; gains from the sale of stocks, bonds and other capital assets; or income from other investments, indeed, from any other sources. This income, too, flows overwhelmingly to the top 4 percent.
For a growing number of individuals and families, the exploding difference in wages and salaries among the people at the top and everyone else means the end of the American dream. Call it the relentless shrinking of the middle class.
Not to worry. The people in Washington want to help. Democrats, for example, have proposed both tax cuts and tax credits for the middle class. But lest you believe Democrats at work in the nation's capital have an edge over Republicans-who through most of 1991 insisted all was well-in dealing with the economy, ponder the words of one party leader. In a speech to his colleagues in October 1991, Richard A. Gephardt, the Missouri Democrat who is the majority leader of the House of Representatives, criticized President Bush and other Republicans for their tax policies of the last decade.
Gephardt zeroed in on the generous tax cuts that were handed out to the wealthy in the 1980s at the expense of those in the middle: "For the last ten years, Democrats have warned of a day of reckoning. We warned that excessive tax cuts for the rich, wasteful military spending, and neglect of the middle class would someday combine to dampen our abundance and diminish our prospects."
Five years earlier, Gephardt delivered quite a different message to lawmakers while urging them to approve the Tax Reform Act of 1986, the legislation that provided hefty tax cuts for the wealthy. Said Gephardt in September 1986: "[This bill] does give a tax cut ... to ordinary, average taxpayers. It does not give the lion's share to people at the top. It helps people at the bottom ... [and] people in the middle, the people we are supposed to be worrying so much about."
It didn't. But that's another matter.
Everyone, to be sure, has a definition of middle class. It is a term that conjures up varying images for sociologists and economists, politicians and
ordinary folks. In Washington, for example, it is often said that the top of the middle class is whatever salary is earned by members of Congress. That is $125,100 a year in 1992. But that is more money than 97 percent of the households in America earn. Similarly, many families that earn $80,000 in wages and salaries a year consider themselves middle class. But that income actually puts them in the top 6 percent of American households that file income tax returns.
For these reasons we have defined the heart of the middle class as those wage-earners who reported incomes between $20,000 and $50,000 on their tax returns in 1989. Median family income that year was $34,213, meaning half of all Americans earned more and half earned less. All told, just under thirty-four million individuals and families filed tax returns reporting incomes between $20,000 and $50,000. They accounted for 35 percent of all tax returns.
A definition of an extended middle class might include all households with reported income between $15,000 and $75,000. While individuals or families in New York would be living in poverty if they earned $15,000, the same individuals or families could well achieve a middle-class lifestyle in, say, Sedalia, Missouri.
Slightly under ten million tax returns were filed by the $15,000 to$15,000to-$20,000 income group. That represented 10 percent of all returns. At the other end of the extended middle class are people earning $50,000 to $75,000. A total of 9.2 million returns were filed by that income group, accounting for 10 percent of all returns.
Overall, 53.2 million individuals and families in the extended middle class-with income between $15,000 and $75,000-filed tax returns. They accounted for 55 percent of all returns. That put 37.3 million individuals and families at the bottom, with incomes below $15,000. They represented 39 percent of total returns. While this figure includes returns filed by teenagers working part-time, the overwhelming majority are married couples, single persons and single parents who represent the working poor.
In fact, the fastest-growing group of persons filing tax returns is made up of heads of households. They include a single parent caring for a child and a person who provides support for a relative, often an aging parent. Their numbers have shot up 1,100 percent over the last three decades, rising from one million in 1960 to an estimated twelve million in 1989.
They represent part of the changing face of America. In 1960, a majority of all tax returns filed-62 percent-were submitted by married couples. By 1989, that figure had fallen to an estimated 44 percent or less. During the same period, returns filed by single persons rose from 33 percent to an estimated 44 percent of the total.
Now consider the incomes of these different groups: 94 percent of all returns filed by heads of households and married persons living separately reported incomes of less than $40,000 in 1988, the latest year for which there is a detailed accounting.
As for married couples, keep in mind that the government statistics on median family income exaggerate the financial condition of families, especially when looked at in historical terms. In the 1950s, median family income was derived largely from the wages and salaries of one working spouse. In the 1990s, median family income represents, in a majority of cases, the wages and salaries of a husband and wife who both work. Thus, goods and services that once could be purchased with a single income now require two incomes.
Whatever your status-a married couple with children, a single person, a married couple without children, a single parent with children-if you work for a living and if you are in the middle-class income range defined here, the chances are that your standard of living is falling or will do so in the coming years. If you are striving to join the middle class, you are working against long odds.
None of this, it must be emphasized, is related to the recession, which, depending upon your economist of choice, began in July 1991 and ended, or will end, on a date uncertain.
In the early days of the recession, Treasury Secretary Brady dismissed the seriousness' of that he then labeled an "economic slowdown" by saying: "I don't think it's the end of the world even if we have a recession. We'll pull back out of it again. No big deal."
That is true-recessions do end. But when that day comes, your standard of living-over the long term-will continue to decline. That is because the plight of America's middle class is rooted in serious structural problems within both the economy and society that go beyond the recession.
To correct those problems will require comprehensive changes in government laws and regulations on a scale of the sweeping legislative revisions of the 1930s. In the absence of such action, the future will remain bleak for the middle class.
This is especially true for the generation now entering the work force. For those at the lower end of the middle class clinging to a lifestyle once promised to everyone. For those at the bottom struggling to move up. And for those who will be retiring early in the next century.
This is one reason why the stories you read in newspapers and magazines, the reports you watch on television, and those you listen to on radio seem disconnected from your personal situation. For the fact is you are
adrift in uncharted economic waters.
The experts-the economists, Wall Street analysts, the politicians talk in traditional terms, use traditional navigational measures to pinpoint the economy's location. Like interest rates.
On Feb. 21, 1991, the Washington Post, relating the testimony of Alan Greenspan, the Federal Reserve Board chairman, before a congressional committee, reported: "Greenspan did note that interest rate cuts engineered by the Fed over the past three months are finally bearing fruit, but he carefully sidestepped questions about whether future rate cuts are needed."
On Mar. 9, 1991, the Chicago Tribune reported: "The Federal Reserve moved to lower a key interest rate Friday just hours after the government reported that the nation's jobless rate jumped unexpectedly last month to 6.5 percent, the highest rate in four years.... Since October the Fed has pushed the rate 2.25 percentage points lower in an effort to encourage borrowing and stimulate growth."
