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Hedrick Smith, author of Who Stole the American Dream?, explains how the land of opportunity became the land of inequality.

How would you define the American Dream?

It was pretty simple to define the American Dream in the ’40s, ’50s, ’60s, and ’70s, because so many people were living it. It was a steady job with steadily rising pay over your lifetime career, health benefits, a lifetime pension from your employer, the opportunity to buy your own home, and the hope that your kids would live a better life.

Is it really a uniquely American concept?
No, I don’t think so at all. I think people in Canada and Germany and England and France and Asia aspire to the same thing. It’s pretty basic.
I think the reason people think of it as the American Dream is that so many people in America achieved it. In the 1950s, when Richard Nixon had his famous “kitchen debate” with then Premier of the Soviet Union Nikita Khrushchev, Nixon said, “We’re the ones who have a truly classless society – you Communists boast about a classless society, but we have it.” So, I think it became embedded in the American political and economic psyche that that’s what should be delivered.
What was Henry Ford’s role in the American Dream?
Ford instituted the $5 day. That doesn’t sound like much today, but at the time he instituted it back in 1914, that was a tremendous pay boost for ordinary workers in the Ford plants that were making Model T cars.
Ford reasoned that this was not only fair, but was also good business: If you pay people well, they can become good consumers, and if they’re good consumers they can buy Model T cars and everything else.
What Ford was talking about, without articulating the whole theory, was what became known among economists as the “virtuous circle of growth.”
General Motors, Ford, Chrysler, U.S. Steel, General Electric … all kinds of big companies did this. They had contracts with strong unions back in the ’40s, ’50s, and ’60s. They had solid job guarantees, good pay, health benefits, lifetime pensions … the kinds of things that were the bedrock of the American Dream.
When they paid well, their tens of millions of workers went out and spent that money, and all that consumption is what drove the American economy. Corporations responded by expanding their production, hiring more workers, building new plants, and buying new equipment, and that spawned another cycle of growth. This went on for 30 or 40 years.
Now, we’ve dismantled that. This whole drive to cut pay, cut jobs, and downsize offshore has not only hurt the middle class, it has hurt economic growth generally.
aterpillar ¬– a big manufacturer of farm equipment out in the Midwest – had record profits in 2011, and imposed a wage freeze on its workers. That means the corporate bosses and the Wall Street investors are going to make more money, but the workers are going to take it in the neck. And they’re not going to have the purchasing power to help drive the American economy.

Here we are, 41 months after the bottom of the recession, and we still have high unemployment. Everybody’s blaming Washington and Obama, but the real problem lies in the private sector. The private sector’s been sitting on nearly $2 trillion, spending $500 billion buying back their own stock instead of hiring people, expanding, and paying their workers more.

What are the consequences of that?
The long-term consequences are slow growth, stagnant living standards for the American middle class, and a mediocre economic performance – not just this year, not just next year, but over a long time.
People forget that there have been other periods in American history – not just the Great Depression of the 1930s, but the long depression of the 1880s and 1890s – where this pattern of concentrated wealth, suppressed wages, and slow growth took place. We could live with that kind of situation for 20 or 30 years.
Does the American Dream, such as it was, still exist anywhere other than America?
I think it’s coming to fruition in a bunch of countries. The Germans, for instance, have done an awful lot better for their economy and their middle class than we have in America. German average wages since 1985 have risen five times as fast as in America. In the 2000 decade, Germany ran a $2 trillion trade surplus – shipping out more than it was buying from the world – and the United States ran up a $6 trillion trade deficit. The Germans were pursuing a social contract that protected the German Dream, if you will, much better than we protected the American Dream. And it not only paid off for the middle class, it paid off for the country as a whole.