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November 1, 2013

Fractured Nation

Why the chronically unemployed, undereducated, politically estranged and economically divided threaten America’s economic vitality and civic purpose

More than four years after the Great Recession, Americans are an unhappy, fractious lot.

Much of the discord, according to public opinion polls, reflects a widening partisan divide between Republicans and Democrats on such issues as the social safety net, immigration and environmentalism. But regardless of party, nearly 40% of Americans believe the nation is less united now than it was during the Vietnam War and the Watergate scandal, according to a spring survey by The Atlantic magazine and the Aspen Institute.

Unfortunately, this is not an abstract sociological or ephemeral polling phenomenon. It also cannot be blamed merely on shifting political affiliations, or government gridlock. This disaffection is rooted in serious and growing economic, demographic, educational and civic trends that affect the nation’s standard of living, quality of employment, financial strength, sense of civic purpose and economic future. 

The signs of estrangement are well documented. The all-cash, underground economy is stronger and broader now than at any time since World War II. This means that a groundswell of working people are off the books with intentionally little civic engagement. One result: The federal government, already faced with a swelling deficit, may be losing as much as $500 billion a year in evaded personal income taxes. At the same time, governments at all levels and businesses of all sizes are working to escape pension and health-care obligations they now see as onerous. Men and women in their 20s and 30s have all but concluded the economic prosperity and social safety nets that their parents counted on will not be there for them. They see fear and worry as their parents lose pensions or deal with greatly reduced payments, and conclude that from Washington, D.C., to the nation’s executive suites, this country is becoming a harsher, less reliable place for them as they age. 

For manufacturers and the metals industries in particular, all of this bodes ill for the near- and long-term business climates. Employees will face stagnant salaries and a significant number of temporary jobs that generally pay minimal wages, even as the nation continues to crawl out of recession. This means that employers will have to draw from a less qualified, more disaffected, and therefore less reliable and committed labor pool. It also means that to stay competitive, employers will have to invest in more and better training for their employees. 

 

The Long Stall

“Structural problems have been brewing in the U.S. economy for decades,” concluded a report last summer by McKinsey & Company, the global consulting firm based in New York, New York. “If young Americans are to enjoy the same increase in living standards over their lifetime as previous generations, the United States must expand employment, make its workforce more competitive and sharply accelerate productivity growth.”

Even our much-publicized productivity increases since the recession began are not what they seem when viewed historically and adjusted for inflation. From that point of view we have declining real productivity growth (rising output per hour worked, adjusted for inflation), which is one cause of stagnant and declining standards of living. “If you take 1972 as the dividing line, productivity growth in the 80 years before 1972 was about 2.3% per year and after 1972 was about 1.5%,” says Robert Gordon, professor of economics at Northwestern University and a leading member of what’s called the declinist school of economics.

Additionally, growth that generated prosperity and fostered worker aspirations in previous decades is drying up. A collage of evidence contains many themes. But when the dots are connected, the picture of a less robust U.S. business climate is clear and politically unbiased.

Among the plethora of warning signs: 

1. America’s birth rate is declining. 

2. Participation of women in the workplace, a major driver of economic growth since World War II, has been receding since 1999. 

3. The number of Americans older than 75 who are holding on to their jobs reached a record this year, meaning fewer jobs are available for young people. 

4. Low-paying, temporary and part-time work with little or no benefits comprises a significant portion of job growth in the wake of the recession. 

5. New business formation, as an absolute number of businesses and as a percentage of the U.S. population, has been trending downward since the late 1970s. Although these numbers ticked upward in 2011, they remain at historic lows. And growth in new business creations, and the jobs they generate, is highest in states where few people live, such as North Dakota and Wyoming. At the same time, states where people and jobs traditionally have concentrated, including California, Florida, Illinois and Michigan, are seeing the greatest increases in poor working families.

6. The nation’s widely known defects in surface transportation infrastructure remain largely unaddressed, impeding access to jobs for commuting workers and increasing transportation costs for employers to obtain supplies and reach just-in-time end markets.

7. Per-pupil education spending has been dwindling since the recession ended, as America has fallen in international rankings of student achievement. The reading and math achievement of 17-year-olds has stalled at a level below that in the 1990s. (One small but telling statistic: Just 19% of 17-year-olds said they read for pleasure almost every day, down from 30% in 1994.) 

8. More than one-third of America’s young adults ages 18 to 31 are living at home, a level that has increased since the recession ended and is the highest in four decades. As a result, first-time homebuyers comprise a smaller portion of home sales.

Some of these national trends, such as the declining birth rate, productivity growth and new business formations, are long-term. Others, such as spending on infrastructure and invaluable basic research, reflect more current policy decisions in Washington, D.C.

“The budget cuts we have scheduled make it much less likely that we are going to solve our infrastructure problems and [will] cut deeply into our ability to do basic research,” says Norman Ornstein, a resident scholar at the American Enterprise Institute and coauthor of the best-seller It’s Even Worse Than It Looks, a 2012 analysis of congressional gridlock. “You cut back on these things and you’re cutting back on the seed corn.”

