Of the collective ideas that define the United States, few are more prominent than the American Dream. Yet in the face of high economic inequality and disappointing intergenerational mobility, an important question is increasingly asked: is that dream still alive?
The fact that inequality is rising is undisputed. But the causes and impacts of inequality, as well as its relationship to economic mobility, spark furious debate. In general, the left howls about inequality’s evils while the right tries to dismiss its significance altogether. In reality, both sides consistently oversimplify inequality, tossing aside the nuances that should define the debate.
Why Most Americans Were Left Behind
It’s easy to see why economic inequality in America has gained so much attention: the simplest statistics about it are hard to ignore. The top one percent rakes in nearly 20 percent of the nation’s income and controls roughly 43 percent of the nation’s wealth. The wealthiest 400 Americans have a greater net worth than the bottom 150 million Americans combined, while about 95 percent of post-recession income gains have gone to the top one percent.
In some ways, a rise in inequality was inevitable. “The two principal causes are the financialization of the economy and the run-up in executive pay,” Timothy Noah, author of The Great Divergence: America’s Growing Inequality Crisis and What We Can Do About It, told the HPR in an interview. “There was a movement in investment banks away from partnerships towards public ownership, which put a lot more money into the hands of the big banks,” Noah explained. As this happened, the American economy’s shift from “labor” to “capital” continued, and CEOs began receiving compensation in stock options, which allowed their pay to skyrocket.
Federal policy, including changes to the tax structure, has exacerbated the rise of the ultra-rich. “1977 was probably the peak year for progressivity,” Bob McIntyre, director of the non-partisan tax research and advocacy organization Citizens for Tax Justice, told the HPR. Since the late 1970s, tax cuts such as the Tax Reform Act of 1986 and the Bush Tax Cuts have disproportionately benefited the rich. As McIntyre explained in a 1992 paper, “Without tax cuts, the wealthy would have a much lower share of total pretax income,” given that these tax cuts have allowed the rich to increase their investment income.
But the narrative of inequality is not just one of rich and poor. “There’s not one divergence, there’s two,” Noah explained. “There’s the divergence of the one percent versus the 99 percent, and then there is the divergence between skilled labor and less skilled labor.” Two phenomena have played large roles in increasing the gap between skilled and unskilled workers. Most notably, the United States’ education system has not produced enough high school and college graduates. “It’s a story about the increasing demand for…workers who have a college education, and the failure of the supply of the workers with those skills to keep up with demand,” argues Scott Winship, a senior fellow at the Manhattan Institute. A shortage of skilled labor increased demand for those with college degrees while most others were left behind.
The decline of unions accentuated this divergence. Unions once provided a backbone for unskilled labor; they fought for higher wages and stronger benefits for their members, leading
to a more equitable society on the whole. “Holding a union card used to be the practical equivalent of holding a B.A., but a lot fewer people in the private sector hold a union card today,” said Noah. The weakening of organized labor has also had political ramifications. Unions were the working class’s most effective allies on Capitol Hill, but their waning power has left them less able to advocate for pro-labor and pro-equality government policies.
An American Dream Fading Away
Inequality itself might be a bit more bearable if economic mobility were strong. If those born on the bottom had nearly
as much of a chance of reaching the top as those born on the
top have of staying there, few could doubt the merits of the American Dream. In the face of a recovery that has left most Americans behind, however, many are beginning to question the validity of that ideal.
In fact, there is broad consensus across the political spectrum that America is lagging behind other developed countries when it comes to economic mobility. According to Winship, “The problem with mobility in the United States is not that it’s getting worse, but that it’s always been low enough that we should not be satisfied with the levels that we have.”
Interestingly, not all areas in the United States are equal when it comes to intergenerational mobility. The Equality of Opportunity Project, a study looking at economic mobility throughout the United States, found vast differences across the country. “What we found is that there is just tremendous variation across the United States in the extent to which kids rise out of poverty,” Nathaniel Hendren, a professor at Harvard University and one of the lead researchers in the study, explained. In San Francisco, California, for example, the odds of someone born in the bottom fifth of income distribution making it to the top fifth is 11.2 percent. Go to Atlanta, Georgia, and the probability sinks to four percent. In general, the South and Midwest have worse rates of mobility than the rest of the country.
Many factors are related to these variations in economic mobility. There are strong correlations between an area’s economic mobility and its income inequality, K-12 education quality, social capital, and overall strength of family structure. Hendren, however, cautioned against reading more into the results of past research than were actually there, noting “we don’t have the causal statement here. We have the correlation.” Indeed, this introduces perhaps the most controversial part in the debate of the causes of economic mobility.
With the exception of improving education (which experts broadly agree promotes mobility), there is significant disagreement over which of the correlates of mobility actually cause it, particularly in regards to inequality. Noah explained that the suggested causal relationship between inequality and mobility “is still a matter of some controversy among economists, but intuitively it makes sense.” One consensus is common among economists, and seldom heard among politicians: we cannot jump to conclusions without more research.
The Meaning of Inequality
Inequality and economic mobility are not just arcane terms to be debated among economists; they are realities in America that, if not addressed, will lead to real consequences. The future is not necessarily hopeful on this front. As Noah explained, while the economic recovery has allowed many in the “one percent” to gain back what they lost in the recession, it has not been sufficiently strong to increase median income.
Perhaps the most striking problem inequality poses is political. Wealth inequalities also drive inequalities in the political sphere, as campaign donations condition candidates to lean towards the preferences of their donors. Inequality also has economic consequences. In concrete terms, McIntyre notes that it simply means “ordinary citizens are less well off” as income gains concentrate at the top. Others worry that high levels of inequality will act as a disincentive to the middle and working classes and will lower economic productivity.
These high levels of inequality and low levels of mobility in the United States clash with the vision of America that many want to believe exists. America is supposed to be the land of opportunity and relative equality, but this is becoming less true daily. If the United States continues on its current trend, it very well might face an existential crisis, as reality drifts farther away from the inspirational vision that has bound the country together. The American Dream, for this reason and many others, is something worth holding on to.