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The Next Economy | Big Questions

The American Dream, Downsized

The middle class now worries more about holding on for dear life than about climbing the ladder to riches.

A Los Angeles County employee joins teachers and other public sector workers as they rally in solidarity with Wisconsin workers outside City Hall in Los Angeles, Calif, Feb. 26, 2011.(AP Photo/Jason Redmond)

photo of Amy Sullivan
April 25, 2013

The Grain Exchange Room in Milwaukee’s old Chamber of Commerce building is a dazzling display of Gilded Age opulence. Its ornate faux-marble columns soar three stories high, and an intricately carved balcony overlooks what is believed to have been the world’s first commodities-exchange trading pit. This temple to business and success was a fitting location for Mitt Romney’s victory speech after the Wisconsin primary a year ago, on the night he eclipsed his last remaining rival for the Republican presidential nomination.

Romney used the occasion to lay out his vision of an “opportunity society led by free people and free enterprises.” Barack Obama, he charged, didn’t believe in opportunity: When the president went after the “1 percent,” he wanted only to turn the United States into “one of those societies that attack success.” Romney’s supporters cheered.

In Chicago, the Obama team cheered, too.

 

Led by Obama’s chief pollster, Joel Benenson, the campaign had spent 2011 examining Americans’ views on economic security and the American Dream. They concluded that something fundamental had changed. It used to be political gospel that a candidate couldn’t risk talking about inequality because such a stance was so easily caricatured as an attack on the rich and because even working-class Americans believed they had an opportunity to be rich someday. But as Benenson explained in a recent interview, “There has been a recalibration of the American mind-set when it comes to economic change.”

What his polling found is that middle-class Americans are much more concerned about holding onto what they’ve got than in pursuing more. The Pew Economic Mobility project, the Allstate/National Journal Heartland Monitor Poll, and other studies have arrived at similar conclusions. When Pew asked Americans in 2011 if they preferred financial stability or moving up the income ladder, 85 percent of respondents chose the safer, surer future.

If that seems like a defensive crouch, it is. The American middle class is broadly defined as households earning two-thirds to twice the median income, or about $35,000 to $100,000 a year. The beginning of the 21st century was a “lost decade” for the middle class, Harvard economist Lawrence Katz said, but the decline has been under way for decades. In the early 1970s, middle-class households earned 62 percent of the national income; today, they bring in just 45 percent. These households are more vulnerable, economists say, than at any time since World War II.

The Great Recession exacerbated this decline. Sixty percent of the job losses in those years occurred in middle-income jobs. The recovery, instead of restoring those jobs, has replaced them with low-wage positions. And the middle class, which once drove American prosperity with its purchasing power and stability, is shrinking. Middle-class households make up barely half the population today, down from 61 percent in 1971. People aiming to reach the middle class, or to stay there, have ample reason to worry.

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Middle-class Americans’ anxieties and the shift in how they define the American Dream had consequences for the 2012 election. Romney spoke in the language of economic risk: “The promise of America has always been that if you worked hard, had the right values, took some risks, that there was an opportunity to build a better life for your family and for your next generation.” Compare that with Obama describing the “basic bargain in America,” a formulation he has used since his U.S. Senate campaign in 2004: “If you’re willing to work hard and play by the rules, you should be able to find a good job, feel secure in your community, and support a family.” So, which guy won?

But if the American Dream, and the understanding of what it means to be middle class, is changing, the reverberations will go far beyond a single election. They speak to the very story Americans tell about themselves. We were once a nation of strivers, raised on Horatio Alger and Bill Gates, confident of the possibility of moving upward. If Americans now aim simply to avoid slipping backward, they will have decided that the American Dream is but a reverie.

WHEN THE DREAM WAS REAL

The United States was already mired in the economic disaster known as the Great Depression when historian James Truslow Adams, in his 1931 book, The Epic of America, first turned “American Dream” into a commonly recognized phrase. The dream may have been put on hold for many Americans at the time, but Adams sought to remind his fellow citizens, “It is not a dream of motor cars and high wages merely, but a dream of social order in which each man and each woman shall be able to attain to the fullest stature of which they are innately capable.”

The cars and high wages would come soon enough, during the economic boom that followed World War II. Agricultural workers moved into towns and cities for higher-paying jobs, and the GI Bill financed higher education for millions of veterans. Americans’ entrepreneurial spirit, backed by capital and opportunity and pent-up consumer desires, sent the economy soaring. And unlike in earlier eras of rising prosperity, the gains weren’t limited to those at the top but were distributed relatively equally across economic classes. The result: an expanding, robust middle class.

Almost overnight, it became not just possible but expected that young marrieds would fare better than their parents had. A middle-class family bought a house, put a car (or two) in the driveway, and raised children who ran around a safe neighborhood and later went to college with their parents’ support. Or the kids might skip college and enter the workforce with a secure, often union-protected, job that allowed them to enjoy a middle-class lifestyle and live in the same neighborhoods as bankers, teachers, and salesmen.

