The Problem with the U.S. Economy

How America is destroying its middle and working classes

The impact of increasing wealth inequality on the U.S. social contract.

The United States has long prided itself on the ideals embodied in the preamble to its Constitution: forming a more perfect Union, establishing justice, ensuring domestic tranquility, providing for the common defense, promoting the general welfare, and securing the blessings of liberty.

However, these foundational principles are increasingly threatened by growing inequality of wealth, which is creating stresses that weaken the social contract that binds the nation together.

Wealth Inequality and Its Impact on the Middle and Working Classes

The dramatic increase in wealth inequality over recent decades has eroded the economic stability of the middle and working classes, groups that overlap significantly and together form the backbone of the American economy and society.

Erosion of Economic Power: As wealth has become increasingly concentrated in the hands of a small elite, wages for the majority of Americans have stagnated. Real wages for most workers have failed to keep pace with productivity growth, while the cost of living, particularly for housing, healthcare, and education, has risen substantially. See, Inflation.

Decline in Upward Mobility: The promise of the American Dream — that hard work and determination can lead to upward mobility — is becoming increasingly out of reach for many. The middle class, once the foundation of American political stability, is shrinking, while the working class faces dramatically increasing insecurity.

Government Policy and the Roots of Wealth Inequality

The current trajectory of wealth inequality in the U.S. has roots in policy decisions made in the late 20th century.

Reduction in Taxes on Extraordinary Income: Beginning in the 1970s and accelerating during the Reagan administration, top marginal tax rates were drastically reduced. This allowed the wealthiest individuals and corporations to retain a disproportionate share of economic gains, further concentrating wealth.

Deregulation of Finance and Business: Financial deregulation in the 1980s enabled the rise of speculative markets, mergers, and corporate consolidation. These shifts disproportionately benefited the wealthy while exposing the middle and working classes to economic instability, such as the 2008 financial crisis.

Pro-Middle-Class Policies Post-WWII: Contrast this with the post-World War II era, when policies like the GI Bill and strong labor protections contributed to a booming middle class. These policies provided affordable education, housing, and job opportunities that allowed millions of Americans to prosper.

The Reagan Revolution and Its Lasting Effects

The Reagan administration marked a turning point in American economic policy, shifting the focus from supporting the middle and working classes to prioritizing corporations and the wealthy.

Tax Reform: Reagan’s tax cuts disproportionately benefited the wealthiest Americans and corporations, reducing the government’s ability to invest in beneficial programs and infrastructure.

Weakening of Labor Protections: Policies that undermined unions and collective bargaining further diminished the economic power of workers, exacerbating inequality.

Deregulation: A wave of deregulation under Reagan removed safeguards in industries such as finance, paving the way for speculative practices that have increased economic volatility and widened the wealth gap.

The Vicious Cycle of Inequality and Division

The resulting social stresses have created a deeply divided electorate, amplifying political polarization and undermining democratic governance.

Distrust and Fragmentation: Rising inequality fosters resentment and distrust among different socioeconomic groups, weakening the shared sense of purpose essential for a healthy democracy.

Policy Capture: Wealthy individuals and corporations use their influence to shape policies in their favor, perpetuating inequality. This creates a vicious cycle where economic and political power become increasingly concentrated.

“There’s class warfare, all right, but it’s my class, the rich class, that’s making war, and we’re winning.” — Warren Buffet

Eroding Democracy: As social divisions deepen, the risk of democratic erosion grows. History suggests that extreme inequality can lead to authoritarianism or fascism, as disillusioned populations turn to strongman leaders who promise quick solutions.

The Historical Transformation of Democracies into Oligarchies

History offers cautionary tales of what can happen when wealth inequality becomes too pronounced within a democratic society. Ancient Athens and Rome, once flourishing democracies, succumbed to oligarchic systems where power became concentrated among the wealthiest citizens.

Athens: Growing economic disparities in ancient Athens contributed to social unrest and weakened democratic governance. The shift toward oligarchic rule eroded the egalitarian principles that had defined its democracy.

Rome: The Roman Republic’s fall into oligarchy and eventual dictatorship was fueled by extreme wealth disparities, which undermined the social contract and created deep divisions among citizens.

These historical precedents highlight the dangers of allowing excessive wealth inequality to fester unchecked within democratic systems. When the economic well-being of the majority is neglected, the foundation of democracy — a broadly shared sense of fairness and opportunity — is undermined.

The Path Towards Restoring the Social Contract

To prevent further erosion of the social contract and ensure the survival of democracy, bold action is needed to address wealth inequality.

Progressive Taxation: Reinstate higher marginal tax rates on extraordinary income and close loopholes that allow the wealthy to avoid taxes.

Strengthen Labor Protections: Reinvigorate unions and support collective bargaining to empower workers and ensure fair wages.

Invest in the Public Good: Expand access to education, healthcare, and affordable housing to reduce economic disparities and promote upward mobility.

Regulate Finance: Reinstate financial regulations to prevent speculative practices that disproportionately benefit the wealthy while exposing the economy to risk.

Encourage Civic Engagement: Foster a sense of shared purpose and participation in democracy by addressing the root causes of polarization and rebuilding trust in institutions.

The Takeaway

The increasing inequality of wealth in the United States poses a profound threat to the objectives articulated in the preamble to the Constitution — and the kind of government intended by that Constitution.

By learning from history and enacting policies that prioritize the well-being of the middle and working classes, the U.S. can strengthen its social contract and preserve the foundations of democracy.

Failure to act risks further polarization, the concentration of power, and the potential descent into oligarchy or authoritarianism. The time to address this challenge is now.

Thank you for reading!

We recommend following this link to a thought provoking collection of charts and graphs about what’s been happening since 1971 (provided by Øyvind Kvien).