By Scott Winship
Monday, May 15, 2017
Is the American dream on life support? That’s the
perennial claim of “declinists,” who are convinced that the American spirit of
opportunity is at death’s door. That claim was recently bolstered by research
from a team of top economists, who found that half of today’s 30-year-olds are
worse off than their parents were at the same age. A closer look at that study,
however, reveals that opportunity is alive and well. That does not mean we
should be complacent about removing barriers to success for those born
disadvantaged, but neither should we worry that the nation’s best days are
behind us.
For a long time, some declinists reluctantly acknowledged
that Americans enjoy much higher living standards than those of previous
generations. But, they argued, it’s harder to rise from rags to riches than it
used to be. That claim ran against 20 years of academic research on “relative
economic mobility” — moving from, say, the bottom fifth to the middle fifth of
family income between childhood and adulthood. Those studies consistently found
that any changes in how often such transitions happen have been so small as to
be difficult to detect reliably.
That academic consensus was ratified two years ago by
Stanford University economist Raj Chetty and his colleagues, who used tax
records to show that relative mobility has been flat since the early 1970s. But
their latest paper gives the declinists an out. “The Fading American Dream”
finds that “absolute mobility” — exceeding the income of one’s parents — has declined
dramatically over the past 45 years. In 2014, 30-year-olds had only a 50–50
chance of beating their parents, whereas nearly all 30-year-olds did in 1970.
Are the declinists finally — finally! — right that
today’s children will be the first generation to do worse than their parents?
No.
For starters, absolute mobility is higher than the Chetty
paper suggests. Because of delayed marriage, rising divorce, delayed
childbearing, and reduced fertility, families are smaller than they used to be.
That means that a given level of income needs to feed fewer mouths than it did
in the past, so adults today can be better off than their parents even when
their income is lower. When Chetty and his colleagues adjusted incomes for
family size, 60 percent of today’s 30-year-olds were better off than their
parents at the same age.
In a recent paper for the Archbridge Institute — a new
Washington, D.C., think tank focused on expanding opportunity — I summarize the
evidence on economic mobility in America. Using a different data source than
the Chetty team, I find that 64 percent of 30-year-olds in 2010, 2011, and 2012
had higher size-adjusted incomes than their parents at the same age — very
close to the average rate of 62 percent found by Chetty during those years.
I then make two additional improvements to the absolute
mobility measure. I adjust incomes for the rise in the cost of living, using
the superior price index preferred by the Federal Reserve Board — whose mandate
is to keep inflation under control — and the Congressional Budget Office. (The
price index used by the Chetty team is known to overstate inflation.) That
raises the absolute mobility rate to 67 percent. Adding income from federal
cash transfers — both social-insurance programs, such as unemployment compensation,
and safety-net benefits, such as Temporary Assistance for Needy Families —
raises the rate to 68 percent.
Better data would show even more adults exceeding their
parents’ income. Neither my estimates nor Chetty’s count employer benefits,
such as health insurance or retirement contributions, as income, nor do they
count federal non-cash benefits, such as housing assistance or food stamps.
These employer and federal benefits have increased over time relative to cash
income. The income estimates do not look at disposable income after taxes
either. Tax rates have declined over time, and refundable tax credits to
low-income families have increased.
Furthermore, research suggests that even the price index
I use overstates inflation, thereby understating the rise in income over time.
Finally, these estimates miss adults whose parents immigrated to the United
States after age 30 or who are themselves immigrants. It seems likely that when
all is said and done, 70 percent or more of today’s 30-year-olds are better off
than their parents were at the same age.
That is still lower than in 1970. But 30-year-olds in
1970 were born towards the end of the Great Depression. Exceeding the income of
their parents was relatively easy compared with today. Few of today’s
30-year-olds would trade the higher absolute mobility their 1970 counterparts
enjoyed for contemporary living standards.
My research shows that today’s 30-year-olds typically are
richer than their parents by more than 25 percent. That translates into over
$10,000 more than their parents. And as noted, these are conservative estimates
of absolute mobility.
Rich children are less likely than poor children to
exceed their parents’ incomes, because a rich child can be affluent as an adult
and still be poorer than his parents, while a poor child can be poor as an
adult and still be richer than his parents. We care more about the poor adult’s
poverty than we do about the rich adult’s lack of absolute mobility.
The same should be true in assessing the lower absolute
mobility in a richer America. The Chinese today are likely experiencing
sky-high absolute mobility rates. Should we wish that we were in China rather
than in the nation that remains the land of opportunity? We should not.
The American dream — even in an affluent United States —
is alive and well. Increasing absolute mobility will require us to boost
economic growth through lower corporate income taxes, deregulation, deficit
reduction, higher-skilled immigration, and revived entrepreneurship. The
mistaken belief that living standards are falling will lead us to embrace
counterproductive policies that will perversely reduce absolute mobility rates.
And that would actually produce the fading American dream that the declinists
wrongly proclaim today.
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