The crisis of middle-class America

Financial Times:

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.

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.

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.”

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.

And although the golden years were driven by the rise of mass higher education, you did not need to have graduated from high school to make ends meet. Like her husband, ­Connie Freeman was raised in a “working-class” home in the Iron Range of northern Minnesota near the Canadian border. Her father, who left school aged 14 following the Great ­Depression of the 1930s, worked in the iron mines all his life. Towards the end of his working life he was earning $15 an hour – more than $40 in today’s prices.

Thirty years later, Connie, who is far better qualified than her father, having graduated from high school and done one year of further education, makes $17 an hour. The pace of life has also changed: “We used to sit around the dinner table every evening when I was growing up,” says Connie, who speaks with prolonged vowels of the Midwest. “Nowadays that’s sooooo rare.”

Connie’s minimally educated father earned enough to allow her mother to remain a full-time housewife and still fund two children through college. Connie and Mark, meanwhile, struggle to pay off the stream of bills in a dual-income household. The state of Minnesota pays for Andy, their 20-year-old son, who suffers from acute autism, to study ­theatre at the local community college.

Strictly speaking, Connie actually lives in a four-income household. “When Andy was two, I was told to buy a karaoke machine because autistic children sometimes respond well to it,” says Mark, pointing at what can only be described as a postmodern antique. “That’s how I got into my karaoke ­business. I get about $100 every Wednesday evening. And on Saturdays I manage the local liquor store. We need all four jobs to keep our heads above water.”

So much for the rising tide.

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.

. . .

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. 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.”

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. “To be pessimistic about the future is so new for Americans and so strikingly un-American,” says Spence. “But most people grasp their own situations way better than any economist.”

. . .

Every now and then the Freemans invite their neighbours round to their front porch, to watch the world go by, drink beer and eat Connie’s justly renowned dish of ­Minnesota wild rice. In the best American spirit, Mark and Connie are active neighbourhood people. They are the types who shovel your snow, volunteer for school events, and coach the baseball little league – Mark has done all three.

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. “As for Andy,” she says, referring to her painfully shy but acutely observant son, “the future really frightens me. If you’re young, it’s bad enough nowadays. But for a kid with autism?”

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.” His words reminded me of a famous quip by George Carlin, the late, great American comedian – “It’s called the American Dream because you have to be asleep to believe it.”

Posted via email from Jim Nichols