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The American Dream: From Promise to Stagnation
What if I told you that the American dream, once a near-guarantee, has become a coin flip? For children born in 1940, 92% grew up to earn more than their parents-a virtual certainty of upward mobility. But for millennials born in 1980, that chance dropped to barely 50%. This stark decline represents what economist Raj Chetty calls the "fading American dream," a phenomenon meticulously documented in David Leonhardt's compelling narrative "Ours Was the Shining Future." The book has captured attention across political spectrums, with figures from Barack Obama to Ben Shapiro acknowledging its clear-eyed analysis of America's economic transformation. Drawing from his Pulitzer Prize-winning journalism and extensive research, Leonhardt crafts a biography of the American dream itself-tracing how the most prosperous mass economy in history was built after the Great Depression, and how it slowly unraveled starting in the 1970s.
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The Rise and Fall of Democratic Capitalism
The story of America's economic transformation hinges on what Leonhardt calls "democratic capitalism"-a system where government guides the economy, recognizing both the power and weaknesses of the market. Under this model, government uses taxes to prevent economic aristocracy and pay for what markets neglect, while regulating businesses to protect consumers and workers.
Democratic capitalism emerged from the ashes of the Great Depression, when America's experiment with laissez-faire economics had produced the Gilded Age's extreme inequality and ultimately economic collapse. The new approach recognized that capitalism remained the best system for delivering rising living standards-but only when properly structured and regulated.
For nearly fifty years after the Depression, this model delivered remarkable results. The middle class expanded dramatically, income inequality decreased, and living standards improved across virtually all demographics. This wasn't accidental-it resulted from deliberate policy choices that balanced free markets with government intervention.
Starting in the 1970s, however, America began dismantling this system. A combination of economic shocks, political realignments, and cultural shifts led to the embrace of a more aggressive form of capitalism that prioritized corporate interests and shareholder value over worker welfare. The results have been staggering: despite overall economic growth, most Americans have experienced stagnant wages, diminished opportunities, and growing insecurity.
The evidence is clear in the data. Since the mid-1970s, productivity has continued rising while typical worker compensation has barely budged. The share of national income going to the bottom 50% of earners has fallen dramatically, while the top 1% has seen their portion nearly double. This isn't just about money-it's reflected in declining life expectancy, deteriorating mental health, and a pervasive sense that the system no longer works for ordinary people.
What makes this transformation particularly striking is that it wasn't inevitable. Other advanced economies maintained stronger worker protections, more robust safety nets, and more progressive taxation-and have seen less dramatic increases in inequality as a result. America made a choice, albeit one influenced by powerful interests and shifting cultural values, to abandon the economic model that had created its broad middle class.
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The Labor Movement's Transformative Impact
The American dream's golden era began with a revolution in worker power. In 1930s Minneapolis, coal truck drivers endured brutal conditions-paid only per delivery, responsible for their own expenses, and forced to wait unpaid between jobs. The city embodied America's power imbalance, with business executives wielding tremendous influence through the Citizens Alliance, which had successfully prevented unionization for decades.
This changed when Swedish immigrant Carl Skoglund began secretly organizing his fellow drivers in 1933-34. Despite fierce opposition from employers and initial police violence, the drivers ultimately prevailed through innovative tactics-including formally involving women through the Ladies' Auxiliary, creating community support networks, and using strategic communication.
When Minnesota's progressive governor Floyd Olson declared martial law during the strike, he took the unprecedented step of using government authority to benefit workers rather than management. Rather than following historical precedent of resolving strikes in employers' favor, Olson imposed a settlement including pay increases and union recognition. He declared only employers accepting these terms could operate in Minneapolis-using government power to rebalance economic relationships.
This victory sparked unionization at 500 local companies, doubling transportation sector wages and crumbling the region's low-wage empire. It was part of a nationwide wave of successful strikes in the mid-1930s that fundamentally changed America's economic power dynamic. Union membership tripled from 10% to over 30% by the mid-1940s, creating a feedback loop where workers saw government as a force that could improve their lives.
