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Originally published January 7, 2012 at 10:00 PM | Page modified January 8, 2012 at 12:01 AM

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Our American Promise is at a crossroads

A Rasmussen Poll last October found that only 37 percent of likely voters believed that America's best days were ahead. In a Gallup survey, 55 percent of respondents said it was very or somewhat unlikely that today's youth would enjoy a better life than their parents'.

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I OVERHEAR many conversations about the economy, but the topper came recently in downtown Seattle.

As two well-dressed men discussed the eurozone crisis and high unemployment at home, one said, "I'll tell you what I think it is: It's the beginning of the end of the world."

The severe recession and its staggering aftermath do represent the end of a world, if not the world. We live in the new hard times.

People sense it. A Rasmussen Poll last October found that only 37 percent of likely voters believed that America's best days were ahead. In a Gallup survey, 55 percent of respondents said it was very or somewhat unlikely that today's youth would enjoy a better life than their parents'.

The phrase "American dream" was long ago co-opted by the housing industry to mean homeownership. And in the rubble of the housing bust, many will see this aspiration put on hold for years.

But what about the American promise? If one is of a certain age — a baby boomer or older — these words are not the slogan for a consumer product. They meant if you worked hard, were willing to adapt and apply yourself, you stood a very good chance of rising. The promise was imperfect. Minorities were long excluded. But that, too, was changing for the better.

Now that promise is at risk.

While Seattle is an affluent "wealth island" far removed from the America where recession still lies heavy on the land, it is also part of the "two Washingtons." The other is a place with poor educational outcomes, 300,000 unemployed and a ladder up that is missing many rungs. Some 1.2 million were on food stamps during fiscal 2010, the most recent data available. This included 32.2 percent in Tukwila and 31.8 percent in Kent.

Poverty rates increased in Washington and 31 other states in 2010. Government cutbacks are hurting the most vulnerable and gutting critical infrastructure for the future. For increasing numbers of our fellow citizens, a university education is out of realistic reach.

The new hard times are here, too.

WHAT IS THIS thing that has us by the throat?

It's not just a jobless recovery. Nor is it comparable to the aftermath of the deep 1981-82 recession. That downturn was precipitated by the campaign of Paul Volcker's Federal Reserve to vanquish high inflation. While unemployment was severe, the economy mended relatively quickly.

We're living through something different, a defining event in the life of the nation. Not for nothing do so many statistics come with the somber qualifier, "the worst since the Great Depression." This is a recession and aftermath unlike any other since the end of World War II.

Robert Reich, secretary of Labor in the Clinton administration, uses "the Great Regression" tracking the decline of the middle class since 1980.

"The Long Emergency" comes from urbanist James Howard Kunstler and was the title of his prescient 2005 book, which warned not only of the dangers of unsustainable sprawl building and globalization but of the convergence of higher energy costs and climate change. Writer Dmitry Orlov calls it "the Permanent Crisis."

I've used the term "the Great Disruption," of which the economic collapse is only a part. In addition to energy, debt, the hollowing out of the economy, climate change and global competition, it is marked by all manner of painful discontinuity. The next 30 years won't be a replay of the past three decades, and Americans are ill-prepared for their changing circumstances.

As to the immediate crisis, Harvard economist Kenneth Rogoff calls it "the Second Great Contraction." The first, famously identified by Nobel Laureate Milton Friedman and Anna Schwartz, was the series of ruptures that preceded the Great Depression.

All of which makes comparisons with the Depression inevitable.

Both share some eerily similar aspects: An era of runaway laissez-faire capitalism, rapid change, mechanization, speculation and fraud followed by a banking panic, global collapse, the disintegration of demand and persistent high unemployment.

But the America of today is different from that of 1930. We're more affluent, with national wealth built up over decades and a safety net cast by the New Deal and later administrations, both Democratic and Republican. The Federal Reserve, led by the nation's leading scholar on Fed policies in the Depression, has not repeated the central bank's mistakes of the 1930s, especially tightening credit in the face of deflation.

