Opportunities Lost: The True Cost of the American Dream

The “American Dream” has always been about the prospect of success, but 100 years ago, the phrase meant the opposite of what it does now. The original “American Dream” was not a dream of individual wealth; it was a dream of equality, justice and democracy for the nation. The phrase was repurposed by each generation, until the Cold War, when it became an argument for a consumer capitalist version of democracy. Ideas about the American Dream froze in the 1950s. Today, it doesn’t occur to anybody that it could mean anything else. The American Dream really starts off with the Progressive Era. It takes hold as people are talking about reacting to the first Gilded Age when the robber barons are consolidating all this power. At this time you see people saying that a millionaire was a fundamentally un-American concept. It was seen as anti-democratic because it was seen as inherently unequal.1

Today the top 1% owns as many assets as the bottom 90%, and it’s getting worse. The largest generation – millennials – are significantly more indebted than Baby Boomers were at their age. Many carry a substantial student loan debt burden, while the median household income is the same as it was in the 1970s, in inflation-adjusted terms. Even though more young people work full-time today than 40 years ago, far fewer of them own their homes. One-third live with their parents. The financial crisis killed off that illusion. Most of the nation’s economic growth over the past 30 years has gone to the top 1%. Inequality is now approaching the extreme level that prevailed prior to the Great Depression. One of the cornerstones of modern capitalism: inequalities are accepted as long as the possibility of betterment exists. We tolerate unfairness as long as there are good chances of improving our condition.

The American Dream is broken. Paul Ryan, speaker of the House of Representatives, recently stated that “in our country, the condition of your birth does not determine the outcome of your life.” Yet the idea that every American has an equal opportunity to move up in life is false. Social mobility has declined over the past decades, median wages have stagnated and today’s young generation is the first in modern history expected to be poorer than their parents. The lottery of life – the zip or postal code where you were born – can account for up to two thirds of the wealth an individual generates. The growing gap between the rich and the poor, the old and the young has been largely ignored by policymakers and investors until the recent rise of anti-establishment votes, including those for Brexit in the UK and for President Trump in the US.

Capitalism has been incredibly successful at boosting wealth, but it has failed at redistributing it. Today, without a push to redistribute wealth and opportunity, the present model of capitalism and democracy may face self-destruction. Credit was the answer to declining growth and rising inequality: if you couldn’t afford university, a new house or a new car, Uncle Sam would lend you the key to the American Dream in the form of that extra loan you needed. Over the following decades, state subsidies to private credit became popular, spreading to the U.K. and Europe. Private debt outgrew GDP four times in the US and Europe over the following decades up to the 2008 financial crisis, accompanied by the deregulation of financial markets and of banks. A decade after the crisis, there remains the balkanization of the regulatory authorities that was the major factor in why the crisis was so bad and why damage to the economy was so great.2

The risk is that rising inequality, lower social mobility and the disenfranchisement of younger generations could result into even more polarized and short-sighted politics, creating a populist trap. The US and the UK could already be stuck: many of the policies on the table in both countries are far from sustainable, and damaging for the people they were to protect. Brexit, or an exit from NAFTA are both striking examples. The alternative to redistribution is instability and crisis. Inequality provides fertile ground for populist parties to harvest support. Over time, populist policies can destabilize democracies, turning them towards nationalism, militarism and anti-capitalism. The fact is, wealth is so unevenly distributed that one could argue that the US should be downgraded from full democracy to a flawed democracy: power is entirely held by an elite that’s never renewed and that captures all of the income gains.

One of the defining features of the “American Dream” is the ideal that children have a higher standard of living than their parents. One measure – rates of “absolute income mobility” or the fraction of children who earn more than their parents – the rates of absolute mobility have fallen from approximately 90% for children born in 1940 to 50% for children born in the 1980s. (from NBR working paper). Because a large fraction of GDP goes to a small number of high-income earners today, higher GDP growth does not substantially increase the number of children who earn more than their parents. Income inequality meant that many try to attain their version of the American Dream through credit cards. The key point is that reviving the “American Dream” of high rates of absolute mobility would require more broadly shared economic growth rather than just higher GDP growth rates.

Given the many competing issues in society to consider, it is unlikely that the public will ever be well informed about the benefits and trade-offs of specific anti-poverty proposals. Instead, in the absence of an integrated understanding, the public is likely to rely heavily on a variety of relevant and potentially conflicting interpretative shortcuts, including their core values, various cultural stereotypes, and those definitions of the issue made most readily available in news coverage. The assumption underlying a belief in individualism is that economic opportunity in the US is widespread and that anyone who tries hard enough can succeed. It is now recommended when appeals are made to the public, instead of emphasizing personal stories about the poor, advocates should focus on systemic and institutional reasons for poverty that are beyond the control of individuals.

“At the end of the day, however, particularly in a rich country like the United States, the persistence of extreme poverty is a political choice made by those in power,” Alston, a UN consultant, wrote, “With political will, it could readily be eliminated.” But the underlying question, that of how it is that the politically powerful rule the economy and, likewise, that the economically powerful dominate our politics, is largely ignored. And that question is one of class analysis, which, it would seem, makes Americans on both sides of the accepted political spectrum uncomfortable, uncomfortable because class analysis is the dirty, dangerous domain of Marxists and other marginal quarters of the radical left. Conservatives know full well that the neoliberal economic system creates inequality but do not consider it a problem, rather part of the incentive aspect of the system. This makes poverty a political problem not an economic one.3

The Great Recession and rising income inequality spelled the end of the American Dream. However, it may not have ended, but only that many have lost faith in the American Dream. Whether it’s upward mobility, homeownership or the ability to provide a better life for your children, the American dream means different things to different people. At one time, The American Dream meant owning a car, owning a home, and having enough money left over in retirement to travel Route 66 on a Harley or in a pimped out mobile home. Today, the American dream is defined as “success through hard work” – but what exactly is “success” for 99% of Americans?  There is need of a new American dream based on equality and sustainable growth. The cost of sharing opportunity and wealth may not be high for today’s elites, but the alternative is far worse.

A 2014 USA Today article determined the price tag for a family of four to live the American Dream is $130,000 a year. At the same time a median family income of $51,000 creates a culture that sensationalizes and valorizes living beyond basic needs. While salvaging the American Dream may not require closing the wealth gap entirely, ensuring that education can be a ladder of equitable opportunity requires reducing wealth disparities that start at birth. Reducing inequality will require a wealth transfer, large enough in size to equip disadvantaged children with a real stake in their own futures, and specifically formulated – by targeting children and focusing on post-secondary education – to be politically palatable. People need to understand that this is a serious problem in need of addressing. It is a system that is inherently unequal, and for change it is necessary to create the political will to affect the outcome – that includes access to decent housing, transportation, groceries, health care, education, clothing and some retirement savings.

1 Anna Diamond (October 2018) The Original Meanings of the “American Dream” and “America First” Were Starkly Different From How We Use Them Today https://www.smithsonianmag.com/history/behold-america-american-dream-slogan-book-sarah-churchwell-180970311/#COjMKouvKHi9m73D.99

2 Alberto Gallo (09 Nov 2017) How the American dream turned into greed and inequality. https://www.weforum.org/agenda/2017/11/the-pursuit-of-happiness-how-the-american-dream-turned-into-greed-and-inequality/

3 UN expert calls US income inequality ‘a political choice’. (4 June 2018)https://apnews.com/2f11091232a349f39cfe2e80e8c46545

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