This analysis of economic conditions in the United States challenges the view, emphasized during the 1994 Congressional elections, that restraining government social spending and reforming welfare should be the country's top domestic policy priority. It is argued instead that the major domestic priority should be to address an economic environment that has been hostile toward less-skilled workers since the early 1970s. Americans tend to cite the behavior of the disadvantaged as the primary cause of poverty, rather than the economic changes that have made it so hard for millions to make ends meet. The poor and the middle class have fared so badly because of the erosion of labor market opportunities, not because of the erosion of the work ethic. Policies are proposed that would reduce poverty by supplementing the earnings of low-wage workers and increasing the employment prospects of the jobless. Demand-side policies of this sort are essential for correcting a labor market that cannot absorb less-skilled and less-experienced workers. (Contains 16 tables, 24 figures, and 207 references.) (SLD)