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Economic Anxiety


Cover Story

ECONOMIC ANXIETY

Ten years of downsizing and widening income inequality have taken an enormous social toll. U.S. workers are losing faith in their ability to prosper

It starts with a rumor: A General Electric Co. plant in the American Midwest is about to close its doors and move its operations to Mexico. A friend calls: Her brother turned down AT&T's buyout offer, only to be faced with immediate dismissal. You consider your future: A career change might be nice, but not an involuntary one. So you rein in spending and ramp up savings, just to be safe.

For millions of Americans, daily living has turned into a high-wire act for everyone--from the blue-collar worker who's eking out $5 an hour plucking chickens to the bank teller whose job is being cut in a merger to the midlevel executive who's now working out of his home as a consultant. It is a story that can't be told by the numbers, because the numbers at times are misleading: 8 million jobs created in four years, the unemployment rate at 5.8%, inflation down to 2.7%, corporate profits on a four-year roll, and four years of economic recovery under our belts (page 34). "All the economic indicators are up...except mine," says Paul J. Szilagyi, 50, an unemployed North Miami Beach resident with a PhD in chemistry.

It's not just the unemployed like Szilagyi who are experiencing some cognitive dissonance these days. Real wages have been stagnant for most of the past two decades. The distribution of income among Americans has become more unequal over the same period. For most Americans, the workplace has become a far more capricious place. During the past decade, Corporate America has restructured, downsized, right-sized, and reengineered millions of people out of their jobs while putting the squeeze on the wages of remaining workers. At the same time, top executives promised that the payoff would come--first in higher productivity and then, labor's due, in higher wages.

It has been like waiting for Godot. It took a rabble-rousing Pat Buchanan, fulminating about jobs lost to Mexico and greedy corporate bosses, to give voice--however incendiary--to Americans' frustrations about the economy. Buchanan and his supporters, of course, have a wide-ranging wish list, from banning abortion to walling out immigrants. He isn't likely to win his party's nomination, but Buchanan's economic message "will survive long after his viability as a candidate has ended," says Steven S. Roach, an economist at Morgan Stanley & Co.

There are economists who believe that robust economic growth would be a strong palliative for this angst--and its causes. James K. Galbraith, an economist at the University of Texas at Austin, argues that the unemployment rate--and by extension, economic growth--is the single most important factor affecting the distribution of income. Push the unemployment rate dramatically lower, he says, and income inequality will be far less of a problem.

Everybody agrees that economic growth stronger than last year's would help. But U.S. macroeconomic policy is inadequate to address the powerful structural changes in the economy--the widespread diffusion of new technologies, the growth of trade's role, more rapid immigration.

LOST CONTRACT. "People have a sense that these are changes radically different from anything they have seen before," says Claudia Goldin, an economic historian at Harvard University. Many workers lament the breakdown of the social contract between employees and employers--a contract that once made it possible to raise both a family and one's living standards. In a BUSINESS WEEK/Harris Poll of 1,004 American adults conducted in late February, 77% of the respondents rated large corporations only fair or poor at providing job security for their workers, and 78% rated the companies similarly on their loyalty to employees (page 42).

The restructuring of Corporate America has carried enormous social costs. Nitin Nohria, a professor at the Harvard business school, tracked the changes that engulfed 100 of America's largest companies--"symbolic markers of our well-being"--from 1978 to the present. He found that on a net basis, 22% of the workforce of these companies, or 3 million workers, was laid off during the period, and 77% of all layoffs involved white-collar workers.

So perhaps it's no surprise that Corporate America gets its share of blame from alienated workers. Workers also believe that something should be done about imports to protect U.S. jobs: In the BUSINESS WEEK/Harris Poll, 50% of the respondents endorse import taxes or tariffs. Since the mid-1970s, the share of trade--imports plus exports--in the American economy has risen. But the perceived threat may be greater than the real threat. Economists believe that global trade explains perhaps 10% to 15%--at most 20%--of the increasing inequality of wages. By the same token, immigration is doing very little direct economic damage.

If trade and immigration don't play such a big role in determining people's economic well-being, what about that other bugaboo, technology? By and large, the BUSINESS WEEK/Harris Poll indicates, workers seem about evenly divided about technology's benefits and whether it's worth enduring the near-term pain for the long-term gain of higher productivity, better wages, and new jobs.

Speak to workers, though, and they know that there's no turning back and that they are going to have to make some adjustments. "It's not like the old days when you graduated from high school and had the same job for 20 or 30 years," says Denis Velez, a 47-year-old commercial photographer. He has taken a job that pays $200 a week processing film at a Ritz camera shop in Deerfield Beach, Fla., so he can get health benefits for his family. "Technology, especially in the field I'm in, is changing so much. In a couple of years, film itself will be obsolete."

Although workers realize they have to retool, many hope for guidance. So far, notes Shoshana Zuboff, a Harvard business school professor and author of The Age of the Smart Machine, only a handful of companies have committed the resources to help their workforces develop new skills. Today, corporations essentially all have the same technology, the same networking systems, the same software, she says.

The only way they can beat out their competitors is by enabling their biggest asset--their workforce--to be more innovative in using the technology to create new products and new services that sell well. Instead, throughout its decade-long restructuring, Corporate America has primarily viewed workers as liabilities rather than assets (page 38).

The Austrian-born economist Joseph Schumpeter observed that creative destruction was capitalism's hallmark, and today Americans are feeling its effects with a vengeance. If America wants the benefits of expanding trade and technological innovation, it needs to do more to ease the pain of transition. For corporations, that means better training programs, heightened sensitivity to the anguish of layoffs, and shared sacrifice by management.

For policymakers, that means encouraging workers to gain new skills--by introducing training vouchers and expanded investment reitrement-type accounts to pay for tuition.

Investing in human capital is not a new idea--but it needs to be pursued aggressively, not merely be given lip service. If America doesn't respond to this challenge, the antibusiness backlash already under way will worsen, and the tenets that have made the American economy so competitive and vibrant will be in danger of being undermined.By Karen Pennar in New York, with Susan B. Garland in Washington, Elizabeth Roberts in Deerfield Beach, Fla., and bureau reportsReturn to top


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