For the first time in American history, most parents believe that their children will face tougher times than they did. Most Americans believe that the achievability of the American Dream is fading out of reach. To most Americans this is stunning and alarming. It is their greatest concern. Unfortunately the economic data supports these fears.

There are things that can be done to address these concerns and restore belief in the American Dream, but first the dimensions of the problem need to be understood. Though they are important factors, the current global economic mess, the growth of the competitive threat from Asian economies, and our trillion dollar deficits and looming national debt, are not the biggest problem. The real problem lies deeper in the changing structure of our national economy.

When the right data is examined, the problem is glaringly obvious. The data is neither overly complex nor subject to interpretation. It just requires looking at it. So here it is. We start with looking at all reported income earned by US taxpayers and how it is divided among them,

SHARE OF TOTAL ADJUSTED GROSS INCOME (As reported by the Internal Revenue Service)

                              1980               1989               1999               2007

Top 1%                 8.5%                14.2%             19.5%             22.8%

Top 5%                 21%                  27.8%             34%                37.4%

Top 10%               32%                  39%                44.9%             48.1%

Top 25%               57%                  62.4%             66.5%             68.7%

Top 50%               82.3%               85.1%             86.8%             87.7%

Bottom 50%        17.7%                14.9%             13.2%            12.3%

From this chart we see that in 1980 the top 1% of taxpayers earned 8.5% of all income that year. In 2007, the top 1% of taxpayers earned 22.8% of all income. This means that the top 1% claimed an incremental 14.3% of the total national economic “pie” during those three decades.

We see that the top 5% of all taxpayers earned 21% of all income in 1980 and that number increased to 37.4% in 2007-- an increase of 16.4% of the total pie. But for those not in the top 1%, they only claimed an additional 2.1% of the total income pie.

We see that the top 10% of all taxpayers earned 32% of all income in 1980 and that share increased to 48.1% in 2007 – an increase of 16.1% of the total pie. However, if you separate out the top 5% from the top 10%, the share of those in the top 10% but not in the top 5% actually decreased by .3%. In other words, they started taking less of the total.

It gets much worse for everyone else.

We see that those taxpayers in what we call the upper middle class – those in the top 50% but not in the top 10% -- lost the most during the last three decades. Their share of the total income earned in the United States declined from 50.3% in 1980 to 39.6% in 2007. This group is comprised in 2007 of those taxpayers earning between $33,000 and $113,000.

We see that in 1980 the bottom 50% of taxpayers earned 17.7% of all income that year. In 2007, the bottom 50% earned just 12.3% of all income.

Less obvious but still visible in this chart is that in 1980 the bottom 75% of taxpayers earned 43% of all income and that by 2007 that number had dropped to just 31.3% of all income.

In other words during the last three decades, nine out of every ten taxpayers have earned a reduced share of the total national income – they are relatively poorer than they were. (It is true that total income grew substantially during that period, so though their share is smaller, their total income actually was larger. However, the point being made here is not whether most Americans are worse off now than they were 30 years ago. The point is that most Americans have a substantially smaller share of the income earned in America than they used to. They are now benefitting less from our economy than they did in 1980.)

Within the data it is obvious that particularly the top 5% grew disproportionately richer – by a lot. It is also important to state that inherent in a capitalist system there is always going to be a degree of income inequality – that is the whole point of capitalism. However, no one should argue that the 1980’s (the Reagan years) were bad for capitalism, yet the change from 1989 to 2007 is very dramatic. The top 5% increased their share of the total pie by 35% since 1989 (an additional 10% of the pie went to them.)

There are many, many factors that changed from 1980 to 2007 that led to the dramatic increase in income inequality that this chart highlights. Usually when this is analyzed the emphasis goes to the changes that led to the increases for the top 5%. However, it is more important to look at the bottom 90% and address the problems there, if the vitality of capitalism in America is to be maintained. If capitalism only ends up working for the few – as they perceive it – it won’t work for anyone in no time at all.

During the last three decades the biggest shift in the U.S. economy relative to the middle class – who are all in that bottom 75% -- is in the continuing shift from an economy based on the production of goods to an economy based on the providing of services. Here is another simple chart.

                                                                                                       1980                    2009

People employed in the production of goods:                   25,000,000           19,000,000

People employed in the providing of services:                   67,000,000           112,000,000

In other words, the number of jobs in manufacturing was reduced by 24%. The number of jobs in the service sector increased by 82%.

The problem that arises in this shift from goods to services, is that a services based economy is by its nature more stratified. The “higher level” services, like banking, technology and healthcare pay disproportionately more than the lower level services, like fast food and maintenance. The importance of college level education also shows up in the data. The loss of manufacturing jobs was felt most in the middle class and those with low incomes. Our country starts being more stratified. The rich get very rich and everyone else struggles. The changes in the Adjusted Gross Income chart start resulting in changes in our political debates.

Now, if we are to restore a positive future for the next generation of children and reinvigorate the American Dream, it is essential that the right lesson be learned here. The challenge is NOT to take from the rich through higher taxes to give to the poor and the middle class through handouts and national benefits. The challenge is to grow the incomes of everyone not in the top 10% by creating more and better jobs. We must give middle America a greater stake in the national economy!

There is another aspect of this problem that must be mentioned. As a result of these income shifts, the bottom 50% of all taxpayers paid only 2.9% of all Federal income taxes in 2007. In 1980, this group paid 7% of all such taxes. What this means essentially is that one out of every two Americans really isn’t paying anything for their government – they are just taking the benefits from it. Like it or not, this changes their perception of government. It is one thing to get things for free, it is quite different if one has to pay for them. A big, bloated, charitable government looks great if you are not the one paying for it.

But also, capitalism is much more appealing to those who get the benefit of it – it isn’t so great if your share of it keeps getting smaller! So if we are to remain a country based on capitalist principles, we must solve the problem that results in the middle class, in particular, earning a reduced share of total income. We must create more and better jobs. That’s it – everything else will work from there. But it will take a clear and concerted effort. It is the most important thing for us to do. It cannot be assumed it will happen by itself. The last thirty years proves that. Just look at the data! Any other goal could forever change the nature of our country!