On May 1, 1991, the Boston Globe reported: "The Federal Reserve yesterday gave up all hope that post-Persian Gulf War euphoria will lift the nation from recession and cut the discount rate it charges banks by half a point to 5.5 percent in an effort to reverse the economic slide.... The rate cut signals the Fed has returned to its pre-war strategy of cautiously cutting the cost of borrowing to jump start the economy back to growth."
On June 6, 1991, the Washington Post reported: "Federal Reserve Board Chairman Alan Greenspan said today that recent evidence suggests the U.S. economy has begun to recover from recession, a prospect that makes unlikely further cuts in interest rates by the central bank to spur growth."
On Nov. 7, 1991, the Los Angeles Times reported: "Acting for the second time in as many weeks to pump more money and confidence into a faltering economy, the Federal Reserve moved decisively Wednesday to reduce interest rates by lowering its benchmark discount rate to an 18-year low of 4.5 percent. The half-point reduction ... was clearly designed to force down interest rates paid by business and consumers in an effort to stimulate more borrowing and to breathe new life into the apparently faltering recovery."
And on Dec. 21, 1991, the New York Times reported: "In a bold move to revive the slumping economy, the Federal Reserve chopped its bedrock discount rate by a full point, to 31/2 percent, the lowest level since 1964. The surprisingly big cut was seen as part of a broad effort to stimulate borrowing and perk up an economy whose signs of recovery from recession have all but vanished."
Label it the interest-rate obsession.
But for a different view, listen to an exchange between Richard Ford, a reporter with KSDK-TV in St. Louis, Missouri, and President Bush, that took place on Nov. 13, 1991:
President Bush-"Interest rates are down, and today yet there's another very important credit card company came down on their rates. At some point when those rates are, people see the rates are where they are, I believe you're going to see confidence start back in housing or in consumer buying. And that's what the economy needs."
Ford-"But people don't have jobs, sir. They don't have any income. They don't care what the interest rate is. They can't spend any money. They can't borrow any money. ".
Indeed so. Nonetheless, the experts continue to talk of interest rates and gross national product and gross domestic product and savings rates
Once upon a time, the measures served a purpose. Their usefulness today, in assessing the current and future state of Americans at work in a global economy, operating without restraints, is doubtful.
For the middle class, there are more relevant measures. For example: What is the rate at which new jobs that pay middle-class wages-upwards of $20,000 a year-are being created? What is the rate at which such jobs are being eliminated?
How much of your weekly paycheck is being transferred to wealthy investors in the form of interest payments on the national debt? What percentage of your paycheck do you have left over after deductions for Social Security and federal, state, and local taxes? How does that percentage compare with, say, the percentage retained by persons earning more than $100,000 a year? What is the rate of job loss attributable to unrestrained imports?
How much of your paycheck is going for health-care costs? What is the percentage of the work force that will receive a guaranteed annual pension?
In the pages that follow, you will find the answers, or at least partial answers, to these and many other questions. But mostly you will find a disturbing picture of American economic life at the close of the twentieth century.
You might think of what is happening in the economy-and thereby to you and your family-in terms of a professional hockey game, a sport renowned for its physical violence. Imagine how the game would be played if the old rules were repealed, if the referees were removed.
That, in essence, is what is happening to the American economy. Someone changed the rules. And there is no referee. Which means there is no one looking after the interests of the middle class.
They are the forgotten Americans.
Rigging the Game
Worried that you are falling behind, not living as well as you once did?
Or expected to?
That you are going to have to work extra hours, or take a second job, just to stay even with your bills?
That the company you have worked for all these years may dump you for a younger person?
Or that the pension you have been promised may not be there when you retire?
Worried, if you are on the bottom rung of the economic ladder, that you will never see a middle-class lifestyle?
Or, if you are a single parent or part of a young working family, that you will never be able to save enough to buy a home?
That you are 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 are right. Keep worrying.
For those people in Washington who write the complex tangle of rules by which the economy operates have, over the last twenty 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 even to 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, these are results of the rules that govern the game:
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, California. Meanwhile, those who have played by the old rules are victims of the transfer, people like Mollie James, a sixty-year-old factory worker, mother of four, grandmother of six, who lives in a working-class neighborhood in Paterson, New Jersey.
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 Company in Paterson, rising from assembly-line worker to become the only female operator of a large metal-stamping machine. In the process, she gained 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, Arkansas, 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 thirty-three 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 sixty-five 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 thirty-four 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 and 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 per-cent 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 ten 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 was 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 a time when their individual payments have fallen off sharply. In 1980, they paid $8.1 billion in taxes, or 3 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 is 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 an income of $9,000 to $10,000-median family income that year was $9,867 paid$9,867paid a total of $1,689 in combined local, state and federal income and Social Security taxes.
In 1989, a Philadelphia family with an income of $30,000 to $40,000 the$40,000the 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. And 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's 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 with incomes over $100,000 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 the average millionaire paid $54,758. That amounted to a 53 percent tax cut.
At first glance, the drop offdropoff 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 stricter 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 $346,673 extra in spending money.
During that same period, the average 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 an increase of $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 $500,000-to-$l 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 for the $ 10,000-to-$ 20,000 income group.
The Good Life-Tax Free. During 1989, some 37,000 millionaires supplemented their other income with tax-free checks averaging nearly $2,607 a week. 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 bondexempt 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 United States 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 fifteen other people in your income group-to cover the $19,034 in Social Security payments that Cranston collected.
Like most members of the United States 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 rceiving Social Security benefits.
Cranston, in fact, was wrong more than 400,000 individuals and families with incomes above $100,000 who also received Social Security. In
1989 those high-income beneficiaries-four-tenths of one percent of all tax return filers-collected a total of $4.9 billion in Social Security payments. That sum exceeded the Social Security tax withheld from the paychecks of about two million workers in Massachusetts earning less than $30,000 a year. Plus more than one million workers in South Carolina in the same income category. Plus more than three million workers in Illinois. And about one million workers in Oregon. Think of it as a simple transfer of money.
Of course, the wealthy paid into Social Security, too. But the $4.9 billion they received is more than the Social Security taxes paid by about seven million workers who earned less than $30,000 in 1989. And it was turned over to 400,000 people who earned more than $ 100,000 in 1989. 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 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 United States 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, Pennsylvania, 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 is cut when your employer sells out to a competitor.
It should be noted that conditions beyond the government rule book are also at work in the economy. They, too, play a part in determining one's fortunes. There is, for example, an entry-level work force 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 twenty-first century.
Also, 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 to read and understand the simplest instruction manuals. And there is an unthinking adherence to arcane work rules that breed inefficiency.
