The Bluegrass and Beyond

Paul Volcker, who was chairman of the Federal Reserve under presidents Jimmy Carter and Ronald Reagan and is a top adviser to President Barack Obama, has earned a reputation as one of the rarest of creatures: a straight-talking economist.

Volcker was true to form Thursday, when he came to Kentucky to speak at the Shakertown Roundtable, a gathering of about 60 of the state’s most influential leaders in business, government, education and philanthropy.

The 82-year-old economist was blunt in his assessment of what caused this economic crisis and what’s needed to fix it. And he brought things back into focus when some executives tried to point fingers, shift blame and complain about recovery strategies.

“We spent, as a nation, more than we were producing,” Volcker said. Mix that with a real-estate bubble, reckless financial manipulation and too little government oversight, and it was a recipe for disaster.

“We were leveraging the economy … and then it all unraveled,” he said, adding that the recovery will be a “considerable slog” that could take years.

Volcker has advised Obama to restore legal restrictions, enacted after the Great Depression but repealed in the 1990s, that separated investment and commercial banking and prevented banks from becoming “too big to fail.”

The Obama administration has balked at Volcker’s suggestions amid industry opposition. But Volcker warned that without such reforms the nation could face a repeat of its current crisis in a few years.

After Volcker’s remarks, the 11 other panelists gave their views on the economy and the proper relationship between business and government. They included Gov. Steve Beshear, Louisville Mayor Jerry Abramson, the presidents of the universities of Kentucky and Louisville and several business leaders.

David Grissom, president of Mayfair Capital in Louisville, said he was depressed at the quality of national leadership. He complained about the huge amounts of money government is using to try to rescue the economy.

Julie Janson, president of Duke Energy in Kentucky and Ohio, lamented new government regulations on energy and utilities.

Churchill Downs Chief Executive Robert Evans warned this was a bad time to raise taxes and increase government regulation of business.

U of L President Jim Ramsey cited sobering statistics about Kentucky’s economic “blood bath,” such as the decline in manufacturing jobs in the past decade from 310,000 to 200,000 and the fact that Kentucky spends $9,000 a year on each public school student, $6,000 on each college student — and $19,000 on each prison inmate.

As each panelist took his or her turn, things turned gloomier. Then the last panelist, the governor, spoke.

Beshear said he thinks Kentucky is in better shape economically than many states and, with smart strategy and investment, the state could position itself to take advantage of future economic opportunities, such as advanced manufacturing.

“Until I heard from the governor, I was in a state of desperation,” Volcker deadpanned, adding that he agrees with Beshear’s optimism.

But, Volcker said, Kentucky and the nation must see the economic crisis as a “wake-up call” and make some fundamental changes.

Volcker also agreed with comments by UK President Lee Todd, who emphasized the need for more rigorous math and science education and more technology research that can be commercialized to create jobs.

Todd criticized the recent emphasis on the service economy: “We can’t create wealth by serving hamburgers to each other.”

In the best line of the day, Volcker said Americans need to shift away from “financial engineering” and focus once again on civil, mechanical and electrical engineering.

We need to regain our leadership in technology development and manufacturing, he said, rather than churning out so many business school graduates who are focused on making big, quick and easy profits by manipulating money.

If there’s one thing this year’s Shakertown Roundtable made clear, it is this: Economic recovery will require us to figure out how to prosper in a new and different global economy, rather than simply trying to get back what we have lost.

Centre College President John Roush, commenting from the audience, perhaps said it best: “I think we are going back to a place of well-being. But it’s a different place.”

It looks as if Detroit may get its bailout after all.

If a reluctant Congress approves, the Big Three automakers could get $15 billion in short-term loans, following in the footsteps of banks and brokerages that are receiving $700 billion in public assistance.

Like many taxpayers, I’m angry at having to come to the rescue of greedy and incompetent corporate executives, but they seem to have us over a barrel.

