SICK SUPERPOWER

America the Not-So-Beautiful

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Ship aground? Graffiti on a boat at an abandoned manufacturing plant in Detroit. Source: Reuters
  • Why it matters

    Why it matters

    America’s existential crisis has its deepest roots in falling productivity. With less to go round, the country is mired in growing conflicts over wealth distribution.

  • Facts

    Facts

    • In the decades after the Second World War, American productivity grew at 2 percent annually. Since 2004, it has grown by only 1 percent per year.
    • In 1973, the CEO of a listed company earned 20 times the average worker’s salary. Today, they make 257 times more.
    • Of poor black American children, only 3 in 100 will ever escape poverty.
  • Audio

    Audio

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The 2016 presidential election – between two of the most unloved candidates of all time – has intensified America’s divisions, already terrifyingly deep.

Will we ultimately see a “rabble-rouser” move into the White House, a man who enrages every Hillary Clinton supporter as he lurches from one scandal to the next? Or will it be the notorious “liar” who Trump’s campaign keeps on trying to warn voters about?

After Mr. Obama’s eight years of modest optimism, the whole country is drifting into a mentality of aggression and mistrust. Pure negativity. Which bad candidate is worse than the other? Who must I absolutely stop from becoming president? These are the questions most Americans will pose when they go to cast their votes. Democracy has rarely seemed more depressing.

So what will happen to the United States after Wednesday? One thing is clear: whoever is elected will have to fill in the trenches dug, reconcile the opposing sides – and open up new economic horizons. Because it is already obvious: America’s prosperity is built on sand. The credit boom of recent years has created a vast debt mountain, crushing the country’s economic dynamism. The money glut has intensified income and wealth inequality, threatening to tear social cohesion wide open.

Just a few decades ago the education system was the guarantee enabling people to climb the social ladder. But for younger Americans, education above all now means the certainty of huge student loans. In short, “for the first time in American history, children are not growing up certain of being better educated, healthier, and richer than their parents,” as lawyers June Carbone and Naomi Cahn put it in their new book on in equality and family structure.

Perhaps most shockingly of all, it is not just the market economy that is starting to look dysfunctional. Democracy itself isn’t looking too hot. Hillary Clinton – a member of a political clan like the Bushes, and the Kennedys. Donald Trump – a billionaire real estate tycoon who presents himself as an outsider, a plain-speaking man of the people. Both come with a strong whiff of plutocracy, finding expression in vastly inflated campaign costs – around €3 billion, or $3.34 billion ­– as well as in the growing absence of any sense of boundaries or decency. Representative democracy, says Constanze Stelzenmüller of the Brookings Institute, a renowned think tank, has “ended up on the defensive.”

“For the first time in American history, children are not growing up certain of being better educated, healthier, and richer than their parents.”

June Carbone and Naomi Cahn, authors of "Red Families vs. Blue Families"

America’s economic problems can perhaps be summed up in a single key trend – the downward direction of American productivity figures. This figure is crucial for continued strong growth.

In the decades immediately after the Second World War, it grew at 2 percent per year. Since 2004, that figure has been cut in half. Economists are still trying to figure out why. Robert Gorden, growth researcher at Northwestern University, sees weak productivity as a sign that the blessings of the computer age may be coming to a halt. Productivity increases triggered by computers and the internet, Mr. Gordon suggests, are nothing compared to the great inventions of the industrial revolution such as electricity and the internal combustion engine. In spite of the “yes we can!” hype, he expects little in the way of radical, ground-breaking invention from Silicon Valley in the coming decades. The next American generation will have to get used to slower increases in living standards than their parents or grandparents enjoyed.

Add to this the loose monetary policy of the Federal Reserve, or Fed, the American central bank. Low interest rates can make irrational investments seem rational, tying up resources and diminishing the quality of the stock of capital. This is why Harald Uhlig, a professor at the University of Chicago, warns the next president to think more about growth promotion than “redistribution and higher corporation taxes.” And if protectionists capture the White House and start cutting off the American economy from the world, lack of competition may drive the downward trend in productivity even lower.

A foretaste of the consequences can be seen in places like Wilkes-Barre, a city in Pennsylvania left behind even by the weak recovery of recent years. Unemployment of 7 percent sounds alright, but that omits the large number of young people who simply move away, never to return. Left behind is a population of the old, the frustrated, the obsolete. These people are the witnesses to decline, the notaries of the slump. Mile upon mile of steelworks, coalmines, and clothes factories have closed, never to reopen. America’s position as an industrial giant is dwindling away.

The consulting firm IW Consult, part of the influential Cologne Institute for Economic Research, has conducted an in-depth analysis of U.S. industry. The results, shown exclusively to Wirtschaftswoche, are shocking. At the beginning of the 1960s, 16.9 million Americans were employed in industry. In 2010, it was just 12.5 million. In other words: within 50 years, this once highly productive sector lost a quarter of its workforce. In the 1960s, America made up almost a quarter of global industrial employment – 23.2 percent; by 2010, this had shrunk to just 8.7 percent. In terms of employment, China and India have long since overtaken America as a world industrial power.