Nonetheless, if all these problems were erased overnight, 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 fringe benefits they have long taken for granted.
Women and blacks will continue to move into the work force, but they will receive substandard wages, substandard pensions and substandard fringe benefits. For the first time, they will be joined by a new minority whiteminoritywhite males in both manufacturing and service jobs.
Workers will be compelled to forgo 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 twenty-to-thirty-year career in the armed forces.
Local, state and federal taxes will continue to consume a disproportionate share of the incomes of ordinary workers. At the same time, the proportion of the incomes of wealthy Americans that goes untaxed win 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.
Casualties of the New Economic Order
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's failure to curb those excesses.
Weikel is forty-seven years old and lives with his wife in Boyertown, Pennsylvania. Their children are grown. Schell is thirty-three and lives with her husband and three children, two teenagers and a seven-year-old, in Royersford, Pennsylvania.
Both worked at the old Diamond Glass Company 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, to the elimination of their jobs and the jobs of 500 co-workers-and to 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, Maryland, to South Bend, Indiana; from Hermann, Missouri, to Martell, California. Over and over, blue-collar and white-collar workers, midlevel 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 shoemaking. 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 new managers knew the workers' names, but never the people behind the names. The new 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, Pennsylvania, 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 Company, a family-owned business that dated from 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, West Virginia, 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, West Virginia, from a bankrupt producer in 1981. Two years later, in 1983, it went public. Then, in April 1985, Diamond-Bathurst purchased Container General Corporation, a Chattanooga, Tennessee, glass manufacturer with twelve plants. And in July 1985, the company purchased most of the assets of Thatcher Glass Com-
pany of Greenwich, Connecticut, a manufacturer with six plants that was operating under the protection of a United States bankruptcy court.
Thatcher, like so many companies in the 1980s, had gone through a leveraged buyout in which managers and investors purchased the company with mostly borrowed money. So much borrowed money that the company eventually was forced into the bankruptcy court. That same month, Diamond-Bathurst moved from the drab second-floor offices above the aging Royersford plant into a modern office complex built into a hillside in the wooded and rolling countryside in Malvern, Pennsylvania. As Frank B. Foster 3d, the company's president and chief executive officer, put it at the time: "We became in three short months one of the largest glass-container manufacturers in the United States, with projected annual sales of $550 million." To finance it all, Diamond-Bathurst borrowed big. Its debt rocketed 700 percent, going from $13 million in 1984 to $104 million in 1985.
Wall Street loved it. The stock shot up from a low of $6 a share to a high of $29. Later, it split. Sales climbed from $62 million to $408 million. Profits went from $2 million to $11 million.
The Philadelphia Inquirer in July 1985 quoted a First Boston Corporation securities analyst, Cornelius W. Thornton, as saying: "There's a whole lot of synergism in this deal. I don't think the question is can Diamond pull it off. I think they've done it." They hadn't. But Wall Street has a short attention span and many investors already had made a killing.
It soon became clear that Diamond-Bathurst would be unable to make the interest payments on its mountain of debt. The debt was made possible by a Congress that, at the time, was working on a tax bill that would eliminate the deductibility of most forms of consumer interest but retain the interest deduction for corporations.
Without that deduction, much of the corporate restructuring that took place in the 1980s, and the job loss that followed, might never have occurred, since the deals depended on the tax advantage. The use of debt to buy and dismantle companies-instead of to build them-was exploding. Congress, in hammering out the Tax Reform Act of 1986, chose to ignore that phenomenon.
In any event, Diamond-Bathurst posted a $6.2 million loss for 1986 rather than the profit that had been forecast by stockbrokers and company management. In June 1987, Moody's lowered the credit rating on Diamond Bathurst's bonds. Company executives had already closed one manufacturing plant after another-in Indianapolis; Wharton, New Jersey; Mount Vernon, Ohio; Vienna, West Virginia, and Knox, Pennsylvania-abolishing the jobs of several thousands of workers.
It was not enough. In August 1987, a heavily indebted Diamond Bathurst was acquired by a competitor, the new corporate headquarters in Malvern was closed and more than 250 salaried workers were dismissed. The buyer was Anchor Glass Container Corporation of Tampa, Florida, a descendant of a leveraged buyout.
When the new owners arrived in Royersford, Larry Weikel, by then a shift foreman; Belinda Schell, a clerk; and other workers noticed an immediate change. "It just became so competitive," Weikel said, "and things just started getting nasty and out of hand. It just seemed like they didn't care what you did to get the numbers.... They'd expect you to get on somebody about a problem that wasn't their fault to start with."
Schell said Anchor Glass sent in managers from its plants in other parts of the country, and they issued conflicting orders. Jobs were eliminated and the remaining employees were pressured to increase output. But there was no investment in more modern equipment or new technology. The final day of production came in August 1990. Weikel, Schell and the remaining 275 or so employees were out of work.
Once again, their stories were much like the stories the authors heard in scores of interviews across the country. With few exceptions, the former Anchor Glass workers have moved into jobs that pay lower wages and offer reduced health-care benefits. Weikel works part time at a marine-supply store run by his brother-in-law. His wife works in a sewing factory, earning about $6 an hour. When he lost his job, he refinanced the mortgage on the family home and has been draining their savings. Jobs that pay the $15 an hour he earned at Anchor Glass do not exist.
Said Weikel: "That's all I ever did in my life, work in a glass plant. I went to work there when I came out of the service and, you know, I really never learned anything because all I did was make bottles, and there's not much call for that. I could reeducate myself, I guess, but I don't want to get into another mess like that. I could get a job anywhere, I mean making $5, $6 an hour. But that's not worth my time.... I would do it if I was starving. But I'm not. My kids are grown and I'm not worrying about it that much anymore. I spent twenty-three years worrying about it.... All I really have to do is make enough money to feed my wife and myself"
Belinda Schell, with a growing family, had no choice but to go back to work. At Anchor Glass, she earned more than $10 an hour. At her new job, as a nursing home aide, she earns considerably less. It is an occupation that the federal government touts as a growth industry that will provide many jobs-mostly low-paying-as the aged population continues to grow.
Belinda Schell's husband, who like Weikel earned $15 an hour at Anchor Glass, found a job in another manufacturing plant in King of Prussia, Pennsylvania. He, too, earns less than he did.
