The Broken Contract: Inequality and American Decline

The surface of life has greatly improved, at least for educated, reasonably comfortable people-say, the top 20 percent, socioeconomically. Yet the deeper structures, the institutions that underpin a healthy democratic society, have fallen into a state of decadence. We have all the information in the universe at our fingertips, while our most basic problems go unsolved year after year: climate change, income inequality, wage stagnation, national debt, immigration, falling educational achievement, deteriorating infrastructure, declining news standards. All around, we see dazzling technological change, but no progress. Last year, a Wall Street company that few people have ever heard of dug an 800-mile trench under farms, rivers, and mountains between Chicago and New York and laid fiber-optic cable connecting the Chicago Mercantile Exchange and the New York Stock Exchange. This feat of infrastructure building, which cost $300 million, shaves three milliseconds off high-speed, high-volume automated trades- a big competitive advantage. But passenger trains between Chicago and New York run barely faster than they did in 1950, and the country no longer seems capable, at least politically, of building faster ones. Just ask people in Florida, Ohio, and Wisconsin, whose governors recently refused federal money for high-speed rail projects.

We can upgrade our iPhones, but we can’t fix our roads and bridges. We invented broadband, but we can’t extend it to 35 percent of the public. We can get 300 television channels on the iPad, but in the past decade 20 newspapers closed down all their foreign bureaus. We have touch-screen voting machines, but last year just 40 percent of registered voters turned out, and our political system is more polarized, more choked with its own bile, than at any time since the Civil War. There is nothing today like the personal destruction of the McCarthy era or the street fights of the 1960s. But in those periods, institutional forces still existed in politics, business, and the media that could hold the center together. It used to be called the establishment, and it no longer exists. Solving fundamental problems with a can-do practicality-the very thing the world used to associate with America, and that redeemed us from our vulgarity and arrogance-now seems beyond our reach.

the unwritten contract

Why and how did this happen? Those are hard questions. A roundabout way of answering them is to first ask, when did this start to happen? Any time frame has an element of arbitrariness, and also contains the beginning of a theory. Mine goes back to that shabby, forgettable year of 1978. It is surprising to say that in or around 1978, American life changed-and changed dramatically. It was, like this moment, a time of widespread pessimism-high inflation, high unemployment, high gas prices. And the country reacted to its sense of decline by moving away from the social arrangement that had been in place since the 1930s and 1940s.

What was that arrangement? It is sometimes called “the mixed economy”; the term I prefer is “middle-class democracy.” It was an unwritten social contract among labor, business, and government- between the elites and the masses. It guaranteed that the benefits of the economic growth following World War II were distributed more widely, and with more shared prosperity, than at any time in human history. In the 1970s, corporate executives earned 40 times as much as their lowest-paid employees. (By 2007, the ratio was over 400 to 1.) Labor law and government policy kept the balance of power between workers and owners on an even keel, leading to a virtuous circle of higher wages and more economic stimulus. The tax code restricted the amount of wealth that could be accumulated in private hands and passed on from one generation to the next, thereby preventing the formation of an inherited plutocracy. The regulatory agencies were strong enough to prevent the kind of speculative bubbles that now occur every five years or so: between the Great Depression and the Reagan era there was not a single systemwide financial crisis, which is why recessions during those decades were far milder than they have since become. Commercial banking was a stable, boring business. (In movies from the 1940s and 1950s, bankers are dull, solid pillars of the community.) Investment banking, cordoned off by the iron wall of the Glass-Steagall Act, was a closed world of private partnerships in which rich men carefully weighed their risks because they were playing with their own money. Partly as a result of this shared prosperity, political participation reached an all-time high during the postwar years (with the exception of those, such as black Americans in the South, who were still denied access to the ballot box).

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