How game was rigged against middle class

Editor's note: The following story ran Oct. 20, 1991, on Day One of the nine-day "America: What went wrong?" series published in the Inquirer.

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Worried that you're falling behind, not living as well as you once did? Or expected to?

That you're going to have to work extra hours, or take a second job, just to stay even with your bills?

That the company you've worked for all these years may dump you for a younger person?

Or that the pension you've been promised may not be there when you retire?

Worried, if you're on the bottom rung of the economic ladder, that you'll never see a middle-class lifestyle?

Or, if you're a single parent or part of a young working family, that you'll never be able to save enough to buy a home?

That you're 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're right.

Keep worrying.

For those people in Washington who write the complex tangle of rules by which the economy operates have, over the last 20 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. And 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 to even 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, the rules that govern the game have:

Created a tax system that is firmly weighted against the middle class.

Look upon it as the dismantling of the middle class.

Today and over the next eight days, The Inquirer will examine how the rules have changed, what that has meant and what that will mean in the future. And its articles will show that, barring some unexpected intervention by the government, the worst is yet to come.

For we are in the midst of the largest transfer of wealth in the nation's history. It is a transfer from the middle class to the rich, and from the middle class to the poor.

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, Calif.

While those who have played by the old rules are victims of the transfer. People like Mollie James, a 59-year-old factory worker, mother of four, grandmother of six, who lives in a working-class neighborhood in Paterson, N.J.

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 Co. in Paterson, rising from assembly-line worker to become the only female operator of a large metal-stamping machine.

In the process, she prospered to 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, Ark., 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 33 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 65 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 Inquirer analysis of a half-century of tax and economic data, tell part of the story:

SHRINKING MIDDLE CLASS

Nearly 34 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, 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 percent 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 combined 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 10 years.

Those figures are not adjusted for inflation, which cuts across all classes 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 Americans 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. Today, the maximum tax rate for individuals is 31 percent. That's a tax-rate reduction of 66 percent. In both the 1920s and the 1980s, Congress enacted large tax cuts for the wealthy.

RISING TAXES OF MIDDLE CLASS

In 1970, a Philadelphia family with income of $9,000 to $10,000 - median family income that year was $9,867 - paid a total of $1,689 in combined local, state and federal income and Social Security taxes.

In 1989, a Philadelphia family with income of $30,000 to $40,000 - 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.

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.

Rep. Marty Russo (D., Ill.), 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 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, a millionaire paid $54,758. That amounted to a 53 percent tax cut.

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 millionaires rose $255,088 - from $515,499 to $770,587 - an increase of 49.5 percent.

SUBSIDIZING THE AFFLUENT

If you earned $20,000 last year, 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 Sen. 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 15 other people in your income group - to cover the $19,034 in Social Security payments that Cranston collected.

Like most members of the U. S. Senate, Cranston ranks in the top 1 percent of all income earners. His total income last year was about $300,000. That included $19,034 in Social Security payments.

Of course, your $1,240 didn't necessarily go to Cranston. It could have gone to some other wealthy American receiving Social Security benefits.

In 1989, the top four-tenths of 1 percent of all people filing tax returns with reported incomes of more than $100,000 received $4.9 billion in Social Security payments.

That was the equivalent of the Social Security tax withheld from the paychecks of 2.9 million workers in Pennsylvania earning less than $30,000 a year.

Plus 1.9 million workers in New Jersey in the same income category.

Plus 1.2 million workers in Maryland. And 200,000 in Delaware.

Think of it as a simple transfer of money.

Of course, the wealthy pay into Social Security, too. But the $4.9 billion they receive is the equivalent of the Social Security taxes paid by 6.1 million workers who earn less than $30,000 a year.

And it is turned over to 400,000 people who earned more than $100,000 a year.

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 the 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 U. S. 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, Pa., 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.

In addition to influencing prices of goods and services and the creation and elimination of jobs, the government rule book also 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, unless there is a reversal of government policies, they will be many times that number.

* * *

Larry Weikel and Belinda Schell know all about the future. For them, it arrived last year when they paid the price for Wall Street's excesses - and Congress' failure to curb those excesses.

Weikel is 47 years old and lives with his wife in Boyertown, in Berks County, Pa. Their children are grown.

