Introduction
Whilst listening to the Freakonomics podcast yesterday I came across an interesting discussion.
http://freakonomics.com/podcast/american-dream-really-dead/
The podcast asked the question, "Is the American Dream Really Dead?".
If focused on the research of a number of economists and organisations, in particular the work of Raj Chetty looking at the issue of upward income mobility in the USA.
Upward income mobility is seen as the "defining feature" of "the American Dream" and refers to the ability of children to earn more than their parents.
Raj Chetty
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Chetty is a professor of economics at Stanford University who is using big data and computational methods to analyse economic issues.
He is also part of something called the Equality of Opportunity Project which states:
"We use big data to identify new pathways to upward mobility."
They have a lot of papers and data on their website including a downloadable version of the information that Chetty Discusses on the podcast:
Link for the PDF: http://www.equality-of-opportunity.org/papers/abs_mobility_paper.pdf
The Paper - the Fading American Dream
The paper is actually quite long at 54 pages. A large chunk of this is taken up with statistical data, figures and supplementary materials.
The authors use a number of data sources including that taken from Censuses and Tax records to construct their study.
Main Findings
The basic "take home" finding is that:
"rates of absolute mobility have fallen from approximately 90% for children born in 1940 to 50% for children born in the 1980s. The result...is robust to the choice of price deflator, the definition of income, and accounting for taxes and transfers"
This would suggest that a central tenet of the "American Dream" - that of upward mobility has almost halved in the last half century.
There also seemed to be substantial geographic and demographic variability:
"Absolute mobility fell in all 50 states between the 1940 and 1980 cohorts, although the rate of decline varied, with the largest declines concentrated in states in the industrial Midwest states such as Michigan and Illinois. We also find substantial declines in absolute mobility for both sons and daughters when income is measured at the household level. The decline in absolute mobility is especially steep – from 95% in the 1940 cohort to 41% in the 1984 cohort – when we compare the individual earnings of sons to their fathers."
What is the Cause of the Decline?
The authors consider this:
"There have been two important macroeconomic trends that have affected the incomes of children born in the 1980s relative to those born in the 1940s: lower Gross Domestic Product (GDP) growth rates and greater inequality in the distribution of growth (Goldin and Katz 2008)."
In order to study these factors they used computer simulations on the actual statistics to adjust them for scenarios of both higher GDP growth and reduced inequality in growth distribution.
In the higher GDP simulation they found:
"absolute mobility rises to 62%, closing 29% of the gap in absolute mobility between the 1940 and 1980 birth cohorts"
So this would only appear to be responsible for under a third of the difference.
In the better growth distribution (but stable GDP) scenario they found:
"the rate of absolute mobility rises to 80%, closing 71% of the gap in absolute mobility between the 1940 and 1980 cohorts"
This suggests that the decline in upward mobility is primarily an issue of unequal growth distribution rather than GDP.
GDP growth is a factor but if this issue is to be tackled it cannot done so purely through growth - although growth might help.
Statistics
There is the old line that one often hears attributed to British Prime Minister Benjamin Disraeli:
"There are lies, damned lies and statistics."
By it's nature a paper of this kind contains a huge amount of statistics.
The sheer amount of data presented here makes it quite hard to follow and assess.
One could see this as one of the caveats of the big data approach.
I will therefore apologise in advance if I have misunderstood anything.
Exclusions Are Hard To Assess
Using tax and census data by definition excludes certain groups because not everyone pays tax and not everyone fills in census forms.
The authors consider those with no tax returns to have an income of "0". Parent's with this rating are excluded from the data.
The author's do address this somewhat:
"This does not pose a problem for measuring absolute mobility because children whose parents have zero income always earn at least as much as their parents. We calculate the fraction of parents with zero income in each cohort based on Census data and include these individuals when computing average rates of absolute mobility, assigning the group of children whose parents have zero income an absolute mobility rate of 100%."