The economic impact was profound. Unions consistently increased workers' pay by 10-20% compared to similar non-unionized workers, playing a vital role in creating economic compression where lower-income workers enjoyed larger percentage raises than the rich. Median family income more than doubled between the mid-1940s and mid-1970s after inflation adjustment, racial pay gaps shrank, and America's middle class was forged.
Contrary to classical economic theory, research shows these union-won raises primarily reduced corporate profits rather than increasing unemployment, altering the distribution of economic wealth without harming overall economic growth. This success depended on both grassroots organizing and political support-a powerful coalition between workers and political elites that reshaped the economy.
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Corporate America's Cultural Transformation
The labor movement's success coincided with a remarkable cultural shift in American business. Paul Hoffman exemplifies this transformation. Initially a typical conservative businessman who opposed the New Deal as "fascist control of business," Hoffman eventually became an evangelist for corporate reform, advocating for good wages, cooperation with unions, and business serving the national interest rather than pure self-interest.
By the 1940s and 1950s, Hoffman's vision had triumphed as many executives raised employee wages beyond economic necessity. Even Republicans under Eisenhower maintained New Deal programs and high marginal tax rates. This shift reflected a profound cultural change triggered by the Great Depression and World War II, which had unsettled American business culture and caused executives to question laissez-faire principles.
In 1940, Hoffman established the Committee for Economic Development, recruiting corporate leaders from major companies to promote a consumer economy built on high wages. He encouraged executives to plan for postwar prosperity rather than depression, appearing on Time magazine's cover in 1943 as the face of this optimistic economic vision.
Though not from corporate America, Dwight Eisenhower cultivated close relationships with business leaders after World War II. Despite filling his cabinet with corporate executives, Eisenhower largely validated the post-Depression economic model. The top marginal tax rate remained at 91%, just one percentage point lower than under Truman, while unions continued growing. Eisenhower focused on behind-the-scenes mediation between business and labor, successfully reducing strikes while wages continued rising.
The clearest sign of corporate America's cultural shift appeared in executive compensation practices. George Romney exemplified this moderation after becoming CEO of American Motors. Despite pioneering the successful compact car Rambler, Romney asked his board to cap executive pay at $225,000 annually-about forty times the typical household income. When bonuses would have exceeded this cap, Romney refused them, turning down $268,000 over five years.
From the 1940s through 1970s, CEO pay rose more slowly than stock prices, GDP, and median family income, shrinking the gap between executives and workers. These leaders saw themselves as part of a patriotic capitalism that had overcome the Depression, won World War II, and was fighting the Cold War.
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Investment in America's Future
America's postwar prosperity wasn't just about redistributing wealth-it was also about creating more of it through strategic investment. Eisenhower's experiences had taught him the power of long-term thinking, from witnessing America's poor infrastructure after World War I to marveling at Germany's advanced highways.
Despite campaigning on reducing government, Eisenhower dramatically expanded federal investment in America's future. Under his administration, federal R&D spending more than doubled as a share of GDP. He funded a 40,000-mile highway network, increased the NIH budget tenfold, and expanded the National Science Foundation dramatically.
The Sputnik launch in 1957 accelerated this investment trend. After the Soviet satellite success and America's "Kaputnik" failure, Eisenhower appointed MIT's president as the first White House science adviser, passed school construction bills, created ARPA (later DARPA), and established NASA.
These investments paid enormous dividends. The government funded basic scientific research the private sector wouldn't conduct, created early markets by purchasing new products, then gradually receded as private markets matured. The computer industry exemplifies this progression-from government funding early contracts to NASA's development of computer networks to DARPA creating the original internet.
Similarly, government research led to medical breakthroughs like penicillin and chemotherapy, while also developing technologies like satellites, jet engines, and microwave ovens that private companies later refined and distributed widely. The educational investment was equally crucial, with universal high schools and expanded college access giving America the world's most educated workforce.
By the late twentieth century, American companies dominated numerous global industries: computers, pharmaceuticals, aviation, automobiles, energy, telecommunications, and higher education. This dominance wasn't inevitable but resulted largely from the postwar investment boom-a commitment to sacrificing present consumption for future prosperity.
