Tightening Our Belts

A Major Issue in the 2004 Election Needs Explanation

Editor’s note: Along with their helpful nitpicks, readers of the Washington Spectator have been filling our in-box with thoughtful pieces on what our founding editor, the late Tristram Coffin, chose 30 years ago as this publication’s main output: “untold stories.” He meant information neglected or buried in the mainstream media.

One of those convoluted sagas is what is happening to our national pocketbook, and the guest writer for this issue, who turns out to be an economist and a lawyer with 30 years of Washington experience, addresses it. In the course of his career, he wrote a book, The White Ethnic Movement and Ethnic Politics, and edited a newsletter when he wasn’t working as a special assistant on House and Senate staffs, including for Senator Adlai Stevenson, and on government affairs at the Commerce Department. He also worked with the Travel Industry Association of America.

He is Perry L. Weed, and he’s now retired and living outside the Beltway. His long experience in the capital makes it possible for him to explain this largely untold story.

The U.S. economy has entered an unprecedented and troubling era. This is important because the state of any nation is determined largely by the health of its economy.
Despite the nation’s history of economic strength and world dominance, dynamic economic, demographic and technological forces have now rendered it more dependent and vulnerable than at any time since World War II. For the first time the U.S. economy confronts basic structural problems at home and abroad that threaten the nation’s high standard of living, prosperity and well-being.

The U.S. economic position is increasingly challenged by other world powers and by regional alliances—the Association of Southeast Asian Nations (ASEAN), the European Union. With changes in world demographics and accelerating advances in technology, communications and transportation, U.S. economic domination is over. It has given way to unrestrained trade and globalization, with the fast movement of labor and capital as well as information and ideas.

Globalization is dominating world affairs. It has evolved from trade wars, currency manipulation, downward pressure on prices, expanding black markets, the relocation of production capacity to cheap labor markets and the digitalization of information. Globalization is swallowing up traditional notions of free trade. We find ourselves selling our assets—our industrial and commercial base—to foreign investors. The U.S., the world’s most lucrative market, is increasingly a consuming, not a producing, nation.

International finances are free flowing and without effective regulation. Every day witnesses the unraveling of the old orderly and manageable world economy. Large parts of Wall Street have shifted to overseas control. Increasingly, fuel prices are managed by a global oil cartel. Japan and China have effectively become the primary sources of funding for the growing U.S. fiscal deficit and current account deficit, providing over $300 billion in loans in the last 18 months. According to a recent article in Foreign Affairs magazine the nearly $2 trillion in foreign exchange reserves of countries in eastern Asia have become the financial backbone of U.S. economic well-being.

The U.S. share of world economic growth is now in decline. China is the world’s most dynamic economy, with a 9.9 percent Gross Domestic Product (GDP)—its growth rate. To stay competitive in a global marketplace and to meet the financial demands of investors, U.S. businesses are squeezed.

WHAT RECOVERY?—Despite longer hours and shorter vacations, American workers find that their, wages are stagnant or declining and employee benefits are being cut. Driven by a relentless focus on reducing costs, U.S. businesses have remained cautious and slow to invest in new plants and new hires, notwithstanding the recent gains in the GDP. When they do invest, much of it is invested abroad—over $70 billion in China in recent years.

The manufacturing job base declined by 6 percent last year. Manufacturing job losses have continued for more than 43 straight months, since July 2000, and they now amount to over 2.5 million. Similarly, white-collar service jobs are moving offshore in accelerating numbers.

More than two-thirds of IBM’s recently announced 10,000 new jobs will be located abroad. Assessing the potential impact of outsourcing white collar jobs, a recent study by the University of California at Berkeley found that 14 million American service jobs are vulnerable. Nineteen states have moved some state jobs offshore, including customer service staffs who respond, in India, to telephoned welfare inquiries from Indiana.

DOWNWARD MOBILITY—Domestically, U.S. economic challenges are growing, especially as the nation moves toward the 300 million population mark and 77 million baby boomers prepare to lay claim to their Medicare, Medicaid and Social Security benefits. In 2002, 1.3 million more Americans fell below the federal poverty line, raising the number of poor, as defined by the federal government, to 34.8 million.

