Global Rumblings: Third World America?

Third world America

Sep 14, 2010 by Luiza Ch. Savage

Danny Wilcox Frazier/Redux/ Robert Galbraith/Reuters/ Shannon Stapleton/Reuters

In February, the board of commissioners of Ohio's Ashtabula County faced a scene familiar to local governments across America: a budget shortfall. They began to cut spending and reduced the sheriff's budget by 20 per cent. A law enforcement agency staff that only a few years ago numbered 112, and had subsequently been pared down to 70, was cut again to 49 people and just one squad car for a county of 1,900 sq. km along the shore of Lake Erie. The sheriff's department adapted. "We have no patrol units. There is no one on the streets. We respond to only crimes in progress. We don't respond to property crimes," deputy sheriff Ron Fenton told Maclean's. The county once had a "very proactive" detective division in narcotics. Now, there is no detective division. "We are down to one evidence officer and he just runs the evidence room in case someone wants to claim property," said Fenton. "People are getting property stolen, their houses broken into, and there is no one investigating. We are basically just writing up a report for the insurance company."

If a county without police seems like a weird throwback to an earlier, frontier-like moment in American history, it is not the only one. "Back to the Stone Age" is the name of a seminar organized in March by civil engineers at Indiana's Purdue University for local county supervisors interested in saving money by breaking up paved roads and turning them back to gravel. While only some paved roads in the state have been broken up, "There are a substantial number of conversations going on," John Habermann, who manages a program at Purdue that helps local governments take care of infrastructure, told Maclean's. "We presented a lot of talking points so that the county supervisors can talk logically back to elected officials when the question is posed," he said. The state of Michigan had similar conversations. It has converted at least 50 miles of paved road to gravel in the last few years.

Welcome to the ground level of America's economic crisis. The U.S. unemployment rate is 9.5 per cent. One in 10 homeowners are behind on their mortgage payments. Home sales are at record lows. While the economy has been growing for several quarters, the growth is anemic—only 1.6 per cent in the second quarter of this year—and producing few new jobs.

Even with interest rates at unprecedented lows, there is anxiety about the possibility of a double-dip recession. Sales of existing homes are at their lowest level in 15 years, and new home sales plummeted this summer to the lowest levels on record. Property and sales tax revenues have shrunk. And nowhere is this more apparent than at the local government level, where officials are being forced to roll back the everyday hallmarks of modern civilization.

Cincinnati, Ohio, is cutting back on trash collection and snow removal and ﬁlling fewer potholes.

The city of Dallas is not picking up litter in public parks. Flint, Mich., laid off 23 of 88 firefighters and closed two fire stations. In some places it's almost literally the dark ages: the city of Shelton in Washington state decided to follow the example of numerous other localities and last week turned off 114 of its 860 street lights. Others have axed bus service and cut back on library hours. Class sizes are being increased and teachers are being laid off. School districts around the country are cutting the school day or the school week or the school year—effectively furloughing students. The National Association of Counties estimates that local governments will eliminate roughly half a million employees in the next fiscal year, with public safety, public works, public health, social services, and parks and recreation hardest hit by the cutbacks. A July survey by the association of counties, the National League of Cities, and the U.S. Conference of Mayors of 270 local governments found that 63 per cent of localities are cutting back on public safety and 60 per cent are cutting public works.

In August, the U.S. Congress passed a US$26-billion stimulus extension bill, aimed in part at saving teacher jobs. But it's a finger in the dike. Jacqueline Byers, director of research for the counties association, said many local governments have yet to confront the full impact of the real estate crisis on government revenues because they do tax assessments only every third year. A fundamental transformation is under way. "When we come out of this recession we're going to see government functioning very differently," says Byers. "We are seeing more public-private partnership than we ever had for things like recreation and parks. We are seeing some of them privatize libraries. They lease the library to a private corporation that employs the workers who don't carry retirement or health benefits." Or they could wind up like Hood River County, Ore., which in August closed its three libraries altogether.

Some governments are looking for creative ways to replace plummeting property and sales tax revenues. Facing a US$1-billion budget shortfall, Montgomery County in Maryland appealed for corporate sponsors to step up and adopt porta-potties in its public parks. In the end, the privies were saved by a combination of park employees taking early retirement, a few private sponsorships, and a negotiated discount from the supplier, Don's Johns. Meanwhile, Montgomery County's school system, banking on its reputation for high standards and test scores, took the unusual step of selling its curriculum to a private textbook publisher, Pearson, for US$2.3 million and royalties of up to three per cent on sales. As part of the deal, county classrooms can be used as "showrooms"—which critics said effectively turns students and teachers into salesmen for a corporation. But the superintendent, Jerry Weast, told theWashington Post, "I tend to look at this from the perspective that we are broke."

