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Chapter 2 NIGHTMARE ON MAIN STREET

America has long been known as the land of opportunity. So what happens when that opportunity vanishes, when the jobs that served as the gateway to the American Dream disappear, never to return? What happens when educational opportunities and the historical underpinning of our vision of ourselves as a nation give way? What steps into the void?

In a word: fear.

The fear that America is in decline—that our greatest triumphs are behind us. The fear that the jobs we have lost are gone forever. The fear that the middle class is on an extended death march—and that the American Dream of a secure, comfortable standard of living has become as outdated as an Edsel with an eight-track player.

We look at our obliterated 401(k)s and dwindling pensions, and hear the whispers about Social Security going broke, and we wonder if we will ever be able to retire—let alone maintain our standard of living into our sunset years. Golden visions of post-work leisure time have been replaced by dark, fevered flashes of deprivation—of having to decide between eating and paying for the medicine we need. Of letting our homes go into foreclosure to scrape together the money to live on.

The void is filled by the fear that America is becoming a nation of haves and have-nots—and that millions are in danger of becoming permanent members of the have-nots. Forget Freddy Krueger. The real nightmare is not happening on Elm Street. It’s happening on Main Street. And it’s not scantily clad teens being slashed—it’s jobs and incomes and stability and quality of life. It’s our future.

And we’re afraid—very afraid—that the worst may not be over, and that the real economy, as opposed to the one on Wall Street, is still melting down. The housing crisis is still raging. The first run of foreclosures was because of subprime loans; the second run is because of people thrown out of work. And the government’s loan modification programs won’t be of any help with this round of foreclosures. As Newsweek’s Nancy Cook pointed out,⁹⁰ “If you’re unemployed, you don’t qualify for a loan modification.” And then there is the coming commercial property crisis and a potential credit card meltdown.

So we look at the suffering all around us, at the shuttered factories and stores, and worry that it is just the tip of the iceberg—or the tip of the tip of the iceberg. We try to fight off the fear that if things don’t change—and in a big way—we may find ourselves working at Walmart or McDonald’s or Dunkin’ Donuts for minimum wage.

We are fast becoming a nation collectively waiting for the next shoe to drop.

Washington is filled with talk about national security: troop levels, airport screenings, Pentagon bud gets, and terrorist threats. But there is another kind of national security: the one that keeps us feeling confident that the economic rug isn’t going to suddenly be pulled out from under us, and that our way of life isn’t going to suddenly implode—the kind of national security that gives us hope for the future. For that national security, especially when it comes to America’s middle class, the threat level has definitely moved from yellow (“elevated”) to orange (“high”)—and we are afraid that red (“severe”) is looming up ahead.

For more and more of its citizens, America has become a national insecurity state.

THE BROKEN BACKBONE OF AMERICA

In 1835, Alexis de Tocqueville published Democracy in America, his observations on the nature of our country. The opening line speaks volumes: “Amongst the novel objects⁹¹ that attracted my attention during my stay in the United States, nothing struck me more forcibly than the general equality of condition among the people.”

Looking across the vast expanse of this developing country, the thing that most drew his attention was a vision of America as a level playing field, a place where the same rules applied to everyone. “Democratic laws,” he noted,⁹² “generally tend to promote the welfare of the greatest possible number; for they emanate from the majority of the citizens, who are subject to error, but who cannot have an interest opposed to their own advantage.”

America’s enlightened elites have always understood that their long-term well-being and security depended on the middle and lower classes having an equal stake in the nation’s prosperity and political institutions. They knew that this great democratic experiment would be defined not by breeding or religion or language, but by a unifying idea—“All men are created equal”—and by an ideal: the good of the many outweighs the good of the few. E pluribus unum. Out of many, one. In the infancy of our nation, Tocqueville saw the power of this idea and its centrality to the American experiment.

He traveled across America before the industrial revolution transformed the country. Once it did, manufacturing jobs helped turn the working poor into middle-class Americans, liberating them from the shackles of a hand-to-mouth existence and moving them closer to enjoying a “general equality of condition.”

So, is America still a nation where its citizens enjoy a “general equality of condition”? Are we still promoting “the welfare of the greatest possible number”? It’s hard to imagine a modern Tocqueville taking in the grand sweep of our current political and economic landscape—with its shrinking middle class, disappearing jobs, growing economic disparity, banking oligarchy, and public policy sold to the highest bidder—and reaching the same conclusions.

Tocqueville’s words are deeply at odds with the reality of modern America. For decades our political leaders have systematically squeezed the nation’s middle class in order to promote the corporate interests paying for their reelection. America’s middle class has been the country’s economic backbone. It is our vast, energized middle class that has done the heavy lifting and inspired the most innovation. Where the middle class heads, the rest of the country follows. So when the middle class is systematically worn down—when too many of its members become downwardly mobile, unable to keep their jobs or their homes or buy as many goods and services and drive market innovations—can a diminished America, a Third World America, be far behind?

MIDDLE CLASS: I KNOW IT WHEN I SEE IT93

The crippling of America’s middle class didn’t happen overnight—and it wasn’t the result of the bad bets made by the game-fixing gamblers on Wall Street (although they sure did their part). It’s actually been decades in the making. But before we look at who set the roadside explosives along the middle class’s road to the American Dream, it might help to define exactly what the term means.

