The Anti-Economist — From the December 2012 issue

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The American dream has never been the rags-to-riches fable of the Horatio Alger stories. But there once was a real American dream, and it went like this: If you work hard, your income will rise consistently and will enable you and your family to have a decent life, a good life—even a secure life.

No more. For at least half of all Americans—those on the bottom rungs of the economic ladder—that dream has been dead for more than thirty years. Their household incomes have hardly risen since the glory decades after World War II. In many cases, their incomes have actually fallen. The only protection these Americans have had from a complete collapse in their standard of living has been government social programs.

This bears repeating: the only reason incomes for the lower half have risen more than marginally since the 1970s is that such federal programs as Social Security, unemployment insurance, the earned-income tax credit, and food stamps have provided support. “Without America’s net of social programs,” political scientist Lane Kenworthy argues, “income inequality would be much worse than it already is.”

It wasn’t always that way, says Kenworthy, who teaches at the University of Arizona. In the 1950s and 1960s, and through much of the 1970s, the American economy itself produced considerable wage growth for workers up and down the income scale. Since the late 1970s, however, the wages paid to the lower half have fallen far behind the growth of gross domestic product.

For households whose income places them in the bottom 25 percent in America, only twenty cents of every dollar of new income over the past thirty-plus years came from earnings on a job. The remaining eighty cents, as Kenworthy demonstrates, came from the social programs mentioned above. Those in the next quartile up did slightly better, but two thirds of their new income still came directly from the federal government.

This isn’t, of course, a uniquely American problem. The free market is failing the bottom half of the population in Europe as well, where lower-income people also depend on government programs for most of their monetary gains. In their case, however, the damage is lessened by the fact that most European social programs are considerably more generous than those in the United States.

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