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Magazine / ECONOMY

The Left-Behinds

How three decades of flawed economic thinking have helped to create record numbers of long-term unemployed and undermine America’s middle class.

Unemployed and unwanted: Newer companies that might employ the children and grandchildren of former steel workers in Braddock, Pa., fret that workers are “damaged goods.”(AP Photo/Andrew Rush)

photo of Michael Hirsh
November 17, 2011

BRADDOCK, Pa.—Movie director George Romero, the master of zombie kitsch, made his first films in the pitted and rusting landscape around this fabled steel town back in the 1960s and ’70s. It was fantasy then. But today, Braddock truly is the land of the living dead.

U.S. Steel’s Edgar Thomson Steel Works chugs on, as it has since 1875, but it’s a sprawling corrugated-metal relic of its former self. Its parking lot is almost empty at midday, and it employs several hundred workers rather than the more than 10,000 who labored here at its peak. The rest of Braddock, meanwhile, is a ragged reminder of the nearly forgotten era when western Pennsylvania’s Monongahela Valley rolled a century’s worth of steel for gleaming new American cities and factories.

This area used to be legendary for hard work; its progeny includes iron-tough football heroes such as Johnny Unitas, Joe Namath, and Joe Montana.

 

Today, Braddock is a black hole of apathy where the gravitational pull of despair is often too powerful to resist. Unemployment is chronically in the double digits, not so much because of displaced steelworkers—most of those jobs disappeared in the 1980s—but because of their children and grandchildren. These are the second and third generations of a lost tribe.

“We have manufacturing companies who say to us, ‘I don’t want to look at those people. They’re not used to showing up and coming to work anymore,’ ” says Stefani Pashman, head of the Three Rivers Workforce Investment Board in Pittsburgh. Unemployment counselors talk about the difficulties of teaching “soft skills”—such as simply showing up on time for an interview and wearing something nicer than a stained T-shirt. “The perception of these people as workers,” says David Coplan, director of the Mon Valley Providers Council, “is that they’re damaged goods.”

It’s easy to write off the Mon Valley left-behinds as an old story limited to the specific woes of the steel industry. But in many ways, the people here are part of a much broader trend toward long-term unemployment in America. As in Braddock, and now a slew of communities laid low by the housing bubble and bust, the phenomenon can feed on itself and create a vicious cycle of disappearing jobs, declining incomes, higher foreclosures, and more layoffs.

In Stockton, Calif., a community of left-behinds has materialized in the wreckage of the mortgage meltdown. Just as European immigrants once streamed into the Mon Valley, descendants of California’s agricultural workers found jobs during the housing boom in home construction for middle-class families who worked an hour or two away in the San Francisco Bay Area. Now, a confluence of bad news has not only cost many of them their jobs but also plunged them underwater on their mortgages. Stockton’s jobless rate is 15.4 percent, fifth highest of any metropolitan area. Even though the city is only an hour’s drive from Silicon Valley, its inhabitants, like those of western Pennsylvania, are becoming damaged goods.

“We have a large population in their teens or 20s with relatively low levels of education,” says Jeff Michael, a labor expert at the University of the Pacific (Stockton). “It’s a huge problem: a whole generation of young people who are going to find difficult employment prospects.”

When Lee Farkas’s mortgage company collapsed and he went to prison, Ocala, Fla., lost 1,200 jobs.

Ocala, Fla., is yet another place where growth exploded during the housing bubble and then, almost as abruptly, imploded. As recently as 2007, the Santa Monica-based Milken Institute, which tracks job growth in metro areas, labeled Ocala the nation’s “best-performing city” for job creation. Riding on the debt-fueled housing bubble and a rising flow of sun-seeking retirees, Ocala enjoyed a flowering of construction companies and the cottage industries that fed them: metal fabrication, electronics, plastics. Ocala now has one of the highest rates of long-term unemployment—defined as 27 weeks or longer—in the country: 11 percent of its workers are officially unemployed, and almost as many more are either underemployed or have dropped out of the job market. More than 80 percent of the officially unemployed have been out of work for more than six months.

