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Yet extreme income inequality causes a cultural separation in society that is unhealthy on its face and corrosive over time. Ultimately, it is prone to reaction, particularly when much of society is struggling.

The rich have not become that way while living in a vacuum. Technological advances, freer trade, and wider markets—along
with the policies that promote them—always benefit some people and harm others. Economic theory is quite clear that the winners gain more than the losers lose—the people who suffer as a result of these forces, it is often said, can be fully compensated for their losses; society as a whole still gains. This precept has guided U.S. government policy for thirty years. Yet in practice, the losers are seldom compensated, not fully and not for long. And while many of the gains from trade and technological progress are widely spread among consumers, the pressures on wages that result from these same forces have been felt very differently by different classes of Americans. Income statistics don’t fully capture the improvement in living standards brought about by technological advance (the Internet, of course, did not exist in 1970). At a minimum, however, the income gains powered by these forces have been extraordinarily lopsided for several decades. In the aughts, incomes grew
only
at the top of the pyramid.

What’s more, some of the policies that have most benefited the rich have little to do with greater competition or economic efficiency. Fortunes on Wall Street have grown so large in part because of implicit government protection against catastrophic losses, combined with the steady elimination of government measures to limit excessive risk taking, from the 1980s right on through the crash of 2008.

Over time, the United States has expected less and less of its elite, even as society has oriented itself in a way that is most likely to maximize their income. The top income-tax rate was 91 percent in 1960, 70 percent in 1980, 50 percent in 1986, 39.6 percent in 2000, and is now 35 percent. Income from investments is taxed at a rate as low as 15 percent. The mortgage-interest tax deduction is most generous, of course, to the affluent, and while it’s small potatoes to anyone who makes a good income, so, too, is the savings incentive provided by 401(k) plans. The estate tax, meanwhile, has been gutted.

As the winners have been separated more cleanly from the losers, the idea of compensating the latter out of the pockets of the former has run into stiff resistance: that would run afoul of a different
economic theory, dulling the winners’ incentives, dispelling their entrepreneurial spirit, and punishing them for their success; some might even leave the country. And so, in a neat and perhaps unconscious two-step, some elites have pushed policies that benefit them by touting theoretical gains to society, then ruled out measures that would distribute those gains widely.

What will become of American society if these trends keep up? Even as we continue to strive to perfect the meritocracy—for of course family background still matters greatly today—signs that things may be moving in the other direction are proliferating. The increasing segregation of Americans by education and income, and the widening cultural divide between families with college-educated parents and those without them, suggests that built-in advantages and disadvantages may be growing. And the concentration of wealth in relatively few hands opens the possibility that much of the next generation’s elite might achieve their status through inheritance, not hard work.

Soaking the rich is not the answer to America’s problems. Holding all else equal, we would need to raise the top two tax rates to roughly 90 percent, then unrealistically assume no change in the work habits of the people in those brackets, merely to bring the deficit down to 2 percent of GDP in a typical year. Even with strong budget discipline and a reduction in the growth of Medicare costs, somewhat higher taxes for most Americans—in one form or another—seem inevitable. While we can and should cut spending in many areas, we also need to increase our national investment in infrastructure and innovation, and to provide some assistance to an increasing number of people who are falling out of the middle class. The professional middle class in particular should not expect exemption from tax increases.

But high earners should pay considerably more than they do now. Top tax rates of 50 percent for incomes in the seven-figure range would be considerably lower than their level throughout much of the postwar era, and should not be out of the question—nor should
an estate-tax rate, for large estates, of similar size. Investment income should be taxed at ordinary income-tax rates (especially as the corporate tax is reduced).

We should not nourish the mercenary tendencies within today’s elite. America remains a magnet for talent, for reasons that go beyond the tax code, and by international standards, none of the tax changes recommended here would create an excessive tax burden on high earners. And while we should continue to celebrate people who make great accomplishments in their work, we should also seek to inculcate a sense of social and civic responsibility among today’s meritocratic winners—one that’s been lost, to some extent, in recent generations. If certain financiers choose to decamp for some small island-state in search of the smallest possible tax bill, we should wish them good luck.

