The economy: the problem

Workingman’s blues

Jul 24th 2008 | KANSAS CITY, MISSOURI
From The Economist print edition

Americans are furious about the state of their country. In the first of two articles, we examine the reasons for their discontent (see also article)

JOEL AND JACKIE BRENDE differ on many things. He’s a Republican, and thrilled to have just shaken John McCain’s hand at a town-hall meeting in Kansas City, Missouri. She’s a Democrat, who supports Barack Obama because she thinks it is “time for a change”. But both of them agree that America’s star is fading.

“We were always optimistic when we were young. We thought that every year, things would get better,” says Mrs Brende. But now: “The bubble has burst. I think my generation [will be] the last to see a great America.” Her husband agrees. Standards are falling in schools, he frets. Young people are finding it harder to get ahead. “We’ve all been so greedy for so long and it has caught up with us,” says Mrs Brende. She hopes that Mr Obama may be able to do something about the national malaise, but fears that “It’s too late. The slide is on.”

Asked about their own lives, however, the Brendes are rather more cheerful. “We’re OK, financially,” says Mrs Brende. She is a travel writer; her husband is a doctor. They live half the year in Missouri and half in Mexico. They have 24 grandchildren and another on the way. Life could be a lot worse.

Regardless of their political beliefs, American voters are in a horrible mood this year. Democrats are sick of George Bush. Republicans are sick of the Democrats running Congress. Everyone worries about Iraq, either because they think the war should never have been fought, or because of the long, costly and thankless slog it has turned into. The latest violence in Afghanistan is depressing. The culture war grinds on: America is slouching towards Gomorrah or theocracy, depending on your viewpoint. The earth is either cooking or being overrun by eco-fanatics. And the American economy is tottering.

The polls tell a dismal tale. Only 29% of Americans approve of the president. Only 14% approve of Congress. And just 6% view the economy positively. Yet many Americans combine despondency about the big picture with personal contentment. More than 80% say they are satisfied with their own circumstances. Even more are satisfied with their jobs. And although nearly everyone despises Congress, most Americans like their own representatives.

How to reconcile these stark apparent contradictions? Some blame the media for overhyping gloomy news. Phil Gramm, a former senator from Texas and adviser to Mr McCain’s campaign, told the Washington Times that: “We have…become a nation of whiners. You just hear this constant whining, complaining about a loss of competitiveness, America in decline…Thank God the economy is not as bad as you read in the newspaper every day.”

He had a point. American headlines are crammed with words like “failure”, “hurting” and “Fannie Mae”. Foreign pundits sound even more bearish, and one sometimes detects a hint of gloating at the hyperpower’s distress. “The Great Depression,” thundered the front page of the Independent, a British newspaper, in April. The story underneath was about an increase in the demand for food stamps, after an effort to publicise their availability.

Amity Shlaes, the author of a history of the Great Depression, thinks the comparison absurd. During the 1930s, she notes, “people lost their homes even though they had borrowed only 10% of the purchase price.” People losing their homes today often borrowed more than 90%. And today’s unemployment rate, though rising, is 5.5%. In the Great Depression, it peaked at 25%.

Most Americans think their country is in a recession. But, buoyed by exports, output has yet to shrink for a single quarter. Mr Gramm suggested that his compatriots are suffering a “mental recession” rather than a real one. The McCain campaign tossed him under the Straight Talk Express, which was harsh but politically wise. For the figures miss an important point: consumers are facing a nasty squeeze, hit simultaneously by soaring costs for petrol, food and health care, tumbling house and share prices, tighter credit and flagging wages. Both candidates hear voters complaining about these things all the time. And since neither of them is a fool, both crack their cheeks trying to sound sympathetic.

Petrol prices, despite their recent retreat, hurt nearly everyone. Adam Julch, an enormous former college football star who is now a manager at a trucking firm in Omaha, Nebraska, complains that he had to trade in his pickup truck for a little Honda Civic. “I’m 350 pounds,” he says, “I feel like I’m in a clown car.”

Soaring energy costs have sent the overall inflation rate to 5%—higher than it was in 1992, when angry voters threw out George Bush senior. Average hourly pay is falling in real terms. Meanwhile houses, most Americans’ biggest asset by far, are tumbling in value at a pace that exceeds that seen in, yes, the Great Depression. The S&P/Case-Shiller index of national house prices is down 16% from its peak, and judging by the overhang of unsold homes, has a lot further to fall. Asset deflation coupled with consumer-price inflation is a powerful recipe for political discontent.

In Prince William County, Virginia, for example, house prices fell by 31% in the year to May and one home in 111 is in foreclosure. During the boom years, lenders offered mortgages to people with no cash for a deposit and no documents to prove a steady income, sighs a local real-estate agent. When these borrowers lost their jobs—and some were in the construction business, which has nosedived—many simply walked away from their homes.

