March 30, 2012 6:06 pm

America’s dream unravels

As other nations rise, the US is in relative economic decline – and the country’s political system is making things worse

It feels like you are entering a parallel universe. In reality it is just a few short steps down a plank into the neon-lit floating world of a casino ship. The location is Lake Michigan. The town is Gary, Indiana. And the host is the Majestic Star Casino. “Welcome to Majestic Star,” says a croupier. And to post-industrial America, she might add.

Many cities and towns across America have been shattered by the demise of mass employment in manufacturing over the last generation. Few have been hit as hard as Gary – once a thriving hub of steel production, and birthplace of the late Michael Jackson, one of the most successful pop stars in history. Some places, such as Pittsburgh, have become showcases of urban reinvention, partly by making the most of the strong medical legacy left by the departing generation of well-paid union workers (whose “Cadillac” healthcare packages spawned a robust hospital system).

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Edward Luce

Almost every city, including Gary, has dug deep to fund a new sporting stadium. Convention centres are also a staple of America’s formula for urban regeneration. The jury remains out on their impact. In contrast, there is a surprisingly broad consensus among state and city officials across America about the economic virtues of gambling. Unlike the titans of football and baseball, whose new stadiums swallow huge chunks of local capital budgets, gaming companies only require a licence to gamble and a few tax breaks. It helps if there is a large population centre nearby – East Chicago virtually merges with Gary at the Illinois state border line.

It helps even more if there is a pool of able-bodied unemployed people prepared to work for low wages and anaemic benefits. Gary can still offer that. But in spite of all the casinos, its population keeps shrinking. In 1980 it had 145,000 people. That is now down to 80,000. “When I was five years old, my mother would hold my hand when we walked down Broadway because there were so many people,” says Saleem el-Amin, a middle-aged city demolition worker, pointing at the town’s eerily quiet main street.

When asked how many of his friends worked in the casino industry, el-Amin says: “There’s a cousin who works at Ameristar [another hotel casino] as a house-keeper” – meaning a cleaner. In contrast, he knows of plenty of people who wager their surplus cash on the blackjack table or the slot machines.

From Florida to California, and numerous Native American reservations in between, the impact of gambling varies, according to a welter of studies. Some show that the effect on the people around the casinos is a net negative. It can also be bad for tax revenues. One study estimated that for every dollar a gaming house invests in an area, three are subtracted by the costs of dealing with its social effects. Casinos may be a way of replacing some of the manufacturing jobs lost to China, Brazil and elsewhere. But they are also a magnet for racketeers, pimps, drugs and those living on the margins.

US casino©Bloomberg

Casinos: regarded as job creators

In a world where the economic centre of gravity is shifting from west to east, the continued faith in casinos, and other forms of gaming, epitomises a certain bankruptcy of thinking among America’s policy makers. On the charts they show up as service jobs, which economists instinctively treat as superior to jobs that involve making things. Much like the shift from farming to manufacturing a century ago, America is now climbing up the value-added chain to the more cerebral world of service industries. Brain power is America’s future.

It doesn’t always appear too cerebral in practice. Too large a share of the new service jobs are dead-end and enforced part-time positions that enable the employer to wriggle out of providing healthcare insurance. In the past decade, the number of Americans insured by their employers has fallen from two-thirds to barely half. Only the senior managerial slots offer any real security and they are mostly taken by outsiders. Much the same could be said of the armies of food preparers, domestic carers and data-entry workers who account for so many of the new service jobs America is creating.

“We are on track to becoming a country where the top tier remains wealthy beyond imagination, and the remainder, in one way or another, are working in jobs that help make the lives of the elites more comfortable,” says Harvard’s Lawrence Katz, one of America’s foremost labour economists. “They will be taking care of them in old age, fixing their home WiFi, or their air-conditioning, teaching or helping with their kids and serving them their food. It is not a very elegant prospect.”

. . .

This essay is about how America is coping with its relative economic decline (“relative” because the US will continue to get richer in the aggregate, although at a far slower pace than the rising east). America is a big and awe-inspiringly diverse place. For every shell-shocked Gary, Indiana, or Flint, Michigan, there is a Pittsburgh, Pennsylvania, or a St Louis, Missouri, that is making a better fist of the transition – although their median incomes are still below the national average. And for every few Garys there is a Palo Alto, the thriving hub of Silicon Valley, where I often stay with my brother-in-law and sister-in-law, who both live there. Its streets may not be paved with gold. But they come close enough. If Dick Whittington arrived in America today, Palo Alto is where he would head. Gary he would avoid.

