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The American Dream is quickly disappearing

from David Ruccio

mobility

 

My students are worried—many of them obsessed by the possibility—they’re not going to be better off than their parents.

As it turns out, they’re right.  

According to new research by Raj Chetty et al. (pdf), the rates of “absolute income mobility” (the fraction of children who earn more than their parents) have fallen from approximately 90 percent for children born in 1940 to 50 percent for children born in the 1980s. And the likelihood is, that rate is going to fall even more for the next generations. That’s because rising inequality—not slower economic growth—is the major factor contributing to declining income mobility.

In his 1931 book, The Epic of America, writer and historian James Truslow Adams defined the American Dream as the “dream of a land in which life should be better and richer and fuller for everyone, with opportunity for each according to ability or achievement.” Such a dream has been central to the legitimacy of capitalism—with each generation supposed to be better off than the previous one. Growing inequality, especially from the mid-1970s onward, took a big chip out of that dream, since it challenged the idea of “just deserts.” But at least there was mobility—that children could still have a life that was “better and richer and fuller” than that of their parents.

Now, it seems that part of the American Dream is quickly disappearing, precisely because of growing inequality.

For each succeeding generation—those born in 1940, 1950, 1960, 1970, and 1980—the chance of making more money than their parents has fallen—from 92 percent (for those born in 1940) to 50 percent (for 1980). That’s an enormous decrease, which is the key statistical conclusion of the study.

But the authors also consider two counterfactual scenarios: “higher GDP growth” (which asks, what would have happened to absolute mobility for the 1980 cohort if the economy had grown as quickly during their lifetimes as it did in the mid-twentieth century, but with GDP distributed across households as it is today?) and “more broadly shared growth” (which asks, what if total GDP grew at the rate observed in recent decades, but GDP was allocated across households as it was for the 1940 birth cohort?). What they find is that less equality is more significant than higher growth:

Under the higher growth counterfactual, the mean rate of absolute mobility is 62%. This rate is 12 percentage points higher than the empirically observed value of 50% in 1980, but closes only 29% of the decline relative to the 92% rate of absolute mobility in the 1940 cohort. The increase in absolute mobility is especially modest given the magnitude of the change in the aggregate economy: a growth rate of 2.5% per working-age family from 1980 to 2010 would have led to GDP of $20 trillion in 2010, $5 trillion (35%) higher than the actual level.

The more broadly shared growth scenario increases the average rate of absolute mobility to 80%, closing 71% of the gap in absolute mobility between the 1940 and 1980 cohorts. The broadly shared growth counterfactual has larger effects on absolute mobility at the bottom of the income distribution, whereas the higher growth counterfactual has larger effects at higher income levels. Since income shares of GDP are larger for high-income individuals, higher growth rates benefit those with higher incomes the most, while a more equal distribution benefits those at the bottom the most.

As we know, neither presidential candidate made inequality a focus of their campaign. President-elect Donald Trump, however, did point out the economy is rigged—and he appealed directly to the anxieties of workers who feel the economy is not delivering for them in the same way it did for their parents. As it turns out, Chetty et al. highlight several sources of those anxieties in the Trump coalition.

They find barely two in five men born in the mid-80s grew up to earn as much, at age 30, as their fathers did at the same age. They show average rates of mobility falling particularly fast in Rust Belt states, especially Michigan and Indiana. And they find a much steeper drop in absolute mobility for the middle-class than for the poor.

Maybe Trump’s victory signals, like George Carlin’s warning a decade earlier, it’s time we stop dreaming and wake up to the end of the American Dream.

  1. December 18, 2016 at 5:53 am

    There is some disagreement about what the American dream is. According to the man who coined the phrase, James Truslow Adams, the American dream is ‘… being able to grow to fullest development as men and women, unhampered by social orders which had been erected for the benefit of classes rather than for the simple human being of any and every class.” But today and for most of the history of America there have been many “social orders” erected for the hereditary rich, the bankers, the corporations, and few for the “simple human being.” And the situation is now so severe that it threatens the future of the nation, and with Donald Trump the future of the world. Per George Carlin, “It’s called the “American Dream’ because you have to be asleep to believe it.” American conservatives and progressives are equally to blame for this situation. Bobby Jindal sums up the conservatives’ attack on that dream, “We need to restore the American Dream so it’s more about opportunity and growth and not redistribution.” Translation: whatever you can get in any way you get it you get to keep it all. Per Leonard Boswell, “The American Dream is one of success, home ownership, college education for one’s children, and a secure job to provide these and other goals.” Translation: everything we want is guaranteed. Nowhere in any of this is there reference to democracy, supporting human rights, or battling for genuine equality. In other words, if these comments are correct the American Dream is a purely commercial proposition. No moral concerns whatsoever.

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