Who Stole the American Dream?

by Hedrick Smith

  So towns like Circleville rode the escalator of American economic growth from the 1970s into the 2000s, and middle-class people like Pam Scholl and Mike Hughes lived the American Dream. Each bought a home, raised a family, and moved up the ladder at RCA, enjoying steady pay, good benefits, five weeks of paid vacation a year, and a company-financed retirement plan. From secretary, Pam rose to a $47,000-a-year job as stockroom supervisor. Mike got good technical training and promotions. By 2000, he was a senior quality control inspector making $50,000 to $60,000 a year.

  “I liked working there,” Pam Scholl said, speaking for both of them. “It was great. I knew everybody. It was wonderful.”

  Wonderful, but it didn’t last.

  2004: The Bottom Falls Out

  The bottom fell out in 2004, even though the U.S. economy was then on the upswing. Facing lower-cost competition from China, RCA sold the plant to the French firm Thomson, which cut back production in 2003 and finally shut down the plant in July 2004. Mike Hughes sensed it coming: The plant was not bringing in as much raw material as it had during boom times.

  Even so, the shutdown was a body blow. Suddenly cast adrift in his early fifties, Hughes could not find steady work. He tried changing careers. With federal displaced worker assistance, he was able to take a year’s course in industrial maintenance. But even that did not lead to a job. Hughes pumped out scores of job inquiries but kept being told that despite his long technical experience at RCA, he wasn’t qualified for entry-level manual labor.

  Eventually, he took a night job as part-time custodian at a local high school for $13,000 a year. A second part-time job at a local glass company earned him another $4,000. Only his wife’s public sector job at Head Start kept Hughes from sinking below the poverty line.

  “What made it difficult for us, we had children coming out of high school wanting to get a college education,” Mike explained. “That’s where my thirty-one years of severance pay went. All of it went to college tuition. I had to choose between my kids’ future and our future.

  Talking about his predicament, Mike Hughes put on a brave front, papering over his hurt and anger. “I’ve got a home. I got a good pension. I somewhat lived the American Dream,” he said. “They just cut me off. They cut off the dream.”

  “The Hardest Thing—Not Being Wanted”

  At first, Pam Scholl fared better than Mike. She found a job as office and traffic manager for a small American Wood Fibers plant. The pay was good, $47,000 a year, until—until they downsized her out of a job in May 2009. Then life went black. By then, she was a single mom, carrying the costs of a home all by herself. For the next eighteen months, the only work Pam could find was three months as a census taker in 2010. Otherwise, she ran through her savings and had to live on unemployment benefits and rising credit card debt.

  “The hardest thing is not being wanted—not feeling worthy,” she told me. “I didn’t realize how bad I felt about it, until I got the census job. Even though it didn’t pay that well, it was uplifting to have something to do. I felt like I was contributing to society. The hardest thing is everybody looking at my résumé and saying, ‘What a wonderful résumé you have—all this experience.’ But I have no job. I know I have completed over five hundred applications and I have had only four job interviews, all for much less money than I was making.”

  Taking tests for public sector jobs, Pam Scholl ran into other people who had been laid off with her at the RCA plant in 2004. Like Pam, they were still hunting for a steady job. “The same 200 people are there,” she noticed. “We are all taking the test for the same job. The very first test I took was for water meter reader for the city of Chillicothe. That was in June 2009. The job paid $14 an hour, and there were 250 people. The bottom line was, there was not even a job. The job was filled internally.”

  A year later, still without a job, she said it was a nightmare not knowing what to do or where to turn. “Oh, it’s horrible,” Scholl told me. “I never dreamed that I would be unemployed for a year. Right now, I am about to sink.” She gave an uneasy laugh that betrayed her anxiety and too many sleepless nights. “I barely stay afloat between charge cards and unemployment benefits. I have depleted my savings at this point, just surviving…. This terrifies me to death.”

  The New Poor—Middle-Class Dropouts of Opportunity

  Pam Scholl and Mike Hughes represent a new phenomenon in America: the New Poor. They have become what might be called “middle-class dropouts”—middle-class Americans sliding down-scale, people slipping backward late in life, which is the exact opposite of the American Dream. In six short years, those two fell from the middle of the American middle class, the middle 20 percent of all income brackets, into the bottom 20 percent or barely above it, and their stories mirror wide trends in American society.

  As a nation, we have just been through the worst decade in seventy years, with fewer jobs at the end of 2011 than ten years earlier and with the income of the typical middle-class family winding up lower than in the late 1990s. But the story begins far earlier than this past decade. Millions of middle-class Americans like Pam Scholl and Mike Hughes started their economic decline before the Great Recession of 2008.

  Their lives reflect “the long arc” of our economic history. They and millions like them are victims of the long-term stagnation of middle-class living standards since the 1970s. The squeeze they feel marks the long, slow erosion of America’s claim as the land of opportunity. Blacks have been harder hit than whites—roughly 45 percent of blacks born into solid middle-class families had lower incomes than their parents by 2007.

