Economic growth and social crisis: explaining the American paradox

Over the past half century in the US, substantial economic growth coexisted with increasing inequality, and the erosion of social capital and well-being. Currently, no comprehensive explanations is available for such paradoxical mix of brilliant eco- nomic performance and social crises. We present a simple endogenous growth model showing that economic growth, the decline of social capital and well-being, and rising well-being inequality can be interconnected, mutually reinforcing phenomena. This type of growth can be described as defensive because it arises from the expendi- tures of households aimed at defending themselves against growth-related negative externalities, thus fostering economic growth. Defensive growth leads to a loss of well-being in the long run because, beyond a certain level of output, private pros- perity is no longer able to compensate for social poverty. Along a defensive growth path, the decline of social capital disproportionately weighs on the well-being of low- income households, because of their relatively lower capacity to finance defensive spending. This prediction is consistent with the evidence showing that over the past 50 years the loser of the "pursuit of happiness" stated in the American Constitution is the working class.