 

Middle-Class Risk

A recent finding from insurance giant Allstate Corp. and the National Journal reflects the erosion of economic opportunity for many Americans: 59% of people who identify themselves as middle class today are concerned they will fall out of the middle class in the next few years.

“This sentiment is at the heart of the uneven recovery,” says Jeremy Ruch, a senior director at FTI Consulting, which conducts the surveys and compiles the Heartland Monitor Poll, published quarterly by Allstate and the National Journal. “The stock market may be up, but around the kitchen table, Americans are uneasy.”

This yawning and growing divide is evident from numerous economic studies. In September, for example, research by Emmanuel Saez at the University of California, Berkeley, and Thomas Piketty at the Paris School of Economics showed that the top 10% of earners in the United States took home half of U.S. income in 2012. It was the highest level ever recorded and has been steadily growing from around 35% of income in the 1980s.

Today, Americans say the most important indicator of a middle-class life is a secure job. Twenty years ago, the top indicator was owning a home, according to the Pew Research Center. Membership in the middle class, once stereotyped as banal but durable, has become insecure, even dangerous, as the job market deteriorates in size, stability and income potential.

“Being middle class is not what it used to be,” Ruch says. Sixty-two percent of those calling themselves middle class today believe they have less job and financial security than middle-class folks in their parents’ generation. Uncertainty is even greater among those whose parents didn’t consider themselves middle class, Ruch says.

 

The Expanding Underground

At the same time, we are seeing an ominous expansion of the underground economy, an indicator of growing dissatisfaction and distrust of the government, among other things. According to University of Wisconsin Professor Emeritus Edgar Feige, whom many call the father of underground economic analysis, the most reliable measure of this phenomenon is unreported personal income taxes. 

Feige estimates that about $2 trillion goes unreported each year, creating a $450 billion to $500 billion tax gap, or the amount of taxes the government could be collecting if there were full compliance. The latest publicly reported numbers from the IRS for tax year 2011 show $1.05 trillion in taxes paid on total national adjusted gross income of slightly more than $8.3 trillion. 

“What’s really important,” Feige says, “is that the estimated noncompliance today approaches what it was during World War II, when we had strict price controls and rationing and consequently the largest underground economy on record. We are a little bit below that now, but the estimated tax gap has increased in absolute terms. Basically, if you take 1997 as a base, it looks as though noncompliance has probably doubled.”

The reasons for this, he says, are fairly obvious: The greater the dissatisfaction with government, the greater the distrust of government. The more people view the tax code as inequitable, the more they will try to evade it.

“One of the major problems not addressed about underground economies is that they tend to break down the social fabric,” Feige says. “People who are engaged in illegal activities begin to destroy the social fabric. People begin to increasingly see government as ineffective and inequitable and civic institutions as unworthy of their participation. Young people are particularly disillusioned with politics now. They see no hope that Social Security or the government or the economy will be there for them. They are convinced the future is not going to be as bright as the present, and that can be very, very dangerous.”

 

To Work, or Not

Why is all this happening now? The trail of causation creating anxiety and disillusionment begins with long-running demographic trends—and ends with short-term government policy debates. The most convincing clues lie in two measures: the labor force participation rate and the rise of so-called contingent workers.

The number of Americans 16 years and older in the workforce—either working or seeking work—has declined as a share of the nation’s population since 2007, to 63.4% last July from 66.4% at the beginning of 2007. (That may not seem like a drastic shift, but 3% represents nearly 5 million workers.)

Unlike the previous economic recoveries of 1981–82 and 1990–91, the labor force participation rate has not bounced back along with job growth, according to researchers at the Federal Reserve Bank of San Francisco. History suggests the participation rate won’t rebound until the number of employed people today exceeds the 146.3 million who were employed when the recession of 2007–09 began. That will require the creation of 2 million additional full-time jobs a year for the next five or so years, according to the Bureau of Labor Statistics’ current employment numbers. Last year, the nation struggled to create about 1.8 million. 

In part, the decline reflects retirement-age baby boomers keeping their jobs, when possible, or remaining in the labor force by changing employers or taking part-time or lower-paying jobs. But diminishing economic opportunities are prompting a change in the behavior of many Americans in their prime working years and the employers who might hire them. In the minds of workers and employers, terms such as temporary, flexible, contingent, casual, alternative and expendable characterize job creation in the current recovery.

“Part-time work as a share of total employment has gone up dramatically,” including jobs in home health care, leisure-related services and food preparation, says Diane Swonk, chief economist for Mesirow Financial Holdings in Chicago. “It’s becoming much more permanent in an economy where there are a lot of extra workers who are unemployed. It’s an issue of the quantity of employment over the quality.”

Employers, citing competitive pressures, are offering temporary jobs that provide no benefits rather than investing in full-time employees. Many Americans in their prime working age, citing slim prospects for a traditional career, are grabbing what work they can.

Since 2007, the biggest gain in U.S. employment measured by hours worked per week has been among people working 30 to 34 hours, according to Stone & McCarthy Research Associates in Princeton, New Jersey. Taking temporary jobs allows people more time at home, which lets them avoid the expenses of child care and parental care as well as commuting, Swonk says.