Software billionaires, such as Larry Ellison of Oracle and Mark Zuckerberg of Facebook, make up an outsized share of the Forbes 400 list of America’s wealthiest. Many of the remainder in the top echelons made their money from hedge funds and Wall Street, such as George Soros and John Paulson. Then there are the retail kings, such as the Walton family, owners of Walmart, whose combined assets equal that of America’s bottom 150 million people.

High up on the list though are people such as Sheldon Adelson, the Las Vegas gaming magnate, and Donald Trump, the real-estate and now reality-TV king, who also has a casino in Gary. Both are heavily involved in the Republican party – Adelson has so far spent $16.5m in support of Newt Gingrich’s doomed presidential aspirations. Trump toyed with his own presidential bid. Both became rich through America’s long-term booms in real estate and gaming. Nor did the good times end in 2007. Adelson’s fortune has jumped by more than a third to $21.5bn since the start of the Great Recession. He is now the eighth richest American (up seven places).

Like so many of his fellow billionaires – 40 of whom have already contributed heavily in this election, according to Forbes – Adelson is prepared to wager a great deal more on candidates who share his belief that government should simply get out of the way – up to $100m in this election, he recently disclosed. Apart from the fact that Indiana’s casinos are legally obliged to stay off dry land, government has already done a good impression of making itself invisible in places like Gary.

Less than an hour’s drive away, in the plush Chicago suburb of Schaumberg, retreating government is precisely what Mitt Romney, Gingrich’s nemesis, is promising to a lacklustre crowd of Illinois supporters. Romney has just won the state primary by a thumping margin, laying to rest anxieties that he will be derailed by Rick Santorum, his latest – and most socially conservative – rival in the Republican primary.

Showing the plus side of the “Etch A Sketch” adaptability for which he is renowned, Romney has recently updated his stump attack on Barack Obama. Until February, Romney focused on joblessness, which is still above 8 per cent. Now he talks about declining incomes and rising petrol prices. The switch makes sense: the US economy has added an average of 200,000 jobs a month since October, while median incomes are still declining. The latter are a far better predictor of whether an incumbent president will get re-elected.

But this is an election and Romney is speaking in soundbites. Around the extended stage, which takes up a quarter of the ballroom floor, there are about 300 well-dressed supporters, many of whom are holding up iPhones to get a picture of their candidate. Behind them, ignored by most of the cameras, is a large empty space leading up to the rope that separates the crowds from the journalists, who number at least 150. This isn’t a passionate event. Democrats fall in love, Bill Clinton once observed. Republicans fall in line.

Mitt Romney©Getty

Mitt Romney: insists America’s best days are still ahead

“This November, we face a defining decision,” Romney says. “Our choice will not be one of party or personality. This election will be about principle. Our economic freedom will be on the ballot.” Voters would have a choice between a constitutional law professor, who keeps apologising for America, and a businessman who for 25 years has “lived and breathed … what it is that makes our American system so powerful”, Romney said. “Together, we will ensure that America’s greatest days are still ahead,” he concluded, to a chorus of cheers.

Although Obama’s programme differs sharply, he shares with his likely opponent a belief that America will prevail, as he argued in his annual State of the Union address in January. Both vigorously dispute that America is in decline. Romney, however, insists that America will start to decline if the president gets a second term. And both, in their own way, argue that it will be up to America, and America alone, whether it declines or not. “Anyone who tells you America is in decline doesn’t know what they are talking about,” Obama said in his January speech.

By the more brutal statistical measure, America’s relative economic decline is already rapidly advancing: a decade ago the US accounted for just under a third of the global economy. Today it accounts for less than a quarter. Unless the big emerging markets, notably China, India, Brazil and Indonesia, come to a halt, America’s share is likely to drop to about a sixth of the world economy by 2020. And so on. There is little the US could do to stop this.

