A Revolution of Falling Expectations: The Macroeconomic Roots of Popular Discontent

This paper analyzes the macroeconomic roots of the collapse of the political center in the United States. The argument is straightforward: Of course, all sorts of demagogic political appeals - racism, sexism, anti-immigrant stereotyping - have played integral roles, but a fundamental underlying driver is popular disillusionment with an economy that has for decades failed millions of people and has now eroded the social underpinnings of America's economy to a breaking point. A detailed analysis of the Biden administration's record shows that, contrary to widely heralded claims, there was no major, transformative break in trends of the wages of American workers. Consumer sentiment turned negative under Biden, not because of mysterious "bad vibes," but due to deeply disappointing real income growth. What did surge, however, was the percentage of wealth in the hands of America's most affluent citizens, thanks especially to the Federal Reserve's quantitative easing policies at the onset of COVID and, later, the AI boom. That had a powerful K-shaped wealth effect on personal consumption expenditures, albeit not as large as sometimes claimed. The paper then extends the analysis backward, showing that during the Neoliberal era key macroeconomic trends spiraled steadily downward for most American households and workers regardless of which party occupied the White House. The paper scrutinizes the long fall of total employee compensation as a percent of GDP and shows that this is not an artifact of a "China shock" or another sudden shift after 2000. It resulted from the Neoliberal policy turn of the 1970s, which prioritized inflation control over (full) employment, favored shareholders while discriminating against workers, promoted deregulated insecure jobs over steady stable employment, and brought permanent austerity for those dependent on social security and healthcare.