The American Dream, Part 1: The End?

In a two-part series, Wallace Turbeville will discuss what our economy used to look like, how it’s changed, and what that means for trying to revive the American Dream. In this post, an economic history of the US and the recent failures of our political leaders to ensure economic equality.

When Barack Obama won the presidency, the progressive left was euphoric with the hope promised by his campaign.

After two years of persistent high unemployment, progressives are disillusioned and public opinion has shifted to the right. Mortgage foreclosures still hang over the middle class like the sword of Damocles. Progressives poke at the administration, claiming their ideals have been betrayed, and Robert Gibbs (presumably as the President’s alter ego) complains about the “professional left.” Hope has morphed into cynicism, anger and despondency, exemplified by — but by no means limited to — the Tea Party.

Some would like to think that perhaps it is all just bad karma. Unemployment seems strangely intractable in this particular recession, and no one will cut the party in power a break until the economic system’s wounds heal.

Believing this would be a mistake of historic proportions.

Decades of conservative policies, vigorously promoted by conservative Republicans and timidly acquiesced to by progressive (nee liberal) Democrats, have torn a hole at the center of the economy. We face a chronic shortage of employment adequate for the workforce to achieve its productive potential. In good times, people find work but feel as if they earn less each year. Disparity between the rich and poor has reached the levels seen just prior to the Great Depression. The periods of high unemployment associated with recessions are increasingly geometric with each downturn. Like overused antibiotics, the tools used by the Federal Reserve and fiscal authorities no longer relieve the pain suffered by workers in downturns. The “new reality,” a popular description of the aftermath of the current recession, has existed for at least 20 years. We simply failed to recognize it until now.

I believe the financial collapse was only a symptom (albeit a calamitous one) of a diseased economy. It no longer fulfills its primary mission: to provide opportunity for the entire population to prosper and improve the prospects for their children. This is commonly referred to as the American Dream, the defining characteristic of Americans. The chronic failure of businesses to reward workers’ potential erodes this fundamental belief. It is an existential threat to economic and political viability.

For decades following the New Deal, prosperity of both the rich and the poor was secured through government policies that broadened participation of the weak and less wealthy in the economy. The Great Depression taught us that balancing the interests of the middle and lower classes against business and the rich is in the long-term interest of both. It is not about class war. It serves the practical long-term interests of everyone.

Along the way, we forgot that profound lesson and were duped into believing that greed and opportunism are of no concern as long as everyone is greedy and opportunistic.

Conservative ideology seeks to discard the progressive model that worked so well for so long. This ideology of exclusion has narrowed participation of much of the population in the economy. It implies that American workers are no longer a great engine of growth. Investment in businesses that produce jobs no longer seems appealing to those who control the allocation of capital. Instead, conservative ideology encourages the wealthy to churn passive investments designed to squeeze out the last drops of value from existing assets through financial “innovations.”

The public needs reminding of the pragmatic connection between progressive principles and a healthy economy, in which businesses are profitable year after year and families have bread on the table. It turns out that the connection is real and has never been more relevant than today.

It is time to take a hard look at where we are, how we got here and what it will take to get out of this mess. “Mess” encompasses far more than the current recession and financial meltdown. It refers to conditions that have persisted for decades that require courage and sacrifice to overcome.
Perhaps the greatest impact of the financial crisis will be that it precipitated a realization of economic conditions that were for so long disguised from public view.

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Progressive leadership must convincingly lay the problem before the public. The scope of the problem must be clear. The public already knows that something is dreadfully wrong. Avoiding the issue does not win elections or sway opinion; it allows conservatives to shape the public’s perceptions. Knowing what the problem is will actually comfort the public and focus its attention. Factually recounting the cause of middle- and lower-class decline must be carefully balanced against assessing blame, but this is not the time to be ambiguous.

Matt Bai in the New York Times points out that the Obama administration and congress have confused the public by repeatedly conflating the need to stimulate an economy in recession with repairing the deep structural flaws that threaten long-term prosperity. Perhaps it is politically too late to distinguish between the two and public opinion will punish the Democrats for not understanding the structural flaws two years ago. But the persistence of unemployment in this recession is a new data point that has taught us a great lesson. We can only hope that this newly-discovered piece of the puzzle can be a fulcrum for changing public perceptions and the direction of the economy.

To paraphrase Ronald Reagan: Government is not the problem.

Government is the only way to fix the problem.

Critical Factors

Before considering what needs to be done, we should look at where we are. A few undisputed facts disclose much about our current circumstances.

These facts, each of which represents a tremendous challenge to policy makers, appear to be interwoven. Together they evidence a structural change in the economy.

  • Income Disparity. Disparities between high, middle and low income groups have grown consistently since about 1970. They have reached levels that mirror income disparity in 1929 at the outset of the Great Depression. Income disparity in the US is now comparable to several Latin American countries, which historically have been criticized for this condition.
  • Unemployment. In the last three recessions (1990-91, 2001 and 2007-present), unemployment has persisted for periods following the resumption of economic growth that have been much longer than in prior recessions. Between the Second World War and 1990, employment rates recovered fully within eight months of the trough of each recession. In the 1990/91 recession, the recovery period was 23 months, and in 2001 the period was 38 months. The recovery period for the recent recession is unknown, but prospects are grim. Accommodative monetary policy and tax reductions, intended to facilitate increased employment by stimulating business investment and growth, have proven ineffective during this period.
  • Consumption. The United States chronically consumes the goods and services of a set of countries that rely on American consumption for their own economic viability. This consumption has been increasingly funded by debt, much of it from the exporting countries themselves, recycling export earnings. US exports, which would be produced by American workers, have not offset these imports.
  • Bubbles. Asset price bubbles and bursts appear to be more frequent and extreme. The residential mortgage market is the most obvious example. But we have also experienced bubbles in commercial real estate, “dot-com stocks,” oil and agricultural products. Deregulation of financial and commodities markets facilitated the bubbles, but an increasing investor preference for short-term financial profits drove them.
  • Education. High school and college graduation rates have stagnated in the United States. This is in contrast with most of the world. In several countries graduation rates now exceed US rates. This is an historic departure from longstanding American leadership in educating its young people.

Now more than ever, it is important to understand the relationships between these factors and what can be done to combat them. This will be the focus of a second post.

Wallace C. Turbeville is the former CEO of VMAC LLC and a former Vice President of Goldman, Sachs & Co. He is Visiting Scholar at the Roosevelt Institute.