In this book, I provide a reporter’s CAT scan of the Two Americas today, examining the interplay of economics and politics to disclose how the shifts of power and of wealth have led to the unraveling of the American Dream for the middle class. I tell the story, too, of how we evolved into such an unequal democracy—how we lost the moderate political middle and how today’s polarized politics reinforce economic inequality and a pervasive sense of economic insecurity.
This is a reporter’s book full of stories of Americans high and low. It portrays the impact of the New Economy and the New Power Game on the rich and the middle—on jobs, incomes, homes, retirement—and on people’s hopes and dreams. Among these people are many Americans I came to know reporting for The New York Times, for PBS investigative documentaries, and for this book—leaders like Bill Clinton, Newt Gingrich, and Martin Luther King, Jr.; CEOs like Al Dunlap, Bob Galvin, or Andy Grove; and middle-class people like jet airline mechanic Steve O’Neill, loan officer Bre Heller, computer plant technician Winson Crabb, contractor Eliseo Guardado, and small-business owner John Terboss.
Most still voice a plucky personal confidence. Yet their faith in the American Dream has been sorely shaken. Like others, they want to know what happened to them and to America—what changed the way our economy and our politics work.
Technology and Globalization
The standard explanation offered by business leaders and political and economic conservatives is that these harsh realities of the New Economy are the unavoidable product of impersonal and irresistible market forces.
America, they point out, was an unchallenged economic colossus at the end of World War II. It was easier then for the United States to generate middle-class prosperity. But as Europe, Japan, and Russia recovered, America’s share of world trade shrank from nearly 20 percent in 1950 to less than 10 percent in 1980. In the early 1970s, we began running trade deficits, and as Asia boomed, we imported much more than we sold abroad. As historian Charles Maier put it, the United States morphed from the “empire of production” into the “empire of consumption.” Today, we benefit as consumers, but we pay a heavy price in lost jobs, American jobs lost to foreign imports or because U.S. companies have moved them overseas.
Business leaders and free market economists tell us that this economic hemorrhaging is an unavoidable cost of progress. It is the price of the inexorable march of technology and free trade. But that seductive half-truth doesn’t fully square with the facts. It ignores the political and economic story that this book tells—the impact of public policy and corporate strategy on how we became Two Americas. It fails to explain why such an overwhelming share of the fruits of technological change and globalization went to a privileged few while the majority of ordinary Americans got left out.
Few would dispute that technological change and the digital age have shaken up the U.S. economy, forcing change, creating new winners and losers, and disrupting many industries and millions of lives. But if technological change and globalization were the primary causes of America’s problems today, then we would see the same yawning income inequalities and middle-class losses in other advanced countries. But we don’t.
A Comparison—and a Fork in the Road
Germany took a different fork in the road in the 1980s and it has fared far better than America in the global marketplace. While the United States piled up multitrillion-dollar trade deficits in the 2000s, Germany had large export surpluses. In the midst of Western Europe’s economic turmoil, Germany is a bastion of strength. Its economy grew faster than the U.S. economy from 1995 to 2010, with the gains more widely shared. Since 1985, the hourly pay of middle-class workers in Germany has risen five times as fast as in the United States, with the result that the German middle class is now paid better on average than Americans.
German leaders worked hard to keep their high-wage, high-skilled jobs at home. While U.S. multinational corporations aggressively moved production offshore, Germany, too, lost some of its production workforce, but it retained a larger share of its manufacturing base at home than America did. Today, 21 percent of Germans work in production; in the United States, it’s 9 percent.
The difference is not in technology but in our government policies and our corporate strategies. Germany has maintained strong trade unions and a strong social contract between business and labor, even reducing unemployment during the Great Recession, while America’s jobless rate shot up.
America Chose a Different Fork
America chose a different path, driven by the pro-business power shift in politics and a new corporate mind-set, both of which lie at the root of the economic rift in America today. The New Economy laissez-faire philosophy of the past three decades promised that deregulation, lower taxes, and free trade would lift all boats. It argued that sharply reduced taxes for the rich would generate the capital for America’s economic growth. Its disciples asserted that the free market would spread the wealth.
But that is not what has happened. The middle class was left behind—the 150 million people whose family incomes range from nearly $30,000 to $100,000 a year—as well as 90 million more low-income Americans living in poverty or just above. Even the 60 million upper-middle-class Americans and the nation’s wealthiest 5 percent have been falling steadily further behind America’s financial elite, the super-rich 1 percent.
The New Economy mind-set marked a sharp break with the corporate philosophy of the postwar era. Then, the mantra of business leaders was to share the wealth—to distribute to their employees a sizable share of the profits from growth and from gains in productivity. Since the 1970s, business leaders have largely abandoned that share-the-wealth ethic. With some exceptions, CEOs have practiced “wedge economics”—splitting apart the pay of rank-and-file employees from company revenues and profits. In fact, according to the Census Bureau, the pay of a typical male worker was lower in 2010 than in 1978, adjusted for inflation. Three decades of getting nowhere or slipping backward.
