There are places in the world where the majority of people are doomed to live no better than their parents and grandparents did. Places where a poor child from the slums might as well dream of being an astronaut as dream of having a decent middle-class job. Places where the children of the rich get even richer while the children of the poor stay poor.
Places like Burma and Kenya and the United States.
Well, at least if you’re a poor Kenyan your son just might grow up to be president of the United States. For most poor Americans, even state senator is out of reach. You’d be lucky to find the money to send your child to college, never mind law school.
As that son of a Kenyan said in his most recent State of the Union address, America is becoming “a country where a shrinking number of people do really well, while a growing number of Americans barely get by.” The numbers back him up. Both executive compensation and the poverty rate are at or near all-time highs.
While Democrats have a reputation for caring about poverty and inequality, Republicans usually focus on the idea that in America anyone who works hard can succeed. America is the country of entrepreneurs. The rags-to-riches story is one of the foundations of our national identity.
The only problem is that it’s not true – or, at least, it’s not true anymore.
According to data from the Organisation for Economic Cooperation and Development (OECD), the United States has some of the lowest rates of entrepreneurship in the world. Even at the top of the boom in 2005-2007, only two countries (Belgium and Norway) had lower levels of new business formation than the United States. The other 22 countries studied by the OECD all had higher rates of new business formation than the United States.
In fact, over 50 percent of Americans work for large companies of 250 employees or more. Only two other countries in the world have economies that are so dominated by large firms: Slovakia and Luxembourg.
We are not a nation of entrepreneurs. We are a nation of workers. And over the past forty years the American worker has gone from riches to rags, not the other way around.
For more than a century, from 1870 to 1973, the wage income of the typical American worker rose an average of 2 percent per year, as I have documented elsewhere. Since 1973, it has fallen. It has fallen most for the young. A typical American 30-year-old makes an astounding 27 percent less today than a typical 30-year-old made in 1973 (adjusted for inflation).
Back in the late 19th century, when the actual Horatio Alger was writing Horatio Alger stories about young working-class people rising into the middle class through hard work and careful saving, actual young working-class people were rising into the middle class through hard work and careful saving. With today’s median wage of $16.57 an hour, that’s not likely.
Even Republicans have come to realize that rags to riches just doesn’t work anymore. Republican presidential runner-up Rick Santorum did more than anyone else to inject this issue into the campaign. “Believe it or not, studies have been done that show that in Western Europe, people at the lower parts of the income scale actually have a better mobility going up the ladder now than in America,” he said during the October 19 Republican presidential debate in Las Vegas.
Believe it. Santorum may not be right about much, but he’s right about mobility. Academic studies typically show that around 45 percent of income differences between families are transmitted from one US generation to the next. This is about twice as high as the equivalent figures in Western Europe and Australia.
More careful economic estimates suggest that the American class system is even more sclerotic than that. In a highly technical report in the Review of Economic and Statistics, Federal Reserve economist Bhashkar Mazumder showed that prior researchers have seriously underestimated the degree to which children inherit their parents’ positions in society.
His best estimate is that the intergenerational stickiness in income is around 60 percent. In other words, over half of a person’s economic status in life is predetermined at birth. Mazumder concludes that it would take an average of five generations for a family’s offspring to rise from low income to middle income.
It wasn’t always this way. Time was when opportunities for advancement in America were expanding, not contracting. Research from the Federal Reserve Bank of Chicago shows that intergenerational mobility increased continuously from 1940 to 1980. Only then did it start to fall.
By 2000 (the final year of the study covered), mobility in America was lower than where it had started in 1940.
What can we do to reinvigorate the American dream? The American people don’t need experts to answer this question for them. Surveys show that the American people are quite capable of answering it on their own.
A 2011 poll from the Pew Charitable Trusts’ Economic Mobility Project found that 83 percent of Americans “support a government role in promoting upward economic mobility.” The top three things Americans said the government should do? Provide all children with a quality education, promote job creation and ensure equal opportunity – all of which President Obama called for in his State of the Union Address.
Government can and should promote greater social mobility. Inevitably, however, greater mobility for the poor and working classes comes at the cost of higher taxes and fewer privileges for the middle and upper classes. Economic opportunity is incompatible with an economy dominated by $8-an-hour service jobs.
We can return to an America of boundless upward mobility only if we return to an America of well-funded schools, good union jobs and top-quality government services supported by progressive taxes on those who can most afford to pay. Like all good things, mobility comes at a price. Those who have achieved the American dream have to be willing to share it with everybody else. Sadly, it seems they no longer are.