Economic Reality Transforms the American Dream

Welcome to the new version of the American Dream.

It may look the same as the old one – personal prosperity and owning your own home – but fewer people are likely to live it, and if they do, it will happen later in life.

The transition Americans are undergoing is not merely recovery from a deep recession with life soon returning to the way it was before 2008.  It is a complete redesign of the American economy.

Two news stories last week prove the point.

“The situation for today's adults in their 30s and younger is particularly gloomy,” reports the nonpartisan Urban Institute.  “When it comes to building wealth -- adding to savings, owning a home, paring down debt, growing a retirement nest egg -- those under age 40 have stagnated,” it says.

Instead of earning more than previous generations, younger people get less pay than what their parents were paid when they were the same age.

We also read that two states – Maine and West Virginia – now see deaths exceeding births each year.  By one measure, Maine is the oldest state in the country with West Virginia coming in third.

They are the bellwethers of the United States as a whole.  In the first nine years of this century, the median age in the country increased by one and a-half years.

Older people have not saved enough for their retirement years, so they cannot be the big-spending consumers they used to be.  In other words, older people are a larger share of the population, and they have less to spend.

American businesses are adjusting to these new realities.  To survive and remain competitive with foreign suppliers in what is now a global marketplace, they must reduce their costs.

And the place where they cut is paying their employees.  Labor costs as a share of total national production are now at record lows. 

High paying jobs have been lost, forcing many to accept new jobs with less income.  Even worse, some have been pushed out of the work force, making the unemployment rate look better than it really is.

Many people have become more realistic about having enough income to afford a new home.  While that means they must wait longer for their dream home, the chances of losing it in foreclosure are less.

There’s some good news.

Jobs that went abroad are coming home.  As wages rise in China and elsewhere in the developing world while they stagnate in the United States, imports are beginning to lose some of their attractiveness.

Taking into account transportation, heavily influenced by the price of fuels, and the narrowing labor cost difference, “Made in the U.S.A.” is staging a comeback.

While people struggle to find decent jobs, American corporations are doing well.  Unemployment may still be too high, but the stock market, which reflects what investors see as the economic future, has broken through to new highs.

U.S. manufacturing, long in decline, seems to be gaining again, thanks to the jobs that are coming home.

In fact, as American-made goods are priced close to world market prices, U.S. exports could improve, which would help promote job growth.

Business is profitable partly because labor costs are down.  Workers – from airline pilots to assembly line labor – have accepted pay reductions in order to keep their employers competitive.  Perhaps as big as government bailouts are the sacrifices made by employees.

Even with this improved outlook for business, the total picture is far from rosy.

Government programs that depend on income-based taxes will have less money to meet the growing financial needs of Social Security and Medicare. 

Rep. Paul Ryan’s proposed Republican budget would keep these programs solvent by sharply reducing benefits.  While these programs might then pay their own way, older people would suffer.

One alternative is higher taxes to help support these essential programs.  In an economy with fewer workers relative to the total population and lower pay scales, those workers might have to pay more to the government.

Another option is for people to save more for retirement.  Like higher taxes, more saving would reduce the amount people could spend.

The new American economy would depend less on consumer spending, now its main driver, as more money went either to taxes or savings.

A rapid increase in the working age population could help slow or reverse this trend.  That’s why immigration reform may turn out to be essential.

Perhaps this new version of the American Dream is not inevitable.  But nobody has yet offered a way to save the old version.