What makes someone middle class? Is there a base income level (fall below it and you are officially poor), or a top-line figure above which you instantly ascend to the upper class (with a quick rest stop at upper middle class)? Does it depend on the size of your house (do you even need a house—can renters be middle class?), the kind of car you drive, the amount of rainy-day savings you have squirreled away in the bank?

In truth, pinning down a hard-and-fast definition of “middle class” is tricky business. It’s a lot like Supreme Court justice Potter Stewart’s famous assessment of what constitutes pornography: “I know it when I see it.” (Indeed, with both porn and the modern middle class, someone is usually getting screwed.)

There is no tidy formula. Paul Taylor, executive vice president of the Pew Research Center, asked during his testimony to the Senate Finance Committee: “Is a $30,000-a-year doctor⁹⁴ doing his residency in brain surgery lower class? Is a $100,000-a-year plumber upper middle class?” Or are they both part of the great middle class?

According to the Pew Research Center⁹⁵, more than half of American adults (53 percent) define themselves as middle class. But behind this assertion⁹⁶, Pew discovered a host of caveats: “Four-in-ten (41%) adults with $100,000 or more in annual house hold income say they are middle class”—as do 46 percent of those with incomes below $40,000. At the same time, a third of those⁹⁷ with incomes between $40,000 and $100,000 don’t believe they are middle class.

For purposes of its research, Pew defined⁹⁸ the middle class as those adults “who live in a house hold where the annual income falls within 75% and 150% of the median” gross income for a family of three in 2006 (the latest year data was available). In dollars and cents, that meant⁹⁹ an income of between $45,000 and $90,000 made you middle class.

But, in the end, in a very American way, it all comes down to self-definition: If you consider yourself middle class, you are middle class.

THE MIDDLE CLASS’S LONG MARCH TO THE EDGE OF THE CLIFF

From 1945 to the 1970s¹⁰⁰, a period characterized by widespread economic prosperity, the wealthiest Americans grew richer at a rate almost identical to that of America’s lower and middle classes. From factory employees to chief executives¹⁰¹, Americans experienced a doubling of income. By the end of the 1980s¹⁰², however, things had changed drastically, with the income of the wealthy skyrocketing while the rest of the country lagged far behind.

What happened? Did middle-class Americans lose their mojo? Or had rich Americans unexpectedly come upon the economic equivalent of the Fountain of Youth—a Fountain of Wealth? They had, but rather than Ponce de León¹⁰³, it was Ronald Reagan who led the income-boosting expedition, marching into Washington under the banner of lowering the taxes of America’s moneyed elite.

But, the Reagan Revolution of the 1980s was about more than shifting the tax burden—it was about shifting the way America looked at itself. In short order, government was no longer seen as a solution—it was fingered as the problem. Tocqueville’s “welfare of the greatest possible number” was replaced by the notion that the invisible hand of the free market could best determine society’s winners and losers—until, that is, the winners got into trouble in 2008 and the government rushed to the rescue in the name of preventing Armageddon.

In books such as The Virtue of Selfishness and Atlas Shrugged, Ayn Rand, the high priestess of free-marketeers such as Alan Greenspan, championed the notion that by doing what is best for yourself, you end up doing what is best for everyone. But, as put into practice by corporate America over the past thirty years, that equation has been flipped upside down. It turns out that an unregulated free market is sooner or later corrupted by fraud and excess. In other words, it isn’t free at all. In fact, it’s as fixed as a street-corner game of three-card monte. And the interests of the elites have become disconnected from the public interest.

In the three decades since the Reagan Revolution, Americans have been preached to from pulpits far and wide the holy word of unregulated markets as the true path to a higher standard of living. As part of the new religion, we were converted from citizens to consumers and taught a catechism about how the market—not “equality of conditions”—was the foundation of our country. Along the way, the social contract—especially the subsections protecting workers, poor people, and our air, water, and oceans—was fed into a shredder. Starting with the New Deal, we began constructing a social safety net to help the most vulnerable among us. But who needed a safety net when the laws of supply and demand were there to protect us, when the trickle-down theory would provide sustenance for us all?

The missing tenet in this new free-market fundamentalism was the recognition, central to capitalism, that businessmen have responsibilities above and beyond the bottom line. Alfred Marshall, one of the founding fathers¹⁰⁴ of modern capitalism, in an address to the British Economics Association in 1890, called it “economic chivalry.” He explained that “the desire of men for approval of their own conscience and for the esteem of others is an economic force of the first order of importance.” There is a reason Adam Smith’s¹⁰⁵ free-market gospel, The Wealth of Nations, was preceded by his Theory of Moral Sentiments. He knew that economic freedom could not flourish without a firm moral foundation.

But that moral foundation is by no means inevitable. The “approval of their own conscience” and “the esteem of others” have gotten a lot cheaper in recent years. We see the results of capitalism without a conscience all around us: the pollution of our environment, workers being injured or killed, the sale of dangerous products, the shameless promotion of risky mortgages for overvalued homes, and the wholesale loss of millions of jobs and trillions in savings.

The collapse of communism as a political system sounded the death knell for Marxism as an ideology. But while unregulated, laissez-faire capitalism has been a monumental failure in practice, the ideology is still alive and kicking. You can find all manner of free-market fundamentalists still on the Senate floor or in governors’ mansions or showing up on TV trying to peddle deregulation snake oil.

