In last week’s post, A System out of Balance, I described the findings of the Persona Project, which revealed average Americans were perplexed about why the economy didn’t seem to working for them and sheepish about their disengagement from politics. In this post, I explain what has led them to feel that way, and how their discouragement represents a concern for the future of democratic capitalism.

It was only in 1947 that economists working at the US Census Bureau, started tracking median family income. From the middle of the Great Depression until 1946, only the mean (or average) family income was officially tracked. The key difference is that the mean family income is inflated by the presence of very high-end incomes at the top of the income distribution. For example, if suddenly every million-dollar earner magically started earning $10 million instead, the mean (total dollars earned divided by number of families) would increase while the median (income of the middle family in the entire distribution, with an equal number of families earning more and less) would remain unchanged.

For the purposes of thinking about the functioning of democracy and capitalism in combination, the median family income is particularly important because the median family is, in some sense, the swing voter. To earn 51 percent (or more) of the vote in order to get democratically elected, a political party needs to satisfy the median family—not literally that family, but the families in the income band around the median. If these families don’t feel that the existing system is working for them, then in due course, the voters in those families will help tip 51 percent (or more) of the electorate toward voting for something else.

In the twenty-nine years from the first year that it was tracked, in 1947, through America’s bicentennial, in 1976, the real median family income in America grew at a healthy annual compound rate of over 2.4 percent, meaning the median family was exactly twice as well off economically in 1976 as in 1947—that is, doubling in one thirty-year generation. This is the kind of long-term, sustained growth that made the American system of democratic capitalism the most effective in producing broad prosperity during the country’s first two hundred years. However, no such doubling happened. In the forty-two years following the bicentennial, the growth in median income fell to an anemic 0.6 percent per year, meaning that the median family was only 31 percent better off after forty-two years—less than one-third the progress in almost 50 percent more time. That is, median income rose by 100 percent in twenty-nine years and then by only 31 percent in the subsequent forty-two years.

It is instructive to compare this post-1976 economic performance with that in America’s darkest historical economic time: the Great Depression. This was the lengthy economic downturn in which half the US banks failed, unemployment hit almost one-quarter of the workforce, and the stock markets plummeted by 70 percent. American families—and their counterparts worldwide—worried that the economy would never come back. In the depths of the Great Depression, military veterans actually marched on Washington in protest for the first and only time in history.

Two features of the current stagnation are different and worse relative to the Great Depression. First and very surprisingly, the stagnation of middle incomes was of shorter duration during the Great Depression and recovered more quickly after the downturn compared with today. It would be nice to know what the median family earned for this comparison, but we have to rely on mean income before 1947—and while the mean isn’t as perfect a measure for our purposes, it is still revealing. It took only ten years from its peak in 1929, through the worst depression in American history, for the average American income to recover its losses. In only another two more years, thanks to spectacular economic growth  in 1940 and 1941 spurred in part by World War II spending,  it grew a further 29 percent. That is to say, despite the country experiencing the worst depression in its history, it took only twelve years for the average American income to grow 29 percent from the predepression peak. Remember it took forty-two years—over three times as long—for the median American income, post-1976, to grow just 31 percent.

What’s more, the average American family of 1929 had to wait only a further three years, after the United States entered the war—for fifteen years in total—to double its income, even taking into account the huge trough of the Great Depression. In stark contrast, on the current trajectory, it would take the median 1976 American family one hundred years to double its real family income—a span covering more than three generations. In fairness, the Great Depression was a much more painful experience in its worst years, with the average family enduring an unprecedented 29 percent decline in earnings from 1929 to 1933. The worst declines the 1976 median family faced were comparatively mild: 7 percent (1979–1982) and 8 percent (2007–2012). But with perseverance through the steep drop, the 1929 family ended up doing so much better, so much faster than the 1976 family has done and will likely do.

Second, and perhaps more important, the Great Depression hit the incomes of the top-earning Americans more severely than it did those of average Americans. This meant that the American electorate could see itself relatively united in a painful economic situation, with the rich taking a bigger hit than the average worker. Nothing could be further from the truth in the current economy. While the median family is stagnating as never before, the top 1 percent (and 0.1 percent and 0.01 percent) are doing better than they have ever done in American history—and there’s no sign of that stopping.

You could argue that it is perfectly fine that the rich are getting richer if their doing so helps the economy grow and if that economic growth flows to those less well-off. And you might be right if indeed the growth were robust and did flow that way. The trouble is, the data shows that most of the historically anemic growth of the past few decades is in fact being captured by the wealthy Americans that we’re supposed to credit with creating it. For starters, at around the same time that the incomes of top earners began accelerating in the late 1970s, economic growth slowed. Annual US GDP per capita growth slowed from an average of 3.24 percent in the forty-two years leading up to the bicentennial to an average of 1.75 percent in the forty-two years that followed—a 46 percent reduction in growth rate. The drop in the growth rate is not in and of itself surprising or highly alarming. It is always difficult for the richest country in the world to maintain high levels of GDP per capita growth for exceedingly long periods of time, and America kept it up for an impressively long time.

