Monday, October 22, 2012

“End of the American Dream?”

Sydney M. Williams

Thought of the Day
“End of the American Dream?”
October 22, 2012

There has been a lot of ink spilt over the end of the “American Dream.” We hear politicians talk about a permanent underclass, and we read Pundits writing of a widening gulf between rich and poor. A year ago “Occupy Wall Street” took the streets highlighting the plight of the 99%.

There is an element of truth to these concerns. A recent study found that 65% of those on the Forbes 400 were born to well-to-do parents; thus had a head start. Others have argued that a child born poor in Europe has a better chance of making it to the top today than one born in the U.S. Certainly one could argue that the children of the wealthy in places like New York City are, in many respects, more isolated from average citizens than they were in the 1950s.

The reasons are myriad. Explanations provided often depend upon one’s social standing, financial well-being, or political bent. But regardless, four reasons seem immediately obvious. The first is that money can more easily move from one country (or one state) to another than ever before – from a high-tax location to a low-tax haven, thereby helping to preserve wealth. A second explanation is that the complexity of the tax code favors the wealthy. They can afford the accountants and lawyers to help burrow their way through several thousand pages of tax regulation, regulations that often have been written specifically for them. Thus, they are better able to hang on to their money. A third reason is that the decline of private sector unions has adversely affected middle-income earners. However, the reason for the decline is because unions became uneconomic. Global competition has only exacerbated the problem. In other words, as we have seen most recently in the auto sector, unions were a principal cause for the bankruptcy of General Motors. The greed of union bosses caused the downfall of the system and the people they were charged with protecting. But the fourth reason is, to my mind, the most obvious and most important, and that is the sorry state of too many of our public schools.

Raghu Rajan, professor of finance at the University of Chicago, recently wrote: “To restore legitimacy and support for the [capitalist] system, industrial economies have to restore opportunity to the middle class, by working hard on improving education…” In Friday’s Wall Street Journal, Brad Smith, executive vice president and general counsel of Microsoft had a provocative op-ed: “How to Reduce America’s Talent Deficit.” Mr. Smith noted that there are too few Americans with the necessary math and science skills to meet companies’ demand. He points out that Microsoft has, currently, 6000 openings – 3400 of those jobs are for engineers, software developers and researchers. In an environment with unusually high unemployment, it seems particularly shameful that Microsoft is having difficulties finding qualified applicants. We are just not training enough students in math and the sciences.

INSEAD, the European Institute of business, now global with alliances at U.S. business schools like the University of Pennsylvania and Harvard, ranks 141 nations on 100 factors related to innovation. This year, the U.S. ranked 10th versus 7th in 2011. In K-12, the U.S. ranked 31. In terms of higher education, the United States ranked 2nd in terms of enrollment, but 74th in terms of students graduating with science and engineering degrees. The National Science and Math Institute, in a survey they conducted, had U.S. high school students finishing 25th in math and 17th in sciences, of 31 countries surveyed. They estimate that 60% of the new jobs that open in the 21st Century will be related to science and technology. To remain competitive, the U.S. must do a better job educating its youth.

All of these surveys must be taken with a grain of salt, but the direction is obvious. The biggest problem in public school education has been unions that have paid teachers on seniority, rather than on performance. Unions, by their nature, are tied to the status quo; whereas schools must look to the future. The focus should always be on the student. While there are some signs of change, each year that goes by means that another 4 million students graduate from high schools, too many of them inadequately (and unfairly) prepared for the world they must face.

Peter Marsh, a British journalist who writes for the Financial Times, has just published a new book, The New Industrial Revolution. The book is fascinating, not only for its telling of the historical events that led to the Industrial Revolution, but for its predictions about manufacturing in the 21st Century. The book is subtitled, “Consumers, Globalization and the End of Mass Production.” He has a chart in which he depicts 30 critical, general purpose technologies from the domestication of plants in 9000 BC to the development of nanotechnology in the 20th Century. Half the developments that he identifies have occurred in the past 200 years, and two thirds of those happened in the 20th Century. He expects that rate of change to accelerate. For example, Mr. Marsh believes that large plants, with efficient, unending production lines, like many of those in China, will be replaced by smaller plants, more conveniently located to their customers. These factories will increasingly produce tailor-made products for specific clients or needs. As a consequence, the study of math, engineering and the sciences will importantly differentiate winners from losers over the next hundred years.

