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Conducted and written by Supply Chain Adviser and Author, Paul Ericksen, this interview focuses on fellow author Michael Collins recent book "Dismantling the American Dream"
Michael Collins spent 35 years in manufacturing, having served at both the vice-president and general manager levels for a large corporation. He is also a prolific writer, having contributed articles to many trade journals including Forbes and IndustryWeek. He has previously written four books on manufacturing related topics, including government economic policy. His most recent book --- “DISMANTLING THE AMERICAN DREAM: How Multinational Corporations Undermine American Prosperity” is the focus of the following interview.
Q: A basic premise of your book is that corporate America fundamentally changed its’ focus in the late 1970’s/early 1980s, to the detriment of the U.S. economy. Can you explain this assertion?
A: The tipping point was associated with a single pronouncement by a single individual. In 1978 Milton Freidman --- at the time a respected, conservative economist --- made the following statement:
“An entity’s greatest responsibility lies in the satisfaction of the shareholders,” i.e., owners.”
Shortly afterwards, the U.S. Business Roundtable further developed Mr. Friedman’s statement into the pronouncement that:
“The point of any business is to generate economic returns to its owners, period.”
Both of these statements were contrary to the previously generally accepted corporate strategy of striving to deliver equal economic benefits to three primary stakeholders which while it included owners, also focused on customers, employees and suppliers. This change in corporate focus has had a severe negative economic effect on the last two of those stakeholders and, in general, the U.S. economy.
In addition during this period Ronald Reagan delivered a significant reduction the corporate tax rate under the presumption that any resulting economic benefits to corporations would “trickle” down to the benefit of all. We know now that the economic benefits related to a corporate reduction in taxes goes almost exclusively to corporate shareholders and their executives.
Q: Those are pretty strong assertions. Can you give any examples of this?
A: Sure. From 1948 to 1979 the productivity of American industry increased 108.1 % and corporations shared much of this financial gain with their employee, increasing compensation by 91.2 percent. Over a similar period from 1979 to 2012, comparable numbers were a 69.6 % increase in industrial productivity yet only an 11.6 % increase in employee compensation. Another way of saying this is that since 1979 corporations have greatly reduced manufacturing costs due to increased productivity, short-changing their employees who delivered those increases.
Q: That’s an interesting insight. Are there other examples of post-1979 changes in corporate strategy that have negatively influenced employee and supplier stakeholders?
A: What has probably been the most visible change in corporate strategy has been the overseas outsourcing of purchased material, moving their material purchases away from domestic Small Manufacturing Enterprises. The premise was that the lower wages and reduced regulations available overseas would results in lower material costs, which they did. On the other hand --- and this was, for the most part, not taken into account relative to purchase prices --significant overhead costs had to be assumed as a result of working with those overseas suppliers.
For instance, due to the drastically longer lead-times of overseas suppliers, corporations had to inventory significantly increased pre-built product to support Customer Fill Rates when customer demand varied from what was forecast. And these additional costs contributed to the need to reduce employee compensation in order to realize the anticipated economic benefits to corporations sourcing overseas.
Q: Can you quantify the impact on the U.S. economy of corporations chasing lower piece-prices overseas?
A: Yes. Sourcing to overseas suppliers led to employment reductions and reduced the manufacturing where-with-all of the country as a whole. For instance, machine shops are one of the basic underpinnings of a country’s economic wealth. From 2002 to 2020, 5,295 (21 %) of all U.S.-based machines shops went out-of-business, resulting in a 63,342 reduction industrial jobs.
One point that is lost in the reduction of domestic manufacturing and employment is the loss of innovation. Many people assume that innovation primarily comes from corporations. Many corporations can be thought of as large ocean liners, where to make a change in direction requires a significant and lengthy turn in direction. This is not the case with Small Manufacturing Enterprises.
The bottom line is that much of this country’s competitive advantages are based on innovation and you can’t have strong innovation without a wholistically healthy industrial economy. It would be hard to say that the U.S. economy is wholistically healthy.