Given how close we were in 2008¹⁰⁶ to the complete collapse of our economic and financial system, anyone who continues to make the case that markets do best when left alone should be laughed off his bully pulpit.

Despite the fact that many banks, car companies, and so on would be defunct without government intervention, the free-market fundamentalists continue to live in denial, trying to convince the world that if only left alone, free markets would right themselves.

Free-market fundamentalism didn’t fail because our leaders didn’t execute it well enough. In fact, during his time in office (until the economic house of cards finally collapsed at the end of his presidency), President George W. Bush and his team did a bang-up job executing a defective theory. The problem isn’t just the bathwater; the baby itself is rotten.

William Seidman, the longtime GOP economic adviser who oversaw the savings and loan bailout in 1991, cuts to the chase: “[The Bush] administration made¹⁰⁷ decisions that allowed the free market to operate as a barroom brawl instead of a prize fight. To make the market work well, you have to have a lot of rules.” Even Alan Greenspan¹⁰⁸, whose owl-eyed visage could adorn a Mount Rushmore of free-market capitalists, finally saw the light, telling a House committee in October 2008 that he “made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such that they were best capable of protecting their own shareholders and their equity in the firms.”

Many, including Bush 43, lay the blame on a few rotten apples: “Wall Street got drunk¹⁰⁹,” he said. Maybe so, but who made the Bush years a nonstop happy hour and kept serving up the drinks?

Of course, Republican leaders were not the only ones drinking the free-market Kool-Aid. It was also chugged by New Demo crats such as Bill Clinton. He came into office knowing it was the economy, stupid, then proceeded to oversee a presidency focused on the soaring Dow Jones industrial average, even as the number of Americans living in poverty stubbornly refused to dip below thirty-two million¹¹⁰, and the number of Americans unable to make ends meet without the aid of a soup kitchen or food bank hit twenty-six million¹¹¹—with more homeless children¹¹² than at any time since the Great Depression. Yet the Clinton White House’s messaging was like a twenty-four-hour Boom Channel: All Prosperity, All The Time.

In those go-go years, even being downsized could, in the eyes of the free-market evangelists, be turned to your advantage. In early 1996, after forty thousand AT&T workers¹¹³ were pink-slipped, future Mad Money host (and Jon Stewart whipping boy) Jim Cramer, then still a hedge-fund manager, wrote a piece that landed on the cover of the New Republic. Head-lined “Let Them Eat Stocks,” the article found a silver lining in the dark cloud of the massive layoff, proposing that the fired workers be given stock options. “Let them participate in the stock appreciation that their firings caused,” Cramer gushed. Cue Eric Idle’s “Always Look on the Bright Side of Life.”

Four years later, Bush v. Gore ushered in the CEO president and his CEO VP. They promptly threw open the White House doors to their corporate cronies from Enron and Halliburton¹¹⁴ and declared open season on the interests of the average American. The Enronization of our economy was under way.

THE RICH GET RICHER

The Reagan years ushered in the era of the widening income gap. The rich grew considerably richer while the real income of everyone else, from the poor to the middle class, either slid back or, at best, leveled off.

In their paper on long-term change in the U.S. wage structure, economists Claudia Goldin and Lawrence Katz of Harvard and the National Bureau of Economic Research reported, “From 1980 to around 1987¹¹⁵, wage in equality increased in a rapid and monotonic [i.e. steady] fashion. Those at the top grew most rapidly, those in the middle less rapidly, and the bottom the least of all. . . . [These] wage structure changes have been associated with a ‘polarization’ of the labor market with employment shifting into high-and low-wage jobs at the expense of middle-wage positions.”

By the late 1980s, due to changes in technology, outsourcing, and the loss of manufacturing jobs, the middle class was sputtering. Even as productivity rose, the wages of the average worker remained flat.

In 1995, the midway point¹¹⁶ between the Reagan Revolution and today, John Cassidy penned an article in the New Yorker entitled “Who Killed the Middle Class?” Cassidy had his readers imagine a lineup composed of every American, arranged from poorest to richest. The individual exactly in the middle—the median—was arguably the most middle-class person in the nation. That man or woman, in September 1979, was earning (in constant, inflation-adjusted dollars) $25,896 a year. In September 1995, that same man or woman was earning $24,700 a year—a 5 percent cut in salary over the intervening decade and a half.

In contrast, the nation’s top 5 percent¹¹⁷ saw their pay rise 29 percent over the same period, up to $177,518. And the top 1 percent did best of all. In fact, between 1977 and 1989 the richest Americans’ average income rose from $323,942 to $576,553—a whopping 78 percent increase in real terms.

The trend continued into the first decade of the twenty-first century. According to a report compiled by Elizabeth Warren¹¹⁸, the average middle-class income between 2000 and 2007 fell $1,175, while expenses rose $4,655. Over the same period, the top 1 percent¹¹⁹—which had pocketed 45 percent of the nation’s income growth under Clinton—captured 65 percent of all income growth under Bush.

And according to a report released in May 2010¹²⁰ by the Brookings Institution, between 1999 and 2008 the median house hold income fell $2,241 to $52,029, while the share of house holds earning middle-class incomes dropped from 30 to 28.2 percent.

