The Great Illusion

The economic crisis unleashed in the US commenced in one sector of the economy and then spread out fast to other sectors and the global markets. This contagion is a symptom of an imbalance at the foundation of the system, the cause of which is unsustainable growth based on indebted consumption and speculation. The inevitable, painful correction, however, is an opportunity to reaffirm the basic principles of healthy development, which are not only economic but also moral principles.
The US economic crisis, which started with the insolvency of the most modest home mortgage holders, i.e. in one corner of the economy, spread out very fast throughout the financial sector, caused the precipitous decline of an already weakened dollar, and ended up producing unrest and suspicion –specially uncertainty– in all global markets.

When a minor cause produces major effects, that very disproportion is a symptom that the great underlying structures are weaker than we had believed.

In the US there is no more talk of a “soft landing”: we are in a full emergency landing. Economic difficulties are already affecting quite elevated sectors of society. The Stock Exchange is performing miracles and still has a debit balance. The dollar loses its value day by day. The mortgage crisis has turned into a collective panic. And on top of this all, according to the opinion of economists Joseph Stiglitz and Winda Bilmes[1], the disastrous war in Irak has an estimated total spending of 3 trillion dollars.

Washingtonno longer hears the Republican siren song promising, inwards, prosperity without sacrifice, uncontained spending, tax rebates and even total exemption and, outwards, universal arrogance, to end up proclaiming urbi et orbi the great commandment of the times, which repeated an insolent 19th century French motet: Enrichissez-vous messieurs!

The different speculative bubbles have burst one by one (a preview that the next one to burst, in no more than a year, will be the so called commodities boom -of metals, hydrocarbons, meat and grain- that will greatly affect the countries of the South). The bubbles being dispelled, a more moderate reality can be seen –so far concealed by the uninterrupted chitchat of the media.

May the reader think for a moment that of the 300 million individuals who live today on US soil, 37 million (many of them children) live in absolute poverty. These are the needy. Let us add to them the ones who live on an annual income ranging from 20,000 to 40,000 dollars (for an average four-member family): another 60 million. The result is quite unpleasant: in a country that claims to be the richest in the world, almost one third of its population lives either in indigence or very close to it. The expression “close to poverty” is not a euphemism. All those individuals who earn an annual income below the 40,000-dollar threshold have precarious jobs– their salaries not increasing at the same pace as inflation–and insufficient health coverage. They find it increasingly difficult to meet their food, health, fuel, transport and education expenses. This third of the population is prey to fear: fear of the future, fear of globalization, fear of foreigners, fear of immigrants. Suffering and fear are legitimate, but they are also fertile ground for demagogic mobilizations.

That fear that springs from the bottom of society is already reaching the middle class sectors –that is to say, those whose annual income ranges from 50 to 100 thousand dollars. Those strata, that constitute the American proverbial middle class, have been the object of some sociological studies, but in general they have not received the public attention they deserve. I dare risk the following diagnosis: the middle class, an emblematic figure of the Northern civilization, is subject to:

(1) A strong social compression. And

(2) A steady collective intergenerational descent.

I explain what this means in the following lines.

50 years ago middle-class Americans could rely on satisfactory and stable jobs, on prospects of significant salary improvements, and on the hope for an even better future for their children. They could count on a nice house in the suburbs, one or two family cars, a mortgage amortized over 30 years, and a free-from-anguish retirement at the end of the road. In general, only one adult in the family (of an average four-member family) would work. Nowadays, those jobs have become scarce.

To cope with this shortage of good, safe jobs, the middle class was forced to use other strategies. In the average family, instead of only one adult member being employed, now there are two working members. Wives and mothers started to work. Since, in general, every cloud has a silver lining, this need for a double income was seen as one step ahead in the fight for gender equality, and as women’s liberation from their traditional family roles. Yet, the harsh reality was that now to keep the same standard of living two jobs were needed where before one was enough.

Also, men and women started to work longer hours and to have shorter holidays. In some cases they had to handle several jobs at a time. In short, they all had to march faster only to remain in the same place. The image that comes to mind is that of a whole social class put to run in a gym. Economists hailed the fact when they verified an increase in productivity: once again, every cloud has a silver lining.