Schell is 33 and lives with her husband and three children, two teenagers and a 7-year-old, in Royersford, in Montgomery County, Pa.

Both worked at the old Diamond Glass Co. 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, the elimination of their jobs and the jobs of 500 co-workers - and 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, Inquirer reporters heard a constant refrain. It was a litany sounded in city after city, from Hagerstown, Md., to South Bend, Ind.; from Hermann, Mo., to Martell, Calif.

Over and over, blue-collar and white-collar workers, mid-level 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 shoe-making. 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 managers knew the workers' names, but never the people behind the names. The 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, in Chester County, Pa., 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 Co., a family-owned business that dated to 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, W. Va., 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, W.Va., from a bankrupt producer in 1981. Two years later, in 1983, it went public.

Then, in April 1985, Diamond-Bathurst purchased Container General Corp., a Chattanooga, Tenn., glass manufacturer with 12 plants.

And in July 1985, the company purchased most of the assets of Thatcher Glass Co. of Greenwich, Conn., a manufacturer with six plants that was operating under the protection of the U.S. Bankruptcy Court after a leveraged buyout went awry.

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.

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 annualized 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 Inquirer in July 1985 quoted a First Boston Corp. 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. That debt was made possible by a Congress which, 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 earlier had been forecast by stockbrokers and company management.

In June 1987, Moody's lowered the credit rating on Diamond-Bathurst's bonds.
Company executives already had closed one manufacturing plant after another - in Indianapolis; Wharton, N.J.; Mount Vernon, Ohio; Vienna, W. Va., and Knox, Pa., abolishing the jobs of several thousand 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 Corp. of Tampa, Fla., a descendant of a leveraged buyout.
When the new owners arrived, 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. Weikel is more blunt:

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 that Inquirer reporters 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 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 re-educate 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 23 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. Today, she works as a nursing home aide and earns considerably less.

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. He, too, earns less than he did.

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. " Schell said he finally found other work, but at lower pay than he made at the glass plant.

As for other 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 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 ballgames. 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 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' original owners helped to write those rules.

He was former U. S. Treasury Secretary William E. Simon, who was catapulted 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 Corp. was itself the product of a leveraged buyout. It was formed in April 1983 by Wesray Corp. and executives of the glass container division of the Anchor Hocking Corp., 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 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 workforce, 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.

After Anchor Glass borrowed the $76 million, according to documents filed with the U. S. 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 20 years.

In other words, the new owner of the glass plants, Anchor Glass Container Corp., 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 Co.

Anchor Glass purchased its casualty and liability insurance, 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 many and varied 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, ranked among the world's billionaire families by Forbes.

The Mexican company's first moves included a decision to close the glass plant in Royersford. And another plant in Vernon, Calif. And another plant in Gulfport, Miss. And another plant in San Leandro, Calif.

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.

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 19 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, 300,000 manufacturing jobs were eliminated. If the trend continues, 500,000 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 workforce 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, 24 hours a day, year after year.

By 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 million 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, '50s, '60s and '70s - 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 Co., last year received salary and bonuses 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 Inquirer 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 78 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 all other service industry employees during the 1980s fell far short of their parents' and grandparents' earnings.

In 1952, it took a factory worker one day to earn enough money to pay the closing costs on a new house in Levittown, then selling for $10,000. That was an era when the overwhelming majority of families buying homes relied on the income of one wage-earner.

In 1989, it took a factory worker 19 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 today's factory worker had the minimum down payment, his income would be insufficient for him to qualify for a mortgage.

That's 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 industry are even worse off, which helps explain why so many Americans can't afford a house. This is especially true for young families, who in decades past were the traditional homebuyers.

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.

Consider Mengabelle Quatre.

On a quiet Saturday afternoon on Dec. 2, 1989, Mengabelle Quatre died at the age of 69 at the Beverly Manor Convalescent Hospital in Burbank, Calif., 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 Inc. - the banner draped over the entrance proclaims "Love Is Ageless; Visit Us" - Mengabelle Quatre, a printer in a movie lab for 35 years, burned to death, in the middle of a hospital, while she was smoking a cigarette.

According to a state investigation, "the county coroner reported that the resident had died of thermal burns . . . over 50 percent of her body. The burns ranged between her front mid-thighs to the top of her head. "

Beverly Enterprises, the nation's largest nursing-home operator, is the product of a new economic order - one envisioned by Michael R. Milken and his Wall Street associates and made possible by rules set down by Congress.

