Wake up: the American Dream is over

Even America's richest think they're getting too many tax breaks from a government determined to keep the poor in their place. As poverty in the US grows, Paul Harris wonders what happened to the Land of Opportunity

There is a common response to America among foreign writers: the USA is a land of extremes where the best of things are just as easily found as the worst.
This is a cliché. But it is often hard to argue with when surveying America's political and cultural landscape. America has some of the worst urban sprawl in the world and also the most beautiful and well-protected wildernesses. Its politics is awash with lobbyist inspired corruption. Yet passionate political engagement among millions of Americans puts many other countries to shame.

Culturally American TV can plunge depths that are hard to imagine. Yet at the same time commercial channels such as HBO produce the best dramas, documentaries and comedies in the world. Its media boasts celebrity tabloids including People and the National Enquirer, yet the New Yorker and Harpers and Atlantic Monthly are examples of its magazines which invest in quality journalism that no publication in Britain can match.
So in this land of black and white, we should not be too surprised to find some of the biggest gaps between rich and poor in the world. Such a yawning chasm is just the American Way, it would seem. Besides, the American Dream offers a way out to everyone. All someone has to do is work hard and climb the ladder towards the top. No class system or government stands in the way.

Sadly, this old argument is no longer true. Over the past few decades there has been a fundamental shift in the structure of the American economy. The gap between rich and poor has widened and widened. As it does so, the ability to cross that gap gets smaller and smaller. This is far from business as usual but there seems little chance of it stopping, not least because it appears to be government policy.

Over the past 25 years the median US family income has gone up 18 percent. For the top one percent, however, it has gone up 200 percent. A quarter of a century ago the top fifth of Americans had an average income 6.7 times that of the bottom fifth. Now it is 9.8 times.

Inequalities have grown worse in different regions. In California, home to both Beverly Hills and the gang-ridden slums of Compton, incomes for lower class families have fallen by four percent since 1969. For upper class families they have risen 41 percent.

This has led to an economy hugely warped in favour of a small slice of very rich Americans. The wealthiest one percent of households now control a third of the national wealth. The wealthiest 10 percent control two-thirds of it. This is a society that is splitting down the middle and it has taken place against a backdrop of economic growth.

Between 1980 and 2004 America's GDP went up by almost two-thirds. But instead of making everyone better off, it has made only a part of the country wealthier, as another part slips ever more into the black hole of the working poor. There are now 37 million Americans living in poverty, and at 12.7 percent of the population, it is the highest percentage in the developed world.

Yet the tax burden on America's rich is falling, not growing. The top 0.01 percent of households has seen their tax bite fall by a full 25 percentage points since 1980. That was when 'trickle down' economics began, arguing that the rich spending more would benefit everyone as a whole. But America's poor have simply been getting poorer: clearly that theory has not worked in reality.

And still the American government is set on tax breaks for the rich. Bush's first-term tax cuts notoriously benefited the upper strata of American taxpayers. So much so that even Warren Buffet, the second richest man in the world who benefited to the tune of hundreds of millions of dollars, has said the tax cuts 'scream of injustice'. As head of a hugely successful investment firm, it is hard to paint Buffet as a lefty liberal who hates Wall Street (though, bizarrely, some conservatives do try).

Still the tax cuts go on. This week one of the main political debates in Washington has been about scrapping the 'estate tax' whereby those who inherit large amounts from their relatives will be taxed on it. This overwhelmingly affects the wealthy. The estate tax is already set so high ($4m) that only one in 200 estates pay any tax at all when they are inherited. Unlike the UK's inheritance tax, which affects more and more Britons as house prices increase, this is not a problem faced by Joe and Jennifer Public.

Yet the White House and many politicians, overwhelmingly Republican, want to get rid of it. The lobbying campaign against it has been financed mostly by 18 business dynasties, including the family that owns WalMart. At the same time the Bush administration has sanctioned millions of dollars of cuts to Medicare, Medicaid and the education budget as part of a measure aimed at reducing the spiraling deficit. This is, frankly, obscene.

The effect of all this has been to scotch that long-cherished notion of the American Dream: that honest toil is enough to reap the rewards and let even the poorest join the middle class, or maybe even strike it rich. A survey last year showed that such economic mobility (a measure of those people trying to make the Dream come true) was lower in America than Canada, Germany, Norway, Denmark, Sweden and Finland. In fact, the only country doing as bad as America was Britain (food for thought, there).

Now this is not some argument against capitalism. Inequality is inevitable. It is a good thing. People need incentives. People need competition. People need markets. Some people will always be poor. Others deserve to be rich. But at the moment it looks like the rules of the game are being fixed in America in favour of the wealthy. The gap between rich and poor will only get wider. That is very dangerous.

Don't just take my word for it. Take Buffet's. After all he doesn't have anything to gain from criticising current policy. In fact he has hundreds of millions of dollars to lose. 'If class warfare is being waged in America,' he has written 'My class is clearly winning.' When even the rich are starting to think they are getting too many tax cuts, then you know something has gone very wrong.