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Rumors of the American Dream’s Demise Are Exaggerated

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Rumors of the American Dream’s Demise Are Exaggerated

April 19, 2017

Stanford University professor Raj Chetty and colleagues released a blockbuster study at the end of 2016 concluding that the share of children earning more than their parents had declined from 90 percent to 50 percent over the latter half of the 20th century. This sparked a discussion about the fading of the American Dream and whether the next generation has more opportunity and brighter prospects than this one.

Fortunately a new paper from Joint Economic Committee scholar Scott Winship, formerly of the Manhattan Institute, provides more reason for optimism. He analyzes a range of mobility measures and finds that “contrary to some claims, the American dream abides.” However, he concludes that the American Dream it is not as robust as it should be, and on some measures, the level of mobility could be improved.

Absolute mobility is defined as the share of children who exceed their parents’ income at a specified age. While absolute mobility has declined from its peak, most children are better off than their parents, and this is especially true for poor children. Recent studies like the one from Chetty and his colleagues get the direction of the trend right, but overstate the magnitude of the effect.

Winship finds that making some adjustments to account for family size, using a more accurate measure of inflation and accounting for transfer programs increases the rate of absolute mobility from the 50 percent reported in the Chetty study to 68 percent.

Even this figure understates the degree of absolute mobility today’s children can hope for due to the effects of the Great Recession. Prior to 2008, approximately three out of four children were better off than their parents. The extent to which most children become better off than their parents is substantial: the typical adult is more than 25 percent better off.

While absolute mobility is important, relative mobility should also be understood when considering the status of the American Dream. Parents not only care that their children can surpass them, but that they also have the opportunity to reach much greater heights relative to their peers, perhaps by entering a skilled profession such as becoming a doctor. Children born into middle class families do have a robust amount of relative mobility, but a worryingly large number of children born at the lower end of the income spectrum remain there.

In a meritocratic society where hard work and talent are the primary drivers of success, these barriers to advancement would be lower, and the share of children moving to higher income quintiles would be higher. This lack of mobility also corresponds to another worrying trend for the American economy: a decline in competition.

Many poor children hoping to climb the economic ladder through hard work and diligence face a barrier to how high they can climb, and the majority of children born into affluence can expect to remain there. Forty-six percent of children born into the bottom fifth of family income will stay there, and only 10 percent will make it into the two top quintiles. At the other end, 41 percent of children born into the top fifth will stay there.

Winship introduces a sibling similarity measure, defined as the likelihood that adults will have a same-sex sibling in the same economic range. As with the traditional relative mobility measures, at both ends of the spectrum these siblings are likely to end up in the same income quintile, while those siblings born into families in the middle of the income distribution do not strongly resemble each other, and other factors aside from familial circumstance appear to be the primary drivers of their trajectory.

Increasing the degree of school choice and accountability could allow more children to develop the skills and obtain the education they will need when they enter the workplace. Reforming welfare programs that reduce the instances of poverty traps, when families lose almost all of each additional dollar earned through higher taxes or increased benefits, could make it easier for them to rise from the bottom end of the income spectrum and join the middle class. Regulations such as occupational licensing and restrictions that slow progress in new industries also reduce opportunity.

One other reason for the disappointing recent trends in mobility is slower economic growth. Policies that lead to more job creation and more robust growth would bolster mobility.

The American Dream lives on, but not as vibrantly as it could. Most children will be better off than their parents, but too many barriers remain that prevent many children from using their capabilities to the utmost extent. Enacting reforms to remove these obstacles would increase opportunity and economic mobility.

Charles Hughes is a policy analyst at the Manhattan Institute. Follow him on twitter @CharlesHHughes

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