"Who Stole the American Dream?" How The 1% Bamboozled Us Into Poverty

With seismic shifts in our economy, the middle class struggles to stay afloat as the gap 

between the haves and have-nots widens. Can we bridge the divide and restore the promise? 

Illustration by Gwenda Kaczor.

Alan: "The Job Creators Have Become The Job Destroyers. Hack Benefits Too." Hedrick Smith Interview (PBS) - http://paxonbothhouses.blogspot.com/2013/09/the-job-creators-have-become-job.html

The Saturday Evening Post

 July/August 2013

Hedrick Smith

Over the past three decades, we have become Two Americas. We are no longer one large family with shared prosperity and shared political and economic power, as we were in the decades following World War II. Today we are a sharply divided country—divided by power, money, and ideology.

Abraham Lincoln gave fair warning: “A house divided against itself cannot stand.” Many observers write about this, but it is hard to grasp exactly how we arrived at our present predicament or how to go about healing America’s dangerous divide. The causes do not lie in the last election or the one before that. They predate the financial collapse of 2008. But certainly one of the chief culprits is the shifting of financial burden from government and large corporations onto the backs of middle-class workers and their families.

When Paul Taylor and Rich Morin of the Pew Research Center did a poll on how people were faring during the Great Recession that started in December 2007, they described a revealing dichotomy in the public mood—a schizophrenia in which 55 percent of Americans reported they were in deep trouble, but 45 percent claimed to be holding their own.

Taylor was so struck by these two different portraits that he titled their report “One Recession, Two Americas.” The report explained the dissonance in people’s experience, such as my own puzzlement at reading newspaper accounts of 15 million Americans being unemployed and 6.7 million families being foreclosed out of their homes, then seeing suburban restaurants jammed with people on a night out, spending as if the economy were strong.

We are literally Two Americas, remarkably out of touch with each other—the fortunate living the American Dream but lacking any practical comprehension of how the other half are suffering, unaware of the enervating toll of economic despair on the unfortunate half, many of whom just two or three years before had counted themselves among the fortunate.

The Pew survey documented a class split in America. Among the losers, the picture was bleak: Two-thirds said their family’s overall financial condition had worsened; 60 percent said they had to dig into savings or retirement funds to take care of current costs; 42 percent had to borrow money from family and friends to pay their bills; 48 percent had trouble finding medical care or paying for it. The psychological toll was heavy. By contrast, the other half, the relative winners, admitted to some problems such as stock market losses but described their woes as modest and manageable.

“The single most common word or phrase used to characterize the past 10 years,” the Pew Center reported, “is downhill, and other bleak terms such as poor, decline, chaotic, disaster, scary, and depressing are common.”

That language tells how average Americans feel. The numbers describe the damage. In 2008, American households lost $11.1 trillion, close to one-fifth of their total accumulated private wealth. More and more trillions evaporated in 2009, 2010, 2011 and 2012. With housing prices falling steadily for five straight years, unemployment stuck at stubbornly high levels, and the stock market bouncing up and down, periodically spooked by fear of a second dip into recession, those astronomical losses became permanently etched into the lives of millions of middle-class families. Their personal safety nets had been shredded.

Translating cold numbers into a graphic picture of the hard economic realities in the lives of ordinary people is a challenge. Recently, Yale University political economist Jacob Hacker and his research team developed the Economic Insecurity Index, which logs the harshest economic blows a family can face—an income loss of 25 percent or more in a single year; superheavy medical expenses; or the exhaustion of a family’s financial reserves. Using this index, Hacker found that in 1985, roughly 10 percent of all Americans had suffered an acute financial trauma. By July 2010, the proportion had jumped to 20 percent—one in five American families suffering from an economic tornado ripping through their lives.

As that Pew Center poll discovered, even middle-class families who avoided the most acute distress have experienced rising economic anxiety. There is good reason for that. Financial insecurity has been written into the DNA of America’s New Economy. Not only have economic gains been distributed more unequally than during the era of middle-class prosperity, but Corporate America has rewritten the social contract that once underpinned the security of most average Americans. The company-provided welfare safety net that rank-and-file employees enjoyed from the 1940s into the 1970s has been sharply cut back, and a huge share of the cost burden has been shifted from companies to their employees.