  Their experience has been happening all across America, to real estate agents in Florida, to bank tellers in New York, to computer programmers in Colorado, even to people with Ph.D. degrees. The numbers of New Poor are legion, certainly among the nation’s 6 million long-term unemployed. In 2010, the Census Bureau reported, another 2.6 million Americans slipped below the official poverty line, bringing the total to 46.2 million people—the highest number in fifty-two years. “We think of America as a place where every generation is doing better,” commented Harvard economist Lawrence Katz, “but we’re looking at a period when the median family is in worse shape than it was in the late 1990s.”

  Baby boomers in their late fifties and early sixties, like Pam Scholl and Mike Hughes, have been especially hard hit. By late 2011, 4.3 million of them, roughly one in six Americans age fifty-five to sixty-four, were unable to find full-time work, and half of them have been looking for more than two years. As a group, joblessness or contingent work has cost them roughly $100 billion a year in lost wages. “This is new…. It is worse than we have experienced before and it is very widespread,” asserts Carl Van Horn, head of the John J. Heldrich Center for Workforce Development at Rutgers University. “It is going to get worse. You are going to have a higher level of poverty among older Americans.”

  The United States: Low Mobility in a New “Caste Society”

  There is growing, and disturbing, evidence that America has evolved into a caste society, increasingly stratified in terms of wealth and income, with people at the bottom almost frozen there, generation after generation, and people at the top more and more frequently passing on the self-fulfilling advantages of high status to their children and grandchildren. Increasingly, privilege sustains privilege; poverty begets poverty.

  “Children born to parents in the top [income] quintile have the highest likelihood of attaining the top,” asserts social scientist Julia Isaacs. “And children born to parents in the bottom quintile have the highest likelihood of being in the bottom themselves.”

  Several countries in Scandinavia and continental Europe, which we used to mock as class-bound hierarchies, have now surpassed us as places where people can move up the social and economic ladder. To gauge such things, experts track how near or far the apple falls from the tree or, in economic terms, how closely the incomes of sons match those of fathers and grandfathers. In those terms, evidence shows that c
ountries like Norway, Finland, Denmark, and Canada offer young people the greatest chances of breaking out of the family mold, and even France, Germany, and Sweden offer young people better chances than America for moving up.

  In fact, America is now classified as “a low-mobility country in which about half of parental earnings advantages are passed onto sons,” reports economist Isabel Sawhill. Isaacs adds that “starting at the bottom of the earnings ladder is more of a handicap in the United States than in other countries.”

  One major reason that a caste society is emerging in the United States is that education is no longer the great social leveler that it once was. Just the opposite. Recent academic studies have found that the educational attainment gap between affluent and low-income families has grown by 40 percent since the 1960s, even as the educational gap between blacks and whites has narrowed. “We have moved from a society in the 1950s and 1960s in which race was more consequential than family income to one today in which family income appears more determinative of educational success than race,” reports Stanford sociologist Sean Reardon. At the college level, one-half of the children from high-income families completed college in 2007 versus only 9 percent of low-income families—again a wider gap than existed in 1989.

  An important driver of these radically different educational outcomes, scholars have determined, is the significant additional time and money that affluent families invest in extracurricular learning and tutoring for their children compared with what low-income families can afford—a spending gap that has been increasing. In addition, the quadrupling of average college tuition and room fees from the late 1970s to the early 2000s has put teenage children of average middle-class families at a large financial disadvantage compared with children of wealthy and affluent families in the basic ability to pay for a college education.

  America can still point to individual rags-to-riches stories of self-made men and women who leapfrog to success. But for all the glitz of sudden stardom on American Idol, for all the hoop stars and gridiron heroes from the inner city, and for every surprise Wall Street billionaire, the unpleasant truth is that a typical child born at the bottom of the heap in America has far less chance of rising into the middle class or above than one born in France, Germany, or Scandinavia. In fact, one study found that it would take five or six generations, 125 to 150 years, for a child from America’s poverty caste to rise to the middle of the middle class.

  “Being born in the elite in the U.S. gives you a constellation of privileges that very few people in the world have ever experienced,” explained David I. Levine, an economist at the University of California at Berkeley. “Being born poor in the U.S. gives you disadvantages unlike anything in Western Europe and Japan and Canada.”

  Three Decades of Getting Nowhere

  Even people who have kept their middle-class status have been stuck in a rut. While the U.S. economy had growth cycles in the 1980s, 1990s, and 2000s, the average middle-class family made almost no headway. The rising tide did not lift all boats, or even most boats. That dichotomy, between the nation’s growth and stagnant middle-class incomes, is captured in a few stark statistics:

  • From 1948 to 1973, the productivity of all nonfarm U.S. workers grew by 96.8 percent and the hourly compensation of the average worker rose by 93.7 percent. In short, as America enjoyed booming economic growth in the postwar period, middle-class workers got a solid share of the nation’s gains in productivity.

  • From 1973 to 2011, the productivity of the U.S. workforce rose 80.1 percent, but the wages of the average worker rose only 4.2 percent, and hourly compensation—wages plus benefits—rose only 10 percent. So while productivity was rising close to 3 percent a year, hourly wages of the average worker, adjusted for inflation, were essentially flat, the same in 2011 as in 1978. Three decades of getting nowhere.