Mrs. Schell said her brother-in-law encountered another obstacle when he sought a job at lower pay than he had made: "They would tell him he made too much money and he wouldn't be satisfied. He was making $16 at Anchor Glass and they said he wouldn't be satisfied making $8. But people like that don't know what it's like to go through a plant closing when you have a mortgage and children to feed. He has two children. He had just bought a new home the year before." She said her brother-in-law finally found other work, but at lower pay than he made at the glass plant. As for there co-workers, she said, "some of them that are working are only making $5 to $7 an hour, which doesn't compare with what we were making at Anchor.... I don't know anybody that is making what they made at Anchor Glass."
For Larry Weikel, the experience was disheartening: "You know what hurts me, that I was liked there at that plant at one time. And then for this to happen.... Twenty-three years in there, you know, and everything was great. And then an outfit comes in like this and destroys you.
'It seems like I prostituted my whole young life to that company and then they turn me out to pasture.... I spent Saturdays and Sundays down there. I didn't do anything with the kids. I didn't go to ball games. I didn't do that. I was always working. And then they turn around and do something like that to you."
Weikel, Schell and the other Diamond Glass employees were working under America's old economic rules that, for many, provided a job and good salary and health care and a pension for life in exchange for a commitment to the company.
The new rules were quite different, and the owners of the Anchor Glass company that bought Diamond Glass knew them intimately. In fact, you might even say that one of Anchor Glass's original owners helped to write those rules. He was former United States Treasury Secretary William E. Simon, who catapulted himself onto the Forbes magazine directory of the 400 richest Americans (his worth is estimated at $300 million) by taking advantage of the tax deduction for corporate debt.
Anchor Glass Container Corporation was itself the product of a leveraged buyout. It was formed in April 1983 by Wesray Corporation and executives of the glass-container division of the Anchor Hocking Corporation, one of the country's glass-making institutions. Wesray was an investment banking firm founded by Simon along with Raymond G. Chambers, an accountant. It was one of the first of what would be many leveraged-buyout firms that acquired companies with mostly borrowed money.
After making cosmetic changes that often included job cutbacks and other short-term cost-reduction measures, the companies would be sold, in whole or in part, at a substantial profit-or taken public, another form of sale.
Newspapers and financial publications regaled readers with Simon successes during the 1980s-among them Anchor Glass. In an article published in October 1988, the Los Angeles Times reported that after Simon helped engineer the Anchor Glass buyout, "managers cut the work force, slashed expenses and made a successful acquisition." Simon, the Times said, "made more than 100 times his money."
When Anchor Glass purchased the old glass-container division of Anchor Hocking, the transaction was financed with the patented Simon debt formula: $76 million in borrowed money and $1 million investment by Wesray and others. You might think of that kind of arrangement this way:
Let's say you want to buy a house for $100,000. You visit your friendly neighborhood bank and offer to put about $ 1,500 down. That is not the kind of deal you can get.
But Simon and his associates got a much better one when they organized Anchor Glass. After Anchor Glass borrowed the $76 million, according to documents filed with the United States Securities and Exchange Commission (SEC), $48.5 million of that sum was reloaned to Simon and friends. They, in turn, used $24 million of that money to buy the land and buildings of the various glass plants. Then they leased the land and buildings back to their new company, Anchor Glass, for twenty years.
In other words, the new owner of the glass plants, Anchor Glass, would pay rent on the land and buildings to Simon and the other investors.
There was still more. Simon and his associates bought the furnaces and other glass-making equipment in the various plants in exchange for a note promising to pay $43.6 million. Then they leased the glass-making equipment back to Anchor Glass.
Several years later, Anchor Glass, in a report filed with the SEC, said the transactions were too generous to Simon and the other investors: "These arrangements were entered into when the company was privately owned, were not the result of arm's-length bargaining and on the whole were not as favorable to the company as could have been obtained from unrelated third parties."
There were other deals. Wesray picked up investment-banking fees for handling the purchase of the glass-container properties and the acquisition of Midland Glass Company. Anchor Glass purchased its casualty and liability lnsurance, and its employee health and benefit insurance, from two brokerage firms in which Simon and his colleagues also held an interest. That was worth more millions of dollars in fees. And finally, there was the Anchor Glass corporate headquarters in Tampa. It, too, was owned by Simon and associates, who leased the building to the company.
In March 1986, Anchor Glass, which had been a private company, offered stock for sale to the public. By February 1988, according to an SEC report, Simon had sold his holdings. His total profits from the deals are unknown. But they run into the tens of millions of dollars.
One more note: In October 1989, Anchor Glass was sold. The buyer was Vitro, S.A., a Mexican glass company that ships products into the United States, competing with American-owned companies. Vitro is part of the corporate empire of Mexico's Sada family, which is ranked by Forbes among the world's billionaire families. The Mexican company's first moves included a decision to close the glass plant in Royersford. And another plant in Vernon, California. And another plant in Gulfport, Mississippi. And another plant in San Leandro, California.
What happened to Weikel and Schell and other glass plant workers is not at all unusual. Nor is what happened to the company they worked for. Nor the money being made by investors and corporate executives. Their
story is the story of millions of middle-class Americans who are being forced out of higher-paying jobs into lower-paying jobs, or who have lost a portion or all of their benefits, or both.
Vanishing Factory Workers. In a letter to Congress in January 1989, President Reagan spoke enthusiastically of the many jobs his administration had created since 1980: "Nearly nineteen million nonagricultural jobs have been created during this period.... The jobs created are good ones. Over 90 percent of the new jobs are full-time, and over 85 percent of these full-time jobs are in occupations in which average annual salaries exceed $20,000."
In fact, the job growth was centered in the retail trade and service sectors, which pay the lowest wages. Higher-paying jobs in manufacturing disappeared at a rate unmatched since the Great Depression. In the 1950s, businesses added 1.6 million manufacturing jobs. They added 1.5 million such jobs in the 1960s, and 1.5 million in the 1970s. But in the 1980s, corporations eliminated 300,000 manufacturing jobs. If the trend continues, 1 million or more will be erased in the 1990s.
While the number of manufacturing jobs fell 1.3 percent from the 1970s to the 1980s, dropping from an average of 19.6 million to 19.3 million, the number of retail-trade jobs climbed 32.5 percent, rising from 12.8 million to 17 million. The retail-trade workers, whose numbers are growing, earn on average $204 a week. The manufacturing workers, whose numbers are dwindling, earn $458 a week.
Those numbers understate the problem. For the percentage of the overall work force employed in manufacturing, people who make things with their hands-cars, radios, refrigerators, clothing-is plummeting. During the 1950s, 33 percent of all workers were employed in manufacturing. The figure edged down to 30 percent in the 1960s, and plunged to 20 percent in the 1980s. It is now 17 percent-and falling.
