"The End of the American Dream? - It Doesn't Have to Be"

Sydney M. Williams

Thought of the Day

“The End of the American Dream? – It Doesn’t Have to Be”

August 2, 2010

The news seems perpetually depressing. The lingering after-affects of too much partying has a way of invading our psyche: Second quarter GDP, at 2.4%, confirming an economic slowdown, a double-dip recession on the horizon, a lost decade, deflation (or is that inflation?), unending years of low job creation, a politician with four rent controlled apartments, but whose unmasking is considered by some a sad end to a noble and dignified career and an “ownership society” which is being replaced with a foreclosure notice in every fifth or tenth mailbox – an unending list of worries and concerns that are daily shoved in our faces. (Very little was made, for example, of the fact that first quarter GDP was revised from 2.7% to 3.7 %.)

And then, over the weekend, the Financial Times felt compelled to insert their two cents: “Goodbye, American Dream” – a major report by Edward Luce, which provided the well-known litany of problems, a meager attempt at some of the causes and very little in terms of suggestions for a solution, except to hint that Europe, with its stronger unions and publically-funded healthcare system, has found a better way. However, Mr. Luce did not bother to mention the ruinous financial consequences such programs are having in much of Mediterranean Europe.

Nevertheless, there was much truth in what he wrote. The wealth gap has been rising. Stagnation in median income is an historical fact. Income mobility has declined. But does he really want to return to a post-war period when everything seemed possible? The pent-up demand for consumer goods in the two decades following World War II was driven by two decades of Depression and War. When I first started working almost fifty years ago, there were no credit cards. Homes were mortgaged, but you had to save up for the 20% down payment. Cars were not leased. They were bought for cash, or one borrowed against some form of collateral. If one could not afford a new car, a used one sufficed. Air conditioning was virtually unknown. Communication was by letter, telegraph or expensive telephone calls. Unions existed and they were, generally, a force for good, at that time – run for the members, not the leaders, or politicians who have cultivated a culture of dependency. Women and minorities were treated as second class citizens. It was not a perfect time, by any means. The Great Society had yet to be born.

Mr. Luce writes, “For years our problem was cushioned and partially hidden by the availability of cheap credit.” That statement is true; debt did mask the problems of stagnating incomes. But cheap and easy credit were principal causes of the downturn. Easy credit permitted what Yuval Levin, editor of “National Affairs” has called a “gluttonous feast upon the flesh of the future.” Mr. Luce cites a few causes: globalization, technology and, quoting Paul Krugman, Reagan Republicans who defanged the unions and who reversed the most progressive elements of the tax code. Paul Krugman is a man with whom one agrees or does not. I do not. Globalization and improvements in technology greatly altered the workplace. Unfortunately the world was changing rapidly and traditional labor could not keep up. Cars and computers could be produced in Asia, or in the U.S., with only a fraction of workers. Unions were mired in the past. The desire to live well today and stay apace of one’s neighbors, contributed to the consumer’s over extension of debt. This land of make believe was abetted by stores like Wal-Mart which were able to sell cheaper clothes, imported from places like China, Vietnam and Bangladesh, and the semi-conductor chip (an American invention) allowed persistently less expensive electronics, from televisions to calculators to cameras. And a proliferation of credit cards made buying easy. But the punch bowl was empty; we are left with a hangover.

In the past decade, while the wealth gap continued to widen with CEOs making increasingly unconscionable bonuses, investors did poorly. And it is with the investor class that Main Street and Wall Street meet. Millions of average people have their life savings, their retirement plans invested in stocks. They are the principal owners of the trillions of dollars invested in mutual funds. They have become America’s forgotten people. In the attempt to demonize banks, ordinary investors have become victims. The super-rich can always find means of hiding or deferring income. The simply wealthy cannot and ordinary investors certainly cannot. Tax rates on capital gains and dividends, it should be remembered, affect all investors.

There are serious issues with which we, as a Nation, must deal. Among them are income disparity – the widening gap between rich and poor, as exemplified in the difference between CEO pay today and thirty years ago – the mobility of people to move up (and down) the income ladder, and stagnating incomes. The causes are, in part, cultural – an acceptance that living beyond one’s means is socially acceptable, debt, a dumbing-down of education, where the focus on getting young students into the next grade takes precedence over actually teaching, and a culture of evading responsibility. Technology will continually advance; capital will seek its highest return and competition for products and labor is global. These are irreversible trends.

The solution requires an honest – not a political – assessment of the problem and an answer that recognizes that the world, to use Tom Friedman’s phrase, is flatter. Technology has replaced many skilled and unskilled jobs. We must avoid a past that seems comfortable in retrospect. Protectionism is politically tempting because of unions, but that way leads to global depression. The world has become more competitive and that must be acknowledged. We must accept that there are other places where certain jobs can be done less expensively and more efficiently. We must be innovative and creative and encourage entrepreneurs to seek out opportunities. We must train the young how to compete in an ever changing environment. The answer requires an educational system that helps students rather than protecting teachers.

Things rarely turn out as planned. Predictions are generally based upon extrapolating our recent experiences, so the doom that oozes from economists and market strategists is unsurprising. Mark Twain once said that reports of his death had been greatly exaggerated. The same might be said about those who are so quick to write off America.