Rewriting the Rules of the American Economy

1. The American economy no longer works for most Americans

We pride ourselves on being the land of opportunity and creating the first middle-class society, yet profound and largely overlooked changes have put the middle-class life increasingly out of reach for the majority of Americans.

Stagnant wages, rising inequality. Over the past few decades, most Americans have seen their wages stagnate while the very wealthy have captured an increasing share of economic gains. Productivity has risen steadily, but worker compensation has not kept pace. This divergence between productivity and pay is unprecedented in the post-WWII era.

Eroding economic security. The pillars of middle-class life - affordable education, healthcare, housing, and a secure retirement - have become increasingly out of reach for many families. Job insecurity has increased, with more workers in part-time or contract positions without benefits. The social safety net has been weakened, leaving more people vulnerable to economic shocks.

Declining economic mobility. The American Dream of upward mobility is increasingly out of reach. Children born to low-income parents are more likely to remain poor as adults compared to previous generations. The U.S. now has lower rates of intergenerational mobility than many other developed countries.

2. Financial sector growth has fueled inequality and instability

The finance industry has shifted away from its essential function of allocating capital to productive uses and has moved toward predatory rent-seeking activities.

Outsized growth of finance. The financial sector has grown dramatically as a share of GDP, from about 3% in the 1950s to over 7% today. Yet this growth has not translated into better economic outcomes for most Americans. Instead, it has primarily benefited those at the top of the income distribution.

Predatory practices. Deregulation enabled the rise of complex financial products that were often exploitative rather than productive. Practices like predatory lending and excessive fees have extracted wealth from ordinary households. The 2008 financial crisis demonstrated the systemic risks created by an oversized, under-regulated financial sector.

Misallocation of talent. The outsized rewards in finance have drawn talented individuals away from potentially more productive sectors of the economy. This "brain drain" effect further reduces economic dynamism and innovation in other industries.

3. Corporate focus on shareholder value hurts long-term growth

The shareholder revolution transformed corporations into sources of cash for financiers.

Short-term thinking. The emphasis on maximizing short-term stock prices has led many corporations to prioritize cost-cutting, stock buybacks, and dividend payments over long-term investments in workers, research and development, and capital equipment. This short-termism undermines sustainable growth and innovation.

Executive compensation distortions. Tying executive pay to stock performance through stock options and other equity-based compensation has created perverse incentives. CEOs are incentivized to boost short-term stock prices rather than focus on long-term value creation. This has contributed to soaring executive pay and widening income inequality.

Financialization of the economy. The pressure to deliver short-term returns to shareholders has led many non-financial corporations to engage in financial engineering and speculation rather than focus on their core productive activities. This further shifts economic activity toward the financial sector at the expense of the real economy.

4. Tax policies favor the wealthy and encourage rent-seeking

There is no evidence that a lower tax rate for the wealthy has encouraged investment or growth.

Regressive tax structure. Changes to the tax code over recent decades have disproportionately benefited high-income earners and large corporations. The top marginal income tax rate has fallen from over 90% in the 1950s to under 40% today. Capital gains and dividends are taxed at lower rates than ordinary income, primarily benefiting the wealthy.

Incentives for rent-seeking. Lower top tax rates increase the returns to rent-seeking activities like lobbying for special tax breaks or regulatory favors. This diverts resources away from productive investment and innovation. The tax code also privileges certain forms of income, like carried interest for private equity managers, encouraging the expansion of those sectors.

Inadequate public investment. Lower tax revenues, especially from high-income individuals and corporations, have constrained the government's ability to make critical public investments in areas like infrastructure, education, and basic research. These investments are crucial for long-term economic growth and shared prosperity.

5. Monetary policy prioritizes inflation over full employment

The Federal Reserve's focus on controlling inflation rather than achieving full employment and managing systemic financial risk has raised unemployment and lowered wages over the past 35 years.

Unbalanced mandate. While the Federal Reserve has a dual mandate to promote maximum employment and price stability, in practice it has often prioritized low inflation over full employment. This bias has led to premature interest rate hikes that have stifled wage growth and job creation.

Disproportionate impact. The costs of high unemployment fall most heavily on low-wage workers, minorities, and those with less education. These groups are often the last to benefit from economic expansions and the first to suffer in downturns. Prioritizing low inflation over full employment exacerbates economic inequality.

