WASHINGTON, DC – 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%. 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.
In this sense, current US trends have been largely destructive. Economic mobility, for example, has declined in recent decades, and is now lower 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.
This does not matter only to Americans. In a world in which individuals’ fates are increasingly linked, and effective governance depends on some consensus on norms of social and distributive justice, growing income differentials in one country – especially one that has long served as a beacon of economic opportunity – can shape behavior elsewhere. Without the belief that hard work begets opportunity, people are less likely to invest in education, undermining labor-market development; they may even be driven to protest.
More generally, declining economic mobility in the US could undermine confidence in the principles of a market economy and democratic governance that America has espoused for decades – principles that are fundamental to many countries’ development strategies. As Nobel laureate Joseph Stiglitz has pointed out: “[T]he extent to which the global economy and polity can be shaped in accord with our values and interests will depend, to a large extent, on how well our economic and political system is performing for most citizens.” Given increasing evidence that the system is performing much better for wealthier citizens than for poorer ones, America’s soft power seems bound to erode substantially.
Reducing inequality will require long-term, comprehensive solutions, such as fiscal-policy reforms that reward public investment in health and education without adding disincentives to an already cumbersome tax code. But pursuing such measures requires significant political will, which the US seems to be lacking.
Indeed, given political paralysis at the national level, initiating a constructive debate about an issue as divisive and consequential as inequality will depend largely on the American public. If more people recognized the constraints that inequality places on their future prospects, they would be likely to press policymakers to confront it. This would not only benefit the US; it would have a positive impact on global governance.
Americans have long prided themselves on their country’s status as the land of opportunity, a destination that people have endured immeasurable adversity to reach. A public-education campaign aimed at highlighting the challenges that inequality poses to the very foundation of this reputation is a low-risk first step toward reviving America’s promise.
Copyright: Project Syndicate/Global Economic Symposium, 2013.