These cuts in infrastructure and education are more than just a temporary belt-tightening in response to a recession. They threaten long-term damage to American's economic foundation—a foundation that has long been eroding. When the eight-lane Interstate 35 bridge collapsed in Minneapolis in 2007, killing 13 people and injuring 145, the American Society of Civil Engineers warned that the infrastructure deficit of aging postwar highways and bridges amounted to US$1.6 trillion. More than a quarter of America's bridges were rated structurally deficient or functionally obsolete. Steam pipes have exploded in New York City and the levees failed in New Orleans.

Despite its position as the world's unrivalled superpower, international comparisons show the U.S. slipping on a number of fronts. On education, the United States has been falling behind, in everything from science and engineering to basic literacy. The U.S. once had the world's highest proportion of young adults with post-secondary degrees; now it ranks 12th, according to the College Board, an association of education institutions. (Canada is now number one.) In 2001, the U.S. ranked fourth in the world in per capita broadband Internet use; it now ranks 15th out of 30 nations, according to the Organisation for Economic Co-operation and Development. "We have been involved for three decades now in paring back public commitments and public spending, and that started with the Reagan revolution. We are living with the outcomes and consequences," says Michael Bernstein, an economic historian at Tulane University in New Orleans.

Meanwhile, prolonged rates of high unemployment are taking a toll on families today, and will for years to come. Studies have shown that the longer a person is unemployed, the more difficult it is to find a job—partly because skills deteriorate, and partly because employers become suspicious of why someone hasn't worked for a year. "The United States is expanding its underclass of a whole group of individuals who will become less employable, less integrated, more subject to criminal and other deviant behaviour—and probably become part of the larger problem of structural poverty in America as well," says Sherle Shenninger, director of the economic growth program at the New America Foundation, a Washington think tank.

Arianna Huffington sees an even starker big picture emerging from the reams of bad economic news. "As we watch the middle class crumbling, for me this is a major indication that we are turning into a Third World country," said Huffington, founder of the Huffington Post, in an interview. "The distinguishing characteristic of the Third World country is you have the people at the top and the rest—you don't have a thriving middle class," says Huffington, whose new book is entitled Third World America: How Our Politicians Are Abandoning the Middle Class and Betraying the American Dream.

America is moving "from the Jetsons to the Flintstones," she argues. "The American dream was already based on the idea you could work hard and do well and your children will do better. Now we are confronted with downward mobility across the board. You have the phenomenon of unprecedented numbers of college grads who can't get jobs." The current public sector cutbacks in education and infrastructure will only make things worse, Huffington says. "You are both hurting people in the present, and basically undercutting your economic growth and prosperity in the future."

But the problem isn't simply a product of the current recession or the 2008 financial crisis. It is now well understood that for years Americans lived beyond their means on borrowed money.

The real estate bubble enabled many homeowners to borrow against inﬂated house prices, giving families the feeling that their wealth was increasing. It was all a mirage. Low interest rates and easy credit allowed consumers to spend enthusiastically, masking the fact that the standard of living and incomes were stagnating, and public and private investment was lagging.

Over the past decade, private sector job growth was sluggish. Combined with recession job losses, there are now only as many private sector jobs as there were in early 1999, a decade ago, while the population continues to grow. And incomes stagnated for a full decade—the longest such period since the U.S. Census Bureau has been keeping track of household income.

"There is certainly a serious erosion of both the American social contract and the American dream for a great majority of Americans," says Shenninger. "There is a worrying trend that the private sector has not been able to generate jobs for now more than a decade."

While business productivity increased—workers created more output per hour of work—that did not follow the traditional model of translating into higher wages. "Eighty to 90 per cent of productivity gains went to corporate profitability—which means that in order to make up for the gap in demand, working families resorted to relying on rising housing prices and debt," says Shenninger. Workers lost the ability to bargain for wage increases as they competed with lower-wage workers in Europe, Asia and other emerging markets. Meanwhile, corporate earnings exploded.

Clyde Prestowitz, a former Reagan administration trade official and president of the Economic Strategy Institute, says the scope of the problem came into focus for him one day last year when he read, in the same newspaper, that China was launching a new 240-mile-an-hour high-speed train, and then an article about city leaders in Pittsburgh considering a tax on university tuitions in order to fund the municipal employees' retirement pension plan. "I thought, the Chinese are building world-record trains and we're taxing kids who go to school!" says Prestowitz. "We've been in decline for quite some time—we haven't recognized it and have been fooling ourselves. But we've gotten to the point it's hard to not see."