I can't really speak to the validity of this method - one would assume that it reduces the likelihood of over overestimating the changes to upward mobility.
Immigrants
The authors also excluded immigrants due to difficulties of assessing parental incomes.
I can understand why this was done but in a nation which is substantially formed from immigrants this is a large demographic to exclude.
The concept of the "American Dream" is perhaps even greater for foreigners and people of non US birth who see it as a land of opportunity.
The authors used a substantial amount of statistical computation to make estimates for overcoming other gaps so I was surprised that a workaround was not found for this.
I am not an economist or statistician though so perhaps there is some reason which makes this a lot harder.
Time to Peak Lifecycle Earnings
Another possible anomaly that was considered is the fact that in modern times it may take longer for people to reach their maximal income (peak lifecycle earnings).
What most people may have achieved in their 30s fifty years ago might only be achieved in people's 40s or even later now.
The authors did consider this:
In our baseline analysis, we measure children’s incomes at age 30. One may be concerned that children take a longer time to reach peak lifecycle earnings in more recent cohorts, which could lead to a spurious downward trend in rates of absolute mobility. Figure 3C addresses this concern by replicating our baseline analysis measuring income at age 40 for children (for the 1940-74 cohorts) and at ages 35-45 for parents. This series continues to exhibit a sharp decline in absolute mobility across birth cohorts. The time pattern of the decline is shifted backward by approximately 10 years, consistent with measuring incomes 10 years later.
So this suggests that it made little difference according to their analysis (see graph).
A "Blip" in the Data
One final interesting finding in regards to the overall decline in mobility is that:
"The decline paused for children born in the late 1960s and early 1970s, whose incomes at age 30 are measured in the midst of the economic boom of the late 1990s. Absolute mobility then continued to fall steadily in the remaining birth cohorts."
This would correspond to the growth of the internet.
I wonder if we could see a similar boost as a result of blockchain technologies like Bitcoin and Steemit in future years?
Many have compared the current state of blockchain technology to the Internet in the 1990s and it is easy to see the parallels.
Discussion
The findings of the study are certainly interesting and the reduction in social mobility will probably chime with a lot of millennials who are in the current jobs market.
I think there is a general perception that the opportunities for people now are considerably less than those for their parents.
The study would also suggest that there are certain areas such as mid-western states that were traditionally industrial hubs where the inequality is even greater.
The finding that this is more a problem of inequality of growth distribution rather than GDP growth (about 70% vs 30%) will probably also resonate with a lot of people.
It is perhaps not a coincidence that Donald Trump directly addressed some of these issues - indeed in one of the audio clips in the podcast he actually says:
"The American Dream is dead".
It would also be interesting to see how these social mobility findings apply in other countries.
They do actually discuss this a little in the podcast.
In relation to mobility from the lowest income 20% to the highest 20% the rates of social mobility are slightly higher in the UK.
The rates for the US are about 6% for this group, in the UK they are about 6%.
Apparently Canada is the "land of opportunity" for the poorest people because the rate there is about 13%.
I would be interested to see how the overall rates compare with these figures.
Conclusion
I hope you have found this post useful.
I think the findings that upward mobility is declining don't just apply to the US.
There is at the very least a perception that it applies to most of the developed world.
Personally I think it is a bit early to say that the "American Dream" is dead. I think this is a concept that is bigger than just a single measure of mobility.
I am not an American and the idea of the "dream" means something to me too. It is about striving and working towards bettering yourself.
I believe it is one of the most successful and important American exports and I don't think it will ever truly "die".
No matter how tough times are it will always exist in people's minds and, dare I say, hearts.
What do you think?
References
- Chetty, Raj, David Grusky, Maximilian Hell, Nathaniel Hendren, Robert Manduca, and Jimmy Narang. 2016. “The Fading American Dream: Trends in Absolute Income Mobility Since 1940.” NBER WORKING PAPER SERIES, December. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2883926.