Back then, federal government was small, and relief was the responsibility of states, localities and private charities. The dollar, like most major currencies, was based on the gold standard, which proved to be a fatal trap for policymakers. Major currencies were tied to the nations' gold supplies, which, in theory, stabilized prices and guaranteed the value of a country's money beyond its borders. Gold underpinned international trade and the global financial system.

The trigger of the Great Depression is commonly thought to be the stock market crash of 1929. In reality, fewer than 2.5 percent of the American population owned stock. Today, about 54 percent own shares, mostly through mutual funds and 401(k)s.

As both President Herbert Hoover and economist John Maynard Keynes knew, the calamity's roots were actually sunk in World War I and the punitive Versailles peace agreement. In its aftermath, the world suffered large imbalances of debt. In the 1920s, America was the globe's largest creditor. That proved to be a vulnerability when collapse came.

The '20s are remembered as roaring, but the American economy was beginning to tear apart. Agriculture was ailing badly. The banking system was antiquated. Automobile production — the equivalent of our era's high-tech sectors — began to slow mid-decade. In some industries, unemployment exceeded 10 percent even before 1929.

After the market crash, these problems were bombs awaiting detonation.

The Smoot-Hawley Tariff of 1930, which raised duties on imports, is commonly thought to have been a mainspring of the Depression. But America was not a huge importer at the time, and tariffs were already high.

Two more momentous events turned the first Great Contraction into the Great Depression. First, Europe fell into a deep recession, and governments left the gold standard and defaulted, which proved shattering to American banks. Second, the Federal Reserve tightened credit, and Washington, following economic orthodoxy, raised taxes to balance the budget to maintain the gold standard. The result was a devastating deflationary spiral.

Once the Depression took hold, unemployment rose rapidly, reaching 25 percent. Banks closed, wiping out families. Armies of the jobless and ruined farmers took to the roads and rails, many living in shantytowns called "Hoovervilles," including in Seattle. Relief programs were soon overwhelmed.

Franklin Delano Roosevelt, elected president in 1932, had the supple mind and shrewd political skills that Hoover lacked. He was willing to experiment. Even if the New Deal didn't fully "cure" the Great Depression, it significantly eased its suffering. And, unlike the stiff, demoralized Hoover, Roosevelt projected a confidence and optimism that made most Americans love him. FDR was Ronald Reagan's lifelong hero.

THE NATION emerged from the trial of depression and World War II with the American promise. Jobs were plentiful and wages rose along with productivity. Unionization was high and its gains influenced nonunion employers. Paid health care and pensions became the norm. The G.I. Bill opened college education to returning veterans, and their children were the beneficiaries of federal grants without which millions could never have attended a university.

Taxes were progressive and high for the richest. The economy was mixed, with vibrant private enterprise balanced by federal regulation and strong unions. Banks were constrained from the abuses of the 1920s. Most top executives shared the consensus of the times: We were in this together.

As a result, from 1947 to 1979, gains were enjoyed widely. Productivity rose 119 percent, and average hourly compensation doubled, according to census and other data analyzed by the Economic Policy Institute. The bottom fifth of earners saw their wages rise 122 percent, the middle fifth 113 percent and the top fifth 99 percent. It was the zenith of the American middle class.

On the other hand, while productivity increased 80 percent from 1980 to 2009, average hourly compensation rose by only 8 percent. A recent report from the nonpartisan Congressional Budget Office revealed that from 1979 to 2007, the top 1 percent saw overall after-tax income, adjusted for inflation, grow by 275 percent. The average growth was 65 percent for others in the top 20 percent. Yet income increased only 18 percent for the lowest fifth.

And much of this damage was done before the Great Recession. For most Americans, the 2000s was a lost decade. More would have noticed without the housing boom, which cloaked the backsliding of the middle class.

Much has been written about the causes: Oil shocks and inflation in the 1970s; complacent big companies unprepared for foreign competition; the election of Ronald Reagan in 1980, which enshrined the doctrines of tax cuts, deregulation and deficit spending; the rise of big finance and unbalanced trade deals that decimated American industry.

