Mitt Romney is casting the 2012 campaign as “free
enterprise on trial” – defining free enterprise as achieving success
through “hard work and risking-taking.” Tea-Party favorite Senator Jim
DeMint of South Carolina says he’s supporting Romney because “we really
need someone who understands how risk, taking risk … is the way we
create jobs, create choices, expand freedom.” Chamber of Commerce
President Tom Donahue, defending Romney, explains “this economy is about
risk. If you don’t take risk, you can’t have success.”
Wait a minute. Who do they think are bearing the risks? Their blather
about free enterprise risk-taking has it upside down. The higher you go
in the economy, the easier it is to make money without taking any
personal financial risk at all. The lower you go, the bigger the risks.
Wall Street has become the center of riskless free enterprise.
Bankers risk other peoples’ money. If deals turn bad, they collect their
fees in any event. The entire hedge-fund industry is designed to hedge
bets so big investors can make money whether the price of assets they
bet on rises or falls. And if the worst happens, the biggest bankers and
investors now know they’ll be bailed out by taxpayers because they’re
too big to fail.
But the worst examples of riskless free enteprise are the CEOs who rake in millions after they screw up royally.
Near the end of 2007, Charles Prince resigned as CEO of Citgroup
after announcing the bank would need an additional $8 billion to $11
billion in write-downs related to sub-prime mortgages gone bad. Prince
left with a princely $30 million in pension, stock awards, and stock
options, along with an office, car, and a driver for five years.
Stanley O’Neal’s five-year tenure as CEO of Merrill Lynch ended about
the same time, when it became clear Merrill would have to take tens of
billions in write-downs on bad sub-prime mortgages and be bought up at a
fire-sale price by Bank of America. O’Neal got a payout worth $162
Pay-for-failure extends far beyond Wall Street. In a study released
last week, GMI, a well-regarded research firm that monitors executive
pay, analyzed the largest severance packages received by ex-CEOs since
On the list: Thomas E. Freston, who lasted just nine months as CEO of
Viacom before being terminated, and left with a walk-away package of
Also William D. McGuire, who in 2006 was forced to resign as CEO of
UnitedHealth over a stock-options scandal, and for his troubles got pay
package worth $286 million.
And Hank A. McKinnell, Jr.’s, whose five-year tenure as CEO of Pfizer
was marked by a $140 billion drop in Pfizer’s stock market value.
Notwithstanding, McKinnell walked away with a payout of nearly $200
million, free lifetime medical coverage, and an annual pension of $6.5
million. (At Pfizer’s 2006 annual meeting a plane flew overhead towing a
banner reading “Give it back, Hank!”)
Not to forget Douglas Ivester of Coca Cola, who stepped down as CEO
in 2000 after a period of stagnant growth and declining earnings, with
an exit package worth $120 million.
If anything, pay for failure is on the rise. Last September, Leo
Apotheker was shown the door at Hewlett-Packard, with an exit package
worth $13 million. Stephen Hilbert left Conseco with an estimated $72
million even though value of Conseco’s stock during his tenure sank from
$57 to $5 a share on its way to bankruptcy.
But as economic risk-taking has declined at the top, it’s been
increasing at the middle and below. More than 20 percent of the American
workforce is now “contingent” – temporary workers, contractors,
independent consultants – with no security at all.
Even full-time workers who have put in decades with a company can now
find themselves without a job overnight – with no parachute, no help
finding another job, and no health insurance.
Meanwhile the proportion of large and medium-sized companies (200 or
more workers) offering full health care coverage continues to drop –
from 74 percent in 1980 to under 10 percent today.
ago, two-thirds of large and medium-sized employers also provided health
insurance to their retirees. Now, fewer than 15 percent do.
The risk of getting old with no pension is also rising. In 1980, more
than 80 percent of large and medium-sized firms gave their workers
“defined-benefit” pensions that guaranteed a fixed amount of money every
month after they retired. Now it’s down to under 10 percent. Instead,
they offer “defined contribution” plans where the risk is on the
workers. When the stock market tanks, as it did in 2008, the 401(k) plan
tanks along with it. Today, a third of all workers with defined-benefit
plans contribute nothing, which means their employers don’t either.
And the risk of losing earnings continues to grow. Even before the
crash of 2008, the Panel Study of Income Dynamics at University of
Michigan found that over any given two-year stretch about half of all
families experienced some decline in income. And the downturns were
becoming progressively larger. In the 1970s, the typical drop was about
25 percent. By late 1990s, it was 40 percent. By the mid-2000s, family
incomes rose and fell twice as much as they did in the mid-1970s, on
What Romney and the cheerleaders of risk-taking free enterprise don’t
want you to know is the risks of the economy have been shifting
steadily away from CEOs and Wall Street – and on to average working
people. It’s not just income and wealth that are surging to the top.
Economic security is moving there as well, leaving the rest of us
To the extent free enterprise is on trial, the real question is
whether the system is rigged in favor of those at the top who get
rewarded no matter how badly they screw up, while the rest of us get
screwed no matter how hard we work.
The jury will report back Election Day. In the meantime, Obama and
the Democrats shouldn’t allow Romney and the Republicans to act as
defenders of risk-taking free enterprise. Americans need to know the
truth. The only way the economy can thrive is if we have more
risk-taking at the top, and more economic security below.
Robert Reich is Chancellor's Professor of Public Policy at the University of California at Berkeley. He writes a blog at www.robertreich.org. His most recent book is Aftershock.