State of the Union January/February 2005

Shaken and Stirred

The United States is about to experience economic upheaval on a scale unseen for generations. Will social harmony be a casualty?
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It has become conventional wisdom that class politics has no legs in the United States today—and for good reason. Regardless of actual circumstance, an overwhelming majority of Americans view themselves as middle-class. Very few have any bone to pick with the rich, perhaps because most believe they will become rich—or at least richer—someday. To be sure, the issues of jobs and wages inevitably make their way into our political campaigns—to a greater or lesser extent depending on where we are in the business cycle. But they seldom divide us as much as simply circle in and out of our political life. Lately anxiety about the economy has been palpable, but for the most part it has not evolved into anger or found specific scapegoats.

Economic insecurity could well divide us in the future, however. We are on the cusp of an economic era whose challenges will be unfamiliar to most Americans of working age. It is likely to erode the psychological pillars on which class unity has rested in this country: personal economic stability for the middle class, and the promise of at least some upward mobility for most Americans. The most likely division—besides that between the truly rich and the truly poor—will be between those in the middle class who are able (through agility or luck) to manage economic risk and those who find themselves helpless before the economic pressures of a new age.

Once upon a time, or so it is said, America was a place with lots of upward but little downward mobility. In the really old, pre—Civil War days you could start out splitting rails, head west, make a success of yourself on the frontier, and perhaps even wind up as president. In the relatively recent, post—World War II expansion you could do well by landing a blue-collar job in a unionized manufacturing industry or a white-collar job at a large, stable American corporation such as IBM, AT&T, or General Electric—which offered job security, high salaries, and long, steady career ladders.

There was always as much mythology as truth to this image of America. Lighting out for the West was expensive; covered wagons did not come cheap. More generally, although many terms could be used to describe economic life in the nineteenth and early twentieth centuries, "stable" and "secure" are not among them.

But there was considerable truth to the image as well, particularly after World War II. Regardless of education level or family background, many Americans who valued stability and security really did have the chance to grasp it; jobs with "a future"—that is, with steadily rising wages and solid retirement plans—were plentiful. And even for many of those who were fired, the economic risks were fairly low: the unemployment rate for married men during the 1960s averaged 2.7 percent, and finding a new job was a relatively simple matter. During the first decades following World War II, to the astonishment of interviewing sociologists, a majority of Americans began to define themselves as middle-class.

This post—World War II period stands as a reference point in our popular economic history—a gold standard for rapid growth and shared prosperity. It lingers in our national memory, and remains an important source of confidence in the unity of our culture and the awesome power of our economy. But although it engendered our current economic expectations, our sense of "the way things ought to be," in reality the postwar era was probably an aberration, a confluence of events never before seen in our history and unlikely to be seen again.

Most obviously, it was an era defined by the isolation of America's continental market from the devastation of World War II. In the early postwar decades foreign competition exerted virtually no pressure on our economy. (In 1965, for example, imports of automobiles and auto parts came to less than $1 billion—about a fortieth of what they are today, after adjusting for inflation.) At the same time, domestic manufacturers benefited from an enormous pent-up demand for mass-produced goods: cars, washing machines, commercial aircraft, refrigerators, lawn mowers, television sets, and so on. New highways gave rise to new suburbs, and to a resulting construction boom.

These economic conditions, along with successful federal efforts to maintain full employment through loose monetary policy, created an environment exceptionally friendly to workers. With little foreign competition on the one hand and a very tight labor market on the other, American firms were willing and able to offer workers strong incentives—such as pensions and first-rate health insurance—in order to attract and retain them. (Generous tax breaks from the federal government encouraged the roll-out of these benefits.)

Meanwhile, the Great Depression had given rise to a system of government programs and policies that came into full force and maturity only after World War II—among them Social Security, unemployment insurance, welfare, and high marginal tax rates. The rise of communism abroad could only have strengthened commitment to workers' welfare, as a means of demonstrating that the American capitalist system offered a humane alternative.

Thus favorable macroeconomic circumstances, the absence of foreign competition, and a historically unique political dynamic all combined to allow postwar America many of the benefits of social democracy without the costs. The economy did not stagger under the weight of ample benefits and high taxes. Americans—at least white male Americans—did not have to worry about tradeoffs between security and opportunity, because the United States offered both. And it seemed that this was the natural order of things.

From the archives:

"America's Changing Economic Landscape" (March 1985)
Is the decline in the industrial belt a step into perilous new territory or is it merely a continuation of the ceaseless transformation that built our prosperity? By James Fallows

"The Return of Inequality" (June 1988)
The great bulk of Americans are losing economic and political power, while the affluent are gaining both. This is not a recipe for social comity. By Thomas Byrne Edsall

The threat of downward mobility first hit America in a big way in the 1980s, when the old-line, unionized midwestern manufacturing companies found themselves under enormous pressure from foreign competition, in particular from export-oriented Japanese companies such as Honda, Toyota, and Komatsu. The result was a hemorrhaging of unionized manufacturing jobs and the emergence of the Rust Belt.

In addition, new technologies and consumption patterns were shifting the U.S. economy's center of gravity from skilled, unionized, mass-production industry—which fashions products from expensive materials and capital-intensive machinery—to services and retailing, where barriers to the entry of competitors are lower, labor costs more significant, and competitive advantage more reliant on squeezing those labor costs. The nation's largest private-sector employer today, of course, is not General Motors or Ford but Wal-Mart. Wal-Mart is in many ways a fine company, but its strategic goals and constraints are quite different from those of the manufacturers of the 1960s. Between them the automakers and the UAW offered workers a fairly robust "social contract": pensions, good health care, high wages, long-term job security. Wal-Mart makes no such offer.

By the early 1990s the nature of unemployment had changed as well. As Erica Groshen and Simon Potter, of the New York Federal Reserve, point out, temporary layoffs have become less common. Instead companies under constant competitive pressure are more frequently making layoffs permanent—using advances in technology to eliminate some types of jobs altogether.

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