So it’s clear: Well before the economic crisis hit in the fall of 2008, the once-envied American middle class was already being driven to its knees. Indeed, in a 2008 Pew survey¹²¹, 56 percent of middle-class Americans said they had either fallen back or merely managed to tread water over the previous five years. It was, according to Pew¹²², “the most downbeat short-term assessment of personal progress in nearly half a century of polling. Fewer Americans now than at any time in the past half century believe they’re moving forward in life.”

And that was just as the Great Recession was beginning to ravage the economy. Since then, life for the middle class has gone from bad to worse. In a revised take on the original Misery Index¹²³—the measure developed by the late economist Arthur Okun that combined the unemployment rate with the consumer price index to condense the state of the economy into one neat, digestible number—the Huffington Post created the Real Misery Index. Incorporating a more extensive host of metrics, including the most accurate unemployment figures; inflation rates for essentials such as food, gas, and medical costs; and data on credit card delinquencies, housing prices, home loan defaults, and food stamp participation, the Real Misery Index is a much more accurate estimate of economic hardship. In April 2010, as the unemployment rate remained stubbornly high and the number of Americans on food stamps grew to forty million, the Real Misery Index, which charts data from 1984 to today, hit the highest level on record. And the bull rally that sent the stock market up an impressive 56 percent from March 2009 to April 2010 surged in tandem with the Real Misery Index, which climbed 16 percent in the same period—reflecting what Lynn Reaser, the incoming president of the National Association of Business Economists, called a “two-tier economy.”

THE MIDDLE CLASS PAYS ITS UNFAIR SHARE

This two-tier economy comes with two sets of rules—one for the corporate class and another for the middle class.

The middle class, by and large, plays by the rules, then watches as its jobs disappear. The corporate class games the system—making sure its license to break the rules is built into the rules themselves.

One of the most glaring examples¹²⁴ of this continues to be the ability of corporations to cheat the public out of tens of billions of dollars a year by using offshore tax havens. Indeed, it’s estimated that companies and wealthy individuals funneling money through offshore tax havens are evading around $100 billion a year in taxes—leaving the rest of us to pick up the tab. And with cash-strapped states all across the country cutting vital services to the bone, it’s not like we don’t need the money.

Here is Exhibit A of two sets of rules: According to the White House¹²⁵, in 2004, the last year data on this was compiled, U.S. multinational corporations paid roughly $16 billion in taxes on $700 billion in foreign active earnings—putting their tax rate at around 2.3 percent. Know many middle-class Americans getting off that easy at tax time?

In December 2008, the Government Accountability Office¹²⁶ reported that 83 of the 100 largest publicly traded companies in the country—including AT&T, Chevron, IBM, American Express, GE, Boeing, Dow, and AIG—had subsidiaries in tax havens, or, as the corporate class comically calls them, “financial privacy jurisdictions.”

Even more egregiously¹²⁷, of those 83 companies, 74 received government contracts in 2007. GM, for instance, got more than $517 million from the government—i.e. the taxpayers—that year, while shielding profits in tax-friendly places like Bermuda and the Cayman Islands. And Boeing, which received over $23 billion in federal contracts that year, had 38 subsidiaries in tax havens, including six in Bermuda.

It’s as easy as opening up¹²⁸ an island P.O. box, which is why another GAO study found that more than 18,000 companies are registered at a single address in the Cayman Islands, a country with no corporate or capital gains taxes.

America’s big banks—including those that pocketed billions from the taxpayers in bailout dollars—seem particularly fond of the Cayman Islands. At the time of the GAO report¹²⁹, Morgan Stanley had 273 subsidiaries in tax havens, 158 of them in the Caymans. Citigroup had 427, with 90 in the Caymans. Bank of America had 115, with 59 in the Caymans. Goldman Sachs had 29 offshore havens, including 15 in the Caymans. JPMorgan had 50, with seven in the Caymans. And Wells Fargo had 18, with nine in the Caymans.

Perhaps no company exemplifies the corporate class/middle class double standard more than KBR/Halliburton. The company got billions from U.S. taxpayers¹³⁰, then turned around and used a Cayman Islands address to reduce its expenses. As the Boston Globe’s Farah Stockman reported, KBR, until 2007 a unit of Halliburton, “has avoided paying hundreds of millions of dollars in federal Medicare and Social Security taxes by hiring workers through shell companies based in this tropical tax haven.”

In 2008, KBR listed 10,500 Americans¹³¹ as being officially employed by two companies that, as Stockman wrote, “exist in a computer file on the fourth floor of a building on a palm-studded boulevard here in the Ca rib be an.” Aside from the tax advantages, Stockman points out another benefit of this dodge: Americans who officially work for a company whose headquarters is a computer file in the Caymans are not eligible for unemployment insurance or other benefits when they get laid off—something many of them found out the hard way.

This kind of sun-kissed thievery is nothing new. Indeed, back in 2002, to call attention¹³² to the outrage of the sleazy accounting trick, I published a tongue-in-cheek newspaper column announcing I was thinking of moving my syndicated newspaper column to Bermuda. “I’ll still live in America,” I wrote, “earn my living here, and enjoy the protection, technology, infrastructure, and all the other myriad benefits of the land of the free and the home of the brave. I’m just changing my business address. Because if I do that, I won’t have to pay for those benefits—I’ll get them for free!”