In 1980, for example, 70 percent of Americans who worked at companies with 100 or more employees got health insurance coverage fully paid for by their employers. But from the 1980s onward, employers began requiring their employees to cover an increasing portion of the health costs. Other employers dropped company-financed health plans entirely, saying they could not afford them.

So pervasive did this burden shift become that by the mid-2000s, only 18 percent of workers—one-quarter of the percentage in 1980—were getting full health benefits paid by their employers. Some companies may have needed this change to survive, but many simply added the cost savings to their profit line.

In terms of the overall financial burden shift from corporations to employees, by far the largest change has come in retirement benefits. In 1980, 84 percent of the workers in companies with more than 100 employees were in lifetime pension plans financed by their employers. By 2006, that number had plummeted—only 33 percent had company-financed pensions. The rest either got nothing or had been switched into funding their own 401(k) plans with a modest employer match.

The switch offered big savings for employers. According to pension expert Brooks Hamilton, the lifetime pension system cost companies from 6 to 7 percent of their total payroll, but they spent only 2 to 3 percent on matching contributions for 401(k) plans. Often those savings went directly into corporate profits and bigger stock options bonuses for the CEO and other top executives.

Businesses said they could no longer afford lifetime pensions. But digging into the records, Wall Street Journal reporter Ellen Schultz found that wasn’t really true. In fact, pension plans were moneymakers for many a big company. In the bull market of the 1990s, America’s blue ribbon companies did so well investing their employee pension funds that many built up huge surpluses, above their obligations to employees, without contributing a cent of company cash for a decade or more. The stock market gains were so large that by November 1999, GE had a $25 billion surplus in its basic employee pension funds; Verizon had $24 billion; AT&T had $20 billion; IBM had $7 billion.

What’s more, some of America’s largest corporations were able to shift pension fund gains indirectly to their profit lines and, Schultz reported, a few legally took advantage of loose and poorly enforced accounting rules to siphon off money from their employee pension funds to finance portions of their corporate downsizing, restructuring, and mergers and acquisitions.

Some companies made billions by shutting down employee pension plans and shifting surplus assets to company profits. And if company pension plans got into financial trouble during the stock market decline in the early 2000s, it was either because the company itself was in deep financial trouble or because company finance officers had been too aggressive in gambling with pension assets, putting them into risky equities in hopes of making big gains, rather than investing carefully in safer, more conservative assets like bonds.

Either way, the shift out of lifetime pensions to 401(k) plans and so-called account balance plans by highly profitable corporations was a heavy cost blow to their workers. In the 1950s, U.S. employees nationwide paid collectively about 11 percent of their retirement costs. By the mid-2000s, they were paying 51 percent. Hundreds of billions of dollars in safety net costs were shifted from companies to employees without any offsetting real increase in the typical worker’s pay.

Corporate America was so successful in shifting a major portion of the cost for health and pension benefits onto individual employees that even a corporate financial giant like Metropolitan Life Insurance Company was moved to comment in 2007 that this shift had essentially turned the old social contract upside down. As MetLife put it, “The burden shift has turned the traditional definition of the American Dream ‘on its ear.’ ”

Perhaps the starkest indicator of mounting middle-class distress has been the sharp rise in personal bankruptcies, now an integral feature of the New Economy. Bankruptcy is a middle-class phenomenon. The poor go broke, but they don’t file for bankruptcy because they have few, if any, assets to protect. Middle-class people and upper-middle-class professionals go into bankruptcy to try to hang on to basic assets such as their home, their retirement nest egg, or their income stream, all of which are protected by law if they file for bankruptcy.

Bankruptcy can happen to almost anyone. Typically when solid families go bankrupt, the cause is almost always some acute and unexpected economic calamity—the loss of a job; a medical catastrophe; divorce; foreclosure or drastic loss of home value; or the slow, relentless ebb tide of poverty in retirement. Millions of middle-class families go over the financial cliff, pushed inexorably into bankruptcy by ever-mounting debt. In fact, private debt in America has risen far more rapidly than government debt. The total personal debt of American consumers exploded from several hundred billion dollars in 1959 to $12.4 trillion in 2011, according to Federal Reserve statistics.

