The Hindu Business Line : American dream turns sour

A combination of housing mortgage collapse, unprecedented hike in food and oil prices, falling dollar and rising unemployment has put the American dream beyond the reach of the average young American. Good education is no longer a guarantee of a high paying job, says Alok Ray.

A few years back, one wide-eyed young relative who had just secured admission in a US university asked me: “Uncle, I read so much about the American dream. What is it?” My son, on hearing this question, answered on my behalf. He said: “A house in the suburbs, with two cars, two dogs and two children.” Though it was said in half jest, my son had summed it up pretty well.

A lot of young Americans now feel that such an American dream is slipping beyond their reach. This realisation is dawning on them after a perfect storm — in the shape of a deadly combination of housing mortgage collapse, unprecedented hike in food and oil prices, falling dollar (vis-À-vis other major currencies) and rising unemployment — has struck them.

But is this an exaggerated fear? What are the hard facts? Though everyone is talking of recession, so far there has not been even a single quarter of declining GDP, thanks largely to export growth due to a falling dollar. The unemployment rate is rising but it is still hovering around 5.5 per cent. Remember, the unemployment rate reached 25 per cent during the Great Depression of the 1930s. Moreover, in the 1930s — unlike today — there was no government insurance of bank deposits protecting depositors against bank failure or any kind of social security such as unemployment benefits.

A real let-down

So, things are nowhere as bad as what Americans experienced during the Great Depression. But perception is not created by mere facts. For one, the present generation has not seen the Great Depression. They are accustomed to a high living standard built on cheap oil and cheaper credit. An American has access to more than one credit card before he passes out of high school. Even school dropouts could reasonably expect to own a house and a car over their life time, provided they were willing to work at pizza parlours or petrol pumps. So, for them, the present situation is a real let down.

Many American parents now-a-days complain that easy life has spoilt their children. They have not seen bad times. As a result, they have lost the inclination or the ability to work hard to get a good education. The average quality of education in junior and middle-schools has also gone down — especially in the areas of maths and science. At the same time, technology is making possible the export of skilled jobs to low-wage countries in an increasing range of activities spanning from call centres to radiologists and research scientists. So, even the standard solution of a good education is no longer a guarantee of good paying jobs in the US. The unpredictable ways in which the technology is changing makes no job a secure one any more. For instance, an American software engineer decided to go for snow-removal business as a safe job because he felt that “snows on US parking lots cannot be moved from India”.

Squeezed from both sides

A sense of gloom is evident among American college students, not to speak of low-skill workers. They feel squeezed from two sides. First, the private cost of college education for an average American student is much more than that for an average Indian or Chinese student. At the same time, the forces of globalisation and technology are compelling the American college graduate to compete with the Indian or the Chinese counterpart whose wage rate is a mere fraction of the American wage rate.

As the CEO of the Intel Corporation put it (slightly paraphrased): “No matter what, Intel will survive. Intel will go where the costs are lower. Intel’s profits will rise. So, as CEO of Intel, I am not worried. But I am also a grandfather. I am worried about what would happen to my grandchildren in the US. Where would they find jobs?”

This is a serious concern for most Americans. The standard argument was that wages in China or India could be one-tenth of US, but their labour productivity is also one-tenth or less. So, the Chinese or the Indians would not necessarily have a cost-advantage over Americans. This argument is breaking down since the labour productivity difference is being wiped out by the global spread of capital and technology while the huge difference in wages still persists. American workers have reasons to be worried, though not the American capitalists.

Widening wage gap

Even within labour, the inequality is on the rise. The wage gap between the high skilled and the low-skilled workers has been steadily widening since the early 1980s. However, the really rich never had it so good.

According to data reported in The Economist, in US “in the 1990s, the incomes of the richest 1 per cent of taxpayers went up 10 per cent a year in real terms while those of the other 99 per cent grew at an average annual rate of 2.4 per cent. Between 2002 and 2006, the richest 1 per cent saw 11 per cent annual real income growth; everyone else got less than 1 per cent.” One can also recall here that 47 million Americans are without any health insurance at a time when medical treatment costs are sky rocketing. Clearly, the American dream is receding for an increasing number of Americans in the recent years.

No doubt, many Americans are learning the hard way. They realise that that the days of cheap oil are over. Many of them are abandoning their gas-guzzling special utility vehicles (SUVs) in favour of smaller cars and hybrids, cutting down their shopping trips and long weekend drives, using more public transport and searching for smaller homes (whose monthly mortgage payment they can afford to pay with their own earnings) nearer their place of work and away from the suburbia. Financial advisers on prime-time TV are teaching a nation with zero personal savings and the highest obesity rate on how to save for rainy days by abstaining from Starbucks coffee and making better use of leftover food.

Shifting power

A huge redistribution of global income is taking place. The rise in oil prices is eroding real income and prosperity in the US, while oil-rich Russia and Gulf countries are reaping the bonanza. The centre of economic power is shifting away from the US.

A question is being asked: How long can US dictate global policy making institutions to its advantage merely on the strength of its superior military power? The rising economic and political clout of the developing world led by China and India is evident in the recent rounds of global negotiations on trade and environment.

Finally, the long-term implications of the US living on borrowed money. The huge trade and budget deficits are mortgaging America’s future to creditors in Asia and the Gulf. The ever-increasing foreign debt service burden will mean that the future generations of Americans will have to suffer a larger reduction in living standards to pay back the foreign debt.

It is nearly unthinkable that the Canadian dollar, whose value used to be less than 70 per cent of US dollar, is now worth the same as the mighty US dollar. There is no doubt that the US dollar will decline even more against euro if and when the major oil producing countries such as Iran and Venezuela price their oil in euro, rather than the dollar. This would further reduce the global demand and the price for the dollar. What should I tell young men like my relative who are in the process of going to the US for higher education and are aspiring to live the so-called American dream?

Irrespective of all the shortcomings of the US school education system, the universities are still the best place for higher education and research. So, make use of these facilities by all means. But, if you like to live the American dream, it may be easier for you to realise the dream in India or in the emerging markets of Asia in the years to come with the knowledge and skill that you would be acquiring in the US.

(The author is a former Professor of Economics at IIM Calcutta. Responses to blfeedback@thehindu.co.in)

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