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December 16th, 2016 at 3:23 pm

The American Dream has finally been quantified

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The phrase “American dream” was invented during the Great Depression. It comes from a popular 1931 book by the historian James Truslow Adams, who defined it as “that dream of a land in which life should be better and richer and fuller for everyone.”

In the decades that followed, the dream became a reality. Thanks to rapid, widely shared economic growth, nearly all children grew up to achieve the most basic definition of a better life — earning more money and enjoying higher living standards than their parents had.

These days, people are arguably more worried about the American dream than at any point since the Depression. But there has been no real measure of it, despite all of the data available. No one has known how many Americans are more affluent than their parents were — and how the number has changed.

It’s a thorny research question, because it requires tracking individual families over time rather than (as most economic statistics do) taking one-time snapshots of the country.

The beginnings of a breakthrough came several years ago, when a team of economists led by Raj Chetty received access to millions of tax records that stretched over decades. The records were anonymous and came with strict privacy rules, but nonetheless allowed for the linking of generations.

The resulting research is among the most eye-opening economics work in recent years. You’ve probably heard some of the findings even if you don’t realize it. They have shown that the odds of escaping poverty vary widely by region, for instance, an insight that has influenced federal housing policy.

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After the research began appearing, I mentioned to Chetty, a Stanford professor, and his colleagues that I thought they had a chance to do something no one yet had: create an index of the American dream. It took them months of work, using old Census data to estimate long-ago decades, but they have done it. They’ve constructed a data set that shows the percentage of American children who earn more money — and less money — than their parents earned at the same age.

The index is deeply alarming. It’s a portrait of an economy that disappoints a huge number of people who have heard that they live in a country where life gets better, only to experience something quite different.

Their frustration helps explain not only this year’s disturbing presidential campaign but also Americans’ growing distrust of nearly every major societal institution, including the federal government, corporate America, labor unions, the news media and organized religion. Yet the data also helps point the way to some promising solutions.

It begins with children who were born in 1940, less than a decade after the publication of Adams’s book, “The Epic of America.” The researchers went into the project assuming that most of these children had earned more than their parents — but were surprised to learn that nearly all of them had, said David Grusky, one of the researchers, also of Stanford. About 92 percent of 1940 babies had higher pretax inflation-adjusted household earnings at age 30 than their parents had at the same age. (The results were similar at older ages and for post-tax earnings.)

The few 1940 children who earned less than their parents were also, for the most part, doing just fine. They were generally earning less because they had grown up rich — children of top corporate executives, say, who became, or married, doctors, lawyers or professors.

Achieving the American dream was a virtual guarantee for this generation, regardless of whether people went to college, got divorced or suffered a layoff. Why? Because they spent their prime working years in an economy with two wonderful features. It was growing rapidly, and the bounty from its growth flowed to the rich, the middle class and the poor alike.

Not even the oldest baby boomers, born in the late 1940s and early 1950s, would be quite so lucky. Economic growth began to slow as they were entering the job market in the 1970s, thanks in part to the energy crises. Still, more than three-quarters of these early Baby Boomers would ultimately make more than their parents.

You can see the effects on the American dream in the charts here. Each line shows the percentage of children born in a given year who out-earned their parents, with children who grew up poor on the left and rich on the right. The line steadily falls over time, across every economic class.

In the 1980s, economic inequality began to rise, a result of globalization, technological change, government policies favoring the well-off and a slowdown in educational attainment and the work force’s skill level. Together, these forces pinched the incomes of the middle class and the poor. The tech boom of the 1990s helped — slowing the decline of the American dream — but only temporarily.

For babies born in 1980 — today’s 36-year-olds — the index of the American dream has fallen to 50 percent: Only half of them make as much money as their parents did. In the industrial Midwestern states that effectively elected Donald Trump, the share was once higher than the national average. Now, it is a few percentage points lower. There, going backward is the norm.

Psychology research has shown that people’s happiness is heavily influenced by their relative station in life. And it’s hard to imagine a more salient comparison than to a person’s own parents, particularly at this time of year, when families gather for rituals that have been repeated for decades. “You’re going home for the holidays and you compare your standard of living to your parents,” Grusky, a sociologist, says. “It’s one of the few ties you have over the course of your entire life. Friends come and go. Parents are a constant.”

How, then, can the country revive Adams’s dream of a “better and richer and fuller” life for everyone? The solution has to involve some combination of faster economic growth and more widely shared growth.

The bad news is that lifting G.D.P. growth is terribly difficult. Trump has promised to do so, but offered few specifics. If anything, he favors some of the same policies (deregulation and tax cuts) that have failed in recent decades.

The better news — potentially — is that lifting growth is the less important half of the equation, notes Nathaniel Hendren of Harvard, another of the researchers: The rise of inequality has damaged the American dream more than the growth slowdown.

One way to think about inequality’s role is to remember that the American economy is far larger and more productive than in 1980, even if it isn’t growing as rapidly. Per-capita G.D.P. is almost twice as high now. By itself, that increase should allow most children to live better than their parents.

They don’t, however, because the fruits of growth have gone disproportionately to the affluent.

The researchers ran a clever simulation recreating the last several decades with the same G.D.P. growth but without the post-1970 rise in inequality. When they did, the share of 1980 babies who grew up to out-earn their parents jumped to 80 percent, from 50 percent. The rise was considerably smaller (to 62 percent) in the simulation that kept inequality constant but imagined that growth returned to its old, faster path.

“We need to have more equal growth if we want to revive the American dream,” Chetty says.

Given today’s high-tech, globalized economy, the single best step would be to help more middle- and low-income children acquire the skills that lead to good-paying jobs. Notably, most college graduates still earn more than their parents did, other data show — yes, even after taking into account student debt.

But education is not the only answer. Incomes have also stagnated because of the rise of corporate powerand the weakening of labor unions, leading profits to rise at the expense of wages. The decline of two-parent families plays a role, too. And tax policy has not done enough to push back against these forces: The middle class, not the affluent, deserves a tax cut.

The painful irony of 2016 is that nostalgia and anger over the fading American dream helped elect a president who may put the dream even further out of reach for many people — taking away their health insurance, supporting ineffective school vouchers and showering government largess on the rich. Every one of those issues will be worth a fight.

If the American dream could survive the Depression, and then thrive in a way few people imagined, it can survive our current troubles.

Image Credit: Cohen/Ostrow/Ocean/Corbis
Article via nytimes.com

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