Review of Who Stole the American Dream by Hedrick Smith


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I wanted to give this book at least 2 stars in respect for Mr. Smith’s journalistic skills and his previous fine work with The Russians. However, this exposition is so flawed and wrong in its diagnosis of the problems and prescriptions that I can barely give it one star. It also saddens me to see 109 five-star reviews – after reading a few I’m left wondering how readers can be so easily led by just-so stories by our media elites. Or is this analysis so ideological that readers just choose to believe what they want to believe and disregard any counter-factual evidence? That is truly a lost, if not stolen, American dream.

First, Smith gives a good journalistic rundown of select history, as we would expect. His selected comparison is the post-war period referred to as the Great Compression. But he fails to see that this virtuous moment in our history was more a product of historical events than public policy. The US was the sole developed nation with an intact industrial base, while all of Europe, Russia and Asia lay in ruins. So, employable skilled labor was in short supply and American workers commanded a greater share of the returns relative to capital. The world was forced to buy our goods, even if we had to extend them the credit. This would not last and came undone in the late 60s. The 1970s was a period of stagnation when wages and corporate profits were similarly depressed by energy spikes and misguided economic policies.

Smith finds his villain in Justice Lewis Powell, who motivated a cabal of rapacious corporate raiders and turn-around artists like Chainsaw Al Dunlap and Neutron Jack Welch to take over American business. Please. The battle for corporate control was a response to ineffectual management that fed fat cat perks in the corporate boardroom while depriving other stakeholders of value. Stagnating stock prices reflected this and provided the opportunity for people like Dunlap and Welch to create value. Yes, and sometimes this depressed value was due to the mismanagement of labor inputs, so the remedy was to increase profits by reducing costs. This is how competitive business becomes efficient. If it hadn’t been Al and Jack, it would have been someone else. The business of America is wealth creation, not job creation. If we want to deal with the problems of winner-take-all globalization, we’d better understand that first.

Thus, Mr. Smith’s basic premise is not only flawed, it’s wrong. What caused the shift in power between capital and labor was the 30-year credit bubble (accommodated by a fiat dollar) that drove down interest on debt (with its tax subsidy), permitting the over-leveraging of capital ownership shares. Combined with the liberalization of developing nations in East, Southeast and South Asia, the world supply of labor exploded, driving down wage incomes across the board. Globalization powered by technology, transportation and communications, has delivered a new world that is so different from the post-war America Mr. Smith craves as to make the comparison ludicrous. We’re not going back to Kansas, Dorothy, no matter what the Wizards promise us.

Mr. Smith’s remedies are equally ill conceived, as we might expect from false premises. He’d like us to imitate Germany’s corporatist industrial policies, and in this he seems to share the same delusions as our current Democratic administration. Corporatism is a form of economic feudalism where control over economics and politics gravitates up to the national level with grand compromises made among peak labor unions, business roundtables, and government bureaucrats. Guess who wins and who loses? Elites win big while average Joe is told to be satisfied with a promised job, retirement, healthcare and three squares a day. This works currently in Germany because of several factors specific to Germany: a homogenous culture and labor force, an export-dependent economy, and a population of 80 million – none of which apply to the U.S. The long-term results of this policy are also less sanguine: the fertility rate of Germany is 1.36, well below the replacement rate of 2.1. There are more deaths than births and immigration does not make up the difference. In other words, like its European neighbors, the nation of Germany is dying a slow death. Hardly a model we would wish to follow. One must ask why, if life is so good, Europeans refuse to invest in the future by having children? Obviously, the developing nations that are liberating their societies see a much brighter future.

One more point that piqued my attention was Smith’s focus on public-private partnerships to recreate a past that he only imagines. This idea is a real buzzword for people who want to believe in the myth of a third way between socialism and capitalism. But does anybody really understand what the terms of these partnerships yield? Private interests use their connections in government to receive taxpayer subsidies to make investments in which they capture the excess returns. The risks of loss are borne by taxpayers, but these taxpayers never receive any direct return from success. This is a pure form of “heads we win, tails you lose” cronyism perpetrated by the elites in business and government. If taxpayers underwrite the risks, why don’t they have residual claimancy on any success? At heart, private-public partnerships are immoral because they violate the golden rule of moral capitalism: she who takes the risk, receives the gain or suffers the loss. (If you wonder about the morality of this rule, consult the Bible or the philosophy of law that defends the innocent from the transgressions of the powerful.)

This gets to the issue of true prescriptions to correct the failures of crony (not free market) capitalism that pervades our world. A world that advances freedom, and that includes the freedom to trade, must promote and defend the basic rights of ownership that undergird not only capitalism, but human nature itself. A worker is little more than an input cost, but ownership represents the residual claimancy on productive effort after all input costs have been paid. The success of capitalist society is measured by the creation of excess wealth associated with productive activities, in other words, profits. The problem is that 20th century industrial policy has associated the distribution of economic success through employment alone. In other words, most citizens only participate in the system as a labor cost. Thinking outside this “job creation” box calls for a wider distribution of the risks and returns to the ownership of the resources used in economic production, not least of which is financial capital. How does Mr. Smith really think all those CEOs got so rich? They all had stock options! Was there theft? Yes, from other stakeholders, principally shareholders. Unions should become the agents representing diversified ownership in American business for workers, and by association for all Americans. That’s a job that would get them on the right side of history.

The way Mr. Smith (and others of his persuasion) would lead us would be the ruin of the greatest experiment in freedom the world has ever known. That’s sounds more like a nightmare than a dream. Please folks, wake up. Do it for the children.

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