Adding felonious insult to injury, one of the entrepreneurs who stoked the city’s torrid growth was Lee Farkas, who opened one of the nation’s largest mortgage-processing facilities for Freddie Mac and Ginnie Mae. Farkas was recently sentenced to 30 years for fraud. When his company collapsed in 2009, 1,200 jobs disappeared overnight.

“We had a perfect storm, too,” says Pete Tesch, CEO of the Ocala/Marion County Economic Development Corp. “It’s going to be a long time before we build houses again.” He laments, “There is not an abundance of high-skilled or high-wage jobs, and these individuals with low to moderate educational levels and skills—where can they go?” In a recent study, the University of Central Florida projected that Ocala will face double-digit unemployment until at least 2016.

At first glance, the long-term unemployment problems of Braddock, Stockton, and Ocala seem totally different in character. Braddock’s plight came from the structural decline of a major manufacturing industry. The other two cities were victims of Wall Street’s excesses and the epic but cyclical bust of the real-estate bubble.

But a deeper look suggests that all three cities fit into a long-term pattern: They are the neglected collateral damage of the transformational changes made possible by unfettered free markets, globalization, and information technology. Most of the shocks were predictable, and many were predicted. U.S. policymakers, however, even more than their counterparts in other advanced countries, consistently underestimated the enduring effects those shocks would have on working families and failed to build in protec-
tive buffers.

Along the way, “long-term unemployed” has increasingly become a synonym for “unwanted.” As industries die, skills atrophy, and ambition fades, especially among older workers. In a new era of jobless growth, fiscal austerity, and the relentless drive for productivity, employers get pickier about whom they hire. Workers who don’t retrain quickly at a high enough level or those who are stuck with an underwater mortgage and can’t move right away for a job opportunity quickly become long-term unemployed.

U.S. companies have grown so brazen about avoiding the long-term unemployed that many place ads for only “currently employed” applicants. Sen. Richard Blumenthal, D-Conn., and Rep. Rosa DeLauro, D-Conn., have introduced bills seeking to bar the practice as illegal discrimination.

In recent months, Federal Reserve Board Chairman Ben Bernanke and President Obama have sounded increasingly urgent alarms about the staggering number of long-term unemployed. And they are right to do so: 42.4 percent of the nation’s 13.9 million unemployed workers have been out of a job for more than six months. That’s by far the highest share of long-term unemployed since the government started keeping records a half-century ago. Expert after expert now warns that the longer a person goes jobless, the greater the atrophy in skills and ambition, and the more likely that person is to drop out of the workforce entirely.

What Bernanke and others rarely mention, though, is that this trend has been building for at least three decades. The share of left-behinds has generally ratcheted up with every economic downturn since the early 1980s. And today, even two years after the Great Recession technically ended in June 2009, the number of long-term jobless has continued to climb to record levels. It shot up from 29.3 percent of total unemployed workers in June 2009 and peaked at 44.6 percent as recently as September.

Washington, dominated by a free-market consensus ever since President Reagan’s era, has ignored that 30-year pattern. Partly as a result, reams of data show that America’s middle class has been shrinking. Among the few who has long second-guessed the Washington mind-set is Frank Levy, an economist at the Massachusetts Institute of Technology who coauthored a much-cited 2007 paper concluding that labor began losing the fight to capital in the late 1970s.

“I’m not sure how much better we could have done in preserving the middle class,” he says. “But I know that, with a few exceptions like the earned income tax credit, we didn’t really try.”

The shock in Mon Valley came from competition in the steel industry from East Asia. Few people in government seemed to appreciate the full impact of the competitive threat from newly rising Asian economies and the introduction of some 3 billion people to the labor markets after the Cold War. A patchwork of worker-education programs from the Job Training Partnership Act in 1982 to the recent Workforce Investment Act has proved woefully inadequate.