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Racial Exclusion and Progress
As America built its great postwar middle class, it systematically excluded Black citizens through both legal and illegal methods. Southern Democrats, who supported redistributive economic policies for whites while maintaining racial hierarchy, held effective veto power over Roosevelt's agenda. They ensured New Deal programs like minimum wage laws and Social Security excluded farmworkers and domestic workers-occupations held by two-thirds of Black southern workers.
Housing segregation exemplified government-enforced racism. Federal and local authorities built superior all-white public housing nationwide while denying funding for Black developments. The New Deal revolutionized homeownership by creating the modern mortgage system with modest down payments and thirty-year terms, but these government-subsidized programs explicitly excluded Black Americans.
The government's discriminatory housing policies extended beyond explicit segregation. Even in communities without "Whites-only" policies, government agencies produced color-coded maps designating Black neighborhoods as poor credit risks, automatically marking them red-the origin of the term "redlining." When Black families managed to save enough to buy homes in white neighborhoods, law enforcement often participated in forcing them out.
Despite systematic exclusion from government programs that built white middle-class wealth, Black Americans remarkably narrowed racial gaps during the postwar boom. Black workers received larger average raises than whites, shrinking the pay gap more before civil rights laws passed than afterward. Life expectancy gaps also declined.
To understand this paradoxical reality-both rapid progress for Black Americans and enduring racial injustices-economists Patrick Bayer and Kerwin Kofi Charles developed a framework distinguishing between two forces that narrow racial gaps.
"Positional" forces address relative positions between similar Black and White workers, often reflecting outright discrimination. "Distributional" forces measure how economy-wide changes disproportionately affect different racial groups, like minimum wage increases or unionization that benefit a larger percentage of Black workers.
During the three decades after the Depression, the narrowing wage gap resulted almost entirely from distributional factors. Discrimination increased in some ways (housing segregation) and receded in others (factory integration), effectively canceling each other out economically. Yet distributional forces-expanding unions, corporate cultures that raised worker wages, and government infrastructure investments-substantially reduced racial inequality.
Civil rights leaders understood this connection between economic and racial justice. As Martin Luther King Jr. noted, "Our needs are identical with labor's needs: decent wages, fair working conditions, livable housing..."
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The Fracturing of the Progressive Coalition
The coalition that transformed America in the mid-20th century ultimately fell apart, leading to increased inequality, persistent racial gaps, slow-growing living standards, and widespread frustration. This splintering began with a fatal division between the "old left" of blue-collar union workers and a "New Left" of educated intellectuals.
C. Wright Mills, a rebellious intellectual from Texas, challenged the mainstream celebration of postwar America's economic consensus. Unlike most liberal intellectuals who celebrated the "countervailing power" of labor, business, and government working together, Mills saw this arrangement as elitist and undemocratic.
During a sabbatical in Copenhagen, Mills noticed students, not workers, driving progressive change worldwide. In his influential "Letter to the New Left," Mills rejected the traditional left's focus on the working class, declaring instead: "Who is thinking and acting in radical ways? All over the world... it is the young intelligentsia."
This perspective electrified young progressives frustrated with the conservative 1950s. Students for a Democratic Society (SDS) emerged at the University of Michigan, rebranding the outdated Student League for Industrial Democracy. The name change, dropping "industrial," symbolized a break from their parents' New Deal era.
In June 1962, SDS members gathered to approve Tom Hayden's Port Huron Statement. Its opening sentence candidly acknowledged its authors' privilege: "We are people of this generation, bred in at least modest comfort, housed now in universities, looking uncomfortably to the world we inherit." Unlike the 1930s-40s progressive movement organized around material concerns like jobs and wages, the New Left emphasized psychological concerns of the privileged.
Betty Friedan's journey paralleled this transformation. Initially a labor writer covering union organizing, she eventually soured on working-class organizations, finding them sexist and insular. Her groundbreaking book The Feminine Mystique focused primarily on "suburban wives" and college alumnae, overlooking working-class women who already worked outside the home out of necessity.