Washington has been trying¹³³ to address the issue for close to fifty years—JFK gave it a go in 1961. But time and again corporate America’s game fixers—a.k.a. lobbyists—and water carriers in Congress have managed to keep the loopholes open.

The battle is once again afoot. While Congress considers legislation that would clamp down on some of the ways corporations hide their income offshore to avoid paying U.S. taxes, corporate lobbyists are furiously fighting to make sure America’s corporate class can continue to enjoy the largesse of government services and contracts without the responsibility of paying its fair share.

The latest tax-reform bills are far from perfect¹³⁴—they leave open a number of loopholes and would only recoup a very small fraction of the $100 billion that corporations and wealthy individuals are siphoning off from the U.S. Treasury. And they wouldn’t ban companies using offshore tax havens from receiving government contracts, which is stunning given the hard times we are in and the populist groundswell against the way average Americans are getting the short end of the stick.

But the bills would end one of the more egregious examples of the tax policy double standard, finally forcing hedge-fund managers to pay taxes at the same rate as everybody else. As the law stands now¹³⁵, their income is considered “carried interest,” and is accordingly taxed at the capital gains rate of 15 percent.

According to former labor secretary Robert Reich, in 2009¹³⁶ “the 25 most successful hedge-fund managers earned a billion dollars each.” The top earner clocked in at $4 billion. Closing this outrageous loophole¹³⁷ would bring in close to $20 billion in revenue—money desperately needed at a time when teachers and nurses and firemen are being laid off all around the country.

But the two sets of rules—and the clout of corporate lobbyists—leave even commonsense, who-could-argue-with-that proposals in doubt, and leave the middle class shouldering an unfair share of a very taxing burden.

Indeed, the double standard was famously ridiculed¹³⁸ by Warren Buffett in 2007 when he noted that his receptionist paid 30 percent of her income in taxes, while he paid only 17.7 percent on his taxable income of $46 million.

HOMER SIMPSON HAS IT TOO GOOD: SNAPSHOTS FROM THE MIDDLE-CLASS BATTLEFIELD

The numbers don’t lie: We increasingly live in a “winner take all” economy. Indeed, we’ve arrived at a point where even Homer Simpson—created as a classic American Everyman character—is now living a middle-class fantasy. After all, how many American middle-class families do you know where the family’s sole breadwinner, a safety inspector at a nuclear power plant, can still comfortably support a family of five on a single income?

A more accurate snapshot¹³⁹ of a modern middle-class family can be found in Nan Mooney’s book (Not) Keeping Up with Our Parents. One person profiled in the 2008 book is Diana, thirty-six, a licensed psychologist with a doctorate in clinical psychology. Her husband, Byron, is a trained engineer who makes his living as a technical writer for a patent attorney. The couple has two young children. Besides bringing up her kids, Diana holds down two part-time jobs, one as an assessment director for a nonprofit organization that places school counselors, the other building her private practice as a psychologist. She makes $35,000 a year. Her husband, a contract worker paid on a per-project basis, makes $40,000. When interviewed by Mooney, their credit cards were loaded with debts totaling $17,000. Their mortgage cost them $1,150 a month. Diana was paying $450 a month on her school loans, but that figure was about to get bumped to $550 a month. Rent on her office, plus condo fees, added another $750 a month. The couple had little equity in their property and had wiped out their savings.

“I feel like we’ve cut every corner we can cut,” Diana told Mooney. “We don’t take vacations. We never go out. Right now, I just keep my fingers crossed that nothing breaks. We need a new roof and new tires for the car. And we’re going to get hit hard by taxes this year.” At that point, Diana’s voice began to crack. “I’m scared. I’m scared we’ll never be able to retire. I’m scared we won’t be covered for health care. I’m scared we won’t be able to send our kids to college. We’ve never had much, but before I always felt like we were doing our time. We were working our way toward a more comfortable future. That doesn’t seem true anymore. At this point, I see no way out at all.”

Diana and Byron’s tale is an increasingly common one. Their high-priced college education—the kind many see as a safeguard against economic hard times—is no longer enough at a time when the jobless rate is almost 10 percent¹⁴⁰ and twenty-six million people¹⁴¹ are out of work or underemployed.

Troy Renault is one of them¹⁴². In August 2009, Troy, his wife, Tammy, and their five children were living in a three-bedroom home in Lebanon, Tennessee. Two years earlier, Troy had lost his construction job. Ultimately, as the Huffington Post’s Laura Bassett reported, they lost their home and had to move into a donated trailer on a local campground. They downgraded from a 1,900-square-foot house to a 215-square-foot trailer.

Says Troy¹⁴³, “You wind up starting to think to yourself, ‘Okay. Do we go ahead and make the house payment and keep a roof over our head but have no lights and no water, or do we go ahead and keep those utilities on and forgo the house payment, and hope that you can get caught up?’ ”

Rebecca Admire is another¹⁴⁴ of the more than eight million people who have lost their jobs since December 2007. A single mom with two kids, Admire was laid off from her job at the Family Guidance Center for Behavioral Healthcare in St. Joseph, Missouri. After several months of struggling to pay her rent, she invited her cousin and two children to move in with them and share costs. There are now eight people living in Admire’s two-bedroom house. The four children sleep in one bunk bed, two to a mattress. But with so many in the house, the utility bills have gone through the roof. “I cry every time a bill comes in the mail,” Admire says.