Erin Currier runs the Pew Economic Mobility Project, which has done two national polls about how Americans interpret the American Dream. “When people talk about their parents,” she said, “it’s in terms of what they were ‘able’ to do. They were able to buy their own home. They were able to attend college. They were able to send their kids away to summer camp. These were accomplishments, and they set the standard.”

SECURITY—A CASUALTY

Being middle class has always meant two separate things: affluence (having a solid income) and security (being able to maintain your quality of life from year to year). For the first several decades after World War II, those appeared to be one and the same. Social norms such as low divorce rates, workplace norms such as lifelong employment and generous benefits, and government-run social insurance helped to insulate people from life’s twists and turns. A high income guaranteed economic security—this was easy to assume.

That assumption began to change in the 1970s. U.S. manufacturing started to slow, then contract, battered by competition first from Germany and Japan, and later from China and East Asia. Successive oil crises wreaked havoc on energy costs. A period of inflation and sluggish growth produced a mashed-together word, “stagflation.” And the increasing use of corporate revenues to benefit shareholders instead of workers undermined the social contract between labor and management.

These developments took a toll on workers’ incomes. The hourly compensation of the average U.S. worker rose by nearly 94 percent, adjusted for inflation, between 1948 and 1973, but by only 10 percent from 1973 to 2011, according to the Economic Policy Institute. “Even after recovery started, typical wages have continued to fall,” said Tyler Cowen, an economist at George Mason University. “And education and health care costs continue to go up—at somewhat slower rates than before, but they’re still nasty price surprises.” Families spend, on average, 75 percent more for health insurance (adjusted for inflation) than they did a generation ago.

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This squeeze between income and expenses has rattled many Americans’ assumptions of economic security. “Some of the stuff that really matters is hard to quantify in terms of money,” said John Schmitt, senior economist at the Center for Economic and Policy Research in Washington. “It’s about economic security. It’s about how many hours you work, how much of a return you get for the education you have, how much security you have in terms of health insurance and retirement.” About half of all workers have a retirement plan at their job, approximately the same as in the 1970s, Schmitt explained, but most of these plans don’t guarantee a particular payout, thereby shifting market risk from the employer to the individual.

Nor can Americans count on a steady and rising income. Incomes have been volatile. Yale political scientist Jacob Hacker has developed an Economic Security Index to measure the increasing variability of Americans’ economic lives. In 2009-10, as the effects of the Great Recession coursed through the economy, roughly a fifth of all Americans saw their household income drop by at last 25 percent, by Hacker’s estimate, creating greater economic insecurity than at any time since the Depression.

Not everyone is convinced that middle-class incomes have declined, however. Such fears are exaggerated, according to Scott Winship, a Brookings Institution sociologist. Citing Congressional Budget Office figures that count health benefits as well as income, he found that “prior to the Great Recession, the 2000s looked as good as the ’90s and better than the ’80s in terms of household income. And we have to remember that Hispanic immigration was continuing to increase, and that exerted a steady downward pull on income.” The overall economic trends, Winship argues, continue to be robust.

One trend that can’t be questioned is the drop in American household wealth. In 2010, median family net worth sank to around $77,300, a decline of nearly $50,000 from the years just before the financial crisis and close to $30,000 less than it was in 2001, according to the Federal Reserve Board. A shriveled nest egg can turn a stint of unemployment from an inconvenience into a catastrophe.

A racial disparity in household wealth has left African-Americans even less secure. A recent Pew study found that white families experiencing a job loss in the past decade had amassed greater wealth than African-American families with unbroken employment.

Security is also a casualty of a restructuring in the U.S. job market. A stark example is the “permatemp” employee. In nearly every industry—from engineering to law and accounting to journalism—the fastest-growing job category is contract workers. They are often the victims of downsizing who were given the “opportunity” to perform their old job but without employment security or benefits and sometimes with a cut in pay. These “labor flexibility practices” have been increasing over the past 30 to 40 years, said Susan Lambert, a University of Chicago expert on low-skilled jobs. “Our current economic downturn has really heightened their use.”

If they make a decent income, are permatemps middle class? Not by the standards of the past. But by the diminished redefinition, maybe they are: earning a middle-class living—for the moment.

RECALIBRATING RISK

The easiest way to see how much people value stability is to look at what happens when they lose it. During the past decade, more and more Americans saw their incomes fluctuate and their savings dwindle. Even when hit with unexpected life events—a lost job, an illness—they didn’t scale back their expectations or lifestyles. Instead, they took on more debt to preserve what they could.

