American Eagle © Steve Allen, Brandx Pictures, Photolibrary

Who killed the American dream?

Whatever happened to the promise that anyone could build a better life by honest labor? That my life would be better than my parents', and that my kids' lives would be better than mine?

That America is gone, now seen only in old Frank Capra movies late at night.

Today in America, the rich are pulling away from the rest of us, taking almost all of the gains for themselves, leaving the middle class scrambling just to stay where they are, and forcing the poor to survive on an increasingly frayed safety net.

A lot of attention has been given to the issue of the widening of inequality of opportunities and outcomes, in part because a chilling new book by New Yorker writer George Packer, "The Unwinding," which tells the horrifying story of how the dream was lost.

More recently, an academic debate in a forthcoming issue of the Journal of Economic Perspective has brought inequality back in the news, thanks to a bluntly argued (and titled) paper "Defending the One Percent" by Harvard economist Greg Mankiw (who is a former adviser to George W. Bush, John McCain and Mitt Romney).

In his paper, Mankiw explains why the top 1% are doing so well while the rest of us sprint hopelessly to catch up: The rich are simply better than us. They make more money because they contribute more to society than we do. They are smarter, have the skills that are in high demand, have better entrepreneurial instincts, and work harder. What's more, their kids inherit these traits genetically.

Not only are the rich better than us, the world is also increasingly becoming their kind of place. Technological changes over the past 30 years have made their advantages even more rewarding than before.

The top 1% really do earn their money, and any effort to reduce inequality would make us all poorer, Mankiw says. We'd have to do without the innovations of people like Steve Jobs, J.K. Rowling and Greg Mankiw.

Mankiw takes it as a given that compensation equals marginal product. The rich earn their money because someone pays it to them, and that someone must have a good reason to pay that much. The markets decide pay, that's just Econ 101, and on that topic.

Plenty of pundits have responded to Mankiw's thesis, but none more effectively than Josh Bivens and Larry Mishel of the Economic Policy Institute, who also contributed a paper to the special issue of the JEP.

It turns out that it's not so much what you know, as Mankiw argues, but how much power you have, especially the power to extract economic rents. Bivens and Mishel show that the increase in the incomes of the top 1% over the past 30 years owes more to successful rent-seeking than it does to efficient and competitive markets rewarding education and skills.

What do economists mean by "rents"? Simply put, it's the income that's received over and above what would be required to induce the person to supply their labor or capital.

For instance, Bevins and Mishel say, "it seems likely that many top-level professional athletes would continue to supply essentially the same amount of labor to their sport, even if their salary was reduced by some substantial fraction, because even the reduced salary would be much higher than their next-best options."