  • The living standards of middle-class Americans have fallen behind a dozen countries in Europe. Americans worked longer hours, often for lower pay and benefits, and made up the difference with the highest ratio of two-income households of any advanced economy.

  • Despite economic ups and downs since 1975, corporate profits have trended upward while workers’ wages stagnated. In 2007, before the Great Recession, corporate profits garnered the largest share of national income since 1943, while the share of national income going to wages sank to its lowest level since 1929.

  • Gaping inequalities in wealth and income now characterize the U.S. economy. While the middle class stagnated, the ultra-rich (the top 0.01 percent) jumped from an annual average income of $4 million in 1979 to $24.3 million in 2006—a 600 percent gain per family. The super-rich (the top 1 percent) gained so much that they captured 23.4 percent of the national economic pie in 2007, more than 2½ times their share in 1979.

  Inequalities are inevitable under capitalism, but no other advanced economy has such a hyperconcentration of wealth. In fact, as we’ve seen, America looks far different from its own past. The contrast between America in the era of the New Economy and America in our earlier era of middle-class prosperity is stark. Business leaders contend the fault lies with technology and globalization, but as we’ve seen, other countries such as Germany enjoy more widely shared prosperity than the United States. The primary cause of middle-class stagnation lies in the wedge economics practiced by business leaders.

  At every turn, average Americans have been forced to swallow cutbacks. Trade unions, trying to hang on to jobs under intense pressure from Corporate America to cut costs, have felt compelled to accept what was once anathema—two wage tiers for the same work, with new workers hired at lower pay and benefits than existing workers. Airline pilots pushed into feeder airlines have had to accept de facto demotions at lower pay for similar work. Ticket clerks, back-office workers, and bank cashiers as well as factory workers have been pushed out of full-time jobs and then hired back by the old company as theoretically “independent contractors” at lower pay as temporary or part-time workers with few or no benefits.

  “Permatemps”: A New Economy Lower Caste

  One hallmark of the New Economy in the 1990s was the rapid expansion of part-time and temporary work. So-called contingent workers became the fastest-growing segment of the U.S. workforce. In 2005, roughly 30 percent of the labor force—42.6 million people—were classified as contingent workers, paid lower wages and lower benefits than regular workers and highly vulnerable to layoffs. By late 2011, more than 8 million Americans were working part-time against their will. Tens of millions more were hired through temp agencies or classified, questionably, as “independent contractors” to keep them off the company payroll but permanently on the job, doing the same work as regular employees for years on end but at lower pay and benefits.

  “Permatemps,” they were called, the wage serfs of the New Economy.

  As the corporate poster child of “permatemping,” Microsoft used thousands of long-term temps for the sophisticated designing, editing, and testing of software, among other jobs. Regular employees wore blue badges, permatemps wore orange. The two groups worked side by side. But Microsoft denied permatemps its employee health benefits, 401(k) plans, and company stock options. Hundreds of other companies copied Microsoft.

  Eventually, the IRS charged Microsoft with violating tax laws by failing to deduct taxes from permatemp pay. In 1992, permatemps filed suit against Microsoft to obtain benefits due employees under labor laws. After a long battle, Microsoft agreed to pay $97 million in damages to twelve thousand permatemps. A federal district judge, upheld by the Supreme Court, outlawed hiring temp workers for longer than six months. To get around the ruling, Microsoft and other companies fire temp workers after six months, lay them off for one hundred days, and then rehire them. People are so desperate for work that they bow to those terms.

  Men Drop Out, Replaced by Young Mothers

  American workers have gone from being the best paid with the best conditions in the 1970s to falling behind other advanced economies by the 1990s. “Th
eir hourly compensation dropped below that of a dozen European labor forces,” former Nixon political strategist Kevin Phillips reported in 2002, and median U.S. pay has fallen since then. What’s more, Americans typically work 350 more hours per year than the average European worker. By 2010, many men had gotten so discouraged at being unable to find good jobs that they have been dropping out of the workforce entirely. From 1948 to 2011, male participation in the labor market dropped from 87 to 74 percent. That adds up to several million male dropouts.

  Economists point out that the only reason average family incomes have risen over the past four decades, even if only slightly, is that so many more women have gone to work. Women have had to work to keep their families financially afloat, often adding enormous strains on families, especially those with small children. “It’s probably true that the typical middle-class family earns more now than thirty years ago—the actual income is probably up,” observed Larry Mishel, director of the pro-labor Economic Policy Institute in Washington. “But you have to balance that out with the fact that they are also working more hours—two of them are working. But it’s an amazing thing that an economy that grows in productivity by 80 to 90 percent still leaves so many people actually worse off.”

  Working women are now the norm, but the toll on young mothers is stunning. In 1960, only 15 percent of American women with children under six worked, but by 2010 that number had shot up to 64 percent—the highest percentage in the world. In fact, the massive movement of women into the workforce, as Kevin Phillips observed, had by the late 1990s already given the United States “the world’s highest ratio of two-income households, with its hidden, de facto tax on time and families.”