Finally, individuals and families resorted to personal and mortgage credits to keep the standard of living they were used to. Rather than saving, they ran into debt more and more. The American dream started being paid for in multiple installments. All these factors, together, make up what I have called “the middle class social compression”. This compression leads them, at the same time, to the suspicion or the fear that their children will not enjoy a more comfortable life or a more prosperous or stable future. Such is the meaning of what I call “intergenerational descent” –an unprecedented pessimism in a social class that was traditionally devoted to the idea of progress in every domain.

Further above, in the sector of society we may call the leading sector, power elite or dominating class, an impressive, alarming change of habit has occurred in the last years. Less thought is given to (and less is invested in) the interest of the country and the system as a whole than to the immediate or short-tem benefit. Last decade’s public policies were characterized by a great “upward” transfer of wealth, a systematic decrease in the tax burden imposed on the wealthiest sectors, and a huge national indebtedness. Ultimately, there has been a transfer of all major collective problems–including environmental contamination, the ageing of infrastructure, the retirement system, public health, and debt servicing–from the present to the future, i.e., from those living today to those who will live tomorrow. We cannot be surprised if those policies are increasingly rejected by several population sectors (within which I am included) because they have gone against a basic principle of human development, which means something more than living one’s own life to the fullest (a highly commendable aim). It also means making sure that those who come after us on the road of life may live as well as, or better than, us. From an economic point of view, this goal has a name: sustainability. From a moral point of view it is called intergenerational solidarity. They are two faces of the same coin, and it is precisely that coin what is at stake in the United States in the year 2008.

Economic categories are also moral categories. Adam Smith, modern economy’s founder, did not teach “Economic Sciences” in his native Scotland. He lectured in “Moral Philosophy”. He did not believe his best work to be The Wealth of Nations, which made him famous, but a treaty he entitled The Theory of Moral Sentiments. With the consent from Smith’s classic economy, we can say that “investing” means “giving something to the future”. By contrast, running into debt implies “taking something away from the future”. We can see a moral dilemma cropping up right away from this basic economic conceptual opposition.

When we say that the high level of public and private indebtedness is “alarming”, we mean to say that, over at least one generation, Americans have swindled their own future to live only in the here and now. (The Argentines reading these lines will recognize the subject very well). Economic development depends on the investment level both in physical capital (technology, infrastructure, systems and machines) and in human capital, which is nothing else than our knowledge and our good health. When instead of investing in these two types of capital, the physical and human infrastructure is overlooked, the work force is “compressed”, exhausted and demoralized (the social class in the gym). We are thus led to the temptation of concealing the situation with an illusory wealth based on borrowed money. Yet this way a country ends up stealing from and deceiving itself, and leaving its descendants a very heavy burden.

Today we have come to the end of a great illusion: living on borrowed money on the basis of a fictitious capital. Credit cards hit a limit, mortgages have to be repaid, houses are worth less than what was borrowed to buy them, foreigners are reluctant to lend in exchange for treasury bonds because they receive promissory notes in devalued currency. In addition, an ill-conceived and ill-executed war absorbs ever greater resources. In sum, who pays for the waste and for the “broken dishes”? The reckoning has begun.

Every severe crisis is also an opportunity. It is, above all, the chance for having a great collective awakening. That is why, in the middle of a crisis, many who were the victims of concealment or bad faith, deep down feel liberated. The truth, even when tough, is always a catharsis. Today the catharsis starts by acknowledging that a country–from the most powerful to the least powerful– makes progress with an educated, skilled and dignified work force, with a high level of investment in infrastructure and technology that may secure a long employment chain, and with a fair and progressive tax system that may actually gather the funds required to pay government services. After so many years of wild illusions, some view this prospect as a “rude awakening”. But it is not that way. All things considered, this one is also a dream: a healthy dream, one that has always been known as the American dream.


[1] Joseph Stiglitz and Linda Bilmes, The Three Trillion Dollar War. The True Cost of the Iraq Conflict, New York: W.W. Norton, 2008.

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