Such a dichotomy has developed in America’s New Economy that last April, while more than twenty-five million Americans were unemployed, were working part-time against their will, or had dropped out of the labor force and the economy was still struggling to recover, The Wall Street Journal ran a front-page story trumpeting that major U.S. companies “have emerged from the deepest recession since World War II more productive, more profitable, flush with cash and less burdened by debt” than in 2007, before the U.S. economy collapsed. Many of the 1.1 million jobs added by American multinationals since 2007 and much of the $1.2 trillion cash added to their corporate treasuries came from overseas. At home, the Journal noted, “the performance hasn’t translated into significant gains in U.S. employment.”
The financial cleavage created by wedge economics has provoked popular discontent. Today, two-thirds of Americans—far more than just a couple of years earlier—say they see “strong” conflicts between rich and poor, and they see economics as more divisive than race, age, or ethnic grouping.
“The Virtuous Circle” of the 1950s–1970s
vs. the New Economy of the 1980s–2000s
The New Economy is not smart. It hurts our capacity to grow, as we have seen from America’s painfully slow recovery from the financial collapse of 2008. The job losses and stagnant pay of the New Economy have broken what economists call “the virtuous circle of growth”—long the engine of America’s economic growth and middle-class prosperity.
In the heyday of the middle class, for thirty years after World War II, America’s great companies paid high wages and good benefits. Tens of millions of families had steady income, and they spent it, generating high consumer demand. Robust consumer demand is the main driving force of the U.S. economy. It propels businesses to invest in new technology, new plants and equipment, and more employees. Corporate expansion contributes to full employment, fueling “the virtuous circle of growth” to another round of expansion and higher living standards.
But in our New Economy, the dynamic th
rust of “the virtuous circle” has been disrupted by job losses and the lid on average pay scales. Flat pay is bad not only for individuals, but for the whole economy. Weak pay leads to weak consumer demand. Companies don’t expand and hire, and as a country, we bog down in long, painful “jobless recoveries.” That has happened several times in the past two decades.
In short, downsizing, offshoring, and wedge economics have backfired. For the economy, they don’t work. For the nation, they don’t work. Individual corporations may profit, especially multinationals that have moved production overseas. But by sharing so little of their gains with their U.S. employees, they have put a crimp on middle-class spending, and without big consumer demand, the nation’s economy can’t move well.
Crisis Politics
Washington can’t move either—because it is frozen in dysfunctional partisan gridlock.
Certainly, genuine differences divide us as a people. That has always been true. America’s political pendulum has swung back and forth as parties battled over policy. But there was an accepted center of gravity. Work got done. Political rivals like Democrat Lyndon Johnson and Republican Richard Nixon would differ, but there was some consensus. Both expanded Social Security; neither tried to privatize it. Republicans might cut specific government programs or trim the budget more than Democrats, but they were not out to dismantle government and shut down entire cabinet departments.
Today, everything is in dispute. Political Washington has lost the habit of compromise and belief in compromise. No issue is ever settled. One Congress passes a law, the next tries to repeal it. The hallmark of the New Power Game is crisis politics—political ultimatums and a partisan blame game. But the stakes are too high for perpetual brinkmanship. It is time to heed Lincoln: “A house divided … cannot stand.”
Challenge and Response:
a New Mind-Set, a Domestic Marshall Plan
It will take a political metamorphosis, a populist renaissance, in America to reverse the political and economic tides of the past three decades and to make our country strong and whole again. The Toynbeean challenge we face requires a response from all of us, a rebirth of civic activism from average people at the grass roots as well as from America’s political and economic leaders. Millions of Americans will have to come off the sidelines and reengage in direct citizen action in order to reestablish “government of the people, by the people, for the people” and to achieve a genuine people’s agenda in Washington.
It is not hard to conceive of the measures needed to restore a fairer, more level economic playing field—action on jobs, homes, taxes, and fairness, plus a reset in long-term economic thinking. It took decades for us to get into our current national predicament; it will take time—and tenacity—to build our way back to a more just, secure, and vibrant society.
To regenerate widely shared prosperity over the long term, we must get “the virtuous circle” working again. That challenge requires our business leadership to share more of their companies’ profits with workers. It requires our political leaders to do more of what past presidents such as Washington, Lincoln, Theodore Roosevelt, and Dwight Eisenhower have done: Use government resources to modernize our aging highways, ports, and airports, to stimulate research and development, to retrain workers who have fallen behind, and to provide incentives to the private sector in order to make America—and Americans—more globally competitive in the years ahead.
There are some hopeful omens. One problem is that we have become so fearful about our economy and so jaded about government that we overlook the good news in our midst. Business leaders have begun to speak out against the New Economy notion that the United States can survive on a service economy. What we need now, insists General Electric CEO Jeffrey Immelt, is a renaissance in manufacturing and production jobs. Make It in America is the title theme of Dow Chemical CEO Andrew Liveris’s latest book. Other top corporate executives call for a domestic Marshall Plan—a mix of tax incentives, aid for research, public-private investment pools, and a skills alliance to modernize the training of American workers displaced by foreign trade.