Orgy of Debt and Interest One major reason for the declining fortunes of workers: American companies went on a borrowing binge through the 1980s, issuing corporate IOUs at the rate of $1 million every four minutes, twenty-four hours a day, year after year. By the decade's end, companies had piled up $1.3 trillion in new debt-much of it to buy and merge companies, leading to the closing of factories and elimination of jobs.
That debt required companies to divert massive sums of cash into interest payments, which in turn meant less money was available for new plants and equipment, less money for research and development. During the 1950s, when manufacturing jobs were created at a record pace, companies invested $3 billion in new manufacturing plants and equipment for
every $1 billion paid out in interest. By the 1980s, that pattern had been reversed: Corporations paid out $1.6 billion in interest for every $1 billion invested in manufacturing plants and equipment.
Similarly, during the 1950s, for every $1 billion that corporations paid out in interest on borrowed money, they allocated $710 minion for research and development. By the 1980s, corporations spent only $220 million on research and development for every $1 billion in interest payments.
Through the 1980s, corporations paid out $2.2 trillion in interest, more than double their interest payments through the 1940s, 1950s, 1960s and 1970s-combined. It was enough money to create seven million manufacturing jobs, each paying $ 25,000 a year.
Bloated Pay for Executives. While companies are cutting jobs that pay middle-income wages and adding large numbers of lower-paying jobs, they are paying ever-larger salaries and bonuses to people at the top. Roberto C. Goizueta, chairman and chief executive officer of Coca-Cola Company, received salary and bonuses in 1990 totaling $2.96 million. Nearly four decades earlier, in 1953, a Goizueta predecessor, Hammond B. Nicholson, earned $134,600 in the top job at Coca-Cola.
To put the salary change. in perspective, if the pay of manufacturing workers had gone up at the same pace, a factory worker today would earn $81,000 a year.
While the news media have written at length on corporate salaries, most publications have suggested that high-paid executives are the exception. They are not. An analysis of tax-return data shows that in 1953 executive compensation was the equivalent of 22 percent of corporate profits. By 1987, the latest year for which detailed figures were available, executive compensation was the equivalent of 61 percent of corporate profits.
Measured from a different perspective, in 1953 corporations paid their executives $8.8 billion in salaries, stock bonuses and other compensation. That year, those corporations paid $19.9 billion in federal income taxes. By contrast, in 1987 corporations paid their officers $200 billion in compensation, while they paid $83.9 billion in federal income taxes. That means businesses paid $2.3 billion in taxes for every $1 billion paid in executive salaries in 1953. By 1987, that pattern was reversed: Businesses paid $2.4 billion in executive salaries for every $1 billion in taxes.
The Downwardly Mobile. Measured in terms of buying power, the wages of manufacturing, retail-trade and other service-industry employees during the 1980s fell far short of their parents and parents'and grandparents earningsgrandparents 'earnings,
To understand why, let's go back in time, to 1952 and the opening of Levittown, Pennsylvania, the world's largest planned community, a symbol of a flourishing middle class. It took a factory worker one day to earn enough money to pay the closing costs on a new Levittown house, then selling for $10,000. More importantly, that was an era when the overwhelming majority of families buying homes relied on the income of one wage-earner. In 1991, it took a factory worker eighteen weeks to earn enough money to pay the closing costs on that same Levittown home, now selling for $100,000 or more.
Unfortunately, even if the average factory worker of the 1990s had the minimum down payment, his income would be insufficient for him to qualify for a mortgage in Levittown. That is because it now requires two incomes for most families to come up with a larger down payment and to meet higher monthly mortgage and tax payments. Workers in the retail and service industries are even worse off, which helps explain why so many Americans can't afford to own a house. This is especially true for young families, who in decades past were the traditional home buyershomebuyers.
On a more mundane level, a store clerk in 1952 had to work two hours to pay for 100 postage stamps. In 1991, a store clerk had to work six hours to buy 100 stamps.
All these things-shrinking paychecks, disappearing factory jobs, fat salaries for corporate executives, uncontrolled business debt, a deteriorating standard of living-are the visible consequences of the distorted government rule book.
Other consequences are harder to see. But look closely and you will find them. They range from mounting racial tensions between whites and blacks competing for a shrinking number of middle-class jobs to an increase in employee theft and shoplifting. From fraudulent worker-compensation
claims approaching epidemic proportions to a growing refusal on the part of citizens to pay taxes that they owe. From a shifting of the responsibility for social-welfare programs from the federal government to the state governments to a shifting of similar burdens from the state governments to local governments. From an increase in domestic violence to a declining quality of care for residents of nursing homes.
What does the government rule book have to do with care in a nursing home?
Meet Mengabelle Quatre, a former resident of a California nursing home operated by Beverly Enterprises, Inc.
Actually, let's begin with Beverly Enterprises, the product of a new economic order-one envisioned by Michael Milken and his Wall Street associates and made possible by rules set down by Congress. Like so many other businesses of the 1980s, its rapid expansion was fueled by easy debt. The company grew by acquiring small, independent nursing homes and building new ones, financed with junk bonds, bank loans and, in part, taxpayer dollars through industrial revenue bonds.
The number of beds in its facilities increased from 51,300 in 1981 to 121,800 in 1986. Revenue rose from $486 million to $2 billion. Profits went from $16 million to $51 million. And its stock shot up from $2.50 a share to $22.50, generating millions of dollars in profits for investors.
Along the way, Beverly Enterprises emerged as the nation's largest nursing home operator. Its investment adviser, Drexel Burnham Lambert, Inc., which had managed a $100 million securities offering for the company in 1983, was bullish on the prospects of making ever more money on the elderly. In a 1985 report to its clients, Drexel Burnham recommended the purchase of Beverly Enterprises stock, saying there were many opportunities for expansion.
"There is still a formidable pool of small independents," the investment firm said, adding that "management's goal is a steady stream of small acquisitions."
In a report a year later, Drexel Burnham predicted the company's profits would reach $86 million in 1987 and said "there is no shortage of growth prospects for Beverly." And in May 1987, the Wall Street Journal reported that a Beverly executive had confirmed that estimates by securities analysts of profits for the year between $54 million and $71 million were "in the ball park."
It turned out to be a different ball park. For Beverly's earnings-like the earnings of so many businesses built on debt-evaporated. Instead of the $86 million profit forecast by Drexel Burnham, the company lost $33 million in 1987. It lost $24 million in 1988. And $104 million in 1989.