In some cases, entire towns are falling into permanent decline when their central industries disappear. Mount Airy, North Carolina, for example¹⁴⁵, which has a population of just 9,500, historically relied largely on the textile industry for jobs. But, as Paul Wiseman reported in a March 2010 piece in USA Today, one after the other, the city’s textile and apparel factories shuttered, shedding more than three thousand jobs between 1999 and 2010. It’s a trend bound to continue: According to the Bureau of Labor Statistics, openings in textile and apparel manufacturing will nearly halve by 2018, as work is increasingly outsourced overseas and replaced by technological advances.

And in Mount Airy—the city where Andy Griffith grew up¹⁴⁶, and the inspiration for Mayberry, the epitome of small-town America for TV viewers for half a century—the transition has rattled an entire generation that had banked on the security of manufacturing jobs. “When you started work, you thought you’d be there until you retired,” Jane Knudsen, who began working in a textile mill in 1973, told USA Today. But Knudsen’s mill closed down, and now she works as a part-time cook at the local jail for two dollars less per hour. Another local, Steve Jenkins, opted to skip college and go straight into apparel manufacturing. He worked at Perry Manufacturing for more than thirty years, advancing through the ranks to earn a salary of $103,000 as director of purchasing. But Perry shut down in 2008. For Jenkins, who received no severance and had few other skills, life was suddenly upended.

“We were not prepared¹⁴⁷,” Mount Airy City Council member Teresa Lewis conceded. “We’ve had a huge loss of jobs in the textile industry. A lot of those people had devoted 30, 35 years to one particular company, and they found themselves in their early to mid-50s without a job or without the skills to go into something else.”

The aggregate effect of these stories—and tens of thousands more like them—is deeply troubling for our country. Through an enviable mix of jobs created by innovative American businesses and a national culture based on self-reliance, America has always had unemployment rates far lower than other developed nations. But this historic advantage is coming to an end. By the end of 2009, the unemployment rate¹⁴⁸ among sixteen-to-twenty-four-year-olds was 19.1 percent. And 19.7 percent of American men¹⁴⁹ aged twenty-five to fifty-four (prime working years) were unemployed—the highest figure since the Bureau of Labor Statistics began tracking this data in 1948.

“Every downturn pushes some people¹⁵⁰ out of the middle class before the economy resumes expanding,” wrote Peter Goodman in the New York Times in February 2010. “Most recover. Many prosper. But some economists worry that this time could be different. An unusual constellation of forces—some embedded in the modern-day economy, others unique to this wrenching recession—might make it especially difficult for those out of work to find their way back to their middle-class lives. . . . Call them the new poor: people long accustomed to the comforts of middle-class life who are now relying on public assistance for the first time in their lives—potentially for years to come.”

OPEN SEASON: SETTING A TRAP FOR THE MIDDLE CLASS

There are those in our country who look at the struggles of the middle class—mortgages underwater, foreclosure notices on the door, mounting credit card bills in the mailbox, bankruptcy on the horizon—and think, “They got into this mess of their own free will; they’re just getting what they deserve.” Who told them to buy that house they couldn’t afford, sign that mortgage without reading the balloon payment fine print, and run up those balances on a credit card that came with a teaser interest rate that is now 30 percent? Why should the rest of us, who were more prudent, be expected to carry the burden of the irresponsible?

This response ignores the ugly truth of what brought about this crisis. It wasn’t a sudden spike in irresponsibility on the part of middle-class Americans. It was the inevitable by-product of tricks and traps deliberately put in place to maximize profits for a few while creating conditions that would soon maximize misery for millions. The devastation was predictable—and, in fact, had been predicted by any number of Jeremiahs who saw the writing on the wall. Indeed, looking at the foreclosure crisis and the credit crisis—and the resulting bankruptcy crisis—it’s hard to avoid the conclusion that, in many ways, things are working out exactly as planned.

In hindsight, it’s as if a giant bear trap had been set for the middle class—a bear trap that was sprung by the economic crash.

Let’s start with the bursting of the housing bubble and the foreclosure crisis that followed. For a century, from the mid-1890s¹⁵¹ to the mid-1990s, home prices rose at the same pace as the overall rate of inflation. The bubble started to inflate in 1996 and within a decade home prices had jumped 70 percent—an $8 trillion bubble.

That bubble was no accident. We’ve just seen the way middle-class incomes had fallen behind expenses over the past three decades. How is it that more and more Americans were able to buy more and more houses—even as incomes stagnated? By taking on more debt, of course, provided by an underregulated army of lenders pitching seductive new mortgage vehicles. By 2005, subprime mortgages had skyrocketed¹⁵² to 20 percent of the market.

Fueling the boom was the development¹⁵³ of securitized mortgages—including collateralized debt obligations (CDOs)—in which mortgages of varying degrees of risk were bundled together in “tranches” and sold to investors. Since lenders were selling off the risk to someone else, they felt much freer to make loans to borrowers who never would have been able to qualify for a prime mortgage.

The Fed did its part, too, contributing extremely low interest rates and lax oversight to the increasingly toxic housing mix. In the words of economist Dean Baker, “The Federal Reserve Board completely failed¹⁵⁴ to do its job.”