In the book he cites four previous industrial revolutions, all of which overlap in one way or another. The first was the original Industrial Revolution, which began in England and dates back to about 1780. During that period, standardized design and production methods were first developed. Agrarian communities were converted to industrial ones. The second revolution he identifies as the transportation revolution, beginning with the steam engine and railroads a little after 1830, and into the jet age. The third period he calls the scientific age, beginning around 1860 with the advent of electricity, which greatly reduced the cost of manufacturing of steel, aluminum, chemicals and pharmaceuticals. The fourth age began around 1950, with the development of the computer. Factory processes could be controlled. Automated assembly lines using integrated control systems would be one example. Large computers morphed into PCs, and now into tablets and hand-held devices. A consequence has been the internet.

He argues that new technologies will lead the new age, with R&D facilities linked directly to customer needs, and that mass manufacturing will give way to smaller facilities controlled by highly skilled employees who can be located nearer their customers. We are already beginning to see this happening. With communication so much easier, products can be assembled from parts made all over the world. The demand for personalized drugs, for example, will affect the way pharmaceuticals are produced. It will be an age of innovation that should prove exciting. Reading the book almost made me wish that I had gone into a business that actually produced something.

In like vein, Walter Russell Mead, in an op-ed in last Tuesday’s Wall Street Journal, argued that those who want to spend more public funds on infrastructure are assuming, from a transportation perspective, that the 21st Century will resemble the 20th. Professor Mead teaches foreign affairs and humanities at Bard College. He notes that the internet has greatly reduced the importance of distance in human affairs, that e-mail has made the Post Office virtually obsolete. (At my home it would be, were it not for all the junk mail I receive. The Post Office loses billions of dollars every year. Think of the billions we spend to have delivered an item we immediately send to the recycling bin!)

Technology has always advanced through individual initiative. It is true that government has at times financed that development, but innovation and aspiration are characteristics of individuals, not government. Creative people, taking risks, have always been the driver of new products. Government’s role should be to ensure that the environment remains conducive for individuals to take risks with ideas and with capital. (It is the strongest argument for a lower tax rate on investment income – first that the dollars being invested have already been taxed once as income and, second, any investment carries with it the risk of loss.)

The U.S. remains in the forefront of technological advancement. An abundance of natural gas, embedded in shale, is now extractable with fracking and horizontal drilling. Such cheap energy provides the United States an enormous competitive advantage in the generation of electricity and in operating manufacturing facilities. I believe it was the New York Times that recently did an article on vertical farming, which would save millions of acres now devoted to food production. Our grandchildren and great grandchildren will live lives we cannot imagine. The products and services they will both produce and consume, and which we cannot conceive, will be designed, manufactured and distributed by people all across the globe. There is no reason to believe that the American Dream is dead, but there is no reason to believe it will be there if we don’t compete for it. Robert Samuelson, writing recently in the Washington Post, said the “Dream backfires when government tries to guarantee that every American will live better than his parents.”

Importantly, the American Dream is not a gift; it is an opportunity to be seized. It is a consequence of a free country where everyone is offered an opportunity. But, it requires hard work, dedication, some smarts and a dose of good luck. It often means going against conventional wisdom and taking a chance. One must understand the risk of loss, and know that neither ‘Uncle Sam’ nor one’s family will necessarily be there to make one whole. The Dream is living in a society that reveres the individual, not the state. A lesson of our very recent past is that house prices do not rise to the sky and that a college education may guarantee one a lot of debt, but not necessarily a job. “In the real world,” Robert Samuelson wrote, “not everyone can succeed.” That is a true statement of fact. Nevertheless, success in any endeavor should always be one’s goal. Just knowing that the future will be different presents opportunities for those who are creative and hard working, for those who have aspiration and a willingness to take risks, – that is the American Dream.

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