As the company sought to cut costs, it developed a reputation for paying low wages and having a high turnover rate among employees. Those two conditions often led to substandard care. The wages were so low and the staffing so minimal at some Beverly-operated nursing homes that reg-
ulatory authorities in one state after another cited the company time and again for patient neglect.
Beverly also lost a civil lawsuit in which damages were awarded to residents of its nursing homes in Mississippi who complained about a reduced quality of life that was due to general neglect and abuse. And the National Labor Relations Board joined the critics when an administrative law judge in November 1990 cited Beverly for unfair labor practices at thirty-three nursing homes in twelve states.
In an article published in December 1988 recounting Beverly's declining fortunes, the New York Times reported: "Perhaps the most damaging blow to Beverly's reputation occurred in California two years ago. The state alleged that poor care at a handful of Beverly's ninety homes caused nine deaths, and inspections turned up fifty life-threatening citations over a fifteen-month period."
All of which brings us to Mengabelle Quatre. Suffering from seizures and cancer of the bronchial tubes, unable to walk without assistance and otherwise confined to a wheelchair, she was admitted to a Beverly nursing facility on Oct. 13, 1989. Seven weeks later, on a quiet Saturday afternoon, Dec. 2, 1989, Mengabelle Quatre died at the age of sixty-nine at the Beverly Manor Convalescent Hospital in Burbank, California, not far from the make-believe world of Hollywood film studios.
A few lines from her death certificate sum up what happened:
"Death was caused by: Thermal injuries.
"Manner of death: Accident.
"Describe how injury occurred: Clothing caught on fire while smoking."
Confined to a wheelchair in a facility operated by Beverly Enterprises-the banner draped over the entrance proclaims "Love Is Ageless; Visit Us"-Mengabelle Quatre, a printer in a movie laboratory for thirty-five years, burned to death, in the middle of a hospital, while she was smoking a cigarette.
State investigators later described the incident: "[An employee] stated in an interview that at approximately 3:10 P.m. on Dec. 2, 1989, he heard someone screaming, ran to the patio adjacent to the TV room where he observed [the patient] on fire. He extinguished the fire and yelled for someone to call the paramedics." Mrs. Quatre was taken to an acute-care hospital where she died five hours later. According to the state investigation, "the county coroner reported that the resident had died of thermal burns ... of yellow-brown to black discoloration over 50 percent of her body. The burns ranged between her front mid thighs to the top of her head."
A California Department of Health Services investigation concluded that Beverly Enterprises "failed to ensure that Quatrej smoked only in a designated area under supervision" and failed to implement a "plan which required the patient's smoking, materials to be kept at the nurses station and the patient to smoke in a designated place supervised by the staff."
Life on the Expense Account
The government rule book that helped create the environment in which Mengabelle Quatre died also makes possible quite a different lifestyle.
Meet Thomas Spiegel. He is the former chairman and chief executive officer of Columbia Savings & Loan Association, a Beverly Hills-based thrift that the New York Times described in February 1989 as an institution that "has been extremely successful investing in junk bonds and other ventures." Spiegel is a major fund-raiser and financial supporter of political candidates, Democrats and Republicans alike. He and his family live in a six-bedroom Beverly Hills home-complete with swimming pool, tennis court and entertainment pavilion-that could be purchased for about $ 10 million.
Spiegel thrived at Columbia during the 1980s, a time when the executive branch of the federal government loosened regulatory oversight of the savings and loan industry. Working with his friend and business associate Michael Milken, whose Drexel Burnham Lambert, Inc. office was just down the street in Beverly Hills, Spiegel used depositors' federally insured savings to buy a portfolio of junk bonds, the high-risk debt instruments that promised to pay big dividends.
Columbia's profits soared. Earnings jumped from $44.1 million in 1984 to $122.3 million in 1985 and $193.5 million in 1986, before trailing off to $119.3 million in 1987 and $85 million in 1988.
Spiegel's compensation for those years averaged slightly under $ 100,000 a week. He spent $2,000 for a French wine-tasting course, $3,000 a night for hotel suites on the French Riviera, $19,775 for cashmere throws and comforters, $8,600 for towels and $91,000 for a collection of guns-Uzis, Magnums, Sakos, Berettas, Sig Sauers.
Not unusual outlays, you might think, for someone who collected a multimillion-dollar salary. Only in this case, according to a much belated federal audit, it was Columbia-the savings and loan-not Spiegel, that picked up the tab.
There is, to be sure, nothing new about lavish corporate expense accounts. The practice of converting personal living expenses to a deduction on a company or business tax return has been around as long as the income tax. It is a practice that Congress has been unable to curb. But in the 1980s, corporate tax write-offs for personal executive expenses as well as overall corporate excesses-from gold-plated plumbing fixtures in the private office to family wedding receptions in Paris and London-reached epidemic proportions.
The reasons varied. Among them:
The pace of corporate restructuring brought on by Wall Street created a climate in which once-unacceptable practices became acceptable, indeed, were even chronicled on radio and television, in newspapers and magazines.
In a monumental change in the rules, Congress deregulated the sav-
ings and loan industry, in effect opening the doors to the vaults of the nation's savings institutions, while at the same time discouraging meaningful audits or crackdowns when irregularities were detected.
The Internal Revenue Service lacks the staffing and time to conduct the intense audits of companies that would uncover such abuses. And even if the resources were available, an impenetrable tax code places too many other demands on the agency.
All this made possible a Tom Spiegel-and an army of other corporate executives who lived high on their expense accounts. Federal auditors eventually found that Spiegel used Columbia funds to pay for trips to Europe, to buy luxury condominiums in Columbia's name in the United States and to purchase expensive aircraft. From 1987 to 1989, for example, Spiegel made at least four trips to Europe at Columbia's expense, the auditors reported, staying at the best hotels and running up large bills.
They included, the report said: "$7,446 for a hotel and room service bill for three nights in the Berkeley Hotel in London ... for Spiegel and his wife ... in November 1988" and "$6,066 for a hotel and room service bill for three nights in the Hotel Plaza Athenee in Paris ... in July 1989. "
The Spiegels' most expensive stay was in July 1989 at the Hotel du Cap on the French Riviera, where the family ran up a $16,519 bill in five days. And when they weren't flying to Europe, the Spiegels spent time at luxury condominiums, acquired at a cost of $1.9 million, at Jackson Hole, Wyoming; Indian Wells, California; and Park City, Utah.
