- Technically speaking, Mark Freeman should count himself among the luckiest people on the planet. The 52-year-old lives with his family on a tree-lined street in his own home in the heart of the wealthiest country in the world. When he is hungry, he eats. When it gets hot, he turns on the air-conditioning. When he wants to look something up, he surfs the internet. One of the songs he likes to sing when he hosts a weekly karaoke evening is Johnny Cash’s “Man in Black”.
- Yet somehow things don’t feel so good any more. Last year the bank tried to repossess the Freemans’ home even though they were only three months in arrears. Their son, Andy, was recently knocked off his mother’s health insurance and only painfully reinstated for a large fee. And, much like the boarded-up houses that signal America’s epidemic of foreclosures, the drug dealings and shootings that were once remote from their neighbourhood are edging ever closer, a block at a time.
- What is most troubling about the Freemans is how typical they are. Neither Mark nor Connie – his indefatigable wife, who is as chubby as he is gaunt – suffer any chronic medical conditions. Both have jobs at the local Methodist Hospital, he as a warehouse receiver and distributor, she as an anaesthesia supply technician. At $70,000 a year, their joint gross income is more than a third higher than the median US household.
- Once upon a time this was called the American Dream. Nowadays it might be called America’s Fitful Reverie. Indeed, Mark spends large monthly sums renting a machine to treat his sleep apnea, which gives him insomnia. “If we lost our jobs, we would have about three weeks of savings to draw on before we hit the bone,” says Mark, who is sitting on his patio keeping an eye on the street and swigging from a bottle of Miller Lite. “We work day and night and try to save for our retirement. But we are never more than a pay check or two from the streets.”
- Mention middle-class America and most foreigners envision something timeless and manicured, from The Brady Bunch, say, orDesperate Housewives in which teenagers drive to school in sports cars and the girls are always cheerleading. This might approximate how some in the top 10 per cent live. The rest live like the Freemans. Or worse.
- It only takes about 30 seconds to tour Mark’s 700sq ft home in north-west Minneapolis. Cluttered with chintzy memorabilia, it was bought with a $50,000 mortgage in 1989. It is now worth $73,000. “At one stage we had it valued at $105,000 – and we thought we had entered nirvana,” says Mark. “People from the banks kept calling, sometimes four or five times an evening, offering equity lines, and home improvement loans. They were like drug pushers.”
- The slow economic strangulation of the Freemans and millions of other middle-class Americans started long before the Great Recession, which merely exacerbated the “personal recession” that ordinary Americans had been suffering for years.
- Dubbed “median wage stagnation” by economists, the annual incomes of the bottom 90 per cent of US families have been essentially flat since 1973 – having risen by only 10 per cent in real terms over the past 37 years. That means most Americans have been treading water for more than a generation. Over the same period the incomes of the top 1 per cent have tripled.
- In 1973, chief executives were on average paid 26 times the median income. Now the multiple is above 300. (because US CEOs got that much smarter and better versus the "pathetic" CEOs of the 1970s! And if you dare question this trend, you are a socialist...even worse, the CEOs will threaten to move to another country and take their talent... of course no one calls them out, since they would not receive a fraction of the same wages in any other country) ;)
- The trend has only been getting stronger. Most economists see the Great Stagnation as a structural problem – meaning it is immune to the business cycle. In the last expansion, which started in January 2002 and ended in December 2007, the median US household income dropped by $2,000 – the first ever instance where most Americans were worse off at the end of a cycle than at the start. Worse is that the long era of stagnating incomes has been accompanied by something profoundly un-American: declining income mobility.
According to Internal Revenue Service data, income inequality in the U.S. is at its worst since the 1920s (before the Great Depression). The top percentile of wealthy Americans earned 21.2% of all income in 2005, up from 19% in 2004, while the bottom 50% of wage earners earned 12.8% that year, down from 13.4% a year earlier.
But many of the studies / stories I've read lately have shown the decreasing propensity for the average American to move out of his 'caste'. Hence the basis for lottery ticket capitalism is faltering; while it is STILL true that (almost) anyone can make it, the percentage of those hitting the lottery is decreasing substantially. Even worse I can argue that despite lower taxes than Western Europe, when you do a side by side comparison of costs (born by individual in U.S., born more through transfer payments in Europe) it is now costing a family with children more to provide the same lifestyle (healthcare, daycare, college education) in the U.S. than someone in highly taxed socialist Western/Nordic Europe. And even if the costs were equal, the risks are far higher in the States - you don't lose a lifetime of savings in Western Europe if you happen to get sick at the wrong time. [On the other hand, I still think the cost structure for those without children is favorable in the U.S.] With that, what we face ahead is a questioning of the American social contract. In return for lack of safety net relative versus 'socialists', you used to have many more lottery winners in America. However in the modern era, there is neither the (W. European) safety net ALONG with the decreasing probability of multiple lottery winners - i.e. worse case scenario in both situations. These are very difficult issues to work through, and no easy solutions as many will argue that you can still hit it big with big sacrifices (which to a degree is true). What cannot be argued is income mobility is far lower today than in the old America - study after study is showing this.