Without the Wall Street bailout, the credit squeeze might have cost even more Kentuckians their jobs and savings and left the state with an even bigger budget deficit. A Detroit meltdown could wash away thousands more Kentucky jobs, from the Corvette plant in Bowling Green to the Ford plants in Louisville and dozens of parts suppliers across the state.

How did we get into this mess? Corporate greed and incompetence, for sure, as well as some irresponsible consumers. But I keep thinking that we could have avoided this crisis if government had been doing its job for the past eight years — if not the past quarter-century.

While we’re fixing the economy, it would be useful to have some sober discussions about the proper relationship between business and government. For decades, some politicians and big-money special interests have reduced that discussion to simplistic sound-bites: Business good. Big business better. Government bad. Government regulation very bad.

Government doesn’t create wealth, business does. Capitalism is the world’s best economic system because of human creativity, entrepreneurial spirit, enlightened self-interest and the nimbleness of business people to respond to the market’s needs.

But for capitalism to succeed over the long haul, it needs a fair and healthy marketplace where government sets some boundaries and enforces rules. Business people are the first to say that their job is to make a profit for their owners, not watch out for society’s best interests. That’s government’s job.

The Wall Street meltdown can be traced to greed and abuse made possible by deregulation and lack of government oversight. And if government had pushed harder for tough fuel economy standards — or helped fund innovation the way Japan has done with its automakers — the Big Three and the rest of us would be in a lot better shape now.

Honestly, I’m almost as concerned about government “oversight” of the auto industry as I am about government’s apparent lack of oversight of the financial services industry, which is getting nearly 50 times more money with few strings attached.

Government isn’t suited to running a business; it’s too bureaucratic and political. Of course, some would say the same about big corporations, especially public corporations more focused on short-term gain than long-term sustainability. Anyone who has ever worked for a big corporation knows why the comic strip Dilbert is so popular.

Some government regulation is essential; otherwise, our air and water would look like China’s and investors would have even less confidence in the safety of our financial system than they do now. But examples of overregulation are easy to find. Just ask any health care professional who deals with the well-meaning but nightmarish federal privacy law known as HIPAA.

As the nation feels its way toward a new relationship between government and business, a good subject to consider is health care.

Unlike in most industrialized nations, our health care system is left largely in private hands. Health care costs have traditionally been borne by business, although, as those costs have risen dramatically, companies have shifted more of them to workers.

The United States spends 16.5 percent of gross domestic product on health care — much more than any other nation — and that figure rises every year. Yet we have an inefficient system where an estimated 47 million people are uninsured and many families are just one serious illness away from financial ruin.

Why should businesses bear that burden? If government took more responsibility for managing health care with private providers, many people think both quality and coverage could be improved. Freed from those benefits burdens, companies could be more competitive globally. Plus, think of the entrepreneurial potential that could be unleashed if so many workers weren’t tied to jobs they hate by fear of losing health care benefits.

Of course, any attempt at change will be vigorously opposed by the health care industrial complex, which profits from the current system’s inefficiency. It will raise fears about “socialized medicine,” even though public-private systems such as Medicare, while hardly perfect, have worked well for decades.

Like many Americans, I’m uncomfortable with government trying to manage big business. But if government would use this opportunity to learn how to do a better job of governing, we might be spared more corporate bailouts in the future.

When she heard that Dawahares Inc. was closing nine of its 31 stores in a dramatic bid to survive, a longtime customer went to the Fayette Mall store and bought a couple of hundred dollars’ worth of clothing.

”She said, “I’m sorry I can’t afford to buy more,’“ said Richard Dawahare, his voice cracking. ”She was trying to help us out.“

A month later, when the rescue plan fell short and Dawahare’s announced it was going out of business, customers began stopping by the Pikeville store to pay their respects.

”That was the term they used … pay their respects,“ said Harding Dawahare, the president and CEO. ”They just came in to share their stories about how much they loved Dawahare’s over the years.“

From Pikeville to Paducah, Dawahare’s might be the state’s best-known family business. It’s no wonder: Kentuckians have been trading with the Dawahare family since 1907, when Serur Frank Dawahare moved to Appalachia and began carrying a peddler’s pack through the coal camps.