By a different yardstick, however, the president and Romney may be right. “Decline” is a subjective term. How the US responds to the deep-seated challenges it faces will determine whether it can once again be a country that is admired. Almost 200 years ago, Alexis de Tocqueville famously observed that America’s greatness lies in her ability “to repair her faults”. The French, de Tocqueville wrote, are obsessed with what works in theory, Americans with what works in practice. “America is therefore one of the countries in the world where philosophy is least studied, and where the precepts of Descartes are best applied,” he wrote.

It is no accident that it was an American, Charles Sanders Peirce, who coined the word “pragmatism” to capture this approach half a century after de Tocqueville described it. The word is distinctively American. Yet it is a quality that seems to have gone missing in action – at least in terms of how America governs itself. The US faces two core problems that intertwine like a Gordian knot. Unless that knot is cut, it is hard to see how America will renew itself.

First, the great American middle class is in long-term crisis. Most people cannot get secure, well-paid jobs any longer. The top 1 per cent captured 93 per cent of the income gains in 2010. The remaining 99 per cent were either treading water or seeing falling incomes. This includes those with an undergraduate or vocational degree, whose incomes have not budged in real terms since 2001. Only postgraduates and those with PhDs have seen income growth since then. Income mobility, once America’s greatest exception, is now wallowing at sub-European levels.

America now boasts of an unmatched plutocracy – or what one observer dubbed a “plutonomy”, given the growing role billionaires play in politics. Below them is an increasingly large floating world of the former and semi-middle class, who have lost the security their parents once had. Concern about a permanently divided America is not confined to the left, or the centre. Charles Murray, the conservative commentator, talks about a new “cognitive elite” that lives in “SuperZips” (the richest zip codes) far removed in sight and habit from those less fortunate. People on all sides of the spectrum admit that America’s egalitarian creed looks increasingly hollow. “America is a society that is starting to belie its promise as a land of equal opportunity in which the place you were born was not as important as the talents you were born with,” says Lawrence Katz.

Second, American politics tracks the growing divide between the elites and everyone else. The two reinforce each other – America’s bifurcating economy polarises the politics and vice versa. America’s parties now behave in a Westminster parliamentary fashion in a system consciously designed to grind to a halt unless there is cross-party co-operation. To give one example, the use of the filibuster to block legislation in the Senate has risen to 70 per cent of bills in 2008 from just 8 per cent in the mid-1960s. Since then it has risen further. The result is often paralysis.

It would be wrong to put equal blame on both parties – Republicans are far more parliamentary than the Democrats. As the veteran political observers Norm Ornstein and Thomas Mann point out in their forthcoming book, It’s Even Worse Than It Looks, America is suffering from asymmetric polarisation. “The Republican Party has become an insurgent outlier – ideologically extreme; scornful of compromise; unpersuaded by conventional understanding of facts, evidence, and science,” they write. “When one party moves this far from the center, it is extremely difficult to respond to the country’s most pressing challenges.”

The authors could have added that Washington’s prolonged impasse has already damaged America’s competitiveness. Last year Congress came to the brink of declaring a voluntary default on America’s sovereign debt. The US lost its AAA credit rating for the first time. A repetition cannot be ruled out after November when the “lame duck” Congress will be asked to raise the debt ceiling again. Lawmakers will also face momentous fiscal decisions on whether to extend the Bush-era tax cuts for the wealthiest as well as an automatic $1,200bn spending cut should they fail to agree on a deficit plan. A wrong turn on any one of these could plunge the US back into recession.

Beneath the fiscal high jinks, however, lies even more troubling evidence that America’s sense of pragmatism is missing. In daggers-drawn Washington, Democrats and Republicans have been able to agree only on a certain type of spending cut. The bulk are targeted at the one slice of the federal budget that qualifies as investment – “domestic non-defence discretionary spending”, which accounts for only 12 per cent of the pie. This includes research and development, infrastructure and education programmes – areas that matter greatly to America’s future competitiveness. They could be described as the “tomorrow” part of the US budget. The remainder, which is mostly healthcare for retirees, pensions, defence and interest payments on past debt, might be seen as the “yesterday” portion. Yet Washington’s first instinct in the new era of austerity was to shortchange the future. There will be more to come even if Obama is re-elected.

. . .

