Who Stole the American Dream?

by Hedrick Smith

  Now, four years later, the time has come to cash in that peace dividend. With the Afghan war costing more than $100 billion a year, a faster draw-down of U.S. forces could free tens of billions for programs to revive our domestic economy. Untold billions more could be saved by bringing home some of our eighty thousand troops still stationed in Western Europe nearly twenty-five years after the end of the Cold War. Billions more could be saved by eliminating wasteful and irrelevant weapons—and still leave America with the largest, most modern military force in the world.

  There is bipartisan support for reducing military spending. In 2010, the bipartisan deficit commission headed by former Republican senator Alan Simpson and former Clinton White House chief of staff Erskine Bowles proposed $750 billion in defense cuts over the next decade. Sentiment for deeper cuts has grown since that report. In today’s sharply divided Congress, cutting defense is one issue on which Tea Party Republicans and liberal Democrats agree.

  Step #8: Fix Housing and Protect the Safety Net

  Step #8 is to fix the housing market by arranging massive refinancing of millions of homes now “under water” to help get the economy moving and to strengthen the nation’s safety net programs, especially Social Security and Medicare.

  The housing market today is both symptom and symbol of the nation’s economic quagmire and its gross inequalities. Wall Street’s megabanks, which fueled the housing bubble and bust, have been bailed out with more than $700 billion of taxpayer money and are back to multibillion-dollar profits, while six million average families have been foreclosed out of their homes and twenty-two million more families are trapped in homes that are “under water”—worth less than their mortgages. Not only have those families been hurt, but the dead housing market has put a damper on a strong economic recovery.

  For those twenty-two million homeowners—mostly creditworthy borrowers who are paying their mortgages regularly—it’s a catch-22. Most can’t afford to sell their homes and take a loss. Many would like to benefit from today’s low interest rates (around 4 percent) and shed their old 7 to 10 percent bubble-era rates. That would give them more cash to spend and to fuel the economics of the virtuous circle and lift the economy. But they are trapped. Banks won’t approve loans for more than the value of the house, and government-backed enterprises such as Fannie Mae and Freddie Mac have balked at writing down loans they have guaranteed in the past, because on their books they would lose some money.

  One modest improvement was the agreement in February 2012 by the main Wall Street banks, under pressure from state attorneys general and the Obama administration, to commit $26 billion to reduce the principal or interest on the mortgages of a million homeowners with loans that exceed the market value of their homes. The banks agreed to spend $1.5 billion on small ($1,500 to $2,000) payments to about 75,000 people who lost their homes in wrongful foreclosures. But the deal was only a partial step forward. It did not cover mortgages insured by Fannie Mae and Freddie Mac (roughly half of all mortgages), it gave the banks three years to take these actions, and it fell far short of fully compensating people who were foreclosed improperly. While hailing the agreement as a step forward, President Obama commented: “No compensation, no amount of money, no measure of justice is enough to make it right for a family who’s had their piece of the American dream wrongly taken from them.”

  Waiting for the market to correct itself is no solution. Establishment bankers such as William C. Dudley, president of the Federal Reserve Bank of New York, assert that “the infrastructure of the residential mortgage market is wholly inadequate to deal” with the massive debt overhang and with getting real upward movement in home sales. Unless the government takes action, Dudley said, the housing market will “destroy much more value in housing than is necessary.”

  Smart economists have suggested multiple ways to break the housing logjam. Glenn Hubbard, former chief economic adviser to President George W. Bush, has urged Fannie Mae and Freddie Mac to reduce loan balances on some of the homes now “under water” and to rewrite their rules so that up to ten million homeowners can qualify for refinancing their mortgages at lower rates. Economists Nouriel Roubini of New York University, Robert Hockett of Cornell University, and Daniel Alpert of Westwood Capital have proposed that the federal government buy up near worthless second mortgages and home equity loans whose holders are blocking first-mortgage lenders from refinancing their loans. William Dudley has proposed easing red tape and long delays both at banks and at government agencies to grant new credit to homeowners and temporary bridge loans for homeowners thrown out of work. To reduce the massive backlog of foreclosed homes that are still empty, Dudley has suggested that the banks be pushed by regulators to convert many of these homes into rentals. Other economists advocate having the Federal Housing Administration offer loan guarantees to banks to induce them to refinance millions of home loans at lower interest rates, a move adopted in early 2012 by the Obama administration. Finally, bankruptcy judges should be given the legal power to alter the terms of mortgages, just as judges now help troubled companies rewrite their contracts with labor unions, creditors, and suppliers.

  Social Security and Medicare

  Equally important are steps to protect and strengthen Social Security and Medicare, something overwhelmingly supported by Republican, Democratic, and independent voters. Privatizing them or altering their basic structures, as some in Congress propose, would spell financial disaster for millions of average Americans, and people know that. Whenever politicians have moved to privatize or radically alter these safety net programs, as Speaker Newt Gingrich did in 1995, as President Bush did in 2005, and as the Republican-led House did in 2011, voters have objected vehemently.

