Is the American Dream Dying?

Income and wealth inequality has worsened considerably, and the idea behind the American dream that ”able and hard-working citizens can move upward freely from one [class] to the next … is less true than it used to be,” according to this opinion piece by James M. Stone, founder and CEO of the Plymouth Rock Group of Companies. He is the author of the book, Five Easy Theses: Commonsense Solutions to America’s Greatest Economic Challenges. He adds that this inequity is troubling because without a “healthy measure of pluralism,” democracy itself could be endangered.

 

 

American Dream Dying
American Dream Dying

That income and wealth inequality was a worsening problem for the United States didn’t fully sink in until I was the Insurance Commissioner of Massachusetts in the 1970s. I had grown up believing that America was already pushing the edges of what was possible for mankind and headed steadfastly further in the direction of an inherent and universally admired fairness. We were lucky not to have to live with the inequities of a Latin American banana republic, a European hereditary aristocracy, or an ancient oriental empire to weigh on our consciences. Our country, I was taught, had both a higher level of distributional equity and more social mobility than just about any nation-state in all of history.

Quite a few of us believed then that if we could only overcome race and gender bias, our society would be on the way to near perfection. Looking back, it seems apparent that the perfection many of us had in mind was ill defined, with some seeking a pure, unbridled meritocracy and others preferring the far edge of an egalitarian flat plane — neither of which is in reality a sound destination. Whatever definition of perfection with respect to distributional equity is used, more importantly, it has by now become clear that this country isn’t going to get there, and in fact, if we were ever on the road at all, we missed our turn and we are now headed in the wrong direction.

At the Massachusetts Division of Insurance, the issue that opened my eyes revolved around setting premiums for car insurance on the basis of a policyholder’s socioeconomic status, a technique used in most of the country. Income is not a terribly bad predictor of claims cost and is statistically better than most — and it is easy to find proxies for it that sound like palatable pricing factors. The problem with this approach is twofold: It lacks incentives for responsible driving behavior that could improve outcomes and lower costs for the population as a whole, and it frequently results in charging clean drivers from disadvantaged neighborhoods unaffordable rates while giving bargain prices to drivers with poor records in wealthier areas, thus worsening the disparities.

The deeper I delved into the issue, and the more I learned about our income and wealth distribution generally, the faster my rosy, distorted view of economic equality in the United States fell away. The topic of inequality has stayed high on my list of interests since the Massachusetts government job ended long ago. But it was a source of no small disappointment to discover how small an audience, including among academics, the emerging picture drew until quite recently.

The American dream that “able and hard-working citizens can move upward freely from one [class] to the next … is less true than it used to be.”

Recent events have made it harder to ignore the issue of distributional equity. If you wonder where the Occupy Wall Street movement that arose after the 2008 crash got its steam, despite its singular lack of leadership or focus, consider that the three-year recovery from the recession that followed was absorbed almost in its entirety by the top 1% of the income distribution. The same reality, ironically, may also be lending additional power to the Tea Party movement. Since 2000, income for 70% or more of Americans has actually been flat or declined a little, thanks in part to the financial crisis.

Meanwhile, for the top decile in this millennium, income is up by double digits, despite the crisis. The average net worth of households in the upper 7% rose by 28% in the initial recovery years of 2009 through 2011 while the wealth of the other 93% fell by 4%. It should not be surprising that so many people think the recession isn’t over yet, and some are pretty angry. The only silver lining is that political and scholarly attention is finally being paid to the increasing economic inequality and the fading of our long-admired mobility.

The view over a longer timeline provides no more comfort. The median income in this country hasn’t risen at all in real terms for 40 years. The United States since most of us were born has regularly harvested more wealth than any other nation in the history of the world, but the fruits have been increasingly carried toward the tip of the pyramid. While income in the middle brackets stagnated over the past four decades, income for the upper 1% tripled. As recently as the middle of the 20th century, the share of the United States’ national income taken by the top 10% of income earners was about one-third. Now it is more like 50%. The fortunate pinnacle, the top 1% of all households, received 10% of the nation’s total income in the middle of the 20th century. Now the upper 1% takes about one-quarter of the grand total. If you are in this segment, I hope you can be grateful without believing that this is the way things ought to be.