 

Dreamers Become Screamers

If threats to a middle-class life are felt equally by middle-class Democrats, Republicans and independents, as public opinion surveys suggest, why aren’t Americans protesting in unison instead of arguing with each other?

There are two answers. First, Americans have lost confidence in the nation’s public and private institutions, especially government institutions, and are turning inward. The spirit to “fight city hall” or “fight all the way to the Supreme Court” dims when people lose trust in such institutions.

At the same time, trust in businesses and labor unions fell during the recession to the lowest favorability level on record, according to Pew Research. The reduction or cancellation of promised retirement income by many companies in the past 15 years and, more recently, threatened by state and local governments, is a major wedge against trust among older Americans.

“We manage a lot of pensions,” says investment bank economist Swonk. “Believe me, this is something everybody worries about. People planned on it.”

Harvard University professor Robert Putnam, author of the 2000 best-seller Bowling Alone, an analysis of social disintegration, sees widespread disaffection. “I think that the anxieties produced by the social distress and isolation have led to distrust in all institutions,” he told Forward

As Putnam wrote in his book, Americans have even withdrawn from less formal civic institutions, such as Parent Teacher Association chapters and service clubs, where people from diverse backgrounds collaborated to solve common problems. Self-expression has replaced civic activity and cooperation, he says.

At the same time, Americans are increasingly clustering with like-minded people physically and through technology—the second explanation for the splintered national identity. Since 1976, the percentage of voters living in counties that voted decisively for the Republican or Democratic presidential candidate has doubled, from 26% to 52% in 2012, according to journalist Bill Bishop, author of The Big Sort: Why the Clustering of Like-Minded America Is Tearing Us Apart.

Bishop says that Americans are encamping in left-wing or right-wing echo chambers, where political and social ideologies receive little or no cross-fertilization with competing ideologies. Others point to the polarizing programming strategies of cable-television news programs and political websites, which for many Americans have replaced the more traditional, politically neutral network TV news broadcasts.

“We can insulate ourselves now more than ever from divergent points of view,” says Amy Walter, national editor of The Cook Political Report in Washington, D.C. “It’s not just that we live in a neighborhood where we all have the same viewpoint, but you can wake up in the morning and log on and surround yourself with people who think as you do.”

Confining civic conversations to one point of view tends to radicalize individual opinions, as people in the cluster reinforce each other, she says. As a result, people confronted by a public controversy in the news don’t examine facts but simply rush to their ideological corners. And despite polling that suggests more Americans call themselves independent, “almost every single issue now is seen through a partisan lens,” Walter says. “If your team says it’s OK, then it’s OK. If your team says it’s bad, then it’s bad.” Few seem to be thinking for themselves.

 

All-In Competitiveness

Dialing back the loud volume and extreme rhetoric of American public discourse depends on more people feeling part of a nation that is advancing economically and socially. But talk of the need for “global competitiveness” usually means a push by business lobbyists for lower taxes, currency adjustments and less regulation. The concerns of disaffected American workers aren’t mentioned.

Still, there are signs that some businesses, particularly manufacturers, are trying to address at least some of these chronic problems. Harvard Business School competition guru Michael Porter and a team of fellow professors launched a project two years ago to improve global competitiveness of American companies, using a definition of “competitiveness” that was pioneered two decades ago by Porter but is seldom heard outside academia:

“The United States is a competitive location to the extent that firms in the U.S. can succeed in the global marketplace while raising the living standards of the average American. The living standards part of that definition often gets short shrift. We frequently hear, ‘The U.S. would be a more competitive country if wages in America were lower.’ But to the contrary, the inability to support good wages is actually a sign that America lacks competitiveness.”

The Harvard Business School team surveyed the school’s graduates and found that manufacturers are leading other sectors in boosting competitiveness through job training, apprenticeships, supplier mentoring and strategic collaboration with other companies in their region—initiatives that should boost middle-class aspirations and trust, as well as corporate profits.

“Labor costs in Asia and a lot of emerging markets have increased significantly. Transportation costs have gone up,” says Willy Shih, a professor on Porter’s team. As a result, many large U.S. manufacturers are boosting in-house training and resuming the development of their full-time U.S. workforce. “I see more companies saying,  ‘We have to take this upon ourselves,’” Shih says. Still, he noted, U.S. labor costs have been relatively flat.

And as long as that remains true, and the gap between the haves and have-nots remains yawning, the country will almost certainly continue to contend with the kind of rude awakening that Starbucks CEO Howard Schultz ran into last year. Schultz implored Americans—and Starbucks customers in particular—to “come together” to address worries about the U.S. national debt. He asked store employees in the Washington, D.C., area to write the phrase on customers’ beverage cups.

“These words express the optimism that’s core to the holiday season, to our country’s heritage and to our Starbucks mission,” Schultz wrote on the company website on Dec. 26, 2012.

Of the more than 100 public comments posted below Schultz’s idea, only 10 supported him. The rest either denounced Schultz rudely or spewed political talking points, from both the left and right. Seven months into the PR campaign, one Starbucks website commenter summed up the quarrelsome reaction: “Well, so much for coming together.”