Inequality and the American Dream
Jun 15th 2006
From The Economist print edition
The world's most impressive economic machine needs a little adjusting
MORE than any other country, America defines itself by a collective dream: the dream of economic opportunity and upward mobility. Its proudest boast is that it offers a chance of the good life to everybody who is willing to work hard and play by the rules. This ideal has made the United States the world's strongest magnet for immigrants; it has also reconciled ordinary Americans to the rough side of a dynamic economy, with all its inequalities and insecurities. Who cares if the boss earns 300 times more than the average working stiff, if the stiff knows he can become the boss?
Look around the world and the supremacy of “the American model” might seem assured. No other rich country has so successfully harnessed the modern juggernauts of technology and globalisation. The hallmarks of American capitalism—a willingness to take risks, a light regulatory touch and sharp competition—have spawned enormous wealth. “This economy is powerful, productive and prosperous,” George Bush boasted recently, and by many yardsticks he is right. Growth is fast, unemployment is low and profits are fat. It is hardly surprising that so many other governments are trying to “Americanise” their economies—whether through the European Union's Lisbon Agenda or Japan's Koizumi reforms.
Yet many people feel unhappy about the American model—not least in the United States. Only one in four Americans believes the economy is in good shape. While firms' profits have soared, wages for the typical worker have barely budged. The middle class—admittedly a vague term in America—feels squeezed. A college degree is no longer a passport to ever-higher pay. Now politicians are playing on these fears. From the left, populists complain about Mr Bush's plutocratic friends exporting jobs abroad; from the right, nativists howl about immigrants wrecking the system.
A global argument
The debate about the American model echoes far beyond the nation's shores. Europeans have long held that America does not look after its poor—a prejudice reinforced by the ghastly scenes after Hurricane Katrina. The sharp decline in America's image abroad has much to do with foreign policy, but Americanisation has also become synonymous with globalisation. Across the rich world, global competition is forcing economies to become more flexible, often increasing inequality; Japan is one example (see article). The logic of many non-Americans is that if globalisation makes their economy more like America's, and the American model is defective, then free trade and open markets must be bad.
This debate mixes up three arguments—about inequality, meritocracy and immigration. The word that America should worry about most is the one you hear least—meritocracy.
Begin with inequality. The flip-side of America's economic dynamism is that it has become more unequal—but in a more complex way than first appears (see article). America's rich have been pulling away from the rest of the population, as the returns for talent and capital in a global market have increased. Even if American business stopped at the water's edge, Bill Gates and the partners of Goldman Sachs would still be wealthy people; but since software and investment banking are global industries, Mr Gates is worth $50 billion and the average pay-and-benefits package for Goldman's 22,400 employees is above $500,000.
On the other hand, the current wave of globalisation may not be widening the gap between the poor and the rest. Indeed, the headwinds of the global economy are being felt less by Americans at the bottom than by those in the middle. The jobs threatened by outsourcing—data-processing, accounting and so on—are white-collar jobs; the jobs done by the poor—cleaning and table-waiting, for example—could never be done from Bangalore.
Those at the bottom have different fears, immigration high among them. Their jobs cannot be exported to rival countries perhaps, but rival workers can and are being imported to America. Yet there is surprisingly little evidence that the arrival of low-skilled workers has pulled poor Americans' wages down. And it has certainly provided a far better life for new arrivals than the one they left behind (see article).
A long ladder is fine, but it must have rungs
To many who would discredit American capitalism, this sort of cold-hearted number-crunching is beside the point. Any system in which the spoils are distributed so unevenly is morally wrong, they say. This newspaper disagrees. Inequality is not inherently wrong—as long as three conditions are met: first, society as a whole is getting richer; second, there is a safety net for the very poor; and third, everybody, regardless of class, race, creed or sex, has an opportunity to climb up through the system. A dynamic, fast-growing economy may sometimes look ugly, but it offers far more hope than a stagnant one for everybody in the United States.
This is not to let the American system off the hook when it comes to social mobility. Although the United States is seen as a world of opportunity, the reality may be different. Some studies have shown that it is easier for poorer children to rise through society in many European countries than in America. There is a particular fear about the engine of American meritocracy, its education system. Only 3% of students at top colleges come from the poorest quarter of the population. Poor children are trapped in dismal schools, while richer parents spend ever more cash on tutoring their offspring.
What, if anything, needs to be done? A meritocracy works only if it is seen to be fair. There are some unfair ways in which rich Americans have rewarded themselves, from backdated share options to reserved places at universities for the offspring of alumni. And a few of Mr Bush's fiscal choices are not helping. Why make the tax system less progressive at a time when the most affluent are doing best?
That said, government should not be looking for ways to haul the rich down. Rather, it should help others, especially the extremely poor, to climb up—and that must mean education. Parts of the American system are still magnificent, such as its community colleges. But as countless international league tables show, its schools are not. Education is a political football, tossed about between Republicans who refuse to reform a locally based funding system that starves schools in poor districts, and Democrats who will never dare offend their paymasters in the teachers' unions.
The other challenge is to create a social-welfare system that matches a global business world of fast-changing careers. No country has done this well. But the answer has to be broader than just “trade-adjustment” assistance or tax breaks for hard-hit areas. Health care, for instance, needs reform. America's traditional way of providing it through companies is crumbling. The public pension system, too, needs an overhaul.
These are mightily complicated areas, but the United States has always had a genius for translating the highfalutin' talk of the American Dream into practical policies, such as the GI Bill, a scholarship scheme for returning troops after the second world war. The country needs another burst of practical idealism. It is still the model the rest of the world is following.
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