The company’s demise has saddened loyal customers, but there’s only one way to describe the Dawahares’ feelings: It’s like a death in the family.

”The family and the business were almost one and the same,“ said Harding, 57, one of six grandsons of S.F. Dawahare now working in the company, along with two great-grandchildren. ”It was very, very difficult to separate the two.“

S.F. Dawahare came to New York City from Damascus at the turn of the last century and met his wife, Selma, at a Syrian singles dance. On the advice of her brother, they moved south, thinking there might be opportunity for a merchant in the booming coal fields.

The Dawahares saved enough money to open their first store in East Jenkins in 1911. Within a few years, the business was growing almost as fast as the family, which included eight sons and three daughters. Grateful to his adopted country, Serur named three of his sons after U.S. presidents — Woodrow Wilson Dawahare, Warren Harding Dawahare and Herbert Hoover Dawahare.

S.F.’s goal was to have a store for each son — the daughters were expected to find husbands — and he almost did it by the time he died in 1951. The family expanded to Lexington in 1961, building a flagship store in Gardenside Shopping Center.

Eventually, the company would have Dawahare’s clothing and Cat Bird Seat collegiate apparel stores scattered throughout Kentucky and across the line in West Virginia. Liquidation sales began Friday.

A family, a company

The end has been hardest on S.F.’s four surviving sons, who are retired from company leadership and declined to be interviewed.

Last week, five of the third-generation Dawahares working in the company gathered around their big oak conference table. The cramped corporate offices were dark and quiet; employees were paid through last week, but there was no longer a need for many of them to come to work.

The Dawahare cousins spent the week tying up loose ends and turning the company’s inventory over to liquidators. They also were coming to grips with the loss of an institution that has been such a big part of their family.

S.F. taught his sons the ethic of many hard-working immigrants: Whatever happens, stick together. All made careers in the family business except for Hoover, who loved politics and represented Whitesburg in the state House of Representatives for a dozen years.

He operated Hoover’s furniture stores in Lexington, Hazard and Whitesburg. It was a separate company, but ties remained close. Brother A.F. Dawahare, who retired as Dawahare’s CEO in 2001, now runs Hoover’s, which remains in business.

”My uncles, especially, could not and still do not separate the business and the family,“ Harding said. ”Our generation has tried a little bit more to separate the two. Even though they’re intertwined, we try to run the business like a business and the family as the family.“

There was tension when some younger Dawahares wanted to pursue other passions. They left for careers as a caterer, a hedge-fund manager and a foreign correspondent, among other things.

”My uncles would say if you were leaving the business, you were leaving the family,“ Harding said. ”And we would say, no, you’re still in the family, you just choose not to be in the business.“

Richard, 53, studied to be a lawyer. ”My dad just said, “Do whatever you want to in life, but you’re crazy if you don’t take advantage of this opportunity“ to be part of the business, he said.

Richard passed the bar, but his first job offer came from Macy’s in Kansas City. He soon realized that retailing was his passion after all.

”I came back because I love my cousins,“ he said. ”And I love the uncles first. They were like Santa Claus my whole life. Not just giving stuff, but it was fun. It’s impossible to overstate how much joy there was my whole life around the uncles.“

Said Harding: ”The cousins all grew up like brothers and sisters.“

The Dawahares have always been an opinionated, outspoken bunch.

”Fighting internally about the business is not a bad thing,“ Harding said. ”It’s a good thing for people to try to get their point of view expressed and out on the table. For the most part, we’ve always fought with each other from a position of respect, most of the time.“

Even last week, the darkest of times, there was affectionate humor to break the tension.

