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Free Market Threatens Hostess

By German Lopez · November 20th, 2012 · Commentary
commentary 2012-11-21

For a week, it was looking like Hostess, maker of Twinkies, Wonder Bread, Ding Dongs and Ho Hos, would shut down at the age of 82. The company was only saved by a judge’s demand for Hostess to mediate with striking workers.

While those with a certain level of culinary taste had little to mourn, the United States would have lost jobs and a food culture icon. In Ohio, the pain would have been felt through closed bakeries, including one in Cincinnati.

And the culprit? Hostess, like many failing American companies in recent years, has been quick to blame workers’ unions. Specifically, Hostess blamed a recent two-week strike by employees of the Bakery, Confectionery, Tobacco Workers and Grain Millers International Union. Inquiring minds were likely quick to think, “Wait, a two-week strike can shut down a company that big? How is that possible?” The answer is it’s not. 

Americans have adjusted their diets during the past decade, a time that has seen Hostess file for bankruptcy twice. The adjustments were set to hit workers at the company hard: Under a new contract, wages would have been cut by 8 percent, and workers faced benefit reductions as well. 

But the cuts seem to have stopped right around where the picket lines started. While workers were seeing lower benefits and wages, executives at Hostess were getting raises. According to an April 9 Wall Street Journal report, the company awarded its top four executives raises between 75 and 80 percent after it hired restructuring lawyers.

That’s right: The company first prepared for bankruptcy, then gave raises to its executives.

What’s sad is the trend of the rich getting richer and the poor getting poorer isn’t exclusive to Hostess. A July report from the Economic Policy Institute found CEO pay has grown 127 times faster than worker pay. Another report released by the Center for Budget and Policy Priorities (CBPP), a left-leaning think tank, found income inequality has been growing for decades. In the United States, the average real income for the richest 5 percent of Americans since the 1970s has grown by 114.1 percent, while average real income for the middle 20 percent has only grown by 26.9 percent. In Ohio, average real income for the top 5 percent has grown by 85.1 percent, while the middle 20 percent have only seen 21.1 percent in raises.

It’s worth pointing out this is a relatively recent phenomenon. Between the 1930s and 1960s, America’s gini index, which measures income inequality, was on its way down. Since then, it has been steadily climbing up, with particularly prominent rises in the 1990s and 2000s.

There are many factors to consider when measuring income inequality. Some economists point to globalization and newer, more expensive technologies. The CBPP report pointed to the recession, government policies — deregulation, trade liberalization, the weakening safety net, the lack of effective laws regarding collective bargaining and the declining real value of the minimum wage — and the expansion of investment incomes, which the think tank says “primarily accrue to those at the top of the income structure.”

But here’s another trend that might inconvenience companies like Hostess: In an almost one-to-one correlation, income inequality has gone up as union membership has gone down. Until the 1960s, union membership was rising or steady. Since then, it has dropped. Until the 1960s, income inequality was steady or dropping. Since then, it has risen.

It’s hard to imagine that rising union membership would fix the country’s continuing income inequality, but it does make sense that declining union membership hasn’t helped. After all, in their strike, workers at Hostess were just trying to keep their wages steady. They were saying no to cuts. Fighting to ensure fair compensation is the kind of behavior that keeps the lower and middle classes from getting less of the company pie.

That’s the dirty little secret behind Hostess nearly closing down. The company epitomizes major problems with corporate America. It has failed to adapt to the times with its unhealthy, processed foods. By giving executives raises while cutting wages for workers, the company failed to keep its own workers happy and played into a relatively new dynamic in the U.S. economy. Hostess’ failures illustrate a story of little innovation, poor management and a troubling American trend, not of unions reaching too far.



CONTACT GERMAN LOPEZ: glopez@citybeat.com or @germanrlopez

 
 
 
 

 

 
11.21.2012 at 11:48 Reply

Although, the idea that four execs got raises while restructuring seems obscene, honestly, we would have to know more.  Sometimes executives are brought into failing companies specifically to deal with possible bankruptcy or restructures, and for making those decisions, may in fact have expected to be rewarded for setting a difficult course and following it. 

Out of hand, without knowing more about who and why, it's not neccessarily an indication of something wrong.

 

11.21.2012 at 03:14

In the context of the story — meaning Hostess nearly undergoing liquidation when I wrote it, and now liquidation set to happen again after mediation failed — I think it's clear those executives did not deserve raises. The company was filing for bankruptcy and never fixed its structural problems. Why should the people in charge of fixing those problems be massively rewarded?

 

 
 
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