America’s Broken Dream

The United States has long been viewed as the “land of opportunity,” where those who work hard get ahead. Belief in this fundamental feature of America’s national identity has persisted, even though inequality has been gradually rising for decades. But, in recent years, the trend toward extremes of income and wealth has accelerated significantly, owing to demographic shifts, the economy’s skills bias, and fiscal policy. Is the collapse of the American dream at hand?

From 1997 to 2007, the share of income accruing to the top 1% of US households increased by 13.5 percentage points. This is equivalent to shifting $1.1 trillion of Americans’ total annual income to these families – more than the total income of the bottom 40% of US households.

Inequality’s precise impact on individual well-being remains controversial, partly because of the complex nature of the metrics needed to gauge it accurately. But, while objective indicators do not provide a complete picture of the relationship between income inequality and human well-being, how they are interpreted sends important signals to people within and across societies.

If inequality is perceived to be the result of just reward for individual effort, it can be a constructive signal of future opportunities. But if it is perceived to be the result of an unfair system that rewards a privileged few, inequality can undermine individuals’ motivation to work hard and invest in the future.

Some argue that, as long as the US maintains its economic dynamism, leadership in technological innovation, and attractiveness to immigrants, income inequality is irrelevant.

In this sense, current US trends have been largely destructive. Economic mobility, for example, has declined in recent decades, and is now lower than in many other industrialized countries as well, including Canada, Finland, Germany, Japan, and New Zealand. An American worker’s initial position in the income distribution is highly predictive of his or her future earnings.

Moreover, there is a strong intergenerational income correlation (about 0.5) in the US, with the children of parents who earn, say, 50% more than the average likely to earn 25% above their generation’s average. Indeed, the US now lies near the middle of the World Bank’s ranking of economic opportunity, well below countries like Norway, Italy, Poland, and Hungary.

Some argue that, as long as the US maintains its economic dynamism, leadership in technological innovation, and attractiveness to immigrants, income inequality is irrelevant. But other pertinent trends – such as failing public schools, crumbling infrastructure, rising crime rates, and ongoing racial disparities in access to opportunities – seem to refute such claims. After all, having some of the world’s top universities means little if access to them is largely a function of family income.