As Obama Fails to Lead, American Dream Is Called Into Question

The Great Recession we have endured was unprecedented and therefore unpredictable. The evidence lies in how completely we underestimated the headwinds inherent in a post-bubble, debt-deleveraging era. We saw a dismal decade of lost growth from 2001 to 2010. The annualized growth of real GDP over the past year is a miserable 1.6 percent. Many remain puzzled why this has happened.

One of the main reasons is the relatively recent transformation from a predominantly manufacturing economy to a service economy—a process that parallels the Great Depression, when we moved from an agricultural economy to a manufacturing economy. The decline in manufacturing jobs has been stunning, going from about one third of the workforce 60 years ago to less than one tenth today.

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Globalization—invented in the United States with the container ship—has led to millions of jobs going overseas to low-wage countries. Another factor is productivity. The increase in output per man-hour that followed the invention of the reaper in the middle of the 19th century freed labor from the land for the industrial revolution. Now those millions have been released from the factories, but they have nowhere to go and earn indifferent wages when they do find work. At $32,000 per capita today, real personal income is no higher than it was in December 2004.

Employment is the key indicator. Fewer Americans are at work (roughly 131 million) than in April 2000. Yet since 2000 our population has grown by approximately 31 million and the labor force by 12 million. About 6 million people have been out of a job for at least six months, double the number in previous recessions. Indeed, in six decades, we've never had so many people out of work for so long.

[See Mort Zuckerman's five sure-fire ways to create jobs.]

For a brief time, the predicament of millions was masked by the bubble in housing prices and the rise in the value of pensions. Then home prices dropped by roughly 35 percent from peak to trough, which translates into a decline in home equity of about 70 percent, given that the average mortgage represents about 50 percent of the original home value. Similarly, the S&P 500 stock index at approximately 1,250 is roughly at the same level it was in January 1999.

Household net worth has declined by over $7 trillion from where it was at the pre-recession highs, something that has never before happened over a four-year span. Average homeowners today have just 38.6 percent equity in their property, down from 61 percent a decade ago, and we are years away from a durable housing recovery given the fact that 20 percent of Americans have an upside-down mortgage, meaning negative equity.

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The evaporation of wealth and the insecurity of income are bound to have a long-term impact on spending decisions going forward. Families save more. The personal savings rate is moving from about 3.5 percent of disposable income toward 8 percent, the normal during difficult times. What's happening is best seen in the relationship of household debt to disposable income. For decades, the ratio was in the range of around 60 percent. In the early 1980s, household debt increased as baby boomers formed their households, but in the dismal decade the ratio exploded. It's now 120 percent, down from 135 percent at the bubble peak. But to get the ratio back to 100 percent, we will need to deleverage at least another $3 trillion.

No longer can the American standard of living be sustained by debt, especially through mortgage refinancing. On average, the U.S. savings rate had dropped to nearly zero in 2007, and since savings are concentrated in the upper-income bracket, that meant most people at the moderate and lower-income levels had negative savings numbers. According to one study, the bottom 80 percent of the American population was spending around 110 percent of its income, a level sustained by the housing bubble. Now, businesses and consumers will be paying down debt rather than hiring and spending.