Thank you for reading
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I believe this platform and things like it will play a role in keeping the American dream alive.
It has definitively increased my overall income.
Cool:)
I hope so:)
Steemit is international though. So perhaps it will usher in the world-wide dream.
I think I will have to disagree with you on this one, @thecryptofiend. I would say the American dream died a very long time ago.
Some would say it was when the Federal Reserve was established, but I think it was when big business fully infiltrated the government, resulting in the implementation of a mass of regulations that made it very difficult for new businesses to get started.
When small businesses suffer, the opportunity for prosperity for the average citizen becomes a rarity. The rich just get richer and the poor poorer.
That's just my take on it anyway.
Great article. +1 upvote and resteem.
Thank you.
Yes that is one way of looking at it. I still don't understand how the whole Federal Reserve thing is considered a good idea!
This research would definitely back that.
To be brutally honest, it's because too many people are idiots. They hear the word Federal and presume that it means it is part of the US government--which it is not.
Then the erroneous understanding of patriotism that afflict so many of us kicks in, and you just end up with a bunch of ignorant fuckers shouting, "America!". Lol.
The craziest thing is that the public can't even get it audited! I believe Ron Paul tried that.
@thecryptofiend - uhmmm.. I think no one can audit it and there's nothing to audit either? it's bankrupt :D isn't it?
on the other hand rumor has it - it's printing money :D
It's a funny situation for sure!
Though we are led to believe that this means things are better for us, and that money from interest bearing loans goes back to the government and not to private stockholders-- this is really just an illusion.
The bank of England is essentially little more than a regulatory body nowadays. It is directly responsible for only a tiny amount of the UK money supply. It's regulatory powers however, give it supreme control over all other commercial banks in the UK.
With this power they are able to dictate which banks will be most successful-- and of course there is no mistake in which banks they select to prosper.
These banks which are chosen, are responsible for about 97% of money creation in the UK(don't quote me on that number as my memory isn't the best-- but it's around that). They also are most definitely privately owned and have stockholders that profit from the interest on loans that they print from thin air.
What has happened here is that the Bank of England was returned to the state as a dog and pony show, whilst the power of money creation and the immense profits for stockholders that come with it, were simply passed on to a number of different big banks.
I suspect the same thing will happen in America soon, and it will appear as though Trump is shutting down the Federal Reserve and rescuing the people from financial slavery, but in reality, the power will just be shifted to JP Morgan, Bank of America, Goldman Sachs etc. The same stockholders will still be cashing in their share of trillions-- only it will appear that it is the US government who is benefiting.
I think the people nowadays are wise enough to see through this though. At least I hope.
Edit: I meant to include that the previous shareholders in the Bank of England simply acquired shares in the banks that we now see dominating the British economy.
Interesting! Thanks for the input:)
Yeah it's fucked up. It has the US by the balls-- and the bank of England has the same grasp on us.
At least the Bank of England isn't a private bank (at least not since 1946). That is worse!
I believe we call it the "American Dream," because America was the first country to apply the age old principles, at a level that anyone could achieve what they dreamed was possible. That dream never dies. Countries fall, and new empires rise, but what we each define as our success is everlasting.
I think America will be the first country that goes as low as it can go, before restoring and exceeding its previous greatness.
I'm hoping blockchain technology might bring about a resurgence!
I'm with you.
Thanks I hope it happens!
The American Dream is based on the equality of opportunities. Right now, there is few equality - or better said equity - left in the world. I don´t think it´s ever going to die completely. But our generation has to fight quite hard for it...
You may enjoy reading that article I published 2 hours ago, it´s touching the same topic from another point of view...:) https://steemit.com/economics/@surfermarly/does-money-make-us-mean-a-critical-view-on-the-world-s-distribution-of-wealth
Yes that is how it seems - perhaps the blockchain economy can restore it.