The economic fortunes of Americans are increasingly uncertain and volatile. Large numbers of families find themselves living beyond their means and are in serious financial trouble. Thirty million Americans earn less than $8.70 per hour. Excluding mortgages, consumer debt has more than doubled in the last 10 years. The American dream is increasingly elusive. The middle class shrinks, and the ladder to upward mobility has fewer and fewer rungs. Without an expanding, vital middle class, our economy and our democracy are at risk.

Real wages for most Americans are eroding. The typical family income has fallen by nearly $1,500 a year. Personal savings are minuscule, less than 2 percent. Household debt and government deficits are at record high levels. The federal debt is at $521 billion, and personal debt averages over $19,000 for each U.S. household, for a total of $2 trillion.

Bankruptcy has become a way of life, not just for families but for our largest corporations as well. In 2003, more than 92 percent of the 1.6 million Americans who filed for bankruptcy were, in social terms, in the middle class, and 9 million families are in credit counseling. The budgets of states and cities are stretched to the extreme. The rewards of our spectacular productivity gains, advances in technology and recent business-friendly federal domestic policies have widened the gap between the privileged and prosperous and the struggling majority of American families.

Homeowners bid up property values, competing to locate near good schools and in safe neighborhoods. The median price of single-family homes increased 6.7 percent in 2003. The real estate market is a bubble. Its value is not sustainable.

Each year fewer Americans are covered by health insurance. Currently nearly 44 million—nearly one in five Americans—are without coverage. The single largest cause of personal bankruptcy in the U.S. is medical debt. Employers are increasingly dropping or reducing coverage and shifting costs to employees, especially to retired former employees. In 2003 the workers’ share of health premiums rose 13 percent. Health care benefits, not wages, are now at the center of every labor dispute. The unbridled growth in the pharmaceutical sector—now comprising 15 percent of U.S. economic output, double its share of 30 years ago—is arguably an economic bubble of a different kind.

Health care expansion and inflation are subject to few checks and balances. Last year, the Kaiser Family Foundation reported that 2003 health insurance premiums rose nearly 14 percent, on top of double-digit increases in previous years. The annual cost of a typical family plan now exceeds $9,000. In 2002 health care spending grew 9.3 percent over the previous year, while the GDP rose by only 3.6 percent. This represents the sixth straight year of accelerating growth in health care expenditures and a 2 percent increase in the health sector’s share of the total U.S. economy.

Education at all levels is under stress. State and local governments are cutting back. Costs of higher education continue to increase at two to three times the rate of inflation. Tuition at four-year public colleges, where 80 percent of the nation’s students are educated, has recently risen by nearly 15 percent a year. While the challenge of the world marketplace requires world class education, the U.S. advantage of a superior, accessible, broad-based educational system is in decline.

All of the elements that in combination constitute the American dream are either eroding or are spiraling out of reach. Combined, secure jobs, a living wage and reliable benefits, the ability to provide a decent home, quality child care and education, competent health care for one’s family, adequate retirement security, and the prospect that the next generations may exceed the present one in their aspirations and prosperity are in decline.

In their book The Two-Income Trap: Why Middle-Class Mothers and Fathers Are Going Broke, Elizabeth Warren and Amelia Warren Tyagi document how the rapid rise of fixed costs for the typical American middle-class family have outpaced income over the past 30 years, offsetting the gains of a two-parent family income. Moreover, they found, using government data over 30 years, that these rapidly growing costs were not the result of overspending on trivialities but were incurred for basics: mortgages, cars, health insurance, child care, and schools. Something has got to give.

A WAL-MART ECONOMY—Job growth trends are ominous. Over 2.3 million jobs have been lost in the last three years, leaving over 8 million unemployed in the worst job recovery in American history. For the first time in U.S. history, there has been no net job creation in the more than two years since the recession officially ended. The current recovery has not produced enough jobs to keep pace with new jobs needed—150,000 per month—to employ first-time hires. Those who are hired are increasingly paid less and are hired as temporary workers. Not since the mid-1940s have we lost jobs for three years in a row.