Bankruptcies and bargains

In the worst-hit neighbourhoods, such as Dale City, the foreclosure signs are everywhere. “People don’t want to buy round here because they see all these empty houses and wonder what’s wrong with the area,” says Ed Moore, an air force veteran who supports Mr McCain. “Things are going badly,” says John, who owns a struggling local construction business and supports Mr Obama but prefers not to advertise the fact to his clients.

Both men are grumpy, but both reckon they will cope. Mr Moore’s home has lost much of its value, but since he plans to stay in it “till they put me six feet under”, he is not unduly bothered. John plans to quit construction, move to Texas and get into publishing. He is a college dropout, but reckons that “if you do some research, you can make a lot out of nothing” in America.

Meanwhile, others see an opportunity in Dale City’s collapse. Jessica Lofiego, a mother of two, is scouring the neighbourhood for a bargain. At the height of the boom, she says, normal families couldn’t afford a nice place this close to Washington, DC. Now, she’s looking at a spacious 3-bedroom house that someone is trying to unload for $149,000.

History suggests the housing slump will last for a while. A study of post-war housing busts by the IMF found that they typically last four years and involve a loss totalling 8% of a year’s output. Inflation, meanwhile, could slow if commodity prices stabilise. But given rapid, commodity-intensive growth in emerging economies, the underlying price shift—where American consumers spend relatively more of their income on food and fuel—is here to stay. Small wonder they are sour.

The malaise stems in considerable part from a feeling that individuals have become more vulnerable to forces beyond their control. The American can-do spirit is not dead, of course. Laid-off workers are finding new jobs, motorists are driving less and cooks are trawling the internet for recipes to jazz up the leftovers in the fridge.

But some shocks are hard to adjust to. The American suburban idyll of big homes and big gardens relied on cheap petrol. With gas prices high, many suburbanites yearn for a shorter commute. But they cannot quickly or easily sell their homes and start living in denser clusters with better public transport. Nor is it clear that they want to. So they suffer, and pray for petrol prices to fall. Sometimes literally: Rocky Twyman, a community organiser from Maryland, leads group prayers at petrol stations to beg for divine intervention.

America’s costly but leaky health-care system aggravates several other problems. Soaring health-insurance premiums depress wages and prompt cash-strapped firms to stop covering their staff. The proportion of workers whose employers cover them fell from 65% in 2001 to 59% in 2007. And the fact that most Americans still get their health insurance through their job makes them much more worried about losing it. Unemployment may be low, but if it means your children lose their health cover, losing a job is scary.

Opinion polls show unprecedented concerns about income distribution and economic mobility. Gallup finds that nearly seven out of ten Americans think wealth should be more evenly distributed, the highest fraction since the question was first asked in 1984. People are worried about inequality for good reason: real median household income has fallen since 1999, while labour’s share of the national pie has shrunk. The squeeze on labour could be cyclical: between 1997 and 2001, workers’ share of national income rose; now it is back where it was in 1997. But the earnings gap between the most-skilled workers and everyone else has been widening since the early 1980s. And in recent years the gains to the top have taken off while most people have stood still, or even fallen back, though the squeeze was partly mitigated by differing spending patterns (see article).

Figures collated by Emmanuel Saez, an economist at Berkeley, make the point starkly. In the 1990s, the incomes of the richest 1% of taxpayers went up 10% a year in real terms (see chart), while those of the other 99% grew at an average annual rate of 2.4%. Between 2002 and 2006 the richest 1% saw 11% annual real income growth: everyone else got less than 1%. Three-quarters of the gains from the Bush expansion went to 1% of taxpayers, who now receive a larger share of overall income than at any time since the 1920s.

Technology is probably the main culprit, but Americans prefer to blame trade. The latest Pew Research Centre survey of global attitudes found that only 53% of Americans think trade is good for their country, down from 78% in 2002 and lower than in any of the other 23 countries included in the survey.

The depth of gloom varies by age. The baby-boom generation (people aged 43-62) are glummer than the young or the elderly, according to Pew. Some 55% of boomers think it unlikely that their income will keep pace with the cost of living in the next year, compared with 44% of 18-42-year-olds and 43% of those aged 63 or more. Many boomers look after children and crumbling parents simultaneously.

Americans have grown accustomed to extraordinary prosperity. Poor Americans today are more likely to have fridges, dishwashers and air-conditioning than average Americans were in 1971. Young voters have no memory of a serious recession, since the last one was in the early 1990s. Some do not even realise that cyclical downturns are normal. Only 18% of Americans think they are worse off than their parents were at the same age. But elections hinge on shorter-term concerns. Four-fifths of Americans say it is harder to maintain a middle-class lifestyle now than it was five years ago. That probably means the election is Mr Obama’s to lose.