Neglect of financial stability. The Fed's focus on inflation targeting led it to overlook the buildup of systemic risks in the financial system prior to the 2008 crisis. A broader approach to monetary policy that considers financial stability and full employment is needed to promote sustainable, inclusive growth.

6. Weakened worker power contributes to wage stagnation

Changes in labor market institutions, laws, regulations, and norms have weakened worker power and made it difficult for workers to countervail the excesses of corporate and market power.

Decline of unions. Union membership has fallen from over 30% of workers in the 1950s to just over 10% today. This decline has reduced workers' bargaining power and ability to secure wage increases and better working conditions. It has also weakened a key political voice for pro-worker policies.

Erosion of labor standards. The real value of the minimum wage has fallen significantly since its peak in the late 1960s. Overtime protections have been weakened, and many workers are misclassified as independent contractors, denying them basic labor protections. Enforcement of existing labor laws has also been inadequate.

Fissured workplace. The rise of outsourcing, franchising, and other forms of workplace fissuring has made it harder for workers to organize and bargain effectively. This has shifted more of the risks and costs onto workers while concentrating the gains at the top of corporate structures.

7. Discriminatory policies perpetuate economic inequality

Structural discrimination creates large wealth gaps between whites and other population groups—inequalities that transmit down through generations from parents to children.

Racial wealth gap. Historical policies like redlining and exclusion from homeownership programs created a large racial wealth gap that persists today. The median white household has 13 times the wealth of the median Black household and 10 times that of the median Latino household.

Educational disparities. Residential segregation and unequal school funding contribute to significant gaps in educational outcomes by race and class. These disparities in human capital development perpetuate economic inequalities across generations.

Labor market discrimination. Studies consistently find evidence of hiring discrimination against racial minorities and women. This compounds other forms of disadvantage and contributes to persistent wage and employment gaps.

8. Rewriting economic rules can foster shared prosperity

Inequality has been a choice, and it is within our power to reverse it.

Rules shape markets. Markets do not exist in a vacuum but are shaped by laws, regulations, and institutions. Changing these rules can lead to more equitable and efficient economic outcomes. This requires moving beyond the false dichotomy between "free markets" and government intervention.

Comprehensive approach needed. Addressing inequality and promoting shared prosperity requires a multifaceted approach. This includes reforming financial regulation, corporate governance, tax policy, labor laws, and macroeconomic policy. Piecemeal solutions are insufficient given the scale of the challenge.

Positive-sum solutions. Many policies that reduce inequality can also promote overall economic growth and dynamism. For example, investments in education and infrastructure can both reduce inequality and increase productivity. Rewriting the rules is not just about redistribution, but about creating a more efficient and innovative economy.

9. Empowering workers and investing in people drives growth

To compete globally in the 21st century, the U.S. economy needs to have every cylinder firing.

Labor market reforms. Strengthening workers' bargaining power through easier unionization, higher minimum wages, and stronger labor protections can help ensure that productivity gains are shared more broadly. This can boost consumer demand and economic growth.

Human capital investments. Expanding access to high-quality education from early childhood through college and beyond is crucial for both individual opportunity and overall economic competitiveness. Workforce training programs can help workers adapt to technological change and economic shifts.

Infrastructure and innovation. Large-scale public investments in physical and digital infrastructure, clean energy, and basic research can create jobs in the short term while laying the foundation for long-term productivity growth. These investments are critical for maintaining U.S. economic leadership.

10. Expanding economic security creates opportunity for all

To right the economic imbalance, to reduce inequality and promote healthy growth in the real economy, we must attack the sources of those rents.

Universal social protections. Expanding access to healthcare, paid family leave, and retirement security can reduce economic insecurity and enable more people to take entrepreneurial risks. This can boost both economic dynamism and quality of life.

Financial inclusion. Ensuring access to basic financial services and protection from predatory practices can help more families build wealth and economic stability. This includes reforms to student lending, mortgage markets, and retirement savings systems.

Progressive taxation. A more progressive tax system can both reduce inequality directly and generate revenue for critical public investments. This includes closing loopholes that primarily benefit the wealthy and using the tax code to discourage short-term speculation and rent-seeking.

Last updated: October 17, 2024