In California’s San Joaquin Valley and in central Florida, the problem was the untrammeled globalization of finance, which attracted cheap money from around the world and helped create the housing bubble that, when it burst, all but destroyed these communities. Deregulated capital flows and financial markets would “better enable American companies to compete,” as then-Treasury Secretary Lawrence Summers declared in 1999 upon repeal of the Glass-Steagall Act, which had restricted banks’ size and their scope of activities. Summers’s fellow Democrat, Sen. Chuck Schumer of New York, was even more blunt: “If we don’t pass this bill, we could find London or Frankfurt—or, years down the road, Shanghai—becoming the financial capital of the world,” he said. Washington gave Wall Street carte blanche as America’s great new “export sector” for financial services.

“We said, ‘Oh, my God, it’s much easier to make money on money,’ ” Sen. Tom Harkin, D-Iowa, told National Journal. The rush was on to securitize and sell mortgage-backed securities and derivatives around the world. And the subprime securitization bubble hit the poorest Americans particularly hard, as Wall Street banks actively preyed on immigrants and low-income minorities with exotic mortgages they couldn’t afford or understand, a practice known as “reverse redlining.”

“We said, ‘Oh, my God, it’s much easier to make money on money.’ ” —Sen. Tom Harkin, D-Iowa

Also poorly understood in recent decades was the astonishing rapidity of technological change. Jerry Nickelsburg, a senior economist at UCLA Anderson Forecast in Los Angeles, says that government and business have, in general, done a woeful job of retraining the workforce—above all, failing to connect education programs to the needs of new industries in a coordinated way. “We still think about education the way we did in 1950,” Nickelsburg says. “The route to the middle class used to be, you learned how to be mechanically skilled working on daddy’s car. Well, you’re not going to learn about an MRI machine with daddy in the garage.” (See “Desperately Seeking Skills.")

In Washington, with its continuing passion for simplistic free-market thinking, few policymakers have considered the full impact of all of these changes on social equity.

“About 30 years ago, the market system turned ferociously—you might even say viciously—against low-skilled labor,” says former Federal Reserve Board Vice Chairman Alan Blinder, an economist at Princeton University. “Regardless of the underlying cause, that phenomenon was going to lead to substantial rise in inequality. So you might have thought the government would look at that and say, to quote William F. Buckley, well, we’re not going to ‘stand athwart history yelling, Stop!’ but we are going to have to ameliorate the effects on low-skilled labor. What government did instead was almost the opposite, starting with the [regressive] Reagan tax cuts. And they tried to cut the welfare state.”

The tectonic changes in the world economy were more or less inevitable, Blinder readily acknowledges. But he contends that there was nothing inevitable about the way the country adapted. “It doesn’t lead you to turn to protectionism or to become a Luddite and stop technology. But it should lead to a thicker social safety net.”

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Now the consequences of all this misguided thinking—that the economy would work through these changes on its own—may be landing in the form of new left-behind communities from coast to coast. In addition to Stockton and Ocala, the new cities of lost dreams include Anderson, S.C., and Kankakee-Bradley, Ill. In Kankakee, which is also part of the Rust Belt, the community had barely begun to catch up from the loss of industry in the 1980s when it was blindsided by the real-estate collapse three years ago. Rick Manuel, head of the Community Foundation of Kankakee River Valley, says that little industry has arrived to replace once-reliable job providers such as A.O. Smith (water heaters) and Roper (outdoor farm equipment). “When I was in college, I could finish classes in May and have a job at those plants in a week. Those opportunities are gone.”

“Recovery” from such downturns rarely brings these communities back to where they were before the bust. In the years since the decline of steel, Pittsburgh has managed to re-invent itself as a health care and high-tech haven. But it did so only by shrinking to half its industrial-era size, with a current population of about 305,000 compared with 660,000 in the late 1940s. The old U.S. Steel Tower, the tallest skyscraper downtown, now bears the logo of the University of Pittsburgh Medical Center.