Meanwhile, the Congressional Budget Office estimates that the share of total income held by the bottom 20% of American households, which was never out of the single digits, has fallen by two points. That means that the middle classes have absorbed the loss of fifteen of the national income points that shifted to the possession of the top decile. Another widely quoted measure of growing disparity, affecting mainly the middle class, is the ratio of CEO pay to the average American worker’s pay. This ratio, which stood at about 20 to one when I was young, is now close to 300 to one. These trends are just not healthy for the nation.

“You are not being an alarmist if you fear that lobbyists and superrich contributors have excessive influence nowadays in every aspect of politics.”

I have always used a kind of shorthand to describe our socioeconomic classes. In this categorization, the all-important middle class consists of those people who can live reasonably comfortably if they are willing and able to work and improve their comfort level by harder or better work. The upper class is composed of those folks who can live well without work if they so choose. The lower class consists of those who can’t scratch together enough money to live decently even if they are willing to work hard.

The economics of our society just isn’t working for the middle class, the majority of its citizenry, when those who are willing and able to work cannot better their financial position. This is increasingly becoming the case in the 21st century. The American dream, moreover, has embodied an assumption that able and hard-working citizens can move upward freely from one of these classes to the next, including exits from the lowest classes and access to the top spots, and that sloth or incompetence will lead to a downward class shift. This is less true than it used to be, and it will be less so still as concentration at the pinnacle vacuums the opportunities from the spaces below.

Legitimate worry, moreover, should extend well beyond individual income and wealth imbalances. The growing concentration of corporate power is equally threatening to the values most Americans share. You are not being an alarmist if you fear that lobbyists and superrich contributors have excessive influence nowadays in every aspect of politics. Corporate power in the halls of Congress has waxed and waned over the history of our republic. It is probably greater now than at any time since Boss Tweed and Mark Hanna reigned from behind the scenes. Statistics show that the great majority of elections are won by whoever raises the largest war chest, and a friend of mine who served in the Senate told me that U.S. senators now typically spend about one-third of their time raising money. For House members, with a two-year election cycle, the situation must be worse.

Democracy itself is endangered by this trend. Our treasured form of government is not something to take for granted. The more you learn about governments around the world, the more grateful you should be for our democracy, and the more clearly you should discern what a delicate flower it is. Not only is democracy far from inevitable for all places and all times, it is historically rare and fragile. Look how seldom democracies have occurred and thrived, in both time and place. The United States and Switzerland, after all, have the oldest two functioning democratic republics on the planet. Contrary to what some in our government thought as they tried to transplant our system elsewhere, democracy requires more than selection of leaders by popular elections. A true democracy is characterized by due process, minority rights, an independent press, reservations of various liberties, and effective separation of church and state. Without those essential corollaries, majority voting can become little more than what a wise humorist suggested: a dozen wolves and a sheep voting on what to have for lunch.

“Democracy requires as a precondition a healthy measure of pluralism — an underlying society with a wide distribution of money and power.”

At its fundamental core, democracy requires as a precondition a healthy measure of pluralism — an underlying society with a wide distribution of money and power. Although they are nicely symbiotic, democracy and a market economy are not the same, and democracy is certainly not identical to prosperity. America’s attachment to a market economy is relatively robust and its prosperity secure … as long as we can maintain our culture of challenge and innovation.

The threat is that we may find ourselves living in a market economy where a tiny fraction of the people and a small number of institutions reap virtually all of the rewards and make all of the social and economic policy decisions, presumably with a bias toward serving their own interests. This would be a democracy in name only. True democracy is surely not the most natural form of government for human beings, and perhaps it is only barely compatible with human nature, but it may well be mankind’s greatest invention. And the growing degree of concentration of wealth and power in our country today threatens its continuation. If our pluralism erodes, with it will vanish America’s brightest gem.

Some political economists will tell you that wealth and income disparities don’t matter because large distinctions in a mobile society spur ambition to succeed. But America is rapidly becoming less mobile as the distinctions grow. More wealth held tightly in the hands of fewer families implies a diminishing reward for hard, honest work on the part of everyone else.

Five Easy Theses: Commonsense Solutions to America’s Greatest Economic Challenges

American Dream Dying