And both sides of the political aisle aided and abetted the bubble. Even after a spate of accounting scandals¹⁵⁵, many Democrats continued to support Fannie Mae and Freddie Mac, seeing them as valuable facilitators of affordable housing. Between 2004 and 2007, Fannie and Freddie¹⁵⁶ became the top buyers of subprime mortgages—exceeding $1 trillion in loans. George W. Bush and the GOP also helped¹⁵⁷ inflate the bubble by pushing to dismantle some of the barriers to homeownership—part of Bush’s vision of “an ownership society” that sought to, as he put it in his second inaugural address, “give every American a stake in the promise and future of our country.” The road to hell continues to be paved with good intentions.

Refinancing homes and offering home equity lines of credit—the better to be able to buy all those things you see on TV but really can’t afford—became a fee-generating bonanza for financial institutions. Protected and encouraged by their political cronies in Washington, banks were given free rein to push ticking time bomb mortgages on the middle class—mortgages they could then slice and dice and sell as swaps, derivatives, and all sorts of complex financial products to investors around the world.

So banks, confident in the securitization of their loans, began selling mortgages to anyone who had a pulse, and they often neglected to confirm that borrowers could afford the mortgages they were selling them. By 2006, 62 percent of all new mortgages¹⁵⁸ were so-called liars’ loans—loans that required little or no documentation.

We got a glimpse into the back rooms of the mortgage industry in April 2010 when a Senate panel investigated the collapse of mortgage giant Washington Mutual. Among the findings¹⁵⁹, as reported by Sewell Chan of the New York Times, was that the bank offered its loan officers pay incentives to originate riskier loans. Loan officers and salespeople “were paid even more if they overcharged borrowers through points or higher interest rates, or included stiff prepayment penalties in the loans they issued.”

The behavior of the WaMu bankers, and the many others just like them, was no different than the behavior of corner drug dealers—and while they weren’t peddling crack or meth, they were selling something every bit as addictive: a no-money-down, no-proof-of-income-needed, interest-only, teaser-rate ticket to the good life. The bankers, with a green light from Congress, were determined to turn everyone into irresponsible consumers.

THE MORALLY BANKRUPT BANKRUPTCY BILL

Of course, the bankers knew that the housing bubble, like all bubbles before it, had to eventually burst. And when it did, massive foreclosures and bankruptcies would result. So they needed to set up their self-protecting bear traps.

Enter the bankruptcy bill¹⁶⁰ that banking lobbyists pushed through Congress and President Bush signed into law in 2005. It was a bill so hostile to American families that it could have come about only in a place as corrupt, cynical, and unmoored from reality as Washington.

Instead of cracking down on predatory lending practices, closing loopholes that favor the wealthy, and strengthening the safety net for working people, single mothers, and elderly Americans struggling to recover from a financial setback, the Senate put together a nasty little bill that:

• made it harder for average people to file for bankruptcy protection;

• made it easier for landlords to evict a bankrupt tenant;

• made it more difficult for small businesses to reorganize, while opening new loopholes for the Enrons of the world;

• allowed creditors to provide misleading information; and

• did nothing to rein in lending abuses that all too frequently turned manageable debt into unmanageable crises.

Even in failure, ordinary Americans could not get a level playing field.

And make no mistake, the inequitable nature of the bill—bending over backward to help the credit industry while sticking it to working people who fall on hard times—was not the result of chance. Time and again, the Senate shot down amendments that would have made the bill less mean-spirited. Senators denied proposals that would have made it easier for military veterans, the sick, and the elderly to qualify for bankruptcy protection. They even rejected an amendment¹⁶¹ that would have put a 30 percent ceiling on the interest rates credit card companies can charge. Thirty percent—that’s more than your neighborhood loan shark charges.

According to the Institute for Financial Literacy¹⁶², in 2009, 9.1 percent of the people who filed for bankruptcy earned $60,000 a year or more, up from 4.7 percent in 2005. And among those who declared bankruptcy in 2009, 57.7 percent had attended college, an increase of 3.9 percent.

The institute’s executive director, Leslie Linfield¹⁶³, also points out that there is an alarming bell curve for bankruptcy filings in the thirty-five to fifty-four age group. “Fifty-six percent of bankruptcy filers,” she says, “are in this age group. This is concerning because you are looking at a group of people who are middle-aged and very unprepared for retirement. As a society we can’t help but ask the question what will happen in twenty years when this group does in fact retire?”

Our elected leaders utterly ignored the fact that the vast majority of people who file for bankruptcy are middle-class folks who can’t pay their bills because they’ve lost their jobs or been hit with high medical bills. In fact, a 2009 study by researchers at Harvard¹⁶⁴ and Ohio University showed that health-care problems were the root cause of 62 percent of all personal bankruptcies in America in 2007. Using that rate, roughly¹⁶⁵ 900,000 of 2009’s 1.4 million bankruptcy filings were medical bankruptcies. Or, to put it another way: Just over every thirty seconds someone in this country files for bankruptcy in the wake of a serious illness. How’s that for a shocking stat? Here’s another¹⁶⁶: 78 percent of the so-called medically bankrupt had health insurance at the time of their illness. It just wasn’t enough to cover the dramatic rise in health-care costs.