Much of the job loss can be traced to the nation’s extraordinary increases in productivity. However, it has compounded a new wave of offshoring. Jobs have moved abroad, including those in call centers and manufacturing, but also higher-value jobs in information technology, engineering, tax preparation, insurance, legal and financial analysis, architecture, accounting and medicine.

This nation confronts a potential hemorrhaging of higher value jobs that is staggering—a critical threat to middle-class stability. A blind faith in free-trade fundamentalism, with its view that retraining will solve everything, is misplaced. What does the student or displaced worker train for now?

Current trends in immigration also jeopardize middle-class stability. Illegal immigration doubled in the 1990s. Over 10 million illegal immigrants now flood the U.S. job market. The threat from these and legal immigrant workers is no longer limited to lower paying U.S. jobs. Temporary work visas are granted to foreign engineers and tech workers as corporations provide the justification for this convenient alternative to training or to adequately paying American workers. This immigrant population, in turn, puts downward pressures on wages and puts fiscal strains on local and state governments. Foreign-born workers make up 11 percent of the U.S. population and 14 percent of the work force. That is more than half of the total work force growth from 1996 to 2002.

Then there is the additional downward wage pressure of fast-food and low-price merchandise chains like Wal-Mart, the nation’s largest employer, and of other big-box retailers. These employers often do not pay a living wage, offer only limited, if any, health care coverage and have successfully discouraged unionization. This creates a situation in which their workers are often subsidized by public tax and medical benefits, a further drain on publicly supported services and hence on the middle-class taxpayer. We have degenerated from a General Motors economy to a Wal-Mart economy. Fifty years later, if what is good for Wal-Mart is good for the country—Good Luck, America!

Rather than acknowledging and trying to alleviate the longer-term downward economic trends, our governments at all levels look the other way and hype the economic data. Washington has been captured by business interests, multinational corporations, Wall Street financiers and other wealthy contributors. It’s initiatives now overwhelmingly favor these establishments. The basic economic strategy follows the big business playbook, which holds that rewarding investment rather than labor empowers economic growth.

Look at the record regarding the average citizen. An astounding 43 percent of the recent $1.7 trillion in tax cuts went to the top 5 percent of taxpayers, the same American households already enjoying rapid pay increases and healthy returns on investments. There is a $400 billion defense budget, plus a $160 billion pre-emptive war in Iraq. New government regulations may cut overtime pay. A proposed law would relax corporate pension protections, now underfunded at a record $350 billion. We have a refusal to allow real competition in the pharmaceutical industry. There is the shameless and unchecked doling out of federal tax dollars by Congress to fund more than 8,000 pork projects for its members. We have a projected $521 billion budget deficit this year. There are personal and corporate subsidies, tax loopholes, tax shelters, and offshore corporate tax evasions. Diminishing corporate payments as a percentage of total federal tax revenues have dropped from 50 percent in 1941 to 10 percent now.

THE TIME IS OUT OF JOINT—The main reason for the growing federal deficit is that revenues have plummeted and are now at their lowest level since 1950. The primary priorities of the federal government in the first years of the 21st century have been tax cuts, military expansion and political-military assertion overseas.

Washington has lost the capacity for basic governance of economic matters. Its energies are increasingly devoted to initiatives calculated to diminish the nation’s social contract, to ensure the incumbents’ re-election and political dominance, and to reward the establishment that sustains it—the wealthy and the economic elite.

Time is running out. The American dream is in jeopardy. Blind reliance on the resilience of the U.S. economy is misplaced, as is the naive optimism that heightened productivity will necessarily create jobs in the service industries, as it did before in the mechanized and automated sectors. Cumulatively, the dynamic economic forces now at work impose increasing risks to the U.S. capitalist system. Failure to deal now with these trends will ultimately lower the living standards of our children and grandchildren and cripple their public policy alternatives and economic choices.

It is certainly within our nation’s capacities to affect our future. The question is: How will Americans grapple with these developments? What will it take—further economic hardship, increased political anger, or, in the extreme, social revolt—to stir the American people to action?