The American Dream, the idea that anyone can rise above humble beginnings and make something of him/herself, these days could better be described as the Northern European Dream, or maybe the Canadian Dream, or even the Australian Dream, inasmuch as recent evidence (pdf) shows that social mobility is notably greater in Denmark, Australia, Norway, Finland, Canada, Sweden and Germany. As William Julius Wilson recently reminded us in a Nation piece where he was reviewing a 2013 book by Timothy Noah, this has not always been the case. Between 1947 and 1970, we experienced growth across the whole economic spectrum because of unions and favorable government policies:
[E]very income group in America experienced economic advancement. As James K. Galbraith reminds us in Created Unequal, the 1950s and ’60s were unique because government policies—social as well as economic—provided a firm foundation for the gains experienced by families across the board. Lower-wage workers benefited from a wide range of protections, including steady increases in the minimum wage, and the government made full employment a high priority. There was also a strong union movement that ensured higher wages and more nonwage benefits for ordinary workers.
Since 1980, however, we have been in a long downward slide toward this (
source):
Like it or not, this is why the American Dream is no longer exactly American. What exactly happened and what can we do to fix it? More on the flip.
1) Political Party of Presidents can make a difference:
It has been shown previously that there is a marked difference between Democratic presidents and Republican presidents since World War II, with the disparity narrowing under Democrats and widening under Republicans. (Bartels pdf) This has been mostly attributable to better economies under Democratic presidents. As Bartels noted:
On average, families at the 95th percentile of the income distribution have experienced identical income growth under Democratic and Republican presidents, while those at the 20th percentile have experienced more than four times as much income growth under Democrats as they have under Republicans. These differences are attributable to partisan differences in unemployment (which has been 30 percent lower under Democratic presidents, on average) and GDP growth (which has been 30 percent higher under Democratic presidents, on average); both unemployment and GDP growth have much stronger effects on income growth at the bottom of the income distribution than at the top. Similar partisan differences appear in the distribution of post-tax income growth of households since 1980, despite the fact that the corresponding pre-tax income growth data for that period show little evidence of partisan differences.
2)Unions have also made a big difference:
Unions also seem to have played an important part in decreasing income disparity, with their decline closely matching the decline of middle and lower incomes relative to those at the top. Richard Freeman, estimates that the decline of union membership accounts for about 20 percent of the Great Divergence among all workers. Western and Rosenfeld, (pdf link) also trace this decline and associate the demise of organized labor with changes in the economy and intensified political opposition. As Tim Noah wrote (and is quoted by William Wilson):
Draw one line on a graph charting the decline of union membership, then superimpose a second line charting the decline in middle-class income share (with ‘middle class’ defined broadly as the middle 60 percent), and you will find that the two lines are nearly identical.
3) Education makes a difference:
One of the key works here is The Race Between Education and Technology by Claudia Goldin and Lawrence Katz. Based on their work, Noah (again as quoted by Wilson) noted that that the increase in the economic returns to “people with college diplomas or advanced degrees, whose limited supply bid up their salaries,” accounts for roughly 60 percent of the growth in wage inequality between 1973 and 2005. Lawrence Mishel wrote in January of 2011 that Education is Not the Cure for High Unemployment or for Income Inequality, but his point was not exactly that education was useless. Rather, his point was that education, in and of itself, is not the sole solution to our unemployment situation, which is mainly one of too few jobs being available. Indeed, among the recently graduated, those who have a college degree are doing measurably better than those with only a high school diploma (link):
For young high school graduates, the unemployment rate was 32.7 percent in 2010 and 31.1 percent over the last year (April 2011–March 2012), while the underemployment rate was 55.9 percent in 2010 and 54.0 percent over the last year.
For young college graduates, the unemployment rate was 10.4 percent in 2010 and 9.4 percent over the last year, while the underemployment rate was 19.8 percent in 2010 and 19.1 percent over the last year.
For those 25 and over, we get this graph from the
Bureau of Labor Statistics:
4) Trade with low wage nations widens the disparity:
Wilson, citing Noah, writes:
As of 2005, China paid workers 3 percent of what workers in the United States received. This recent dramatic shift in international trade, Noah argues, drove up the wage gap between skilled and low-skilled workers in this country, as the latter found themselves in greater competition with workers producing the same goods for lower wages in developing nations. We replaced high-wage nations with low-wage nations as our main trading partners, and this lowered average wages in the United States.
The word "outsourcing" is not used in that snippet, but that is what leads to a lot of job losses. It isn't just manufacturing jobs that are being lost but also a lot of high-paying jobs.
Here is a 2008 graph showing IT job categories and the percentages of these jobs that were outsourced:
5) Changes in the way banks work and some US executives are compensated has also widened the income disparity:
Noah notes the impact of the shift in the principal activity and structure of investment banks—from banking to trading, and from partnership structures to publicly traded corporations. He also notes the government deregulation of Wall Street. The top 1 percent’s increase in the share of income during the Great Divergence (through 2005) was 17 percent in the United States, in comparison with an increase of 2 percent or less in France and Germany.
Here is a chart from Felix Salmon, followed by his explanation of what it means, that shows some implications of what has happened in the finance industry:
What this chart says to me is that nothing has changed, and nothing is going to change. Banks are still extracting enormous rents from the economy, and profits which should be flowing to productive industries are instead being captured by financial intermediaries.
From a recent study by the
AFLCIO, we learn that the CEO-to-worker pay ratio widened even more in 2011, which is a huge rise when compared with 1980:
The ratio of CEO-to-worker pay between CEOs of the S&P 500 Index companies and U.S. workers widened to 380 times in 2011 from 343 times in 2010. Back in 1980, the average large company CEO only received 42 times the average worker's pay.
From a recent study by
NELP (pdf), we find that most of the jobs growth that we have seen in the US is in low wage industries:
However, these same "low wage" industries are making money and compensating executives while at the same time they are paying low wages:
As most of the largest low‐wage employers in the U.S. have successfully recovered from the recession, they have shared their profits generously with their top executives and shareholders, while wages for frontline workers in these industries have remained stagnant:
In the most recent fiscal year, the top‐paid executive at each of these 50 companies was awarded an average $9.4 million in compensation – even as many of their employees are paid at or near the minimum wage (just over $15,000 per year).
The top 50 low‐wage employers have distributed $174.8 billion in dividend payments and share buybacks to their stock holders over the past five fiscal years.
These numbers make clear that most of the low‐wage employers that would be disproportionately affected by an increase in the minimum wage are in a strong financial position and can afford the cost of a higher minimum wage. The fact that post‐recession profit growth for these businesses has not resulted in higher wages for the lowest‐paid workers in their industries reveals the critical importance of a strong minimum wage in setting fair pay standards.
Here are the recent profits (last four fiscal years) for the top three low wage corporations (WalMart, Yum and McDonalds). These healthy profits stand in stark contrast to the wage stagnation in these same three corporations:
6) Conclusions: Who is killing the American Dream?
1)Who states that getting rid of a Democratic president is their top priority? Republicans. 2)Who is it that is the opponent of unions? Republicans. 3)Who would cut funding for college students? Republicans. 4)Who recently blocked a bill that would curb outsourcing? Republicans. 5)Who is obsessed with deregulation of all things corporate? Republicans.
Who is killing the American Dream? Republicans.