Meanwhile, the labor movement had grown stagnant under leaders like George Meany, who emphasized protecting existing members rather than expanding. Despite labor's declining membership-from 33 percent to 25 percent of workers during his tenure-Meany remarkably stated, "I don't know, I don't care" when asked about the decline.
By the late 1960s, millions of American workers had no political home. The labor movement had lost its vigor as a mass movement for economic justice, while the New Left focused primarily on college students, intellectuals, and professionals. The country had split into two ineffective halves: a progressive elite movement and self-interested labor unions.
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The Crime Wave and Political Realignment
The Great Plymouth Mail Robbery of 1962 marked a turning point in American crime. After years of low crime rates, the early 1960s saw a surge in robberies, burglaries, and murders. Crime rates continued rising for nearly three decades, with murder rates doubling and robbery rates quadrupling between 1962 and 1980.
Paradoxically, this crime wave occurred during economic prosperity, contradicting assumptions that poverty drives crime. This "crime amidst plenty" reflected and contributed to a broader sense of societal disorder that included political assassinations, war losses, urban riots, and generational divides.
Scholars eventually discovered that crime waves typically coincide with periods of social discord. When political consensus fractures and trust between citizens erodes, lawbreaking increases-even without political motives. Political scientist Ted Robert Gurr identified this pattern dating back to the early nineteenth century, finding that political turmoil and crime rates moved in tandem across cities worldwide.
Conservatives and liberals made different mistakes responding to the crime wave. Many conservatives correctly identified that social turmoil fed crime but ignored the underlying injustices that sparked the turmoil. Many liberals, meanwhile, denied crime was actually increasing, using skeptical quotation marks when discussing the "crime wave" and suggesting media was sensationalizing isolated incidents.
These dismissals contradicted Americans' lived experiences. By 1970, many knew crime victims personally and made daily decisions based on safety concerns. Combined with arguments over Vietnam, race, marijuana, pornography, and sex education, rising divorce rates, and declining trust in government, Americans felt social order was breaking down.
Nixon seized the opportunity to dismantle Roosevelt's coalition. His strategist Kevin Phillips recognized that the Democrats' embrace of civil rights was alienating white ethnic voters who had been part of the New Deal coalition. Phillips saw 1968 as a realignment election where Nixon could speak to the "silent center" exhausted by turmoil.
Nixon narrowly won in 1968, but Phillips correctly predicted this was just the beginning of a "new era in American politics." The New Left's takeover of the Democratic Party culminated in George McGovern's 1972 candidacy, which Nixon's campaign caricatured as representing "acid, abortion, and amnesty." Nixon's landslide victory completed his remaking of American politics, persuading millions of working-class voters that Republicans were the "one of us" party.
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The Reagan Revolution and Neoliberalism
The economic crisis that would transform American politics began in October 1973 when Saudi Arabia announced an oil production cut and threatened to halt all shipments to the United States unless Washington stopped supporting Israel. Oil prices more than doubled within months, causing inflation to soar from under 2 percent in the early 1960s to 12 percent by late 1974.
For American families, this created unprecedented economic stagnation-median family income in 1979 was lower than in 1973, the worst protracted slump since the Great Depression. This economic pain gradually shifted American political attitudes, making citizens more receptive to conservative economic approaches.
Ronald Reagan emerged as the standard-bearer for this new movement. His 1979 campaign established economics as his primary focus, proposing Jack Kemp's large tax cut-30 percent over three years-despite establishment nervousness about deficits. To sell this radical plan to corporate America, Reagan enlisted Charls Walker, who served as his ambassador to business leaders, lending establishment credibility to supply-side economics.
Deregulation formed the second major plank of Reagan's economic agenda. Reagan's team realized they could deregulate without new legislation by appointing the right people to executive agencies and courts. Learning from Nixon's perceived mistake of appointing too many establishment figures, Reagan's campaign compiled lists of ideologically aligned candidates long before Election Day.
