The Fading American Dream

In the midst of trade wars abroad and mounting debt at home, a pressing question arises: what political economy issue is President Trump speaking to? The answer, according to Dean of Tuck Business School Matthew Slaughter, is the American Dream. Rather, the widespread perception in the United States that the American Dream is fading, or has disappeared altogether. The President’s policies, rhetoric, and economic vision tap into a deep sense of unease among the American population: that hard work no longer guarantees upward mobility, that the rules of the game are rigged, and that the promise of a better future has become out of reach for too many.

Perhaps you have a sense that you are living the American Dream. Some might have a sense their parents have lived it as well (I, for one, feel very fortunate). But over the past three decades, belief in the American Dream has steadily eroded. For the first time, Americans are earning less than their parents did in the generation before. Surveys consistently show declining confidence in the country’s future and growing pessimism about whether people will be better off in five years. The dream of upward mobility, which was once the defining promise of American life, is indeed fading in the eyes of much of the public. America might be entering an era where “Freedom from Want,” that is, economic security, will become the defining issue for the foreseeable future.

But why is this the case? What has transpired under the surface during the last decades to get us to the present situation? As part of Dartmouth’s Four Freedoms summer lecture series, the argument Prof. Slaughter makes essentially is an economic one: the fading of the American Dream is, to an extent, attributable to the stagnation of worker productivity. A key shift in the U.S. economy has left wages flat and many Americans feeling left behind despite consistent growth in GDP. In other words, the frustration that Trump has successfully managed to tap into is not imagined. It is rooted in real, structural economic changes.

To better understand the eroding belief in the American Dream, consider the following question The Wall Street Journal has been asking for many years: “Do you feel confident or not confident that life for our children’s generation will be better than it has been for us?” Increasingly, this is not the case. In 1990, 50% of Americans were confident that the future for our children will be better, while 45% were not. In 2023, only 21% remained confident, while a whopping 78% were not (it should be noted that in 2023, the economy was close to full employment). Furthermore, this skepticism is more pronounced among younger generations.

Professor Slaughter illustrates this shift with a telling anecdote from his course, Leadership in the Global Economy, taught at Tuck. Each year, he poses the same question to his MBA students:

Which of the following statements comes closer to your view?
A: The United States is a country where anyone, regardless of their background, can work hard, succeed, and be comfortable financially.
B: The widening gap between the incomes of the wealthy and everyone else is undermining the idea that every American has the opportunity to move up to a better standard of living.

In 2014, the class was evenly split: 50% chose A, 50% chose B. But by 2024, that balance had shifted dramatically, with only 30% choosing A, while 70% agreed with B. As Slaughter puts it, in just 10 years one in five students had moved from believing in meritocratic mobility to believing that rising inequality has fundamentally broken the ladder.

This generational loss of faith in upward mobility is not unique to the United States. As Slaughter points out, a global shift is underway. In Edelman’s annual international survey, respondents in 28 countries were asked: “Will my family and I be better off in five years?” The answers revealed a stark divide. Optimism was highest in countries like Kenya, India, China, and Indonesia, all of which are nations experiencing rapid economic growth. In contrast, advanced economies showed deep pessimism: only 36% of Americans answered yes. Furthermore, the numbers were even lower across much of the West, with only 26% in Spain, 23% in the UK, 19% in the Netherlands, 18% in Italy, 15% in Germany, 12% in France, and just 9% in Japan.

The takeaway, Slaughter argues, is clear. The nations where optimism remains high are the ones where productivity is growing quickly. And therein lies Slaughter’s core thesis: the fading American Dream, and the disillusionment we see across other advanced democracies, stems fundamentally from a lack of productivity growth and from the failure to ensure that whatever growth does exist is broadly shared. Without productivity, there is no rising tide. Without shared gains, there is no sense of progress.

What is productivity? In simple terms, productivity is the amount of output produced per worker across the economy. It is also the single most important indicator of a nation’s long-term economic strength. Rising productivity is the only reliable way to achieve sustained increases in standards of living. When productivity grows, businesses can afford to pay higher wages without raising prices, and those higher inflation-adjusted wages translate into rising real incomes. Over time, this is what fuels the material foundations of the American Dream: not only wealth creation, but opportunity for individuals and their children. In market economies, productivity is largely about innovation. Firms develop entirely new products or discover more efficient ways to produce existing goods and services. Labor becomes more efficient.

And governments can, in fact, play a crucial role in fostering the conditions for productivity growth in three main ways. First, they can create a policy environment that allows the creation of ideas and, in particular, allows the broad sharing of ideas once those ideas are created. In the United States, such innovation is fostered by the “patent clause” in the Constitution (Article I, Section 8, Clause 8).

Second, governments can help build “human capital,” i.e., the knowledge and skills each of us brings to our workday lives. This encompasses building reading and writing skills, as well as teamwork and executive function skills, things learned in school and college. Third, governments can build connections to the rest of the world. International trade competition compels companies to become more innovative, and governments can allow for an influx of talented immigrants from around the world.

