Caleb Crain does a detailed analysis of this trend in the Christmas Eve issue of The New Yorker (and what a lump of coal that was). http://www.newyorker.com/arts/critics/atlarge/2007/12/24/071224crat_atlarge_crain?currentPage=all. His focus is largely on the effect of this trend (e.g., a decline in the ability to think abstractly), not the cause, and the NEA doesn't directly address caustion either; it reports only a correlation with increased participation with electronic media.
That's the conventional wisdom, I suppose, that there are too many other media competing for our attention. Back in the heyday of reading, it was either read or whittle, and eventually you ran out of wood.
But I'm afraid that it might be more than just a question of time allocation. I'm afraid the trend shows a societal backlash against literature by an increasingly anti-elitist population. Crain notes that literary reading might someday become the province of a special "reading class," as it was in the 1800's, but without the prestige of exclusivity that it had in that era; instead, it will be regarded simply as an arcane hobby.
Literary reading used to be something that non-readers aspired to, not scoffed at. In the pre-mechanization cigar factories in Ybor City, Florida, the workers would listen to a lector read great works of literature while they hand-rolled each cigar. (This practice inspired the Pulitzer-prize winning play, Anna in the Tropics, by Nilo Cruz.) Can you imagine assembly-line workers today giving their rapt attention to a well-dressed lector reading Anna Karenina? There would be jeers and catcalls, cries to shut the f__ up.
Egalitarianism is usually a good thing, but not when it fosters an attitude that nothing and no one is better than me, and I don't need to aspire to nothing. Literary reading isn't just overlooked in the flurry of multiple media, it's rejected as too snooty, too condescending, and who you think you're talking to?
The same attitude is apparently at work in the growing (and also alarming) trend of newspapers to drop their book reviews. The former book editor of the L.A. Times blamed it on “faux populism,” explaining that only the books that can be understood by the greatest number of readers can be reviewed, because anything else smacks of elitism. http://vueweekly.com/articles/default.aspx?i=7761
What's the solution? We're not going to change the nature of the populace, but we could change the way literature is presented to them. We should stop force-feeding archaic texts to our high school students. Yes, Shakespeare was brilliant, but save him for college. Teach literature as a form of entertainment and not torture. Make it accessible. Make it fun.