Reagan's team recognized their regulatory rollback needed permanence beyond their administration. Their solution: appoint federal judges with free-market views who had lifetime tenure. The administration meticulously vetted candidates, seeking those with established conservative records who were unlikely to change their minds. They prioritized younger nominees for longer careers on the bench, appointing numerous University of Chicago professors.
Reagan balanced ideology with pragmatism, often complaining that hardline conservatives preferred purity over progress. "I'd rather get 80 percent of what I want than go over the cliff with my flag flying," Reagan said. His 80 percent transformed the American economy.
While Reagan didn't reduce social program spending as promised, his presidency marked a turning point for tax policy and regulation. The top marginal income tax rate fell from 70 percent when he took office to 28 percent when he left, and has never again exceeded 39.6 percent. Reagan's firing of striking air traffic controllers in 1981 ushered in new combativeness toward labor unions. Union membership shrank twice as rapidly during the 1980s as in the late 1970s.
Some of neoliberalism's greatest victories came through the courts, where Robert Bork's consumer-price-focused approach to antitrust became dominant. Judges grew skeptical of blocking mergers unless regulators could prove they would increase prices. The conservative legal movement eventually created mechanisms to ensure ideological consistency, with the Federalist Society becoming an influential professional network that marked judges as true conservatives.
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Immigration and the Changing American Economy
The immigration reform of 1965 emerged as a key element of the neoliberal revolution, predating Reagan's presidency. Though later progressives would celebrate immigration while criticizing neoliberalism, the two were inherently connected-both advocated fewer restrictions on the movement of goods, capital, and people.
For most of the twentieth century, America's immigration system operated under strict national quotas established in 1924 that heavily favored western Europe while virtually banning Asian immigration. The Kennedy family, descended from Irish immigrants, became champions of reform, with Edward Kennedy leading Senate hearings in 1965 to overhaul this system.
When opening these hearings, Kennedy focused not on lofty ideals but on dispelling what he called misconceptions about the bill. He and other supporters repeatedly assured critics that the legislation wouldn't substantially increase immigration numbers, maintaining the existing level of about 265,000 immigrants annually. Kennedy specifically promised the bill wouldn't bring workers who would compete for blue-collar jobs.
These assurances were crucial because progressives had historically worried about immigration's impact on vulnerable American workers. Economic research had shown that previous immigration waves depressed wages, while the mid-century decline in immigration had contributed to rising working-class incomes, particularly benefiting Black workers who often competed with immigrants for jobs.
But the bill's advocates were entirely wrong. The law sparked a decades-long immigration wave that continues today. Annual legal immigration rose from 297,000 in 1965 to over 1 million by 2001. The critical oversight was the "nonquota" loophole that allowed unlimited family members to enter without counting toward the 265,000 annual cap.
The relationship between immigration and native workers' wages presents a complex picture. While immigration hasn't been the primary cause of wage stagnation since the 1970s, research suggests it has played a meaningful secondary role in suppressing wages. A National Academy of Sciences report found predominantly negative effects on native wages across multiple studies. Immigration has benefited high-earning professionals who face little competition from immigrants and enjoy cheaper services, while creating more competition for lower-wage workers.
Immigration also appears to have political implications. Research shows immigration can undermine support for generous welfare states, as societies sustain such systems when citizens view each other as similar. With immigrants comprising one in six American workers (up from one in twenty in 1970), the rapid transformation has made the country more politically conservative.
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The Investment Shortfall and American Decline
The United States now prioritizes the elderly over children, spending two and a half times more per capita on government programs for the elderly than for children. Other countries have managed this challenge differently, spending less on questionable medical care and taxing affluent citizens at higher rates, allowing them to invest more in children.
This shift in priorities has had profound consequences. Cross-country travel in America has stagnated or even regressed over the past half-century. While travelers once marveled at the progress that reduced coast-to-coast journey times from weeks to hours, today's trips actually take longer than they did in the 1970s.