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I don't have the answers, but certainly we should acknowledge the issues rather than sweeping them under the rug or conveniently blaming a President for structural ills that have been building for decades. There are many great things about our current society and many advantages - but it is not close to perfect. No system is perfect... and we can learn from others; for example Germany seems to do a good job of balancing many of the 'profit seeking' motives that drive all decisions in America, with some social benefits lacking in the U.S. Perfectly? No - but we're not at a stage where we even acknowledge anyone else might have better systems in any aspect. Germany was up to this year the world's largest merchandise exporter despite a highly paid mfg workforce, with 40% of GDP reliant on such - with world class education, healthcare, manufacturing, and a retirement age as high or higher than the U.S. - not exactly lazy "socialists" who want nothing but "handouts" as is the dogma if you watch U.S. media. In fact, when Prez Obama was at the G20 asking for increasing spending by governments worldwide, it was Merkel who pushed back saying no. Irony.
As the world changes and we introduce a few hundred million competitors to the global labor force, to not have discussions on how the system could (or must) adjust, and instead rely on the narcissistic (and dogmatic) "We're #1!" (which we no longer are in many measures) as a defense mechanism, is cheating the populace. Further, having an increasing amount of the populace feel as if they cannot even grasp at a middle class existence can become a dangerous situation in the decades ahead. Based on recent history, I assume we'll simply kick the can (speaking of things we're #1 at) trying to blow new economic bubbles (if only housing would re-inflate the ATMs could be turned back on!) and turing people on each other via political dogma to 'distract the sheep', until it reaches such an extreme point that leadership fears "cake will be eaten"... which is a sad indictment in itself. Until then... business as usual I am afraid.
[July 26, 2010: [Video] DatelineNBC - America's Increasing Ranks of Poor]
[Jul 29, 2009: Japan's "Herbivore" Men - Young American Men's Future?]
[Sep 7, 2009: Citigroup - America; A Modern Day Plutonomy]
Back to the FT piece:
- Alexis de Tocqueville, the great French chronicler of early America, was once misquoted as having said: “America is the best country in the world to be poor.” That is no longer the case. Nowadays in America, you have a smaller chance of swapping your lower income bracket for a higher one than in almost any other developed economy – even Britain on some measures. To invert the classic Horatio Alger stories, in today’s America if you are born in rags, you are likelier to stay in rags than in almost any corner of old Europe.
- Combine those two deep-seated trends with a third – steeply rising inequality – and you get the slow-burning crisis of American capitalism. It is one thing to suffer grinding income stagnation. It is another to realise that you have a diminishing likelihood of escaping it – particularly when the fortunate few living across the proverbial tracks seem more pampered each time you catch a glimpse. “Who killed the American Dream?” say the banners at leftwing protest marches. “Take America back,” shout the rightwing Tea Party demonstrators.
- Statistics only capture one slice of the problem. But it is the renowned Harvard economist, Larry Katz, who offers the most compelling analogy. “Think of the American economy as a large apartment block,” says the softly spoken professor. “A century ago – even 30 years ago – it was the object of envy. But in the last generation its character has changed. The penthouses at the top keep getting larger and larger. The apartments in the middle are feeling more and more squeezed and the basement has flooded. To round it off, the elevator is no longer working. That broken elevator is what gets people down the most.” (great analogy)
- Unsurprisingly, a growing majority of Americans have been telling pollsters that they expect their children to be worse off than they are. During the three postwar decades, which many now look back on as the golden era of the American middle class, the rising tide really did lift most boats – as John F. Kennedy put it. Incomes grew in real terms by almost 2 per cent a year – almost doubling each generation.
- From the point of view of most economists, the story so far is uncontroversial. Most agree on the diagnosis. But they diverge on the causes. Many on the left blame the Great Stagnation on globalisation. The rise of China, India, Brazil and others has undercut wages in the west and put America’s unskilled, semi-skilled and even skilled workers out of jobs. Manufacturing now accounts for only 12 per cent of US jobs. Think of the typical Detroit car worker 30 years ago, who had a secure middle-class lifestyle, good healthcare and a fat pension to look forward to. Today, he lives in Shenzhen.
- Another group singles out the explosion of new technology, which has enabled the most routine and easily automated jobs to be replaced by computers. Think of the office assistant, who once took dictation and brewed the coffee. She is now a BlackBerry who spends half her life in Starbucks. Or the back office person who, much like those shoemakers in the fairy tale, now stitches your accounts in Bangalore while you sleep.
- Then there are those, such as Paul Krugman, The New York Times columnist and Nobel prize winner, who blame it on politics, notably the conservative backlash which began when Ronald Reagan came to power in 1980, and which sped up the decline of unions and reversed the most progressive features of the US tax system.
- Fewer than a tenth of American private sector workers now belong to a union. People in Europe and Canada are subjected to the same forces of globalisation and technology. But they belong to unions in larger numbers and their healthcare is publicly funded. More than half of household bankruptcies in the US are caused by a serious illness or accident.