When you combine credit cards, auto loans, home mortgages, student loans, and other forms of credit, the average debt for every adult man and woman in America has nearly quadrupled since the 1950s. “We have gone from a society where most consumer borrowing was episodic and for special purchases, to a society where many families have to use credit to pay for ordinary household expenses and are permanently indebted,” University of Illinois bankruptcy professor Robert Lawless told Congress.

After Congress deregulated consumer lending in the 1970s and 1980s, the market was flooded with complicated, high-interest, and potentially dangerous credit products that were sold to unwary consumers untutored in the fine print of credit fees and charges that kept them sinking into the debt quagmire.

But the single biggest cause of exploding private debt, Lawless contends, was a U.S. Supreme Court decision in 1978. “That really opened the floodgates,” Lawless told me. “It effectively deregulated the credit card interest rates. Banks hail that as ‘democratization’ of credit. Their attitude was, we can now charge 30 percent to people who would not qualify for a loan before, because they were too high a risk. For banks, these vulnerable borrowers are the most lucrative borrowers.”

Once the lid was off interest rates, the banks had a field day. They sold as much debt as possible. In the early 2000s, banks and credit card companies blanketed the nation with preapproved credit card offers totaling $350,000 per family. This profligate policy represented a complete reversal in lending strategy. A generation earlier, banks were extremely careful, almost stingy, about granting credit. They were quick to shut it off if a borrower got in trouble. But by the 1990s, banks had come to see slow-paying borrowers who were in financial peril as their most lucrative targets.

One way to get off the treadmill of endless credit or debit card debt is to file for bankruptcy and get a second chance financially, much the way bankrupt corporations do. But as personal bankruptcies rose through the 1990s, banks and credit card companies saw the bankruptcy process as depriving them of the most profitable segment of their business. In the early 2000s, the financial industry began lobbying Congress to close the bankruptcy door, or at least tighten the terms for going bankrupt. They told Congress that “high-income deadbeats” were using bankruptcy to welsh on credit card debt.

In 2005, the financial industry got what it wanted. Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act, which raised the legal and financial barriers to bankruptcy filings. As expected, the number of personal bankruptcies plunged from just over 2 million in 2005 to about 750,000 in 2006. But after a few years, bankruptcy filings climbed sharply again in the wake of mass layoffs and high unemployment. By 2010, bankruptcies were back over 2 million a year, evidence that even with tougher barriers to bankruptcy, financial distress among the middle class was more acute than five years earlier.

What’s more, when experts examined who was filing for bankruptcy, it turned out that the banks and their lobbyists had misled Congress. As the financial industry had urged, the law was designed to block supposed high-income deadbeats from improperly filing for bankruptcy by instituting a financial “means test.” With the means test as a filter to weed out high-income filers, the average income of bankruptcy filers should have fallen. But that didn’t happen. Researchers saw no significant change.

So instead of filtering out high-income cheats, the new law was actually creating obstacles for honest, financially busted debtors, just as consumer advocates had feared.

Once again, the rules were altered and average Americans got hurt. In the Old Economy, bankers issued credit just to strong, creditworthy customers who typically paid off their debts. The go-go New Economy went for easy credit and higher debt for all, especially people with risky credit records, and many more people wound up in bankruptcy. Over the past several years, as the housing market nosed down and 25 million Americans lost solid, full-time jobs, more and more middle-class families turned to easy credit to try to stay afloat. That added to the profits of banks and credit card companies, but the more money they made, the more middle-class and working families sank into financial ruin.

So the new credit system, coming on top of the great burden shift on pensions and healthcare, has contributed to the unraveling of the American Dream for average Americans and to America’s ever-widening wealth gap.

Rescuing average Americans from the New Economy credit trap will require reversing course—steps such as reimposing ceilings on interest rates and requiring down payments on houses. But the determined efforts of Wall Street banks and congressional Republicans to hamstring the operations of the new U.S. Consumer Financial Protection Bureau shows how hard it will be to do that—unless the middle class demands it.

We are at a defining moment for America. We cannot allow the slow, poisonous polarization and disintegration of our great democracy to continue. We must come together and take action to rejuvenate our nation and to restore fairness and hope in our way of life. We see the challenge. It is now time.

From Who Stole the American Dream? by Hedrick Smith © 2012 Hedrick Smith. Published by arrangement with Random House, an imprint of The Random House Publishing Group, a division of Random House Inc.