An American born in the early twentieth century witnessed transformational changes not only in transportation and schooling but also in cooking, house cleaning, and many other areas of daily life. The changes of recent decades have been considerably smaller, even with the creation of the internet and AI. As economist Robert Gordon explained in "The Rise and Fall of American Growth," recent advances have been concentrated in communication, entertainment, and information, while progress in food, clothing, shelter, transportation, health and working conditions slowed dramatically after 1970.
Economist Mancur Olson developed a theory explaining why victorious nations like Britain struggled economically after WWII while defeated countries like Germany and Japan thrived. He argued that stable, affluent societies create conditions for their own decline by allowing interest groups to accumulate power over time. These groups secure government favors that benefit them at society's expense, not only capturing a larger share of the economic pie but also preventing it from growing.
The parallels with modern America are clear. Our postwar preeminence produced powerful interest groups that block change: farmers lobbying for high food prices, corporations seeking tax breaks, unions maximizing wages at companies' long-term expense, and education groups resisting accountability. NIMBY neighborhood associations oppose new construction, keeping housing prices high and blocking transportation improvements.
Healthcare exemplifies this problem. American medical costs far exceed those worldwide because hospitals, insurers, pharmaceutical companies, and doctors' groups have created an exceptionally expensive system that benefits industry insiders at everyone else's expense.
The investment slowdown has worsened inequality in both obvious and subtle ways. While underfunded public universities hurt middle and lower-income Americans and deteriorating transit systems inconvenience working people, another significant impact involves gender inequality. America has remained a laggard in early childhood education, with only about half of American three and four-year-olds attending pre-K programs, compared to over 95% in Western Europe, Japan, South Korea, and Israel.
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Rebuilding the American Dream
The decline of the American dream stems largely from the absence of a strong political movement dedicated to protecting it. The right has pushed to recreate the rough-and-tumble economy of the 1920s, while the left has focused on social and cultural issues rather than economic ones. Unlike the labor unions of the mid-20th century, today's progressive groups concentrate on gun safety, environmentalism, abortion rights, and other social causes-not worker wages, wealth taxation, or corporate concentration.
The political right can play an important role in reviving broad prosperity. Throughout history, conservatism hasn't necessarily embraced laissez-faire economics-it can combine social conservatism with government responsibility for creating a prosperous economy that strengthens communities and families.
A candidate combining social conservatism with economic populism might be electorally stronger than a laissez-faire Republican, appealing to the heart of American public opinion: progressive on economics but right-leaning on social issues. This explains why Republican-dominated states like Missouri and Nebraska have passed ballot initiatives raising minimum wages and expanding Medicaid.
A new progressive movement dedicated to the American dream must tell a persuasive story rooted in freedom-America's national creed. FDR succeeded by framing his policies as liberating Americans from "economic royalists," while Reagan later promised freedom through smaller government and unleashed individual genius. Today's extreme inequality similarly restricts freedom: poor children can't escape poverty, workers can't earn fair wages, and Americans lack the health outcomes and infrastructure enjoyed by citizens of other wealthy nations.
The next economic transformation may not require a singular crisis like the Great Depression. Change might come through incremental policy victories over decades, potentially during periods of prosperity when citizens feel generous and optimistic.
What's missing is a strong grassroots movement focused on economic equality. Labor unions, despite declining to just 10% of workers, show promise with approval ratings reaching 50-year highs. Policy reforms could strengthen unions by simplifying the organizing process and potentially implementing German-style sectoral bargaining that allows workers across entire industries to negotiate collectively.
For progressives to build effective economic movements, they must listen more attentively to working-class Americans and make the left less dominated by white-collar professionals. Today's well-off progressives often treat opposing views on guns, immigration, Covid, abortion, and gender issues as ignorant or bigoted rather than merely different.
While no movement is destined to succeed, and injustice can persist for generations, America's current problem isn't naive optimism but rather cynicism and negativity. Many Americans believe the system is rigged and change impossible, which only helps preserve the status quo. Despite current challenges of slow income growth, soaring inequality, and stagnant life expectancy, Americans have the power to create a better economy. After all, the American dream was invented during the Great Depression-proof that the future can be different from the past.
