The ‘Dominant Power in Washington’

To the Editors:

I am grateful to the editors for choosing an economist of such stature as Professor Benjamin M. Friedman of Harvard to review my book Who Stole the American Dream? [“The Oligarchy in America Today,” NYR, October 11]. But his review is inaccurate on two essential points:

1. Professor Friedman misstates, and thereby trivializes, my thesis about the power shift in Washington since the 1970s that has been so devastating to the economic fortunes of the middle class and so lucrative to the nation’s super-rich, including our corporate elite. He says that I ascribe that power shift to a “collusion” by “a group of willful individuals”—a power conspiracy. I did not use that term. Nor did I make that argument. I described how the managerial class, spurred into action by a fiery memo from the famed corporate attorney, later Supreme Court Justice Lewis Powell circulated by the US Chamber of Commerce, mounted a broad and sustained movement over several years to achieve dominant power in Washington in order to influence policy in favor of Corporate America and Wall Street.

A movement is not a cabal of “a group of willful individuals,” unless we are prepared to say that Rosa Parks and the Reverend Martin Luther King Jr. colluded to mount a conspiracy against racial segregation in America. The power shift engineered and implemented by a broad swath of corporate leaders in America remains politically so successful and so dominant that the nation and the middle class still feel its impact every time that Congress votes on economic legislation.

1. Professor Friedman says that I did not offer any “counterfactual” to the severe cost-cutting, job-cutting, factory-cutting strategies of America’s corporate leaders, no evidence of how some possible alternative strategy might have worked over recent decades. But, in fact, I did provide a counterfactual that Professor Friedman overlooked or ignored. That counterfactual is Germany, where great multinational corporations, under pressure from and in tandem with powerful trade unions, have pursued a very different strategy. German business leaders, facing the same global competition and dealing with the same technological changes as American business leaders, have shared much more of Germany’s economic gains with their middle-class employees, and they have made far more serious efforts to retain high-paying, high-tech production jobs in Germany rather than eagerly offshoring production.

While American corporate leaders told us that corporate survival and competitiveness made it imperative to slash their payrolls, close plants, and allow very little increase in employee pay for three decades, Germany’s business leaders demonstrated that this was not so. Their record suggests that the American strategy might even have been counterproductive for our economy as a whole. Since 1985, German corporations have raised the average wage of middle-class employees five times faster than in the US and they managed to keep far more of Germany’s high-tech, high-paying production jobs at home. Today, 21 percent of Germany’s workforce is in manufacturing versus 9 percent in the US.

What’s more, contrary to the forecasts of US business leaders and some American economists, Germany’s “counterfactual” strategy has paid off handsomely in the global marketplace. While the United States suffered $6 trillion in trade deficits during the decade of the 2000s, Germany’s high-paying businesses were compiling a $2 trillion trade surplus. No wonder that today, a small but growing minority of American business leaders, plus some policymakers and economists, insist that America can no longer ignore these “counterfactuals” and must move to new strategies, more like Germany’s, to help revive our economy and the lost dream of America’s middle class.

Hedrick Smith
Bethesda, Maryland

Benjamin M. Friedman replies:

If I misrepresented Mr. Smith’s argument I gladly apologize. To be clear, (1) “collusion” was my word, not his, and (2) he certainly did write about business–labor relations in Germany.