General Motors and Chrysler went to the brink of extinction in 2009, but they have come back. The auto industry bailout was brutal, but it signaled some significant changes: business and government working together, management and labor doing give-and-take to save companies and jobs. Both GM’s CEO, Dan Akerson, and the United Auto Workers union scrapped their “us vs. them” rhetoric. The union agreed to keep wages steady. GM and Ford pledged to reopen plants in the United States and not to shift production to Mexico as they had planned. By early 2012, the Big Three carmakers planned to invest several billion dollars to retool multiple plants in the United States.
More broadly, manufacturing employment edged up in both 2010 and 2011, adding more than three hundred thousand jobs, and U.S. manufacturing exports began to rise. And by 2012, the once irresistible cost advantages of China were looking less attractive to some U.S. employers. With labor unrest and wage inflation in China and stagnant or falling wages in America, a few companies such as General Electric, Otis Elevator, and Master Lock of Milwaukee have begun to bring jobs back from China to the United States—and smart government policies could foster that trend. In all, some 25,000 manufacturing jobs have returned to the United States in the past few years, according to Harry Moser, president of the nonprofit Reshoring Initiative.
Personal Involvement
But for the long-term effort to level the economic playing field and to reclaim the American Dream, what is needed is a modern political crusade by average Americans on the model of the civil rights and environmental movements of the 1960s and ’70s.
Inevitably, people ask for leadership: Where is the great new Lincoln to heal the fissures of our divided nation and set our nation on an upward path? In the past, civic leaders such as Martin Luther King, Jr., have emerged from below, from mass movements. The starting point is populist civic action. The vital ingredient is personal involvement.
As Toynbee observed, a grave danger arises when many people living in a mature civilization no longer feel part of that society—that is, no longer feel they matter. Mass alienation and serious schisms emerge when people come to believe that they are not significant participants with a role and a voice in determining the nation’s destiny.
“Americans have reason for negative attitudes,” the late John Gardner, head of the public advocacy group Common Cause, observed a few years ago. “But the sad, hard truth is that at this juncture the American people themselves are part of the problem. Cynicism, alienation and disaffection will not move us forward. We have major tasks ahead.”
The techniques of the Tea Party have shown one way to press a political agenda in Washington. But instead of pushing a middle-class agenda, the Tea Party freshmen in Congress have pushed tax cuts and policies that protect vested corporate and financial interests. Their strategy has been to cut aid to college education for middle-class kids, retirement funds and health care for middle-class seniors, and programs designed to keep middle-class families in their homes.
The Tea Party agenda is not a middle-class agenda. Perhaps not a surprise, since more than half of the sixty Tea Party members in the House of Representatives are themselves millionaires, with an average net worth of $1.8 million.
But what can be learned from the Tea Party is that a fresh surge of civic energy at the grass roots can change the political debate in Washington—and the balance of power.
Another fresh surge of energy came last fall from Occupy Wall Street demonstrators in New York City and thousands more from Boston to Portland, Oregon, and St. Louis to Los Angeles. They gave voice to a populist protest against concentrated power and wealth in America, and much of the public responded positively to their message. In a few short weeks, the Occupy movement, inchoate as it was, not only changed the public dialogue on economic issues, but implanted in America’s political lexicon a vivid, Twitter-easy slogan—“We are the 99 percent”—opposing the rich
est 1 percent—a slogan that frames a central issue for election-year politics and policy makers in Washington.
But lasting change in America will require a broader movement that is more deeply rooted, better organized, and more politically clear about a short list of policy goals. Still, the first shoots of an American political spring have appeared, and our history teaches that, once mobilized, a peaceful but insistent, broad-based grassroots rebellion can regain the power initiative and expand the American Dream.
What’s needed, John Gardner declared, is “a powerful thrust of energy” from grassroots Americans: “We the People” demanding that Washington carry out an authentic middle-class agenda.
CONTENTS
Cover
Title Page
Copyright
Epigraph
PROLOGUE: THE CHALLENGE FROM WITHIN
PART 1: POWER SHIFT
CHAPTER 1. THE BUSINESS REBELLION: THE POWER SHIFT THAT CHANGED AMERICAN HISTORY
CHAPTER 2. THE PIVOTAL CONGRESS: JIMMY CARTER AND 1977–78 DEMOCRATS
CHAPTER 3. MIDDLE-CLASS POWER: HOW CITIZEN ACTION WORKED BEFORE THE POWER SHIFT
CHAPTER 4. MIDDLE-CLASS PROSPERITY: HOW “THE VIRTUOUS CIRCLE” WORKED BEFORE THE NEW ECONOMY
PART 2: DISMANTLING THE DREAM
CHAPTER 5. THE NEW ECONOMY OF THE 1990S: THE WEDGE ECONOMICS THAT SPLIT AMERICA
Who Stole the American Dream? Page 2