  Conservatives are right that some adjustments and cost controls are needed to prevent health care inflation and our longer life span from undermining the financial viability of Social Security and Medicare. One suggestion is to readjust the formula for the annual cost-of-living increases in Social Security payments so as not to exaggerate inflation. The 2010 health care law included measures to slow Medicare cost growth, partly by curbing overpayments to private health insurance plans that cost more than Medicare and by rewarding health providers for quality of care rather than volume.

  But the easiest way to put Social Security and Medicare on more solid financial footing is to remove the income cap on the payroll tax. Economists have estimated that taxing now exempt incomes over $106,800 would entirely eliminate the anticipated Social Security shortfall over the next seventy-five years. Added revenue could be raised by increasing Medicare premiums for the top 10 percent of income earners (income over $138,925) or by applying a means test for Medicare’s low-cost health coverage.

  Without these safety net programs, retirement security for average Americans is in serious peril. As we have already seen, roughly 50 percent of U.S. workers already face long-term poverty in their senior years. To prevent that, we may need to expand retirement protection with new laws requiring all companies with one hundred or more employees to provide some retirement program and to contribute a minimum of 4 percent of each employee’s salary. Where 401(k) plans are offered, people need help—both a guaranteed employer contribution and the option of joining a pool of professionally managed funds with low fees.

  Finally, as long as we claim to be a “land of opportunity,” the United States must keep open the economic ladder upward for the sixty million in America’s “aspiring middle class”—the hardworking poor. They depend on such safety net programs as college student loans, Medicaid, food stamps, child care support, housing assistance, and the earned income tax credit. Without those programs, the chances for rising into the middle class would almost disappear. Certainly poverty would be far more severe. Opinion polls show that majorities of Americans favor such programs, and the country can afford them. Over the next thirty years, our economy is projected to grow by 60 percent. That’s another $8 trillion to $9 trillion. Steps #4, #5, and #7 suggest ways to generat
e funds for these programs through tax reform, defense cutbacks, and long-term savings on entitlements.

  The Role of Politics

  Thirty or forty years ago, in the era of middle-class power, a broad political consensus supported the kind of middle-class agenda outlined in this chapter. But in today’s harsh partisan climate with the Senate often immobilized by filibuster tactics, the opposition will be formidable and Washington gridlock will be hard to overcome.

  An authentic populist agenda won’t be achieved without altering the power equation in Washington, so the political challenge (steps #9 and #10) is to revive middle-class power and to reduce polarized gridlock in our government by returning more power to the political center, the terrain inhabited by moderates and independents.

  CHAPTER 22

  POLITICS:

  A GRASSROOTS RESPONSE

  REVIVING THE MODERATE CENTER AND MIDDLE-CLASS POWER

  There is a disconnection between the people and their leaders. Citizens do not trust their government. And a variety of polls indicate that the distrust extends to corporations and the media. People do not feel that they have much control over their lives, and the sense of impotence grows like a great life-endangering tumor.

  —JOHN W. GARDNER,

  cabinet secretary to President Lyndon Johnson

  Either democracy must be renewed, with politics brought back to life, or wealth is likely to cement a new and less democratic regime—plutocracy by some other name.

  —KEVIN PHILLIPS,

  Wealth and Democracy

  CHANGING THE POWER EQUATION in Washington will take a mass movement at the grass roots to force the White House and Congress to listen to average Americans and to put a middle-class agenda into law. It will also require reforms in our political system to increase the influence of political moderates and independent voters by reducing the built-in advantages now enjoyed by partisan extremists.

  Voting is critical, of course, but experience teaches that voting is not enough. Even when voters elect a middle-class-friendly president and Congress, the hard grit of policy is chiseled out between elections, when voters have turned their backs on politics. That is when the influence game in Washington goes to work and undoes much of what voters thought they had voted for. The public may vent its frustration to pollsters, but as we have seen, Congress doesn’t listen to polls.

  Congress—and presidents, too—listen to money. The business of members is getting reelected. As the costs of political campaigns have soared, the power of political money has grown to the point where we have a government responsive largely to the superclass, what economist Joseph Stiglitz called government “of the 1%, by the 1%, for the 1%.” Or as Senator John McCain, the conservative Republican presidential nominee in 2008, put it, the flow of money into lobbying and into election campaigns is “nothing less than an elaborate influence-peddling scheme in which both parties conspire to stay in office by selling the country to the highest bidder.”

  Action to Counter the Influence of Money

  To counteract the influence of money in the New Power Game, average Americans need to exercise their unique political leverage—direct personal engagement in politics. As John Gardner, longtime head of Common Cause, the nonpartisan public advocacy group, observed, “The sad, hard truth is that at this juncture the American people themselves are part of the problem.” Average Americans have become disenchanted and politically disengaged and, as a consequence, disenfranchised.

  If we genuinely want government of the people, by the people, and for the people to fix the deep problems that plague our country, then millions of average Americans will have to become directly involved once again in citizen action—making their presence felt, taking to the streets, just as millions did in the 1960 and 1970s—to restore the vital link between Washington and the people.