More worrisome is where the growth has gone. The overall payoff profile has changed dramatically since the same approximate time. As late as 1980, the rule in the American economy was that the poorer you were, the more you benefited from growth in the American economy: Americans in the lowest fifth percentile did better than those in the tenth who did better than those in the twenty-fifth who did better than those in the fiftieth who did better than those in the seventy-fifth who did better  than those in the ninetieth who did better than those in the  ninety-ninth. That is, economic growth in 1980 was an equalizing force. By 2014, this relationship had flipped entirely: the poorest benefited least from growth, and all the way to the 99.999th percentile, the richer you were, the more you benefited.

Other data confirms this pattern, and perhaps there is no better illustration of how the average workers are losing out than the dramatic shift in the relationship between productivity growth and wage growth of nonsupervisory workers—the regular Americans we interviewed. Historically, up through the mid-1970s, there was an extremely tight relationship between productivity growth and wage-compensation growth. If workers were more productive, their pay went up proportionately, an outcome that spread the rewards of growth broadly, because economic growth and productivity growth are tightly coupled. For example, between 1948 and 1972, productivity grew 92 percent and wage compensation 88 percent—and they tracked each other closely each year. That meant that if workers produced more economic output for their employers, they were compensated with increased wages mirroring almost exactly the increase in output—fairness in the extreme. In 1972, however, that relationship broke up, and between 1972 and 2018, while productivity grew by 84 percent, growth in wage compensation barely budged, growing just 13 percent, or 0.25 percent per year for forty-six years.

And what was once a sterling feature of the American experience, economic mobility in the land of opportunity, has ground to a halt. Strong improvement in mobility in the 1940s and 1950s gave way to slower improvement in the 1960s and 1970s, and to slight decreases since. It is now harder than it was fifty to eighty years ago to get from the bottom quintile of the income distribution to the top quintile in one’s lifetime.

The fundamental story of the standard public data and of the Persona interviews I revealed in my previous article is that American democratic capitalism is more vulnerable than it was during the Great Depression.

Back then, when many of the world’s major developed countries voted for fascism, communism, or socialism over capitalism, Americans stuck with capitalism, although they did shift quite significantly leftward, seeing President Franklin Roosevelt’s New Deal as the best way to tackle the economic crisis of the time.  And the fact that American capitalism rebounded so strongly from the 1929 crash and its immediate aftermath reinforced belief in the great American dream that hard work and passion will de- liver economic and social rewards. If America could come back so strong, it must surely be doing something right, though the great collective effort of World War II played an outsize role in the recovery.

But this time, if and when discontented Americans like Amy and Sarah do reengage with democracy, it’s by no means clear that they will vote to stick with the capitalism part of the American model. The 1970s represented the first protracted stumble after the recovery from the Great Depression, with two oil-price shocks and a nasty recession mid-decade. Had recovery from those challenges been as strong as that in the late 1930s and 1940s, no doubt faith in the system would once again have been vindicated. Instead, as the data shows, the post-1970s decades have been, for Americans like Amy and Sarah, a slow drip feed of disappointment and frustration.

In this environment, a more sinister narrative about capitalism has been taking root. Capitalism is no longer unambiguously about everybody working hard and getting ahead—it is about the benefit of overall economic growth flowing so disproportionately to rich people that there just isn’t enough left for average Americans to consistently advance. If the little that does trickle down isn’t enough to keep Amy and Sarah afloat, then sooner or later they will wonder why they trust the management of the economy to Wall Street CEOs and Beltway politicians and policy wonks. And then they will surely reengage with the democratic part of the US system—probably with dramatic and potentially harmful results.To be sure, it is always tempting to look for a clear, easily identified whipping boy—a bad president, an atrocious piece of legislation, callous Wall Street, venal hedge funds, the unfettered internet, runaway globalization, or self-absorbed millennials. While no one of these can be held responsible for the yawning inequality of the US economy and the alienation that it engenders, many actors have played a role. It has taken almost half a century of both Democratic and Republican presidents and houses of Congress to get us to the current point. And if numerous actors are in part responsible, then we have to ask—given all that the data shows—whether there may be a fundamental structural problem with democratic capitalism. If so, can we fix it?


  • Roger Martin is a former dean of the Rotman School of Management at the University of Toronto. His forthcoming book is "When More Is Not Better: Overcoming America’s Obsession With Economic Efficiency."