QUELCH: Redefining the American Dream

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By John Quelch

COMMENTARY:

The current economic crisis has been blamed on the greed of Wall Street, on bankers' excessive leveraging of assets, on irresponsible banks and mortgage brokers who fabricated applications for no down payment home loans knowing the risks could be readily laid off on unsuspecting third parties.

But underpinning the collapse of the housing bubble is a demand-side problem - the American Dream - that has been hijacked in countless political speeches from an embodiment of America's core values into a crass appeal to materialism and easy gratification.

Right-wing politicians touting the American Dream consistently advocate lower taxes. The more money citizens can keep, the faster they can attain their dreams. But these same politicians are consistently unwilling to raise taxes when required. The massive budget deficits run up during the last eight years of war (now projected at 3.8 percent of gross domestic product in 2009) reflect a federal government living beyond its means like a drunken sailor, setting anything but a good example for the average citizen.

Left-wing politicians are equally guilty of framing the American Dream in material terms. They claim the Dream is increasingly out of reach of middle-class Americans, pointing to a $2,000 decline in median family income over the last eight years. On this basis, they justify policies to redistribute wealth so we can cross-subsidize each other's dreams. The most egregious recent example: so-called affordable housing policies to enable as many Americans as possible to own their homes. It started appropriately enough with the 1977 Community Investment Act that challenged redlining policies of local banks that set higher hurdles for homeownership among minorities. But it ended with the recent $5.2 trillion guarantee of Fannie Mae and Freddie Mac assets after these quasi-government housing agencies overleveraged themselves lending against inflated home prices and requiring minimal evidence of ability to repay from borrowers.

Politicians on both sides have been equally culpable in defining the American Dream in material terms, in encouraging Americans to live beyond their means in its pursuit, and then putting in place policies that enable them to do so. Hardly any politician has had the courage to call for restraint.

Average household debt in the United States is 130 percent of average household income, up 20 percent since 2005 and double what it was 20 years ago. The U.S. household savings rate is close to zero. Consumer confidence has plummeted with the value of 401(k) plans and retirement nest-eggs. Retail sales fell 1.2 percent in September, double the expected decline. Car sales are at a 15-year low. And credit card defaults look like the next shoe to drop as cash-strapped Americans have run up credit card debt to postpone the day of reckoning.

Americans need a refresher course on the American dream. The Constitution speaks of life, liberty and the pursuit of happiness, not an automatic chicken in every pot. The American Dream embraced by immigrants over the last two centuries has been the opportunity to set one's own goals and pursue them honestly to the limits of one's ambition and ability. Too many Americans have been expressing the Dream by acquiring stuff. Others see the Dream as raising a family in a land that delivers Franklin Roosevelt's (and Norman Rockwell's) Four Freedoms. Still others dream of their children accessing the highest possible level of education, living healthy lives, being good citizens in their communities.

As defined by historian James Truslow Adams who spoke first of the American Dream in his 1931 book "Epic of America": "It is not a dream of motor cars and high wages merely, but a dream of social order in which each man and each woman shall be able to attain the fullest stature of which they are innately capable, and be recognized by others for what they are, regardless of the fortuitous circumstances of birth or position."

Marketers as well as politicians have doubtless helped to distort the meaning of the Dream. A barrage of commercial advertising encourages people to focus on the acquisition and consumption of goods, to be consumers first and citizens second. Credit card offers flood the mail. Media supported by advertising encourage consumers to aspire to celebrity lifestyles, to keep up with the Joneses by acquiring more stuff. Even President Bush, following the shock of Sept. 11, 2001, called on Americans to show their patriotism by going out to shop.

The injustice of the current crisis is that citizens who acted responsibly and were saving for their retirement have seen the values of their homes and 401(k) plans collapse. Those who acted irresponsibly, living day-to-day and not saving at all have barely been inconvenienced. They have been able to walk away from homes they couldn't afford with, in many cases, no penalty. Meanwhile, responsible citizens, and their children and grandchildren, will pay in extra taxes to clean up the mess.

In past downturns, the resilience of consumer spending has saved the day. Until recently, it has accounted for 72 percent of the American economy, compared to around 60 percent in European countries where government spending is higher.

Given the likely depth and length of the current recession, consumers will not continue to spend at the same level. Christmas retail sales will be an early indicator. But, not to worry. The federal government promises to come to the rescue, with both parties supporting a fiscal stimulus in the form of tax rebates and infrastructure spending that will pump more money into the economy, run up the deficit further and mortgage our children's ability to achieve their American Dreams.

John Quelch is a professor at the Harvard Business School and coauthor of "Greater Good: How Good Marketing Makes For Better Democracy" (Harvard Business Press, 2008).