When productivity growth slows, it doesn’t just mean slower overall economic expansion. Rather, it fundamentally alters how the benefits of whatever growth does occur get distributed throughout society. During periods of consistent productivity growth, there’s enough economic expansion to lift wages across the board, as businesses compete for workers and can afford higher compensation without sacrificing profitability. However, when productivity stagnates, the limited gains from economic growth become increasingly concentrated among those who can leverage technology and globalization to scale their talents. This reflects what economists call “the scalability of talent.” In today’s globalized, technology-enabled economy, individuals with rare skills can leverage their abilities across vast markets in ways previously impossible. A hedge fund manager can now oversee tens of billions in assets, while star athletes can reach global audiences. This scaling effect creates a winner-take-all dynamic: income growth becomes concentrated at the top and a small elite captures most of the benefits. Meanwhile, the majority of workers see their real wages stagnate or decline. This leads to the wealth inequality we have been experiencing in recent decades.

And the data tells a crass story: From 1947 to 1973, productivity growth in the United States averaged nearly 3% per year, roughly doubling the standards of living every generation. During this era, income growth was broadly distributed across the skills spectrum. Workers at all education levels could expect their wages to rise alongside the nation’s economic output, embodying John F. Kennedy’s metaphor of “a rising tide lifting all boats.”

But since 1973, productivity growth has slowed considerably, with only one notable exception: a burst of growth in the 1990s driven by the globalization of information technology. And the consequences of this productivity stagnation become even more troubling when examining how the limited gains have been distributed. From 2000 to 2016, real earnings for 96.5% of American workers actually declined. Those with high school education or less saw their earnings drop by 0.7%, while workers with some college experience faced a 7.2% decline. Even college graduates with bachelor’s degrees experienced a 4.3% decrease in real earnings. Only those with advanced professional degrees and PhDs saw their incomes rise during this period.

But the most compelling evidence for the fading American Dream comes from groundbreaking research by economist Raj Chetty and his colleagues. Chetty tracked the economic mobility of entire generations of Americans. By linking tax return data through Social Security numbers across decades, they asked the quintessential American Dream question: Are children earning more than their parents did at the same age, 30 years later? And their results provide a strong empirical validation for the widespread perception that upward mobility has stagnated.

For Americans born in 1940, the American Dream was statistically real—92% of them were earning more in inflation-adjusted terms than their parents by 1970. This near-universal upward mobility reflected the golden age of productivity growth and broadly shared prosperity that defined the post-war era. However, Chetty’s data reveals a devastating decline: for those born in 1980, only 50% were out-earning their parents by 2014. This isn’t a marginal shift. Rather, it represents the collapse of intergenerational mobility as a defining feature of American life.

Furthermore, the erosion of income mobility had profound implications for wealth distribution. Federal Reserve data from 1990 to 2023 shows that the middle class (defined as households between the 20th and 80th percentiles) saw their share of national wealth plummet from 36% to 26%. Meanwhile, the top 1% doubled their wealth share from 13% to 26% during the same span.

Against this background, it becomes more clear why populist appeals around the world increasingly resonate. The economic grievances are genuine concerns, backed by data. Something indeed is broken. However, Slaughter argues that Trump’s prescribed solutions (in particular, aggressive tariffs) will exacerbate rather than solve these problems. A study from the Budget Lab at Yale demonstrates that the average effective U.S. tariff rate of 17.5% is at the highest it has been since 1934. He argues protectionism of this magnitude actually worsens economic outcomes by reducing productivity growth and GDP. Furthermore, it induces massive economic uncertainty around the globe, which impedes the very thing America needs to compete: innovation. This has been borne out by historical data (think of the recent Japanese market volatility or the Brexit aftermath). In the end, he argues, tariffs threaten global stability, which ultimately hurts American interests.

So how do we get out of this rut? The key question is whether AI, particularly generative AI tools like ChatGPT and Claude, might generate a productivity boom for the United States and other countries. Slaughter emphasizes the remarkable speed of AI adoption by comparing it to previous technology innovations. Using a chart that tracks days to reach one million and then 100 million users, it shows how adoption rates have accelerated over time. While sites like Netflix and Facebook achieved this cumulatively over years, ChatGPT’s adoption line appears almost vertical, reaching these user benchmarks in an unprecedented timeframe.

As a consequence, some have heralded generative AI as the economic fountain of youth, while others paint a far bleaker future. But at the end of the day, we don’t know (yet).

However, the uncertainty about AI’s ultimate economic impact underscores a deeper truth about the current predicament: the solution isn’t found in the specifics of any single policy or technology, but in the quality of leadership we bring to bear on these challenges. The United States is missing a unified vision for what the country could be. Slaughter argues that visions for a better tomorrow are what truly animate people. America’s greatest achievements came from visionary leadership that set compelling, forward-looking goals around which the nation could unite. The space race succeeded precisely because it gave Americans something ambitious to build toward.

What the country needs now are leaders willing to step up. The question for this generation of Dartmouth students is whether they will be among those leaders who rise to meet this moment.