To make all this travel easier, Spiegel arranged for Columbia, a savings and loan that had no offices outside of California, to buy corporate aircraft, including a Gulfstream IV equipped with a kitchen and lounge. Federal auditors now say that Columbia paid $2.4 million "for use of corporate aircraft in commercial flights for the personal travel for Spiegel, his immediate family and other persons accompanying Spiegel." Columbia wrote off those expenses on its tax returns, thereby transferring the cost of the Spiegel lifestyle to you, the taxpayer.
The Federal Office of Thrift Supervision has filed a complaint against Spiegel, seeking to recover at least $19 million in Columbia funds that it claims he misspent. Spiegel's lawyer, Dennis Perluss, said Spiegel is contesting the charges.
"All of the uses that are at issue in terms of the planes and the condominiums were for legitimate business purposes," Perluss said.
But you are paying for more than Spiegel's lifestyle. You are also going to be picking up the tab for his management of Columbia. After heady earnings in the mid-1980s, Columbia lost twice as much money in 1989 and 1990-a total of $1.4 billion-as it had made in the previous twenty years added together. Federal regulators seized Columbia in January 1991. Taxpayers will pay for a bailout expected to cost more than $ 1. 5 billion.
That final figure depends, in part, on how much the government collects for the sale of the corporate headquarters on Wilshire Boulevard in
Beverly Hills. When construction started, it was expected to cost $17 million. By the time work was finished, after Spiegel had made the last of his design changes-"the highest possible grade of limestone and marble, stainless steel floors and ceiling tiles, leather wall coverings"-the cost had soared to $55 million.
It could have been even higher, except that one of Spiegel's ambitious plans never was translated into bricks and mortar. According to federal auditors, he had wanted to include in the building "a large multilevel gymnasium and 'survival chamber' bathrooms with bulletproof glass and an independent air and food supply."
Just who Spiegel thought might attack the bathrooms of a Beverly Hills savings and loan is unclear.
An Indifferent Congress
Congress has done little to curb the abuses of the 1980s. Consider for a moment Congress's response to the leveraged-buyout and corporate-restructuring craze of the 1980s that led to the loss of millions of jobs. As mergers, acquisitions, hostile takeovers and buyouts swept corporate America in the 1980s, defenders of the restructuring process contended it was merely another stage of the free-market economy at work.
During an appearance before a congressional committee in April 1985, Joseph R. Wright, Jr., then deputy director of President Reagan's Office of Management and Budget, summed up the prevailing attitude: "There is substantial evidence that corporate takeovers, as well as mergers, acquisitions and divestitures are, in the aggregate, beneficial for stockholders and for the economy as a whole."
It is true that the restructuring of business is as old as business itself So, too, the demise of corporations that are mismanaged or that manufacture products for which there is no longer any demand. Once, the Baldwin Locomotive Works sprawled over twenty acres in Philadelphia and more than 600 acres in Eddystone, Pennsylvania. At the company's peak, it employed 20,000 persons. When the market for steam locomotives disappeared, so, too, did Baldwin.
In those days, when factories and technologies died out-and workers lost their jobs-new factories, new technologies replaced the old. Always at higher wages. But what sets the current era apart from the past is this: There are no new manufacturing plants to replace today's Baldwins. And the remaining jobs pay less. While the government rule book encourages deal-making over creating jobs and rewards those who engineer new pieces of paper to be traded on Wall Street rather than those who engineer new products that can be manufactured and sold, Congress has displayed little interest in making changes.
From the mid-1980s on, lawmakers distributed news releases decry-
ing corporate excesses. They made speeches deploring the loss of jobs. They conducted hearings exploring the possibility of enacting legislation to curb abuses. They issued reports reciting their findings.
At one point, the flurry of activity stirred concern on Wall Street. An article in a January 1989 issue of the Wall Street Journal, under the headline, "Wall Street Fears That Congress Will Put Brake on LBOS," began: "Fears are mounting on Wall Street that Congress may actually do something to slow down the gravy train of takeovers and leveraged buyouts."
The fears were misplaced. Lawmakers were content with giving the appearance of action: News releases. Speeches. Hearings. Reports. But nothing else. Especially no legislation.
As one congressional staff member put it when he explained why committee hearings trailed off: "There simply is no interest among lawmakers in this."
Indeed not. But Congress was merely following the lead of the White House and Presidents Reagan and Bush.
President Bush summed up his attitudes on corporate takeovers in a question-and-answer interview with Business Week magazine: "To the degree that there are egregious offenses in these short-term takeovers that result in increased debt, I think we ought to take a look. But I have no agenda on that. I'm always a little wary about the government trying to solve problems when, historically, the marketplace has been able to solve them."
Members of Congress, for their part, seemed satisfied with the arguments mounted by the experts who insisted that all was working well and that new laws were unnecessary. To Capitol Hill they came to testify, from the Harvard Business School, from Wall Street investment houses, from law firms specializing in mergers and acquisitions, from the offices of corporate raiders. People like Carl C. Icahn, who spoke on the virtues of corporate takeovers during an appearance before a House Energy and Commerce subcommittee in March 1984.
Icahn had already made hundreds of millions of dollars in raids on such companies as Texaco, Inc., Hammermill Paper Company, Uniroyal, Inc., and Marshall Field and Company.
It was the year before he would take over Trans World Airlines, Inc., a company from which he would personally extract millions of dollars, firing thousands of employees, and which he would pilot into bankruptcy court.
Downplaying concerns about layoffs that follow mergers and acquisitions, Icahn told lawmakers: "Generally, if the company is doing pretty well ... there are not an awful lot of layoffs, and the layoffs that do occur are really getting rid of some of the fat that is not productive for society."
Similar views were expressed by Icahn's fellow raiders and others who profited from the restructuring of business-Wall Street investment advisers, bankers, lawyers, accountants, brokers, pension fund managers, arbitrageurs, speculators and a close circle of hangers-on. This army of deal-
makers turned the government rule book to its own advantage, seizing on provisions that place a higher value on ever-larger profits today at the expense of long-term growth, more and better-paying middle-class jobs and larger profits in the future. In doing so, they made billions of dollars.
Popular wisdom has it that the worst has passed, that it was all an aberration called the 1980s. The age of takeovers and leveraged buyouts. The decade of greed. And greed has been officially declared dead by trend trackers. A higher economic morality is supposedly in for the 1990s. Popular wisdom is wrong. The declining fortunes of the middle class that began with the restructuring craze will continue through this decade and beyond.
There are, an analysis suggests, two reasons: First, there is the global economy-the current buzz-phrase of politicians and corporate executives. As will be described in a later chapter, the global economy will be to the 1990s and beyond what corporate restructuring was to the 1980s.
