America Gone Astray
The Crushing of the 'American Dream'
The promise of the American dream was a good job, a good education and a good home, but that's no longer the case. Who's responsible for stealing it away?
The Crushing of the 'American Dream'By Ting-feng Wu, Shu-ren Koo
From CommonWealth Magazine (vol. 485 )
"America's golden age is over," states Thomas Ball with conviction. Once a Wall Street hot shot, Ball went bankrupt after investing in risky hedge funds and for a time had to drive a taxi for a living. His precipitous fall reflects the broader fate of the nation, he is convinced, and Americans will have to get used to their new, straitened circumstances.
The United States of America is acting out a familiar tragedy. After the end of World War II, the whole country experienced an unprecedented burst of prosperity. But family fortunes rarely last through the third generation.
"Now we've been yanked awake, and realize that the good days are over," says Joshua Graham, a 35-year-old graduate of the University of Southern California. "My grandparents were the hardworking generation. My parents are the baby boomer generation, for which getting jobs and making decent money was easy. But they spent more than they made and wound up in debt. And now in my generation, it's hard to even find work."
The scourge of unemployment is being felt around the country. The jobless rate in the U.S. was 9 percent in October, down slightly from the post-financial crisis peak of 10.1 percent in October 2009, but still historically high. For people under 25 years of age, it was 17 percent.
But it is not just the younger generation that is feeling the pinch. Graying baby boomers are feeling insecure as retirement looms. "I've been a nurse for 37 years, but I don't dare retire. Medical costs are too high. Getting sick is unaffordable," says a 61-year-old woman.
A young population without career prospects. Older people full of fear, unwilling to retire. Two generations stuck in the mire of uncertainty. What is at the heart of the problem, and how has the United States gone astray?
A Rich-Poor Divide on a Par with Africa
America is like a giant with hardened arteries. An increasingly widening divide between rich and poor has blunted the social mobility the country once took for granted.
"Inequality will continue to mock the American promise of opportunity for all. Inequality hardens society into a class system, imprisoning people in the circumstances of their birth — a rebuke to the very idea of the American dream," said senior New Yorker magazine staff writer George Packer in a lecture in April.
The U.S. income gap is not only the biggest among Western democracies but is fast approaching levels of inequality seen in Africa and Central America.
Two indicators reflect the onerous trend. First, the income of the top 1 percent of Americans has risen from 8 percent of total income in the U.S. in the 1960s to 20 percent today. Second, the average income of top corporate executives, which was 40 times higher than average worker compensation in the 1970s, has skyrocketed to the current ratio of 400 to 1.
"New technologies and globalization cannot explain the dramatic increase in the U.S. income gaps, because countries in continental Europe and Japan are going through the same technological and globalization forces, yet are not experiencing such a dramatic increase in income gaps," says Emmanuel Sanz, an economics professor at the University of California Berkeley.
Sanz, a specialist on tax policy and income inequality, won the John Bates Clark Medal in 2009, an award seen by some as a precursor to a Nobel Prize in economics.
In fact, income inequality in the United States is as much a political problem as it is an economic one.
In their book Winner-Take-All Politics: How Washington Made the Rich Richer and Turned Its Back on the Middle Class, political scientists Jacob S. Hacker and Paul Pierson argue that the U.S. has systematically cut taxes and eased regulations since the end of the Jimmy Carter administration in the late 1970s. The result has been the concentration of resources in the hands of a few.
The core of their argument is that the growing inequality in income is not the natural result of market forces but a conscious political choice.
A Massive Generational Redistribution of Wealth
Since 1978, the USA has engineered a major redistribution of wealth, primarily through repeated tax cuts. When Ronald Reagan became president in 1981, his administration abandoned the idea of distributing economic benefits through a progressive tax system, focusing instead on cutting taxes to stimulate investment and growth.
Lowering taxes later became a mainstream approach, and politicians knew that any call for tax hikes was tantamount to threatening their political careers.