And often, the jobs that accompany new economic activity in hard-hit industrial communities are not as well-paying or as secure as the old ones. In Braddock, the grandchildren of former steelworkers work at 7-Eleven or perhaps at one of the retailers at the riverside mall in nearby Homestead. In Stockton, new jobs may appear as shipping docks open up on the San Joaquin River, but they are expected to be low-paying temp jobs, says Bobby Bivens, the local NAACP representative.

“I’m not sure how much better we could have done in preserving the middle class. But I know that, with a few exceptions, … we didn’t really try.” —Frank Levy, MIT economist

This pattern helps to explain why the disparity in income between America’s haves and have-nots has steadily risen. According to a recent report by the Congressional Budget Office, from 1979 to 2007, the nation’s top 1 percent of earners saw their income quadruple 275 percent to $347,000. By contrast, the 60 percent of Americans considered middle-income earners experienced an increase of less than 40 percent. Indeed, the greatest beneficiaries of globalization and the Information Age, including an amply bailed-out Wall Street, are the richest “1 percent” of the nation, to adopt the language of the growing Occupy Wall Street movement. This fortunate elite increasingly prospers in a place apart, both physically and spiritually. “This is a different America than the one we’ve known for 200 years,” says Schumer, who has become a trade hawk and spoke recently of a new “darkness” in the American soul. “The No. 1 fact of this decade,” he said, “is that middle-class incomes are declining … for the first time since World War II.”

There can be little question that the middle class, or what’s left of it, is less and less able to cope. Adjusted for inflation, average hourly wages declined by 1 percent from 1970 to 2009. Meanwhile, home prices increased 97 percent, gas prices went up 18 percent, health costs rose 50 percent, and the price tag for public college spiked a whopping 80 percent after adjusting both wages and costs for inflation, according to figures compiled by the Senate Health, Education, Labor, and Pensions Committee. The average family of four needs an annual income of $68,000 just to cover basic costs, but in 2010, half of all jobs paid less than $33,840. The number of Americans living below the poverty line—46.2 million—is the highest in the 52 years that the Census Bureau has been tallying figures.

The Great Recession and the cyclical collapse in demand exacerbated but did not solely cause these dismal statistics. The declineof the middle class has been like a “slowly growing cancer” that no one noticed until it was too late, says Dani Rodrik, a Harvard University economist who issued one of the earliest warnings against runaway free trade a decade ago in his book Has Globalization Gone Too Far?

The bleak numbers raise obvious questions about the dominant economic paradigm of our time. For more than a generation, we have thought of the spread of free markets and globalization were pretty much inevitable. Economists, trade experts, and policymakers, including both Republican and Democratic presidents, have told us, in effect, that we could do little about the brutal displacement of old industries and jobs, and that we might as well just get used to it. Indeed, we were told, the U.S. must lead this charge: Free trade in the West helped to win the Cold War, after all, and the United States emerged as the sole superpower. It created to a strange blend of false fatalism and American hubris. Somehow, the champions of hands-off economic policy insisted, we would come out on top in the end.

This self-conceit infected both political parties. It was Democratic President Clinton, after all, who pushed through the North American Free Trade Agreement and “triangulated” his way to agreement with then-House Speaker Newt Gingrich, R-Ga., on a workfare replacement to the welfare system.

Most economists agree that opening up markets, especially in the aftermath of the Cold War, produced a wealthier world overall. And it may well be that it’s still in America’s interest to lead the free-trade agenda. In a new book, J. Bradford Jensen, a senior fellow at the Washington-based Peterson Institute for International Economics, suggests that the United States will remain very competitive globally in business and personal services—now 50 percent of the economy—and reap millions more jobs. Even three years after the financial crash, some successful services-based cities such as Omaha, Neb., and Sioux Falls, S.D., continue to enjoy relatively low unemployment rates. UCLA’s Nickelsburg, a free-trade hawk, rejects labor unions’ complaint that the nation’s jobs have all gone to China and other places. “They’re not really going to China,” he says. “Most are going to automation, to advanced manufacturing. The American manufacturing worker has become more productive.”