Outwardly, the middle class still looked vibrant. But, in reality, many of those homes, cars, and pricey college degrees weren’t emblems of affluence but rather symbols of an overextended, overleveraged economy. Political leaders were hardly bystanders in promoting a culture of debt. Washington’s response to rising income inequality was to provide easy credit to consumers and to encourage everyone to buy a home, or so Raghuram Rajan, former chief economist at the International Monetary Fund, argued in his 2010 book, Fault Lines.

When the Great Recession struck, millions of Americans found they could no longer keep up with the debt they had taken on, triggering a chain reaction of default and retrenchment. The suburban house was now underwater. The two cars the parents needed for work became two car loans to shoulder as gasoline prices shot up. The college education entailed loans that brought stifling debts.

“The measures of the American Dream that brought about a sense of comfort and control and pride,” Benenson said, “became symbols of debt and risk. And that has people becoming a little more cautious, weighing risk more carefully in their lives. They have seen the consequences of taking an extra car loan or refinancing their homes. They thought the people who had tamed risk for them—banks, mortgage lenders—hadn’t done it.”

Benenson believes that many Americans have experienced a “come to Jesus” moment regarding their personal finances and are trying to commit themselves to more prudent stewardship. After U.S. credit-card debt topped $843 billion in the first part of 2010, it has slowly but steadily fallen. Average debt loads dropped in all 50 states in 2010; last fall, Moody’s Analytics found that U.S. consumer debt had sunk to 2006 levels. Personal savings rates are finally starting to rise nationwide, after a long decline.

Signs show that hard times have also prompted Americans to reevaluate what they want out of life. Not, perhaps, at first glance. Participants in focus groups convened by the Pew Economic Mobility Project are asked to draw a picture of the American Dream. Nearly everyone’s sketch is the same—two adults, some kids, and a dog in front of a house with a fence. (Even cat owners end up drawing a dog.) It is the set of Leave It to Beaver, sans canine, unchanged since the 1950s.

And yet, “when we delve deeper and ask people to explain what these symbols mean,” project manager Currier said, “they are all about security. It’s being able to afford a house. Having a healthy family and kids. Living in a safe neighborhood. A pet means you can afford a little extra. You have what you need and no more. It became clear that for the individuals we spoke to, the American Dream was much more about feeling they could sleep well at night than about getting ahead.”

NO RULES

If these changes in American attitudes and behaviors merely dated to the Great Recession, they might not last. But the recession simply punctuated a set of underlying economic trends that were several decades in the making. That may be why, even as the economy has recovered, insecurity hasn’t subsided much. As in earlier business cycles, employers aren’t hiring many workers as their profits bounce back; many are looking to downsize further and scale back employee benefits.

Above all, the recession made clear that the old rules—work hard and you will be rewarded with a comfortable, stable life—are no longer in effect. “This was a dramatic event that caused a lot of upheaval, not just financially and economically, but in terms of how they viewed the American economy overall,” Obama pollster Benenson said. “One of the big sources of concern for the people we talked with was that they didn’t recognize any new rules in this environment. All of the rules they had learned about how you succeed, how you get ahead—those rules no longer apply, and they didn’t feel there was a set of new rules.”

No wonder Americans are skeptical that their children will be better off than they are—a core element in the American Dream. A startling 59 percent of respondents to a 2011 Pew survey said it would be harder for their children to move up the income ladder than it was for them. The path to rising higher isn’t as clear as it was.

The older, ambitious model of the American Dream has even drawn some critiques. In the 1990s, the Clinton administration said Washington should “attempt to help all American households become homeowners.” After the housing market collapsed, the Treasury Department declared in 2011 that the Obama administration’s policy “does not mean all Americans should become homeowners.”

A similar downsizing of dreams popped up in last year’s campaign for the Republican presidential nomination, when former Sen. Rick Santorum of Pennsylvania called Obama a “snob” for thinking everyone should attend college. (Obama jumped to clarify that he meant community colleges and job training, too.) Economic research shows the advantage of a college diploma; a Georgetown University study last summer found that the unemployment rate for recent graduates of four-year colleges was 6.8 percent, compared with nearly 25 percent for recent high school grads. Even so, a majority of Americans tell pollsters (54 percent in last fall’s Heartland Monitor survey) they are skeptical that a college education is worth the burden of student loans.

Reducing one’s risk in pursuit of housing or education isn’t necessarily irrational. But a middle class that is increasingly characterized by risk aversion essentially rewrites our national narrative, the one that highlights ordinary people who take risks and create new opportunities and industries.

Scaling back may also mean accepting that people who haven’t yet made it into the middle class never will. “A growing body of evidence suggests that the United States, far from being the land of opportunity celebrated in our history and our literature,” economist Isabel Sawhill has written, “is instead a country where class matters after all, where upward mobility is constrained, especially among those born into the bottom ranks.” That isn’t a phrase likely to be inscribed on a national monument anytime soon, but for millions of Americans, it’s the new reality–and it hurts. 

Sophie Quinton contributed contributed to this article.

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