During their combined 12 years in office, Reagan and his successor, George H.W. Bush, worked hard to lower the income taxes of high income earners and cut taxes on capital gains and investment income, ultimately creating an extremely friendly tax environment for wealthier Americans.
During Bill Clinton's presidency, when his Democratic Party was actually the minority party in the U.S. Congress, his administration joined with Republicans on Capitol Hill to pass a welfare reform bill, which limited government aid to poor households, and the largest scale reduction in capital gains taxes in U.S. history – lowering the maximum rate from 28 percent to 15 percent.
These initiatives left the USA with one of the lowest tax rates among industrialized nations. The potion of low basic individual tax rates and the many tax avoidance tools at the disposal of the wealthy has resulted in such a light tax burden for America's richest citizens that tycoon Warren Buffett has finally had enough.
"My friends and I have been coddled long enough by a billionaire-friendly Congress. It's time for our government to get serious about shared sacrifice," he said in mid-August this year.
Wall Street Out of Control
The playing field in the United States has not just been tilted in favor of the rich, but especially in favor of the country's financial wizards – the 1 percent condemned by the "Occupy Wall Street" movement.
The emergence of that reviled "1 percent" did not occur overnight.
Beginning with the Reagan administration, the White House and Wall Street have developed a cozy relationship. In 1981, Reagan appointed then Merrill Lynch chairman Donald Regan as treasury secretary, and of the nine people who have since followed Regan in the post, four have come from the financial sector, including two with long careers at Goldman Sachs – Robert Rubin, who served under Clinton, and Henry Paulson, who served in the George W. Bush administration.
Generally speaking, top White House financial officials have either come from Wall Street or moved to Wall Street immediately after leaving politics. For the past 30 years, the American government has essentially been controlled by this revolving-door "Treasury Department-Wall Street complex."
Some even joke that the Treasury Department is not America's Treasury Department but Wall Street's Treasury Department.
This tight circle of power has empowered Wall Street lobbyists to use their money and political connections to push policies favorable to the financial sector. As a result, Wall Street's interests have become America's national interests.
Thus, the once strictly regulated banking sector broke free of regulatory constraints step by step, and instead of concentrating on their core businesses, financial institutions began using depositors' money to pursue highly leveraged and risky investments.
The industry turned into a machine pushing mergers and acquisitions, growing rapidly until it eventually became America's most influential sector and the biggest source of the country's asset bubble.
Nouriel Roubini, a professor of economics and international business at New York University's Stern School of Business who is popularly known as "Dr. Doom," says that in 2006 when the housing bubble was at its height, 40 percent of the profits of the S&P 500 were generated by financial institutions.
Some went so far as describing the U.S. as already having turned into a big bank.
Every push for market liberalization over the past three decades, sold by the industry under the guise of "innovation," enabled financial institutions to win the support of U.S. government policies. In retrospect, however, every move toward further deregulation ended in disaster.
In the 1980s, the U.S. government loosened restrictions on the savings and loan industry, allowing these community institutions to invest their deposits in more speculative instruments without imposing corresponding restraints. More than 700 S&Ls went bust, costing many people their life savings and the American taxpayer US$124 billion to clean up the mess. It was described by the American media as "the biggest bank robbery in history."
In the 1990s, restrictions on derivatives were eased, unleashing a frenzy that drove an explosion in financial markets. According to Treasury Department statistics, the U.S. derivatives market had inflated to US$182 trillion by the second quarter of 2008, 13 times the size of U.S. GDP at the time. That, combined with the housing bubble, plunged the entire country into the biggest financial crisis in history, sending more than 10 million Americans below the poverty line.
Middle Class Gets the Shaft
The steady deregulation of the financial sector over the past 30 years, which eventually sent it spinning out of control, at a time when America's economic structure was also undergoing a major shift. Technological progress spurred a huge rise in labor productivity and spawned an era where the ability to innovate became more valued than the ability to work. But that has only helped a small minority.