- Much as they disagree on what has caused the Great Stagnation, economists also differ on the remedies. Most agree that better education improves people’s earnings potential, even if it does not solve the underlying problem. Others point out that not everybody can be a bond trader, a software entrepreneur or a Harvard professor.
- Many of the jobs of the future will be in “inter-personal” roles that cannot be easily replaced by computers or foreigners – janitors, beauty technicians, home carers and landscape gardeners, for whom college is often superfluous. Furthermore, a large chunk of Americans who have been hit by stagnation over the past decade are college graduates. Even they are not immune. But more education, at the very least, will improve one’s chances. Paying for it is another matter.
- Shareen’s son and daughter-in-law, Dustin and Ruth, both aged 23, recently had to move back home because they could not afford to rent, even though both hold down jobs – Dustin with a bath remodelling company, Ruth in a fabrics store. Both did well in high school and would like to study marine biology – a skill of the future. But they cannot afford the debt. (yet another bubble in America - the cost of higher education - now completely out of line with many people's ability to pay for it)
- While incomes in America are stagnating, the cost of education is soaring. Since 1990, the proportion of Americans who are paying off more than $20,000 in student loans a decade after they graduated has almost doubled. [Dec 5, 2008: NYT - College May Become Unaffordable for Most in US]
Conclusion?
- What, then, is the future of the American Dream? Michael Spence, a Nobel Prize-winning economist, whom the World Bank commissioned to lead a four-year study into the future of global growth, admits to a sense of foreboding. Like a growing number of economists, Spence says he sees the Great Stagnation as a profound crisis of identity for America.
- For years, the problem was cushioned and partially hidden by the availability of cheap debt. Middle-class Americans were actively encouraged to withdraw equity from their homes, or leach from their retirement funds, in the confidence that property prices and stock markets would permanently defy gravity (a view, among others, promoted by half the world’s Nobel economics prize winners, Spence not included). That cushion is now gone. Easy money has turned into heavy debt. Baby boomers have postponed retirements. College graduates are moving back in with their parents.
- The barometer is economic. But the anger is human and increasingly political. “I have this gnawing feeling about the future of America,” says Spence. “When people lose the sense of optimism, things tend to get more volatile. The future I most fear for America is Latin American: a grossly unequal society that is prone to wild swings from populism to orthodoxy, which makes sensible government increasingly hard to imagine. (this is such an important point) Look at the Tea Party. People think it came from nowhere. While I don’t agree with their remedies, most Tea Party members are middle-class Americans who have been suffering silently for years.” (bingo)
- Spence admits he is thinking aloud and going “way beyond the data”. And he concedes that America probably still retains its most vibrant strength in its still world-beating capacity for technological innovation. Most economists are not as bleak as Spence. But it is in the neighbourhoods among ordinary Americans that his pessimism gets its loudest echo.
- It takes optimism to be like this. But in the past few years the Freemans have been running low on it. “I guess the penny dropped in the last 18 months when we finally realised that it’s always going to be like this – we are never going to be able to retire on our savings,” says Connie.
- When I asked what the American Dream means to them, Mark looked despondent. “It’s not a dream,” he said. “I would hate to sound like one of those Tea Party people but I really do want my country back. I just don’t feel like that is going to happen.”
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I don't have the answers, but certainly we should acknowledge the issues rather than sweeping them under the rug or conveniently blaming a President for structural ills that have been building for decades. There are many great things about our current society and many advantages - but it is not close to perfect. No system is perfect... and we can learn from others; for example Germany seems to do a good job of balancing many of the 'profit seeking' motives that drive all decisions in America, with some social benefits lacking in the U.S. Perfectly? No - but we're not at a stage where we even acknowledge anyone else might have better systems in any aspect. Germany was up to this year the world's largest merchandise exporter despite a highly paid mfg workforce, with 40% of GDP reliant on such - with world class education, healthcare, manufacturing, and a retirement age as high or higher than the U.S. - not exactly lazy "socialists" who want nothing but "handouts" as is the dogma if you watch U.S. media. In fact, when Prez Obama was at the G20 asking for increasing spending by governments worldwide, it was Merkel who pushed back saying no. Irony.
As the world changes and we introduce a few hundred million competitors to the global labor force, to not have discussions on how the system could (or must) adjust, and instead rely on the narcissistic (and dogmatic) "We're #1!" (which we no longer are in many measures) as a defense mechanism, is cheating the populace. Further, having an increasing amount of the populace feel as if they cannot even grasp at a middle class existence can become a dangerous situation in the decades ahead. Based on recent history, I assume we'll simply kick the can (speaking of things we're #1 at) trying to blow new economic bubbles (if only housing would re-inflate the ATMs could be turned back on!) and turing people on each other via political dogma to 'distract the sheep', until it reaches such an extreme point that leadership fears "cake will be eaten"... which is a sad indictment in itself. Until then... business as usual I am afraid.
[July 26, 2010: [Video] DatelineNBC - America's Increasing Ranks of Poor]
[Jul 29, 2009: Japan's "Herbivore" Men - Young American Men's Future?]
[Sep 7, 2009: Citigroup - America; A Modern Day Plutonomy]