There are numerous theories about the path America took to get where it is. Prestowitz blames the American approach to trade and globalization. A former trade negotiator who worked on NAFTA and advised Ronald Reagan's commerce secretary, he argues that at the root of the problem is a long-term American naïveté about global trade, a case he makes in his bookThe Betrayal of American Prosperity.

American jobs are being lost not only to low-wage competition from emerging economies, but to strategic policies by foreign governments to dominate critical sectors of the economy, or to keep their currency values low to promote exports. "Other countries recognize the importance of economies of scale and promote the development of certain industries, whether solar panels, or semiconductors, and we don't," says Prestowitz.

High-tech plants and research labs of companies such as Intel, Applied Materials, General Electric and BP have been moving to China because the Chinese are offering subsidies in the form of free energy, free infrastructure, reduced taxes and discounted utilities. Prestowitz made the argument earlier this year to a meeting of White House economists who were debating the administration's funding for alternative energies such as battery technologies. "My position was, if you spend all this money and not do anything about currency manipulation by China, South Korea, Singapore, Taiwan, Malaysia, Thailand, if you don't do anything about the investment incentives being offered to companies like Applied Materials, if you don't deal with all those things and just give money to some battery company—forget it, that's money down the rathole."

Prestowitz accuses successive American administrations of sacrificing trade issues to geopolitics. "The highest priority for the U.S. government is national security. We need a base somewhere or a vote at the UN, and we make an economic concession," he says. Exhibit A: "The Obama administration has bent over backwards to avoid calling China a currency manipulator," he noted.

Huffington blames politicians' domestic economic policies: first, Republicans for tax cuts and deregulation that favoured top earners and corporations, and now Democrats for failing to undo the damage. As a candidate, Barack Obama accused George W. Bush of ignoring the middle class, she notes. But now Huffington criticizes Obama for campaigning on prioritizing the middle class and then failing to do so in the White House. "What happened is he picked an economic team whose primary focus has been Wall Street and who dramatically underestimated the depth of the crisis," she says. "The emphasis has been on fixing Wall Street, which was bailed out without any strings attached, and which turned around and cut lending instead of lend more."

Shenninger points in part to foreign policy: waging expensive wars overseas rather than spending the money at home. "Our priorities are horribly distorted," he says. "We spent billions on new energy plants in Iraq and most of the money got siphoned off. We are spending billions of dollars trying to build schools in Afghanistan. But we are not willing to borrow at historically low rates to keep teachers at work or improve public infrastructure at home."

Whatever the causes, the way out is not clear. While some critics are calling for a major program of reinvestment in public infrastructure and reviving parts of the U.S. manufacturing base, the politics do not favour it. In a speech in Milwaukee on Monday, Obama asked Congress to pass a US$50-billion infrastructure spending program to refurbish roads, runways and railways. But concerns about government deficits among Republicans and some Democrats make it unlikely that any large spending package could pass Congress—especially after the gains the GOP is widely expected to make in the mid-term elections on Nov. 2.
Republicans are calling for aggressive spending cuts. When Democrats pushed through their spending bill for local governments, Republicans called it a "bailout" of proﬂigate local governments that overindulged public sector unions with generous salaries and benefits. House Republican whip Eric Cantor called Obama's latest call for infrastructure spending "another play called from the same failed Keynesian playbook," adding, "We need to cut spending immediately and end the environment of uncertainty that continues to impede real private-sector job creation and growth." The GOP members on the House budget committee have identified US$1.3 trillion in potential cuts to federal spending. House minority leader John Boehner calls federal spending "a job killing agenda." " We have to remember that, even when spending is not at record-setting levels, each dollar the government collects is taken directly out of the private sector," Boehner said in a recent economic speech. He added: "I'm not afraid to tell you there's no money left. In fact, we're broke."

But where does that leave people like the good citizens of Ashtabula County, Ohio? How can they be safe from criminals without a fully staffed local police force, TV station WKYC asked a local judge in April. "Arm yourselves," came the reply from Ashtabula County Common Pleas Judge Alfred Mackey. "Be very careful, be vigilant, get in touch with your neighbors, because we're going to have to look after each other."

And so they did. In July, a group of farmers removed the safeties from their shotgun triggers and surrounded a trailer in which a suspected house robber was hiding while they waited for the county's last, lone squad car to arrive.

Tags: 2008 financial crisis, America's economic crisis, economy, recession, unemployment, United States
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