Barry Bosworth and Rosanna Smart of the Brookings Institution¹⁶⁷ found that the catastrophic collapse of the 2008 sub-prime mortgage market resulted in the disappearance of $13 trillion in American house hold wealth between mid-2007 and March 2009. Bosworth and Smart also found that “on average, U.S. house holds lost one quarter of their wealth in that period.”

The abrupt meltdown of the subprime mortgage and financial markets dramatically changed the lives of millions. Once-attainable goals like owning a home, achieving financial security, and being able to retire were suddenly out of reach. And, as we have not yet hit bottom, millions more may soon find their standard of living lowered—and their dreams of a brighter future dashed.

We are facing nothing less than¹⁶⁸ a national emergency: 2.8 million homes faced foreclosure in 2009, and an estimated 3 million more are expected¹⁶⁹ to be foreclosed on in 2010. If there was ever a middle-class Katrina, this is it. Yet even modest attempts to loosen the trap that snapped shut on so many have had a hard time getting traction in special interest– dominated D.C.

Take Senator Dick Durbin’s attempt to allow homeowners in bankruptcy a so-called cramdown, a means to renegotiate their mortgage with the bank under the guidance of a bankruptcy judge. Currently, mortgages are exempt from bankruptcy proceedings¹⁷⁰. Until 1978, allowing cramdowns was standard practice. Subsequent court battles eventually eliminated their use¹⁷¹. The mortgage industry, not surprisingly, has been vehemently opposed to bringing the cramdown back. The banks scored a lopsided victory¹⁷² in late April 2009 when the Senate rejected Durbin’s measure, which would have helped 1.7 million homeowners keep their homes and preserved an additional $300 billion in home equity.

Given the tidal wave of foreclosures that so destabilized our economy, this seemed like a no-brainer. There had already been more than eight hundred thousand¹⁷³ foreclosures in the first three months of 2009. But even after major concessions¹⁷⁴ that diluted the bill, the Mortgage Bankers Association¹⁷⁵ (whose members’ subprime schemes helped bring our economy to the brink), the Financial Ser vices Roundtable, and the American Bankers Association fought tooth and nail against it. And won.

Making matters worse is the fact that America’s banks and mortgage lenders are often so disorganized that people are being erroneously foreclosed on.

As ProPublica’s Paul Kiel reported¹⁷⁶: “Sometimes the communication breakdown within the banks is so complete that it leads to premature or mistaken foreclosures. Some homeowners, with the help of an attorney or housing counselor, have eventually been able to reverse a foreclosure. Others have lost their homes.” Kevin Stein, associate director of the California Reinvestment Coalition, told Kiel, “We believe in many cases people are losing their homes when they should not have.”

You want an economic nightmare? How about a foreclosure bear trap that snaps shut on your leg even when you haven’t stepped in it?

YOU HAVE THE RIGHT TO AN ATTORNEY . . . UNLESS YOU’RE ABOUT TO LOSE YOUR HOUSE

America’s foreclosure crisis is being made even worse by the shortage of legal assistance available to beleaguered homeowners. According to a study by the Brennan Center¹⁷⁷ for Justice, “the nation’s massive foreclosure crisis is also, at its heart, a legal crisis.” The vast majority of homeowners face foreclosure without legal counsel.

In New York’s Nassau County¹⁷⁸, in foreclosures involving subprime or nontraditional mortgages (which are disproportionately targeted at minorities), 92 percent of homeowners did not have a lawyer. Having legal help can be the difference¹⁷⁹ between families keeping their homes and being evicted. A lawyer can stop foreclosure proceedings or put enough pressure on lenders to convince them to rework the terms of the loan. A lawyer can also intervene in other ways, such as enforcing consumer protection laws or spotting legal violations by banks and lenders.

The barriers keeping homeowners from obtaining proper legal representation are twofold. The first is funding. In 1996, the bud get for the Legal Ser vices Corporation¹⁸⁰, the primary agency that provides help for low-income Americans in civil cases, was cut by a third. At this point, to match¹⁸¹ the funding level the Legal Ser vices Corporation received in 1981 would require an increase of $753 million. If Goldman Sachs or Bank of America needed that kind of cash (or even ten times that kind of cash), Washington wouldn’t think twice. But low-income homeowners have no clout in D.C.

The second barrier is that restrictions¹⁸² to adequate legal help have been deliberately built into the system. Remember the 1994 “Contract with America”? It turns out that one of its provisions severely limited the ability of homeowners to get legal protection from predatory lenders. Homeowners represented by the Legal Ser vices Corporation are barred from bringing class-action suits. Nor are they able to make the other side pay attorneys’ fees, even when the law would normally allow it. The chance to recoup attorneys’ fees when a defendant wins his case is critical in discouraging lending companies from dragging out proceedings merely to exhaust a defendant’s financial resources. The Obama administration has asked Congress to remove many of these limitations, to no avail. The $789 billion stimulus plan¹⁸³ didn’t contain a single dollar for foreclosure-related legal help.

Although Americans losing their homes are being treated like an afterthought, foreclosures are actually a gateway calamity. Every foreclosure is a crisis that begets a whole other set of crises. When families lose their homes, they are forced to move in with relatives, or into a motel, or live out of a car, or on the street. Meanwhile, the home sits vacant. Surrounding home values drop. Others in the neighborhood move out. In many communities, squatters move in. Crime goes up. Tax revenues plummet, taking school bud gets down with them.