It was created with high-risk, high-yield bonds - junk bonds.

To pay the interest on its bulging debt, Beverly Enterprises kept a tight rein on personnel costs, paying low wages and understaffing its facilities.

A California Department of Health Services investigation concluded that Beverly Enterprises "failed to ensure that (Quatre) smoked only in a designated area under supervision. "

The wages were so low, the staffing so minimal at Beverly-operated nursing homes that regulatory 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 due to general neglect and abuse.

The National Labor Relations Board joined the critics when an administrative law judge last November cited Beverly for unfair labor practices at 33 nursing homes in 12 states.

* * *

The government rule book 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 yearly 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. This is one practice Congress has never come up with a rule to curb.

But in the 1980s, corporate tax writeoffs 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:

All this made possible a Tom Spiegel - and an army of other high-living executives.

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, staying at the best hotels and running up large bills:

". . . $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."

". . . $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.

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, Wyo.; Indian Wells, Calif., and Park City, Utah.

To make all this travel easier, Spiegel arranged for Columbia, a savings and loan that had no offices outside 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 which 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're 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 20 years added together.

Federal regulators seized Columbia in January. 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" - 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 multi-level gymnasium and 'survival chamber' bathrooms with bulletproof glass and an independent air and food supply. "

Just whom Spiegel thought might attack the bathrooms of a Beverly Hills savings and loan is unclear.

* * *

Congress has done little to curb the abuses of the 1980s.

Consider, for a moment, Congress' 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 20 acres in Philadelphia and more than 600 acres in Eddystone. 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 there are no new manufacturing plants to replace today's Baldwins. And the remaining jobs pay less.

While the government rule book encouraged deal-making over creating jobs, Congress has displayed little interest in making changes. From the mid-1980s on, there were news releases. There were hearings.

There were reports.

But nothing else.

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.

Members of Congress seemed satisfied with the arguments mounted by business people, business-school professors and other experts who insisted that new laws were unnecessary.

People like Carl C. Icahn, who during an appearance before a House Energy and Commerce subcommittee in March 1984, spoke on the virtues of corporate takeovers.

Icahn already had made hundreds of millions of dollars in raids on such companies as Texaco Inc., Hammermill Paper Co., Uniroyal Inc. and Marshall Field & Co.

It was the year before Icahn would take over Trans World Airlines Inc., which he would pilot to the edge of bankruptcy.

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 corporate 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 dealmakers 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 Inquirer analysis suggests, two reasons:

First, there is the global economy - the current buzz-phrase of politicians and corporate executives. As The Inquirer will outline later this week, 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.

* * *

Meet Edwin Bohl of Hermann, Mo.

He, like Larry Weikel and Belinda Schell, knows all about the future.

The place to begin Bohl's story is with a company called Interco Inc., a 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.

That was in 1988, the year the investment banking firm, Wasserstein Perella & Co., set out to reorganize Interco, a St. Louis-based 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.

Michael C. Jensen, a professor at the Harvard Business School and one of the academic community's most vocal supporters of corporate restructurings, put it this way:

". . . The benefits of debt in motivating managers and their organizations to be efficient have largely been ignored. "

But 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 - just enough to pay the interest on the company's new mountain of debt for five days.

At the Florsheim plant in Paducah, Ky., 375 employees lost their jobs. At the Florsheim plant in Hermann, Mo., 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 70 miles west of St. Louis. Settled by Germans from Philadelphia in the 1830s, it remains heavily German.

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 simply as "the shoe factory. "

It was a model of stability for the town and one of the manufacturing jewels of the International Shoe Co., later Interco, its owner. Because of the factory's efficient workforce, 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 . . . "

They were people like Edwin Bohl, who went to work at Florsheim in 1952.

Bohl began as a laborer. "I think I started for 70 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 37 years later.
Announcement of the shutdown came without warning a few weeks before Christmas of 1988.

There was a meeting that morning, Bohl said, 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 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 age 58.

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. "

Since then, Bohl, who was earning $19,000 a year at the shoe factory, has found part-time work in the local Western Auto store. The job pays $4 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 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 this way 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."