Hedrick Smith’s book highlights events in the USA between 1971 and 2011 that ended with a call for change at the grassroots level. It illustrates the USA perspective within the Moral Innovation framework.
The Moral Innovations framework focuses on 5,000 year evolution of the four ancient civilizations. Egyptians focused on innovations and evolved through the Roman Empire to become the 2.4 billion Christians today. USA, with 75% Christian population (both Protestants and Catholics), continues to focus more on innovation in a democratic government. When USA was born 240 years ago, China was the largest economy on earth with 33% of the global GDP. Today, USA’s economy is double the size of the #2 China. As a percentage of global GDP, USA and China together command 33% of the global GDP.
The author presents a logical story of how USA became a global leader by virtue of a vibrant middle class after Henry Ford started to pay his employees sufficiently high wages to command a comfortable living. This was reinforced by labor unions which have been exempt from anti-trust laws, and thrived through the second world war and the civil rights movement. Overall, USA was the “land of opportunity” with the most widely shared economic prosperity (to the majority of the US population) and the most affluent middle class of any place on earth.
There was a perfect storm that hit the USA Middle Class from three directions that favor the super-rich 1% of Americans: 1) government, 2) companies that make products, and 3) companies that provide services:
– There was backlash against the social progress through the 1960s with Civil Rights, Voting Rights and 20 million people march on Earth Day. The US Chamber of Commerce Lead Counsel and later Supreme Court Justice Lewis Powell woke up Corporate America to lobby in the best interests of the companies, specifically the CEO plus the shareholders of the companies. This propelled the formation of 2,000+ pro-business entities that support the transfer of trillions of dollars from 99% of Americans to the top 1% super-rich in the form of “reverse Robin Hood” through trickle-down economics in the form of Reagan and Bush tax cuts (e.g. corporate tax decreased from 92% to 35%, preferential capital gains tax of 15% instead of 37% for ordinary income, and estate tax declined from 77% to 55% or lower). The unlimited funding of the Super-Political Action Committees supported the US$6 billion 2012 political campaigns, down to the level of district gerrymandering where Democrats may win the popular vote, but Republicans would win the congressional districts. With only 37% of eligible voters voted in the 2010 elections, the “minority tyranny” used filibusters to control the Congress despite a 52 year high of 46 million Americans below the poverty line, and 1% of Americans captured 93% of the nation’s recovery. In 2013, Ted Cruz’s Tea Party used filibusters to shut-down the government.
– In terms of product offerings, evidence that USA began to lose its innovation leadership includes the spin-off of the basic research performed by Bell Labs in Murray Hill to Lucent Technologies in 1996 to focus more on profit making. Two major cost components that affected business profit were pension and health care expenses. Businesses began to offload pension expenses in the form of 401(k) for employees to manage their own retirements, and Obamacare is beginning to offload healthcare expenses for employees to manage their own health care expenses. Just as USA started to shift the pension and healthcare expenses, both China and India offered lower cost alternatives to businesses primarily in manufacturing and IT functions, respectively. They facilitated the CEO decisions to lower cost by laying off high cost USA employees (in salaries, pensions, and healthcare expenses). This shift meant millions of USA middle class jobs went overseas. For example, Microsoft had 12,000 permanent temporary workers without benefits in the 1990s. In 2005, 43 million US workers were classified as contingent workers. The lower employee costs meant higher company profits that CEO reported to shareholders under the façade of globalization. CEOs were rewarded with high salaries, but more importantly, most of the CEOs compensation were in the form of stock and stock options with preferential capital gains taxation that dominated the wealth accumulated by CEO and shareholders. With friendly bankruptcy laws that allowed the CEO to continue to work in the company, CEOs took out huge compensation packages no matter what happened – to reorganize, to sell, and to separate from the company.
– In terms of service offerings, the mortgage banks, the Rating Agencies (that determine the cost of borrowing based on the risks associated with the debt), and the Federal Reserve Bank enthusiastically supported George Bush’s call to increase home ownership (especially to minorities): They offered mortgages to middle class Americans who cannot afford them. The mortgage bankers had no risk because they sold their individual mortgages through two quasi-government entities Freddie Mac and Fannie May who, in turn, sold them to investment bankers and innocent investors who believed these Collateralized Debt Obligations (CDO) were low risk because they had equivalent AAA ratings from the rating agencies. The 2008 housing bubble meant middle class Americans lost US$5.1 trillion of home equity primarily because the banks offered financing to people who could not afford the homes they purchased. With government bailouts and support, CEOs took out huge compensation packages no matter what happened – to create the bubble, to solicit bailout from the government, and to tell the world what happened.
These three dimensions highlight the focus on innovations without sufficient consideration to have corresponding appropriate moral standards. Two other issues were not covered in the book: 1) the valuation of the stock prices have been very subjective, dictated by “financial analysts” that are incentivized by higher valuation of the stocks, and 2) the impact of OPEC oil prices that transferred wealth to OPEC countries and large energy companies and their shareholders.
The use of “company” to build wealth is not new. To bypass the authority of the Catholic Pope who gave the world to the Spanish and Portuguese in two treaties signed in 1494 and 1529, Britain and Dutch created British East India Company in 1600 and VOC in 1602. They were both corrupt and vanished, but the British East India Company lasted longer because the British government gave the company monopoly power to trade in opium which led to the century of humiliation of the Chinese.
USA is becoming more like an aristocracy or plutocracy, not a democracy. Changes will require grassroots organizations to hear the voices of the people, not the lobbyists. From the Moral Innovator perspective, our ability to change the status quo in the USA will also impact India (the largest democracy on earth), because India has a very difficult task to separate the 1 million super-beings or angels from government decisions. Without USA and India, we may lose democracy as a form of government on earth.