Fixing the American Dream Machine

Fixating on the traditional aggregate measures of the economy’s health — GDP growth, the unemployment rate, or the inflation trade — ignores not only rising income and wealth inequality, but the fact the American Dream machine has been sputtering for at least two or three decades. Stanford’s Raj Chetty and his co-authors have shown that only half of Americans born in 1980 or later were out-earning their parents at the age of 30, compared to 90 percent of those born forty years before. No wonder so many Americans across the political spectrum have been so anxious or even angry, with racial resentment and political incivility on the rise.

Three broad narratives for fixing our American Dream machine, which admittedly won’t cure all problems, have been advanced by political leaders and researchers. The two that have received the most media attention are both either misleading or inadequate.

One narrative, pushed by President Trump and in more muted tones by some Democrats, blames increased and “unfair” trade for the decline of manufacturing jobs and stagnant or slow real-wage growth. Trump and many Republicans also wrongly blame illegal immigrants, who are working (if they can) at low wages doing jobs like cleaning dishes or mowing lawns that few American citizens want to do. 

The trade critique is belied by the decline in the share of workers (though not in output) in manufacturing throughout the developed world. In fairness, the “China shock” of the 2000s accelerated the decline in manufacturing jobs, but this fact cannot account for a multi-decade decline in upward mobility across much of the American workforce, of which manufacturing jobs account for only 8 percent. The Trump trade wars, allegedly mounted to help American workers, have instead shown that protectionism is zero sum at best: It benefits some workers in import-competing industries but hurts an equal if not greater number in exporting firms.

A second narrative, embraced by some Democrats and a few economists and journalists, is that many industries in the U.S. economy are becoming less competitive, driving up the profit share of income, at the expense of workers.