Examples like this show how present corporate strategy has led to this country’s inability to be self-sufficient in important areas. One only has to see the current situations of U.S. production (or lack thereof) of microchips to understand how outsourcing overseas has undercut this country’s manufacturing viability. And restoring it will likely take --- again, as shown in microchips --- millions of dollars of governmental funding.
Q: Has the impacts of the change in corporate strategy changed U.S. culture in any way?
A: In many ways. Perhaps the most immediate impact has been to reduce the value this country places on work. As I described earlier, “trickle down” as an economic theory has been dis-credited by the results it has delivered over the last four decades. Instead, the corporate “return on investment” focus has accelerated a rising stock market such that investment return rates returns far outweigh increases in employee compensation. The result has been that those with enough disposable assets to invest have benefited from current corporate strategy while the opportunity of those that don’t to “raise themselves up by their bootstraps” has significantly decreased. Today, the top 10% of all American’s own 88 % of all assets, a significant increase from 1980. This is the highest disparity in wealth ever in this country, including that of the 1890’s “Gilded Age” and led to the largest economic inequality in western nations.
Q: Are there any other changes to culture due to the change in corporate strategy?
A: Yes. One that is often overlooked is in the area of start-ups. Back in the 1950’s, for instance, if a man started up a business in his garage --- say, a machine shop --- it was likely with the intention of providing a living for his family and creating/developing an value producing entity for passing on to his children.
Today, business start-ups are seen more as a “get rich quick” scheme where the created product can be sold to a large corporation, significantly increasing the wealth of the start-up’s investors. This phenomenon has also led to a type of technical outsourcing by large corporations where they lack internal resources to develop their own tools.
Q: Can the federal government facilitate a change in the way such that economic benefits are delivered to all corporate stakeholders? If so, why hasn’t it?
Yes, the government can and should play a critical role in making this happen. For instance, the 2017 Corporate Tax Reduction Act was passed under the understanding that the increased corporate financial benefits would lead to increased domestic investment and jobs, as well as increased business activity leading to higher tax receipts. But there were “no strings attached” to the benefiting corporations and over 50 % of the revenue windfall due to the tax reduction was spent on stock buybacks, which led only to a positive financial impact for stock-holders. The primary reason the government doesn’t apply a “strings attached” clause to financial assistance such as tax reductions. In a word, this is due to lobbyists. In 1975, only 175 corporations employed lobbyists. In 2011 there were 12,929 registered lobbyists representing hundreds s of corporations and industries, spending $3 billion dollars in lobbying activity. And that figure doesn’t include the donations corporations make to politician election and/or re-election campaigns.
But even with government intervention the changes needed to support U.S. industry and jobs cannot take place without the commitment of multi-national corporations. In 2018 181 CEOs of large corporations pledged to change their strategies to benefit all stakeholders, including employees and suppliers. But is this really happening?
Instead, a current widely hailed strategy as corporations relocate from their distant Chinese suppliers is “near shoring.” Specifically, this is referring to sourcing from Chinese to Mexican suppliers, which will do virtually nothing to restore U.S. jobs or help raise the economic circumstances of the typical employee --- manufacturing and otherwise. What is needed instead is a strategy of “onshoring.”
Final Question:
Any overall message you’d like to give the American people and our politicians relative to economic policy?
A: Yes. The American Dream is alive but fraying. The corporate performance metrics that Boards of Directors have given their executives have an almost solitary focus on increasing stock price. This needs to change so that all stakeholders share in corporate financial benefit. With all of the momentum focused on providing returns to stockholders, it will take a significant effort to reverse this force. This will require government economic policies and practices that protect American commercial interests by ensuring a level-playing field and channel corporations to have a wider perception on who their stakeholders are an how they should be treated. Businesses need to understand that in the long run, without a middle class, there will be no-one to buy the products they sell.
Interviewers Note:
Despite my background in business, Mr. Collins new book gave me a much deeper understanding of it. He has both documented and quantified his assertions with governmental numbers and statistics which, in my opinion, make many of them pretty much unassailable. Anyone who has wondered by why U.S. manufacturing employment has dropped by almost half over the last three years and why our country’s trade balance continues to rack up significant debt, year after year, would benefit from reading this book.