We need to diminish the extraordinary power held by the rich over American government. Most Americans have little problem with high earnings won on a level playing field. But wealth always brings influence, and the self-reinforcing relationship between the two can lead to policies that are unfair, anticompetitive, and bad for the economy. Nowhere is this clearer than in the financial industry, which concentrates gains in the hands of a few and—because of its relationship to the government—distributes losses among the broader public. Lax regulation of finance combined with an implicit government guarantee against failure has inspired much mischief, made many fortunes, and left the country poorer. The specifics of financial reform to limit moral hazard and rent-seeking are beyond the scope of this book (I recommend
13 Bankers
, by Simon Johnson and James Kwak, as a starting place for interested readers). But these problems remain enormous; the financial reforms undertaken since the crash have not solved them.

To the extent possible, we should keep money out of politics. Strict restrictions on campaign contributions and issue advertising, along with lobbying reform, would make our democracy healthier. The Supreme Court has struck down some measures that were designed
to achieve these goals, saying they unconstitutionally violate free speech. Those decisions should be reconsidered.
The former labor secretary Robert Reich has argued that all campaign contributions should go through “blind trusts” so that political candidates and office-holders cannot know who contributed to their campaigns, or how much they contributed. “The quid,” he writes, “would be severed from the quo.”

Economic tumult has frayed the social fabric; if we remain in a period of slow growth and high unemployment, many aspects of public life and social relations could become more bilious than they are today. And even once employment rises back to more-normal levels again, the most-powerful economic forces of our times will remain fundamentally divisive, concentrating wealth at the top of society and putting more pressure on the middle. The great challenge of our times is adapting to and ameliorating these forces.

Politics will not be easy in the coming years, in part because the problems we face have no easy, painless political solutions. As Tyler Cowen wrote in
The Great Stagnation
, we should not pretend that they do—and we should resist the tendency to reflexively demonize those who disagree with us, rather than trying, where possible, to find common ground.

Many of the ideas presented in this chapter would help decrease the social distance that has grown between different American cliques and classes, a crucial charge if the United States is to retain a common culture. A society in which the different classes jostle more frequently alongside one another—living in the same communities and cities, harboring the same hopes and expectations for their children—is inherently healthier than one in which they are segregated physically and split by cultural norms. Broader exposure to one another
would foster the ideals of civic equality and equal opportunity that are our cultural bedrock.

The information age—individualistic, experimental, boundary-breaking—has eroded other once-common virtues, ones that we do not associate as strongly with a distinctly American character, but that are nonetheless essential to a cohesive, successful society: from family commitment rooted in marriage, to civic responsibility. The Great Recession has merely cast light on the extent of that erosion. The past is not a hallowed place, and we would not want to return to it even if we could. But we do need to sow those virtues again as we move forward—through education and through our own private actions and expectations.

As with the end of the nineteenth century, the Great Depression, and the 1970s, when we look back on this period, we will see it as a time when much that was familiar came to an end. But we will also see many new beginnings. After years of profligacy, the crash and its aftermath may mark a generational turning toward thrift and personal responsibility, changes that would serve the country well for decades. We will likely remember the Great Recession not only as a time when women first became a majority of the workforce, but also more broadly as a transition from a male-centered economy to one built more around women. The end of the housing-construction boom—and the financial sector’s preoccupation with housing—will surely clear the way for growth in other industries, and for the rise of new ones.

The most-important legacies of this period are, of course, unknowable today. Will education take another leap forward, as it has during the major economic transitions of the past? Will the long trend toward the concentration of income be altered—and in what manner? Will the middle class retain its optimism and its sense of unbounded opportunity?

We should not underestimate the size of the challenge the United States faces in the coming decades. But nor should we underestimate
the resourcefulness of the American people in meeting it—through private invention and decisive government action, through continuing competition tempered by mutual support.
The journalist James Fallows has observed that worrying over national decline is a time-honored American pastime frequently in vogue since the very foundation of the republic. Cycles of crisis and renewal appear throughout our history; at critical moments, we have always found the courage to fix what was broken in our politics, our economy, and our society.

Can we find the national courage to do that again today, though it surely means sacrifice? Can we still discern a national interest above our personal ones? Amid the strains and fissiparous forces of a new, global era, can we still find ways to mix and balance liberty with justice, self-interest with cooperation? If we are to remain one nation, in any meaningful sense of the word, we must.