Beyond doubt, however, the advocates have overstated globalization’s benefits and underestimated its hazards, including social upheaval. The open trading system that Washington adopted more aggressively than any other major country—particularly, the giant economies of China, Germany, and Japan—has exacerbated inequalities at home far more than the government was prepared for, casting whole communities and regions into peril. Federal policies for at least the past 30 years have actively whittled away at the middle class while affording it almost no protection. Similarly, the U.S. is the only advanced country that doesn’t play favorites to protect essential domestic industry, even when it comes to government procurement policies.

Those who challenged the wisdom of the day, who pushed for “fair trade” (more tariffs, unemployment insurance, and worker protections) over “free trade,” were typically branded protectionists and driven from the discussion. The outcasts included Robert Reich, Clinton’s dissident Labor secretary, who loudly advocated a sturdier safety net for the middle class and was edged out of power. Those who second-guessed the massive deregulation of Wall Street mostly suffered the same fate. What job training and adjustment programs the government did provide were meager and mostly ad hoc.

Robert Scott, head of research for the left-leaning Economic Policy Institute, has published a pair of withering reports making the case that two of the biggest free-trade deals of the last few decades, NAFTA and China’s entry into the World Trade Organization (which required a lowering of tariffs as well), have brought nothing like the economic boons that supporters predicted. The United States had a small trade surplus with Mexico before NAFTA; as of 2010, the surplus had become a giant deficit, displacing production that might have supported 682,900 U.S. jobs, Scott estimates. He reckons that as many as 30 percent of the workers that NAFTA displaced never came back into the workforce and that those who did tended to take jobs at lower wages.

“I call it a policy of malign neglect,” Scott says. “We allowed China to manipulate its currency. We allowed China, Germany, and Japan to pursue very effective managed trade and stood by idly on the sidelines. And the contrast could not be clearer.”

It may not be an accident that the growth of long-term unemployment, starting in the 1980s, coincided with what MIT’s Levy calls the end of the “Treaty of Detroit”—a consensus that supported high minimum wages, progressive taxes, and other New Deal policies. Scott agrees. “Looking at wage trends, they all shift dramatically for the worse since then. The peak was really 1979. That’s the point at which three trends came together: the process of globalization, de-unionization, and deregulation. The fundamental guiding philosophy was, ‘markets know best.’ ”

Today, as a result, a deeper sense of alienation haunts American society than anyone can remember. “The sense that were all in this together as one nation, a common society and a common policy, has been disrupted by globalization,” Rodrik says. “Now, there is a greater realization that the benefits of globalization accrued disproportionately to the professional classes, the higher skilled, the ones who had the mobility and access to capital.” “And what strikes me is how unperturbed and unaffected and apparently insulated the winners have been in this whole process.... The costs are heavily concentrated among the youth, the high school dropouts, those with little education, the blacks in the urban areas. The rest of us effectively have been insulated.”

Until now, anyway. The Occupy movement, which has sprung up in cities nationwide, appears to be partly a broad-based expression of anger at chronic unemployment and income inequality. And these problems may be provoking a shift in Washington’s thinking. Obama has hardened the government’s stance toward China, stepping up WTO challenges to its trade practices, and his economic team has intensely debated trade and manufacturing policy, says Jared Bernstein, a former top adviser to Obama and Vice President Joe Biden.

But Bernstein would go further. He says that Washington should no longer shun some form of industrial policy in which the government takes a bigger role in shaping the economy. “I don’t think we pushed it as far as it needs to go,” he said. “I think there is a very misguided view that we shouldn’t do industrial policy and that we don’t do it. When, in fact, we do; we spend billions on it, but it’s all under an ad hoc hush-hush regime that ends up favoring the groups with the best lobbyists.”