Millions also embraced Milton Friedman, the pitchman of laissez-faire (as opposed to the serious scholar of the Depression), and the idea took root that markets would police themselves.

The old stewardship of executives faded in the go-go years. In 1980, the chief executive of a large American company made 42 times the average worker's median pay. By 2010, the ratio had risen to 343 times the median. Even failed bosses received more in their golden parachutes than most Americans might earn in their lifetimes.

Politics was taken over by moneyed elites, and public policy was steered to their advantage, fatally disrupting the careful balance of midcentury America. The supposed free market, which actually only worked for all under evenhanded regulation, became a gamed market.

This change was vividly displayed in finance, which went from a sober, rather dull undertaking to a high-flying operation with little connection to the real, productive economy. It also, along with house building, ascended to become the nation's dominant industry as manufacturing contracted.

Starting in the 1980s, the masters of the universe on Wall Street engineered waves of mergers. They were money machines for the bankers, lawyers and executives. But many made little economic sense. The result was a highly concentrated economy with many cities losing their corporate crown jewels and best jobs.

Still, times seemed good for most in the 1980s and '90s, the American promise renewed. Americans enjoyed a cornucopia of inexpensive imported goods. The rise of high-tech sectors gave us the personal computer and a profusion of electronic gadgets to delight and distract. The Microsoft Millionaire seemed to emblematize a new age of aspirations.

Middle-class Americans gained entry into domains once largely those of the rich, from easy credit and ever-larger houses to gourmet foods. If pensions were replaced by risky 401(k)s, many embraced the change: In the long bull market, average folks became investing geniuses.

When the bull market and dot-com run ended, Alan Greenspan's Fed eased credit and the housing boom began. The now-deregulated and highly concentrated banking industry turned it into the biggest, riskiest speculative bubble in history.

They weren't alone. Both political parties encouraged the binge. Many bought houses they couldn't afford. Houses became something to flip, a source of easy riches because, the experts assured us, prices would always go up.

Even with stagnant wages, average Americans kept up appearances. Until the bubble burst.

Consumer spending accounts for two-thirds of the economy, and even as more were falling behind, they kept spending. When two-paycheck families, or even multiple jobs, weren't enough, they went deeply into debt.

Then came the collapse. Millions were ruined. Not one major figure behind the dodgy schemes or outright swindles on Wall Street was prosecuted. A federal criminal investigation of Kerry Killinger, who built venerable Washington Mutual into a gigantic mortgage mill, was dropped. No one, it seemed, would be held accountable for the nation's biggest bank failure.

IN THE AFTERMATH, the nation is divided more than it has been at any time since the Civil War. We're split into haves, have-nots and, increasingly, never-will-haves. Divided politically, even as officials of both parties depend on the corporate and Wall Street elite for campaign funding. Separated by arguments over how to fix the economy and restore the American promise.

Government debt threatens to pit generation against generation. This, even though America remains the richest nation in history and corporate profits are at record highs. But the plenty is not in the hands of those with unfulfilled consumer needs. Rather, it is held by the rich who use it for financial speculation and big corporations, many of which are American in name only.

The Great Depression taught us what not to do: When FDR tried to cut federal spending in 1937, the nation tipped back into severe recession.

The realities of the 21st century should show us what to do: Invest in education and infrastructure, prepare for a high-cost energy future, provide incentives to address climate change, fix a broken trade paradigm, end wars. And, yes, at some point taxes must be raised.

As Steve Jobs reportedly told Rupert Murdoch, "The axis today is not liberal and conservative, the axis is constructive-destructive."

Most of all, we must reclaim something at the heart of the American promise: A balance between individualism and the truth that we're all in this together. We're not just consumers but citizens, not merely economic actors but souls bound on the same journey.

Jon Talton is economics columnist of The Seattle Times. Alan Berner is a Times staff photographer.

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