Which brings us back to Gary and Palo Alto. The two cities may inhabit opposite ends of the spectrum, but their fates are tied to Washington. Both are victims of a politics that is “even worse than it looks”. Middle America needs a Marshall plan to adapt to an exponentially automating and integrating global economy. Washington is in no danger of delivering. At the school level, America continues to slip in the international rankings and now comes below 20th in maths and science. In terms of higher education, it is slipping even faster. Just a generation ago, the US had the highest proportion of graduates in the world. Now it is 16th.

Facebook HQ©Jamie Kingham

Thriving: Facebook HQ – yet fund-raising in Silicon Valley is now declining

Likewise, Palo Alto needs to be able to attract the most risk capital and the brightest entrepreneurs if it is to remain the world’s leading incubator of new innovation. Yet the pool of risk capital keeps shrinking. Sequoia Capital, one of Silicon Valley’s largest venture capital firms, now has eight offices, of which only one is in the US. Annual fund-raising in Silicon Valley is running at less than 15 per cent of where it was in 2000 when the dotcom bubble burst.

Apple may now be worth more than any company in the world. But the future flow of ideas, and the spread of R&D, is globalising. So too is American-educated talent. The Washington of earlier decades would have stapled green cards to foreign graduate degrees. Nowadays, having received a subsidised technical education, the world’s brightest students are put on a plane and sent back home. Fear trumps hope. As US commentator Fareed Zakaria remarked, “Every visa officer today lives in fear that he will let in the next Mohamed Atta. As a result, he is probably keeping out the next Bill Gates.”

In contrast with what Larry Summers, the former national economic adviser, likes to call Washington’s “looney tunes”, America’s market clearing process beyond the beltway remains the most efficient in the world. America has outperformed its counterparts in deleveraging since the start of this “balance sheet recession”. US households have paid off far more of their debts than Europeans. America’s performance looks impressive. But the gains may be pyrrhic. Germany has suffered far lower joblessness than the US because it has subsidised employers to keep workers on their books. That minimises the taxpayer costs of the recession and prevents what economists call “hysteresis” – the process by which workers gradually lose their skills, self-respect and ability to work. The US has done very little to keep its vast reserve army of labour in shape. This will store up costs for the future in terms of larger prison populations, higher suicide rates and family breakdown. “I don’t worry much about the efficiency of America’s market system,” says Tim Geithner, the US Treasury secretary. “I do worry about what I call America’s dark side. We need to find better ways of fixing it.”

US manufacturing©James P. Morse

Manufacturing: falling sharply

That may be an understatement. Far from being an afterthought, or a moral side issue, the fate of America’s labour force is its most pressing problem. Almost every elected American pays lip service to an economy of the future based on brain power. But it takes time to build a new generation of homegrown brains and the country is doing its best to deter foreign ones. Unsurprisingly, much of the action is therefore shifting with the IQs, whether that is to Singapore, Canada, Germany or China. Roughly three-quarters of US private R&D comes from manufacturing companies, which now account for barely a 10th of the US labour force. In spite of a recent shift towards “reshoring”, the trend is still eastwards.

Then there is the human dimension, which is after all what an economy is supposed to serve. At the Majestic Casino in Gary, I talked to Alicia Kimbrough, a quick-witted woman from Chicago, who makes a good living as a refinancer of student loans. Every month or so, she heads to Gary to play blackjack. Last year she reckoned she was up $5,000. “Eventually the house wins,” she says. “I know that.” Far better off than most of the patrons, Alicia talks about how the casino is sucking the life out of the community. “Most of the people here are desperate,” she says. “The casinos are just preying on them.”

It is 11am on a Wednesday morning and half the tables are busy. The age range is striking. One patron can only move with the help of a Zimmer frame while still clutching a large bag of change. Younger ones are downing beers at their games. Alicia is already down $700. “They’re the ones putting the money up,” says Alicia, gesturing at the scattering of patrons, almost all of whom are in shorts, T-shirts and baseball caps. “No one else is betting any money on them.”

Edward Luce is the FT’s chief US commentator. His book ‘Time to Start Thinking: America and the Spectre of Descent’ is published on April 3 by Grove Atlantic in the US and Little, Brown in the UK. This essay is not an excerpt.

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