Ad hoc, as in the last-minute bailout of the Detroit automakers or the eleventh-hour rescue of Wall Street in 2008. In contrast, Bernstein says, consider Germany, which has had a frank and intensive industrial policy for decades that protects key industries and retrains displaced workers. Leo Gerard, the gruff head of the United Steelworkers Union, said in a recent interview with National Journal that he was somewhat encouraged. When he recently proposed a U.S. industrial policy to senior economic officials in the administration, he says, “they didn’t throw me out of the room.”

Amid the chronic joblessness, Capitol Hill is sounding a new get-tough attitude toward Beijing. Despite the recent passage of three long-delayed free-trade agreements with Colombia, Panama, and South Korea, free-traders are no longer so sure of themselves. Legislation labeling China a currency manipulator, a latter-day cudgel of labor and the Left, has attracted considerable support from GOP lawmakers and from presidential contenders Mitt Romney and Jon Huntsman. For the first time in years, a bill applying tariffs to China as a penalty—theoretically resulting in more competitive exports to the U.S.—cruised through the Senate last month and might have a chance in the GOP-led House. Although Treasury Secretary Timothy Geithner and others warn of a trade war, supporters of the legislation say that tariffs are the best compensation for U.S. businesses if Beijing steadfastly continues to prop up the value of its currency and thus renders U.S. exports less competitive. (In practical terms, it is nearly impossible for Washington to try to depreciate the dollar versus the renminbi.)

Many nations continue to game the globalization system, but the size of the biggest current violator of trade rules, China—compared with, say, Japan 30 years ago—has had serious effects, most economists agree. In a much-cited recent study, David Autor of MIT, Gordon Hanson of the University of California (San Diego), and David Dorn of Madrid’s Center for Monetary and Financial Studies found that many traditional blue-collar jobs began to disappear in large numbers the same year that China joined the WTO. Although U.S. trade with China helped keep inflation low and opened opportunities for exporters, the three economists estimate that up to two-thirds of those gains were wiped out by adjustment costs that included higher government outlays for food stamps and other safety-net programs.

What is the answer? For some labor advocates, it comes with a great big I-told-you-so. “Everything we said would happen is happening,” the Steelworkers’ Gerard told National Journal. “Thirty years of record-breaking trade deficits year after year, except for ’08-’09, have created $7 trillion to $8 trillion in wealth transfer to other economies. Now we have to get the message out: We need a new social compact.”

Let’s face it—the United States is not about to adopt a socialistic or even a European-style industrial policy. In any case, it’s not clear whether more protectionism or policies that more consistently forced China, Japan, and other countries to play by the rules would have made a huge difference.

“Lots of it was probably unavoidable,” says economist Thomas Lemeiux of the University of British Columbia. Lemeiux, who has done studies comparing how Canada and the U.S. responded to globalization, concedes that Canada’s inequality issues are not as great (although that is partly related to the weaker Canadian dollar) and that Europe has done better at maintaining equality with its very different concept of social equity. “For the first time in years, Germany’s unemployment rate is lower than America’s,” he notes.

Instead, the solution for the United States may be a smarter combination of more-intensive training and education programs that turn industry and academia into partners, and a savvier policy of subsidizing crucial industries. Whatever the budget constraints, American workers need a lot more money for education and training. Total federal spending for job training adds up to a mere $15 billion annually, or one-tenth of 1 percent of gross domestic product, far less than any other major country. It may be too late for today’s displaced workers. But the children and grandchildren of displaced workers mired in these lost communities need to know that jobs exist for those willing to leave home and get trained and that education does not require on ruinous debts.

Nor should industrial policy be about the government “picking winners,” as the debacle over Solyndra, the bankrupt solar-panel company, made clear. Instead, the government can more subtly prod strategic industries along by, say, taxing fossil fuels to encourage investment in green technologies. For anything like such a comprehensive change to happen, of course, politicians in Washington will have to agree on the nature of the malady they helped to create over the past 30 years. And there is little sign of that happening yet.

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