Through the last decade, decisions that produced short-term profits at the expense of jobs and future profits were justified because they increased "shareholder value." In the 1990s, the same decisions are being made with the same consequences-only this time the justification is "global competition."
Second, the fallout from the 1980s will drag on for years, as more companies file for protection in bankruptcy court, more companies lay off workers to meet their debt obligations, more companies reorganize to correct the excesses of the past.
Wall Street's Greatest Accomplishments
Meet Edwin Bohl of Hermann, Missouri. He, like Larry Weikel and Belinda Schell, knows all about the future.
The place to begin Bohl's story is in 1988 with a company called Interco, Inc., a once-successful Fortune 500 conglomerate whose products included some of the best-known names in American retailing-Converse sneakers, London Fog raincoats, Ethan Allen furniture, Florsheim shoes. In that year the investment banking firm Wasserstein Perella & Co. set out to reorganize St. Louis-based Interco, a company with scores of plants operating in the United States and abroad.
Interco could trace its origins back more than 150 years. It was one of the country's largest industrial employers, with 54,000 workers. It had annual sales of $3.3 billion. It had paid dividends continuously since 1913.
In the summer of 1988, a pair of corporate raiders out of Washington, D.C., brothers Steven M. and Mitchell P. Rales, targeted Interco for takeover, offering to buy the company for $64 a share, or $2.4 billion. To fend off the Raleses, Interco's management turned to Wasserstein Perella, which came up with a plan valued at $76 a share. Interco obviously did not have that kind of cash lying around. So the plan called for the company to borrow $2.9 billion.
The financial plan was the sort that Wall Street embraced with great enthusiasm. Supporters of corporate restructurings insisted that debt was a positive force, imposing discipline on corporate managers and forcing them to keep a tight rein on costs. Said Michael C. Jensen, a professor at the Harvard Business School, who was one of the academic community's most vocal supporters of corporate restructurings, "The benefits of debt in motivating managers and their organizations to be efficient have largely been ignored."
As it turned out, Interco failed to be a textbook model for the wonders of corporate debt. Instead of encouraging efficiency, it compelled management to make short-term decisions that harmed the long-run interests of the corporation and its employees. Within two weeks of taking on the debt, Interco closed two Florsheim shoe plants-and sold the real estate. Interco announced that the shutdowns would save more than $2 million. That was just enough to pay the interest on the company's new mountain of debt for five days.
At the Florsheim plant in Paducah, Kentucky, 375 employees lost their jobs. At the Florsheim plant in Hermann, 265 employees were thrown out of work. None was offered a job at another plant.
Hermann is a picturesque town of 2,700 on the Missouri River, about seventy miles west of St. Louis, Settled by Germans from Philadelphia in the 1830s, it remains heavily German. The town's streets are named after noted Germans. The local telephone book reads more like a directory from a town on the Rhine than one on the Missouri. As might be expected from such a heritage, the deeply ingrained work ethic served the town's largest employer well. Beginning in 1902, that employer was known down through the years simply as "the shoe factory."
It was a model of stability for the town and one of the manufacturing jewels of the International Shoe Company, later Interco, its owner. Because of the factory's efficient work force, whenever Florsheim wanted to experiment with new technology or develop a new shoe, it did so at Hermann. The plant had a long history of good labor relations. And it operated at a profit. So why, then, did Interco choose to close the factory.?
Listen to Perry D. Lovett, who was city administrator of Hermann when the plant shut down and who discussed the closing with Interco officials: "We talked to the senior vice president who was selling the property and he told me this was a profitable plant and they were pleased with it. The only thing was, this plant and the one in Kentucky they actually owned. The other plants they had, they had leased. The only place they could generate cash was from the plant in Hermann and the one in Kentucky.
"He said it was just a matter that this was one piece of property in which they could generate revenue to pay off the debt. And that was it. That brought it down."
In short, a profitable and efficient plant was closed because Interco
actually owned-rather than leased-the building and real estate. And the company needed the cash from the sale of the property to help pay down the debt incurred in the restructuring that was supposed to make the company more efficient.
Hardest hit by the closing, Lovett said, were the older people: "Here were folks who had never worked anywhere else.... They had gotten out of high school and they went to work in the shoe factory."
So it was with Edwin Bohl.
Bohl began as a laborer in 1952. "I think I started for seventy cents an hour," he recalled. Except for two years out to serve in Korea, he worked at the plant, rising to a supervisory position, until its closing thirty-seven years later.
The announcement of the shutdown came without warning a few weeks before Christmas of 1988. There was a meeting that morning, Bohl remembered, in which there was talk about increased benefits and changes in the way shoes were made. "They had given me a bunch of new chemicals, " he said, "that I was to use in the finishing department. They had told us that everything was looking good." A company executive was supposed to fly in from Chicago that same morning. No one said exactly why, but his plane was delayed.
"The minute we came back from lunch," Bohl said, "they called us supervisors together.... The man read us the papers and said there were no jobs held for anybody.... They told us they had to close the plant because of the restructuring.... They had to raise money.... They told [us] it was not because of the quality. We were rated the top in quality and cost.... We had no idea this would happen."
Unexpectedly, Edwin Bohl found himself on the unemployment rolls at the age of fifty-eight. He was given a choice: He could wait until he reached retirement age and collect his full pension. If he did so, he would have to pay for his own costly health insurance. Or he could take early retirement, with a sharply reduced pension, and the company would continue to pay his health insurance.
"I sacrificed 29 percent of my pension to get it [the health insurance]' he said, adding, "If I hadn't taken early retirement, my insurance would have been sky high. You really didn't have much choice." Later, Bohl, who was earning $19,000 a year at the shoe factory, found part-time work in the local Western Auto store. The job paid $4 an hour. By 1992, he was making $4.75 an hour.
Lamented Bohl's wife, Geraldine: "We thought this would be the best time of our life. Now he doesn't know when he's going to get a day off. You either take a poor retirement and have your insurance, or have your retirement and pay for high insurance."
As for Bruce Wasserstein and Joseph Perella, whose firm collected $9 million in fees for arranging the restructuring that left Interco with $2.9 billion in debt-which ultimately forced the company into United States Bankruptcy Court-they have a somewhat different perspective of their efforts at reshaping corporate America. In February 1989, Perella modestly assessed his firm's contributions for the Wall Street journal. "No group of people-not just me and Bruce-ever accomplished so much in such a short period of time in Wall Street's history."