The decline of American industry has turned much of the American working class into the losers of globalization, intensifying conflicts over distribution. In the aftermath of the Second World War, a worker could earn a very decent living, with real incomes increasing by 2.5 percent per year. This changed around the beginning of the 1970s. Now the gap continues to widen between the top income segments (who are doing very well indeed) and the rest. Real incomes for the top ten percent rose on average by 1.4 percent per year, whereas the remaining 90 percent saw their income drop by around 0.2 percent.

There are many reasons for this. The first is global competition. Since 1970, the proportion of imports in America’s gross domestic product has tripled, to more than 16 percent. At the same time, the rate of unionization has fallen to just 13 percent of the workforce, half of what it was in 1973. The economist David Autor of Massachusetts Institute of Technology has shown that between 1990 and 2007, 25 percent of industrial job losses could be attributed directly to Chinese competition.

Immigration is another reason. In the mid-1960s, the United States got rid of its selective immigration policy. The resulting wave of arrivals came overwhelmingly from Latin America and Asia, mostly low-skilled workers. “Immigrants are pushing down wage levels for native workers. This is most clearly the case for people with no high school diploma,” said Mr. Gordon. Since 1970, the foreign proportion of the working population has tripled, to 15 percent. If unchecked immigration continues, economic and social tensions seem set to increase.

At the other end of the spectrum, upper-level incomes are skyrocketing. In 1973, the chief executive of a listed company earned 20 times the average worker’s salary. Today, he makes 257 times more. In the financial industry above all, salaries and bonuses have gone through the roof.

The Fed’s money flows to those in finance first, allowing them to buy shares, bonds, and property more quickly and easily than anyone, giving them a real growth advantage. According to a study by the Pew Research Center, the net worth of the top American earners doubled to around $640,000 between 1983 and 2013. By contrast, the net worth of middle sectors stagnated, and that of the lowest groups shrank.

The increasing gap in incomes and wealth has increased social tensions. If the Fed continues to flood the credit market with cheap money, and the government continues its policy of unchecked immigration, America is headed for serious social conflict. Unemployment currently stands at 5 percent. But the numbers do not include those who have entirely given up trying. If you include them, the numbers jump to a shocking 10 percent.

Previously it was African-Americans hit worst by the social stigma of unemployment, but now whites are also joining the ranks of globalization’s victims. Like Mike Howard of Ashland, Kentucky, laid off a year ago, along with 500 others, by his employer AK Steel. “I blame Chinese price dumping,” he says.

The poor white working class is the great discovery of this election campaign. One powerful voice on their behalf is that of J.D. Vance, author of the best-selling “Hillbilly Elegy,” a memoir of a “family and a culture in crisis.” Coming from a background of rural poverty and drug-addiction, he succeeded in the American dream, with a Yale law degree and an investment banking career. But most of the people he grew up with did not. Recalling those who grew up around him, he writes: “Americans call them hillbillies, rednecks, or white trash. I call them neighbors, friends and family.”

The white poor are not materially worse off than black Americans. But for many whites, to be on the same level as blacks counts as humiliation. For anyone at this level, they know, there is no way back and no way out. It is the last resting place of the American dream. From a dishwasher to a millionaire: what a joke! Only one in 10 poor children makes it into the economic mainstream. Among blacks, that figure is 3 in 100. For blacks born into the middle class, the likelihood of social decline is twice as high as whites. Sometimes, the worries of the white poor might seem enviable for the black poor.

Things are getting worse. America’s education system was once the envy of the world. These days, that system hangs heavily on any hope of growth or change. The top universities are world-class, of course, but further down, young people struggle to earn the diplomas they need to compete in the global economy. The country is eleventh in the global league table for high school graduation rate, and the only country where that rate is actually falling. In the Pisa tests, a popular measure of international educational comparison, American kids came 17th in reading, 20th in science, and 27th in math.

States and local governments have cut education expenditure by a third over the last decade. On the other hand, since 1972, higher education costs have gone up three times faster than inflation. Put the two trends together, and you get a tsunami of student loans: student debt now amounts to €1.2 trillion, three times more than ten years ago. Seven million students run the risk of personal bankruptcy, leading to later marriages, fewer births, and an aging population.

“Americans call them hillbillies, rednecks, or white trash. I call them neighbors, friends and family.”

J.D. Vance, author of "Hillbilly Elegy"

These demographic trends will continue to pressurize the national finances in years to come, as the baby boomer generation retires. Experts predict a drop in per capita income of around 0.4 percent per year. On top of that, the old pay less tax and receive larger pension and insurance payments. Without a radical budgetary shift, U.S. national debt could climb to 107 percent of gross domestic product. “That would put the United States on the level with Italy, Portugal, and Greece,” said the Harvard economist, Martin Feldstein. “Whoever wins the election has to put the brakes on national debt.”

In concrete terms, this means higher taxes or cutting spending. If the new government does not manage to clean up the budgetary mess, the Federal Reserve will have to keep interest rates low and drive up inflation, so as to push down the national debt. For ordinary Americans it would mean – tighten your belts! Either the government taxes them more heavily, or the central bank expropriates them with inflation. No wonder that 51 percent of 18–29 year-olds are worried about the future, according to a Harvard Institute of Politics (IOP) survey.

The new American president will not just need political savvy, judgment, and expertise. He or she will need to lead an entire nation out of its existential crisis.

 

This article originally appeared in WirtschaftsWoche. To contact the authors: malte.fischer@wiwo.de

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