After globalization hollowed out America's once mighty manufacturing sector, the U.S. economy became more service-oriented. But the real beneficiaries of the growing emphasis on services have been the financial, health care and information technology sectors, and their small, highly educated, high-paid workforces.
For the vast majority of those employed in services, however, the picture isn't as bright. They are concentrated in the retail, food and beverage, and entertainment industries – sectors where technical thresholds are low, the pay is poor and unions are weak. At some companies, such as Wal-Mart Stores, the biggest retailer in the U.S., unions simply do not exist.
"You know, McDonalds doesn't give you a pay raise just because you have a Ph.D.," Graham says.
When the economy goes south, these service sector workers are usually the first to be laid off.
The Symbol of the American Dream: A Home
Aside from regular service businesses, the U.S. has another important domestic sector: real estate.
Owning one's own home is a must for a middle-class American family and the core of the American dream.
The younger president Bush once said, "I do believe in the American dream. I believe there is such a thing as the American dream. And I believe those of us who have been given positions of responsibility must do everything we can to spotlight the dream… Owning a home is a part of that dream."
This vision of the American dream offered by the president resonated with many people, but in the end, it contributed to a mortgage crisis that continues to haunt the U.S. economy today.
Richard Walker, a professor of economic geography at UC Berkeley, says that while it was Wall Street that turned secondary mortgages into the credit derivatives and investment vehicles that were at the heart of the subprime mortgage crisis, "the principal fount of mortgage origination was California."
California had long been seen as the model of the American dream. The state not only attracted countless immigrants, but also had the most millionaires and billionaires in the U.S.
The wave of real estate speculation that struck California before 2008 sent housing prices in Los Angeles and San Francisco soaring far faster than in other major American cities. But salaries were unable to keep up, leaving a large gap between real estate prices and what consumers could afford. Under those conditions, the property sector had to think of ways to attract buyers who could drive housing prices up even further.
The way out of the dilemma was the subprime mortgage, which is why when the mortgage bubble burst, California had more foreclosures than any other state with the exception of Nevada. As of the end of September 2011, 1.49 million homes had been foreclosed, leaving millions of Americans without a home to call their own.
Worsening Finances Limit Upward Mobility
Americans have always believed that education was the best channel for social mobility and the ladder leading to the American dream.
But commentator and CNN show host Fareed Zakaria says pessimistically that America's basic education system has fallen far behind that found in rival countries. It falls far short of South Korea in terms of students' intensity and lags behind Finland in teacher quality.
Also, the U.S. has a 25-percent high school dropout rate, creating an underclass of people for whom the window of opportunity for social mobility will likely never open.
One of the keys to a strong education system is investment, but America's long-term obsession with tax cuts has not only left public agencies unable to support education initiatives, they have even cut education budgets and raised tuition.
In California's case, tuition for schools in the University of California system rose 277 percent from 2001 to 2010.
At the same time, US$5.2 billion was slashed from the budget for the state's K-12 public school and community college programs for the 2008-2009 and 2009-2010 school years, with funding for textbooks and summer school suffering the deepest cuts.
Julie Klinger, a Ph.D. candidate at UC Berkeley, told CommonWealth Magazine that the financial burden for education for low and middle-income families had clearly increased. Klinger said that although she had received a scholarship, she was still saddled with US$50,000 in student loans.
In fact, college tuition is the fastest rising cost of any item in the U.S., resulting in a snowballing student loan problem. America's outstanding student loans now exceed total credit card debt, and many believe student loans may present the next big crisis after the subprime mortgage disaster.
If tuition for higher education – the main vehicle for fostering a middle class – becomes so expensive that students cannot repay their loans, America will be nothing more than a fragile sand castle without a foundation. Average Americans are now wondering, "Does America still have a tomorrow?"
Who will give them an answer?
Translated from the Chinese by Luke Sabatier