Episode 3: How Policy Created Financial Insecurity
In the previous article, I explained why depression is not the result of a chemical imbalance, but rather an economic one. The next question, then, is how this imbalance developed. The answer is that it did not happen by accident. It was the result of deliberate policy decisions made over decades.
To understand this, it helps to go back to 1945.
At the end of World War II, the United States was in an unprecedented economic position. Most industrialized nations had been devastated by the war. Their factories, infrastructure, and labor forces were severely damaged. By contrast, the U.S. mainland was untouched, and the country had already built a massive manufacturing base to support the war effort.
All the United States needed to do was shift from producing weapons to producing consumer goods. This allowed the country to dominate global manufacturing for roughly the next twenty years.
At the same time, the domestic policy environment strongly favored working-class Americans. Union membership was high, giving workers real bargaining power. The tax system was progressive, meaning higher earners paid higher rates, while working families paid relatively less. Wages rose alongside productivity, and a single income could often support an entire family. Strong social safety nets existed to support people during periods of unemployment or hardship.
This combination of industrial dominance and worker-friendly policy produced high levels of financial security. Living standards rose rapidly, and optimism about the future was widespread. This period represented the high-water mark for living standards in the United States. Notably, it was also a period of sustained GDP growth, demonstrating that high taxes on top incomes and corporations can coexist with strong economic growth and broadly shared prosperity.
That stability began to unravel in the 1970s.
A series of political crises in the Middle East led to sharp increases in global oil prices. At the time, the United States was heavily dependent on foreign oil. Nearly every sector of the economy relied on transportation powered by gasoline, so higher oil prices translated into widespread inflation across the entire economy.
At the same time, the global landscape had changed. By the 1970s, most industrialized nations had rebuilt their manufacturing sectors. The United States no longer held a monopoly on production and now faced international competition. Increased global supply drove prices down and placed pressure on companies to limit wage growth to preserve profits.
The combination of high inflation and stagnant wages is what economists refer to as stagflation.
This period of stagflation coincided with strong union membership, which is critical to understanding what happened next. Many union contracts included cost-of-living adjustments. When companies raised prices to offset higher oil costs, inflation increased. Because wages were tied to inflation through union contracts, employers were then required to raise wages as well. This back-and-forth between prices and wages created what economists call a wage-price spiral.
Around 1979, this conflux of factors reached an inflection point. A new narrative emerged that blamed unions for inflation. This narrative ignored the fact that inflation had already surged due to external shocks, particularly oil prices. Workers were not demanding higher wages arbitrarily. They were attempting to preserve their existing living standards in the face of rising costs.
Beginning in the early 1980s, the United States underwent a dramatic policy shift. Taxes on high incomes were cut. Industries were deregulated. Companies began aggressively offshoring jobs. At the same time, labor unions were systematically weakened, reducing workers’ ability to negotiate for higher wages.
Productivity continued to increase, but the benefits of that productivity no longer flowed to workers. Instead, the gains were captured almost entirely by corporate executives and shareholders.
For working Americans, the consequences were profound. Over the next 45 years, the cost of living rose steadily while real wages stagnated.
Consider the federal minimum wage. In 1980, it was $3.10 per hour. Adjusted for inflation, that is equivalent to roughly $12 per hour in 2025 dollars. Despite rising living costs, the current federal minimum wage remains $7.25 per hour. In real terms, the minimum wage today is just over half of what it was in 1980. Low-wage workers are objectively worse off than they were four and a half decades ago.
What about the median household? In 1981, median household income was $21,020, which is approximately $76,000 in 2025 dollars. The current median household income is around $85,000. On paper, that suggests a real increase of about 12 percent.
Yet this improvement does not feel real to most households, and there is a reason for that.
Standard measures of inflation rely on the Consumer Price Index (CPI), which tracks everyday goods such as food, household supplies, and gasoline. Between 1980 and 2025, CPI inflation was roughly 293 percent. Groceries now cost about three times what they did then.
However, CPI fails to capture some of the largest expenses households face. Over the same period, housing costs increased by more than 300 percent. Childcare costs rose by approximately 600 percent. Health insurance costs increased by over 650 percent. The cost of a college degree rose by more than 1,200 percent.
These increases occurred gradually, which made them easy to overlook. Living standards did not collapse overnight. The American dream did not die suddenly. It bled out slowly over the course of decades.
For young adults, the consequences are especially severe. Many enter the workforce only to find that entry-level jobs do not pay enough to live independently. Most must live with roommates or family members. Even then, they face high healthcare premiums, significant student loan debt, and an economy that increasingly favors part-time, contract, and gig work to minimize labor costs. Those who do not attend college often face even worse financial prospects.
These conditions are fertile ground for anxiety and depression. Therapy can help people cope with these pressures, but it cannot repair the underlying economic conditions that created them.
At this point, it should be clear how policy changes produced widespread financial instability. The remaining question is where all that money went. In the next article, the focus will shift to wealth concentration and how gains at the top have translated into despair at the bottom.