  There is ample tinder to fire a new populist rebellion. Public discontent over the gaping economic inequalities in America today is at a new high. Two-thirds of Americans now say there are “strong” conflicts between rich and poor—up roughly 20 percent from just two years ago. And this is not the view just of liberals. The perception of class conflict has risen sharply among white people, middle-income earners, political independents—even among a majority of Republicans (55 percent).

  Confidence in government, especially in Congress, has plunged to historic lows. The popular sense of alienation is acute. Americans are fed up with the mean-spirited partisan warfare in a Congress that fails to do the people’s business. In the summer of 2011, 70 percent told a CBS News poll that special interests have too much influence in Washington, and 85 percent said that ordinary people have too little influence. Voters in focus groups told Democratic pollster Stanley Greenberg: “There’s just such a control of government by the wealthy…. We don’t have a representative government anymore.”

  Hard facts support this conclusion. Political scientists have documented in detail that without active grassroots pressure, Washington ignores large majorities of Americans. When Larry Bartels of Princeton University analyzed a host of congressional votes in the 1980s and 1990s, he found that senators were “vastly more responsive to affluent constituents” than to middle-class and poorer voters.

  In 2005, Martin Gilens, another Princeton political scientist, made a detailed comparison of the policies that voters preferred with the policies Washington adopted and concluded that politicians had disregarded the views of middle-class voters. “Influence over actual policy outcomes,” wrote Gilens, “appears to be reserved almost exclusively for those at the top of the income distribution.”

  Correcting the obvious inequalities in our democracy, as well as in our economy, will require political reforms—pushed from the bottom up.

  Step #9: Rebuild the Political Center

  Step #9 is to regenerate the centrist core of American politics both by rejecting extremist candidates in both parties and by opening up our political process in every state to give more influence to moderate and independent voters.

  Historically, when there has been mass disenchantment with both major political parties, public anger has spawned third party movements. In the 1992 presidential election, Texas billionaire Ross Perot ran for president and won nearly 20 percent of the popular vote running as an independent.

  At that time, 39 percent of the voters voiced dissatisfaction with how government was being run. Today, dissatisfaction with both parties in Washington is far higher—81 percent—and it has once again spurred an urge to reach beyond party lines and revive the political center. The 2012 political year has seen a wave of new political movements such as Americans Elect, Votocracy, Third Way, and No Labels. “There is just so much unrest out there that something is going to explode,” commented Democratic pollster Peter Hart.

  Americans Elect is the most ambitious effort to promote a bipartisan middle ground in the presidential election. Capitalizing on the Internet, Republican strategist Kahlil Byrd and wealthy philanthropist Peter Ackerman have been promoting what Byrd calls a “widespread draft movement for presidential candidates,” with strong appeal to moderate and independent voters. Their idea is to bypass the Republican and Democratic nominating conventions with more direct democracy: Offer registered voters a forum to nominate their own presidential candidate via the Internet, with the proviso that whoever is chosen as presidential nominee must select a running mate from the opposite party. By early 2012, Americans Elect accomplished a major goal—getting the organization listed on the ballot in all fifty states.

  The key, of course, is fielding a high-profile, vote-getting candidate and sustaining the movement. After the 2010 midterm elections, New York’s Republican mayor, Michael Bloomberg, seemed to cast himself as a centrist contender with his broadside blast at both major parties. “Despite what ideologues on the left believe, government cannot tax and spend its way back to prosperity, especially when that spending is driven by pork barrel politics,” Bloomberg declared. “… Despite what ideologues on the rig
ht believe, government should not stand aside and wait for the business cycle to run its natural course. That would be intolerable….” But having staked out the political middle, Bloomberg did not throw his hat in the ring. Even when third-party movements have run a potent vote-getter, such as Theodore Roosevelt and the Bull Moose Party in 1912 or Ross Perot in 1992, third parties have never offered a long-term solution to a sharp divide between the two major parties. Perhaps the most important role of Americans Elect in the future may be in state and Congressional races because it has gotten its own ballot line all across the country.

  Another sign of rising protest against political extremism—at the state and congressional level—is the birth of No Labels, a group formed by longtime Democratic fund-raiser Nancy Jacobson and Republican Mark McKinnon, a media strategist for the Bush presidential campaigns in 2000 and 2004. No Labels won early blessings from Mayor Bloomberg, Florida’s former Republican governor Charlie Christ, and former Clinton administration official Jonathan Cowan. As Cowan puts it, the goal is to counteract “this kind of hyper-partisanship, my party, right or wrong, damn the consequences” and to pressure politicians in all 435 congressional districts into “setting aside their [party] labels” and moving toward compromises on the nation’s most pressing issues.

  But Third Way, a think tank linked to No Labels, has a more focused and practical agenda. Its leaders see parties as the main cause of today’s “pathological polarization” of politics, and they want to break party control over primary elections, the gerrymandering of congressional districts, and party line election of congressional leadership. “Political parties have turned out to be a disaster,” argues former conservative Oklahoma Republican congressman Mickey Edwards. “The problem is the party system itself. And No Labels has on its mission statement to move toward open primaries and to take away party control over districting.”