Joe Dawahare joined the interview late, and he was introduced as the corporate attorney, secretary and treasurer. ”So, really, this is all his fault,“ Harding quipped. Everyone laughed except Joe, who didn’t catch the remark. ”What did you say?“

At another point, Richard was waxing poetically about the company’s emphasis on customer satisfaction. ”We never would let a customer down. Never!“ he said.

”Well, I did once,“ Harding deadpanned.

More laughter.

What went wrong?

Hindsight and regrets are inevitable. For example: not making the successful Cat Bird Seat stores, which sell University of Kentucky and University of Louisville branded merchandise, a separate company.

But it’s a miracle Dawahare’s Inc. lasted as long as it did. Most family-owned retailers were out of business by the 1980s. In the past few months, the softening economy has taken down other retailers such as Goody’s Family Clothing.

Dawahare’s always survived by knowing its customers, serving small towns and finding niches that set it apart from competitors. ”We had some good merchandising skills that kept us competitive with the best of the best,“ Harding said.

But challenges kept coming. Clothing prices have been flat for a decade, yet wages and other business costs continued to rise. National chains were able to buy goods cheaper than Dawahare’s, further squeezing its profit margins.

Take, for example, designer Tommy Hilfiger’s popular clothing. ”When Tommy was hot and people wanted it, there was only one place to get it in the small towns, and that was us,“ Harding said. Then, late last year, Hilfiger eliminated two lines and signed an exclusive deal with Macy’s. Suddenly, $5 million in sales became zero.

The potential for growth in small towns is limited. And it didn’t always help that Dawahare’s sold clothes for all ages. Big competitors could focus on niches, such as young people, and market more effectively to them.

”We had a core base of customers who loved us,“ Harding said. ”We just could not grow our market share.

”We actually did have a plan in place that would have shown profitability this year,“ he said. ”We eliminated one-third of our corporate overhead, and we cut another 10 percent out of store payroll and other expenses. But the cash flow wasn’t there“ to quickly repay $5 million in debt to Fifth Third Bank.

”I have to say that Fifth Third has been a great partner,“ Harding said. ”They’ve worked with us over the last two years. It’s not their fault that we’re in this situation; it’s our fault.“

Saying goodbye

What’s next for the Dawahare family?

”I think most of us are looking for jobs,“ Harding said.

There are thoughts about trying to buy some of the stores out of bankruptcy. Richard mused about running stores as community co-ops. Harding rolled his eyes. ”Don’t associate my name with that,“ he said.

Amid the sadness, there is also guilt. Justified or not, there’s no escaping it.

”You feel like you let your family down, you let the employees down,“ Harding said, noting that 500 people will soon be without jobs.

”We tried hard, we worked hard. We never ran a business where the owners went and played while everyone else worked. We all had jobs with responsibilities, and we showed up every day to do them. But there’s always the sense that we didn’t get it done, we let the rest of the family down. That’s always in the back of your head.“

Also in the back of their heads, they knew that few family businesses survive the second generation. By the third and fourth generations, they’re on borrowed time, especially in an industry that has been turned on its head.

”I think it’s hardest to know that we’re not going out on our terms,“ said Serur Dawahare, 44, one of youngest of the third generation. He has spent a lot of time recently writing recommendation letters for employees seeking new jobs and scanning the newspaper for opportunities that might be good for them.

Dawahare’s ownership was divided among 39 family shareholders, most of whom didn’t work in the company. The stock never paid dividends. But now it’s gone.

”The family has been great,“ Richard said. ”They haven’t blamed those of us working here. If I were in their shoes, I might be tempted to.“

”We have a good family,“ Harding said softly.

Then Richard turned philosophical: ”It’s tempting to visualize my late father and grandparents and uncles and aunts in heaven, looking down and wondering …. It’s too easy to be negative and say they would be so ashamed. But I do not feel that way! I know that in their hearts they know we did what we could to make it work.“

Harding shifted the conversation back to earthly matters.

”I would thank every employee who ever worked for us, every customer who ever shopped with us, every family member who put their heart and soul into this thing,“ he said. ”We had a good run.“