How Macroeconomics Led to the Political Center’s Collapse in the US

In this insightful analysis, Tom Ferguson, Servaas Storm, and Jie Chen delve into the evolving political landscape in the U.S., building upon Jim Carville’s famous expression, “It’s the economy, stupid.” They trace a historical trajectory from the Reagan era, featuring Jacob Javits—a Republican who championed Social Security, unions, and Great Society initiatives—to today’s political dynamic, where those views appear more aligned with Democratic Socialism. The authors argue that this shift didn’t merely happen but was orchestrated by wealthy right-wing factions, such as the Koch Brothers, who launched extensive messaging campaigns supported by conservative think tanks.

The success of neoliberalism has proven self-reinforcing, generating economic discontent that conservatives have redirected towards scapegoating welfare recipients, rather than addressing the wealth accumulation of the affluent few. Thus, the simplified takeaway from current U.S. electoral trends seems to be: “It’s the inequality, stupid.”

By Thomas Ferguson, Research Director, Institute for New Economic Thinking and Professor Emeritus, University of Massachusetts, Boston; Servaas Storm, Senior Lecturer of Economics, Delft University of Technology; and Jie Chen, University Statistician, University of Massachusetts. Originally published at the Institute for New Economic Thinking website

Our recent INET Working Paper investigates the macroeconomic foundations behind the political center’s decline in the U.S. The central claim is clear: while elements like racism, sexism, and anti-immigrant sentiment have fueled the rise of right-wing populism, the deep-seated disillusionment with an ineffectual economy serves as a significant motivator. This is especially true for millions whose social and economic foundations have reached a critical state.

The ongoing affordability crisis affecting the working and middle classes is not a new issue; it’s been compounded by stagnant wages and precarious employment, leading to a long-standing emergency. This issue is exacerbated by recent inflationary pressures, but its roots lie in longstanding economic inadequacies.

The paper begins by scrutinizing the Biden administration’s performance regarding wages and income, illustrating the evolving impact of macroeconomic policies over time. By looking at real hourly wages, real weekly earnings, the employment cost index (see Figure 1), and median family and household income, the findings indicate that Biden’s approach has not fundamentally improved wage growth compared to pre-pandemic norms.

Figure 1: Employment Cost Index: Private Industry
(constant 2019 U.S. dollars; 2019 =1.0)

The data reveals a steady trend in wages with no significant break during Biden’s presidency. Union strength has remained stagnant (Figure 2), and the lowest rungs of the income ladder have not experienced significant upward movement, as demonstrated in Figure 3. This figure illustrates 90-10 household income inequality from 1967 to 2024 and 80-20 family income inequality from 1947 to 2024. While income inequality steadily decreased from 1947 until the late 1970s, it has increased consistently since then, showing no significant relief from Biden’s policies.

Figure 2: America’s Unions Are in a Deadly Spiral: Union Density and Collective Bargaining Coverage (Percent)

Figure 3: Income Inequality Over Time: 90-10 Household Income Inequality (1967-2024) and 80-20 Family Income Inequality (1947-2024)

Consumer confidence dipped during Biden’s tenure, not due to an intangible “bad vibe,” but because of disappointing actual income growth. Such economic policy merely perpetuated the status quo established since the Reagan era—a period characterized by entrenched structural inequalities. Interestingly, between the second quarter of 2021 and onward, personal consumption expenditures significantly outpaced expectations based on prior trends, even though growth rates for real income and employee compensation fell compared to pre-pandemic years (see Figure 4).

Figure 4: Growth of Real Personal Income and Real Personal Consumption Expenditure during 2014-2019 versus 2021-2025 (Percent)

In contrast, the wealth concentrated among America’s richest soared after 2020, driven primarily by the Federal Reserve’s quantitative easing during COVID and the subsequent AI boom. This resulted in a K-shaped wealth dynamic influencing personal consumption expenditures. The spending habits of the affluent—though smaller than often portrayed—sustained economic growth, especially with substantial investments in AI-related infrastructure. The paper reviews multiple studies concerning this wealth influence and provides estimates deemed plausible.

Moreover, the paper examines the lengthy evolution of macroeconomic policy since the New Deal. The analysis reveals that major economic trends for the majority of American households worsened throughout the Neoliberal era, irrespective of which party occupied the White House. We conduct an econometric assessment of the decline in employee compensation as a percentage of GDP under both Democratic and Republican administrations, illustrated in Figure 5.

Figure 5: The Labor Income Share (1947q1-2026q1)
(Compensation of Employees as a Percentage of GDP)

Our findings indicate that the downward trend in labor income share cannot be attributed to the so-called “China shock” or any abrupt shift post-2000; rather, it stems from the Neoliberal policy pivot of the 1970s, which emphasized inflation control over full employment, favored shareholders over workers, and promoted deregulated, insecure jobs instead of stable employment. These changes ushered in enduring austerity for those relying on social security, healthcare, and many educational sectors.

This consistent pattern also applies to the increasing share of income held by the wealthiest individuals (see Figure 6), the relentless rise in income inequality (Figure 7), and the ongoing decline in economic shares among the middle class and lower-income brackets over the last seventy years.

Figure 6: Extreme Inequality: The Income Share of the Richest 1% (1947-2024)

Throughout the Neoliberal epoch, no significant differences in macroeconomic results can be traced to party affiliation. While glaring contrasts exist concerning issues like abortion, gender rights, LGBTQ+ rights, and increasingly, race and civil rights, the bipartisan consensus surrounding Neoliberal economic policies continues to weaken America’s economic foundations.

Figure 7: Gini Coefficient of Family Incomes (1947-2024)

The evidence is compelling: since the New Deal framework was abandoned in the 1970s, macroeconomic outcomes have persistently worsened for most Americans, regardless of which party controlled the presidency. Democrats have been largely beholden to Wall Street, the tech industry, and various corporate interests, which has led to a deterioration of the “American Dream” associated with middle-class prosperity and upward mobility. As a consequence of prioritizing the financial well-being of shareholders, American factories closed their doors, jobs were relocated overseas, and a flood of imports entered the country under both Republican and Democratic administrations.

The impact of these neoliberal economic policies on the U.S. economy has been severe. Potential growth has been on a long-term decline, labor productivity growth has slowed across most industries, and manufacturing even confronted negative growth post-2010. This bipartisan regime of sluggish wage growth and stagnant real incomes for the majority has weakened domestic demand and led to reduced capacity utilization, ultimately undermining profits and investment in most sectors, except finance and AI.

Indeed, the recent stock market exuberance that has inflated share prices of American AI companies, coupled with growing wealth inequality and an enormous wealth effect on consumer spending, collectively drive demand that might otherwise have faltered due to dwindling wages and incomes for most. Supportive measures from the Federal Reserve via ongoing interventions have allowed the financial sector to inflate financial bubbles within an increasingly unequal economy. This scenario epitomizes the unfortunate outcome of over four decades of bipartisan Reaganomics: a state of private wealth amid public poverty, or, as John Kenneth Galbraith aptly put it, a kind of socialist system favoring the rich while enforcing persistent austerity for everyone else. Therefore, widespread dissatisfaction and disenchantment with a system that serves only the oligarchs is not unexpected.

In concluding this thorough examination, the authors emphasize lessons for the future, particularly how the apparent discord within the Democratic Party may influence its actions in response to the mounting challenges posed by the Trump administration.