After 40 years of market fundamentalism, America and like-minded European countries are failing the vast majority of their citizens. At this point, only a new social contract – guaranteeing citizens health care, education, retirement security, affordable housing, and decent work for decent pay – can save capitalism and liberal democracy.
NEW YORK – Three years ago, US President Donald Trump’s election and the United Kingdom’s Brexit referendum confirmed what those of us who have long studied income statistics already knew: in most advanced countries, the market economy has been failing large swaths of society.
Nowhere is this truer than in the United States. Long regarded as a poster child for the promise of free-market individualism, America today has higher inequality and less upward social mobility than most other developed countries. After rising for a century, average life expectancy in the US is now declining. And for those in the bottom 90% of the income distribution, real (inflation-adjusted) wages have stagnated: the income of a typical male worker today is around where it was 40 years ago.
Meanwhile, many European countries have sought to emulate America, and those that succeeded, particularly the UK, are now suffering similar political and social consequences. The US may have been the first country to create a middle-class society, but Europe was never far behind. After World War II, in many ways it outperformed the US in creating opportunities for its citizens. Through a variety of policies, European countries created the modern welfare state to provide social protection and pursue important investments in areas where the market on its own would underspend.
The European social model, as it came to be known, served these countries well for decades. European governments were able to keep inequality in check and maintain economic stability in the face of globalization, technological change, and other disruptive forces. When the 2008 financial crisis and subsequent euro crisis erupted, the European countries with the strongest welfare states, particularly the Scandinavian countries, fared the best. Contrary to what many in the financial sector would like to think, the problem was not too much state involvement in the economy, but too little. Both crises were the direct result of an under-regulated financial sector.
After the Fall
Now, the middle class is being hollowed out on both sides of the Atlantic. Reversing this malaise requires that we figure out what went wrong and chart a new course forward, by embracing progressive capitalism, which, while acknowledging the virtues of the market, also recognizes its limitations and ensures that the economy works for the benefit of everyone.
We cannot simply return to the golden age of Western capitalism in the decades after World War II, when a middle-class lifestyle seemed within reach of a majority of citizens. Nor would we necessarily want to. After all, the “American dream” during this period was mostly reserved for a privileged minority: white males.
We can thank former US President Ronald Reagan and former British Prime Minister Margaret Thatcher for our current state of affairs. The neoliberal reforms of the 1980s were based on the idea that unfettered markets would bring shared prosperity through a mystical trickle-down process. We were told that lowering tax rates on the rich, financialization, and globalization would result in higher standards of living for everybody. Instead, the US growth rate fell to around two-thirds of its level in the post-war era – a period of tight financial regulations and a top marginal tax rate consistently above 70% – and a greater share of the wealth and income from this limited growth was funneled to the top 1%. Instead of the promised prosperity, we got deindustrialization, polarization, and a shrinking middle class. Unless we change the script, these patterns will continue – or worsen.
Fortunately, there is an alternative to market fundamentalism. Through a pragmatic rebalancing of power between government, markets, and civil society, we can move toward a freer, fairer, and more productive system. Progressive capitalism means forging a new social contract between voters and elected officials, workers and corporations, rich and poor. To make a middle-class standard of living a realistic goal once again for most Americans and Europeans, markets must serve society, rather than vice versa.
Invasion of the Wealth Snatchers
Unlike neoliberalism, progressive capitalism is based on a proper understanding of how value is created today. The true and sustainable wealth of nations comes not from exploiting countries, natural resources, and people, but from human ingenuity and cooperation, often facilitated by governments and civil-society institutions. Since the second half of the eighteenth century, productivity-enhancing innovation has been the real driver of dynamism and higher living standards.
NEW YORK – Three years ago, US President Donald Trump’s election and the United Kingdom’s Brexit referendum confirmed what those of us who have long studied income statistics already knew: in most advanced countries, the market economy has been failing large swaths of society.
Nowhere is this truer than in the United States. Long regarded as a poster child for the promise of free-market individualism, America today has higher inequality and less upward social mobility than most other developed countries. After rising for a century, average life expectancy in the US is now declining. And for those in the bottom 90% of the income distribution, real (inflation-adjusted) wages have stagnated: the income of a typical male worker today is around where it was 40 years ago.
Meanwhile, many European countries have sought to emulate America, and those that succeeded, particularly the UK, are now suffering similar political and social consequences. The US may have been the first country to create a middle-class society, but Europe was never far behind. After World War II, in many ways it outperformed the US in creating opportunities for its citizens. Through a variety of policies, European countries created the modern welfare state to provide social protection and pursue important investments in areas where the market on its own would underspend.
The European social model, as it came to be known, served these countries well for decades. European governments were able to keep inequality in check and maintain economic stability in the face of globalization, technological change, and other disruptive forces. When the 2008 financial crisis and subsequent euro crisis erupted, the European countries with the strongest welfare states, particularly the Scandinavian countries, fared the best. Contrary to what many in the financial sector would like to think, the problem was not too much state involvement in the economy, but too little. Both crises were the direct result of an under-regulated financial sector.
After the Fall
Now, the middle class is being hollowed out on both sides of the Atlantic. Reversing this malaise requires that we figure out what went wrong and chart a new course forward, by embracing progressive capitalism, which, while acknowledging the virtues of the market, also recognizes its limitations and ensures that the economy works for the benefit of everyone.
We cannot simply return to the golden age of Western capitalism in the decades after World War II, when a middle-class lifestyle seemed within reach of a majority of citizens. Nor would we necessarily want to. After all, the “American dream” during this period was mostly reserved for a privileged minority: white males.
We can thank former US President Ronald Reagan and former British Prime Minister Margaret Thatcher for our current state of affairs. The neoliberal reforms of the 1980s were based on the idea that unfettered markets would bring shared prosperity through a mystical trickle-down process. We were told that lowering tax rates on the rich, financialization, and globalization would result in higher standards of living for everybody. Instead, the US growth rate fell to around two-thirds of its level in the post-war era – a period of tight financial regulations and a top marginal tax rate consistently above 70% – and a greater share of the wealth and income from this limited growth was funneled to the top 1%. Instead of the promised prosperity, we got deindustrialization, polarization, and a shrinking middle class. Unless we change the script, these patterns will continue – or worsen.
Fortunately, there is an alternative to market fundamentalism. Through a pragmatic rebalancing of power between government, markets, and civil society, we can move toward a freer, fairer, and more productive system. Progressive capitalism means forging a new social contract between voters and elected officials, workers and corporations, rich and poor. To make a middle-class standard of living a realistic goal once again for most Americans and Europeans, markets must serve society, rather than vice versa.
Invasion of the Wealth Snatchers
Unlike neoliberalism, progressive capitalism is based on a proper understanding of how value is created today. The true and sustainable wealth of nations comes not from exploiting countries, natural resources, and people, but from human ingenuity and cooperation, often facilitated by governments and civil-society institutions. Since the second half of the eighteenth century, productivity-enhancing innovation has been the real driver of dynamism and higher living standards.