Cool. Will do thanks:)
The "American Dream" was a dream itself, a fantasy of belief to get people to believe in an illusion while they lived in blissful ignorance. Now the dream is being shown for what it is, a fantasy. The disparity of wealth and social mobility is forcing people to realize the dream is just that, a dream. Many millennials, myself included, won't have the old age security many now have in our current progression. None of these issues are being address, no connections being made, people just go on living in ignorance...
George Carlin on "the American Dream"
Good points. Love Carlin BTW:)
Sent to me by my friend Ben Garrison here in Montana. I think the "Fantasy" is believing that it is "owed" or a inferred "right". Social Security in it's inception back in 1935 was a 'hidden tax' on the US population no less than the socialized medical care enacted in the past term. The ability to provide for individual welfare should never have been rested in the hands of a centralized government to begin with, hence if one has a dream, it should not be tied to a nation state. IMHO
Yeah, I didn't mean to linchpin everything on some fact that old age security would be gone. That is part of the dream that people depend on, more so now with the millennial generation, was my point. Those of my generation will think that is a sure thing. I know otherwise ;). Thanks for the feedback.
it's alive there are just many more boots on the throat/a web of red tape trying to prevent you from obtaining it lol american dream is simply about being able to WORK your way out of poverty. That's all it is. And the state prevents ppl from doing that (licenses/fees etc).
ppl can't ever have the same opportunities because that would imply they could meet the same ppl and make the same networking connections etc which do play a role in someone's success...or that they could start off with the same amount of $funding and they can't.. ppl are different and we should celebrate those differences
Thanks for sharing you perspective:)
Hopefully blockchains can help people wrestle back some of that control.
True.
A couple of thoughts...
Economic disparity is not a problem by itself. E.g. if one person is very rich and another is very, very, very rich, this disparity is not an issue. The issue is how many people are truly poor.
If people in this country were economically upward mobile for a long period of time, this might be one reason it is harder now. If I am better off than my parents, it's going to be harder for my children to be better off than me because it is a further step up. A better question would be how many people moved from poor to middle class or from lower middle class to upper middle class and it becomes hard to make an apples to apples comparison.
Great points. In fact this discuss this in the podcast a little bit but not in the paper itself.
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Thanks!
Short answer: YES.
Slightly longer answer: They sure seem to be dreaming alright... And some of them a nightmare.
Thanks for your perspective:)
You're welcome ; )
Upvoted & resteemed!
Thanks:)
This was really interesting man! So it would seem that younger generations are earning significantly less than their parents generation corrected for inflation at the same life stage? I mean the whole earning more than your parents thing can't possibly continue for ever, I agree with you that the metric of upward mobility doesn't seem to be good enough to account for all that is the "american dream."
Thanks. Yes it is corrected for things like inflation - I agree it would seem illogical to assume that earnings would continue to be better for subsequent generations forever.
Part of the reason for some of the disillusion (and not just in America) is the disruptive technology that is hitting many parts of the world at the same time of changing economics. Foxconn setting up a plant in America is something probably not thought of at all in the last year.
Good point:)
Great article yet again, my friend!
The generation of baby boomers already have a big advantage here in the UK. Many owning their own homes and flourishing quite well.
It's the next generation after them that will suffer hardship of affordable housing and rising debts the most. It's very interesting and insightful stuff to see things from an american standpoint.
Brilliant as always, @thecryptofiend. :)
Thanks so much mate. Yes it is certainly an issue over here too. There is a general feeling that people now have it worse than there parents.
Ha, it is related to the epic Star Wars meme I just put up 30 mins ago.
The clawback of civil rights under the guise of security over the years has been the death knell in the UK, #Canadastan , the #UnitedStatesOfAssault , and everywhere else.
That has been going on forever I think. I bet it happened it Roman Times too!
I certainly found the picture just above that snippet useful! :-)
But to be serious, that report you excerpted touches on a lot of issues. I'm a wee bit skeptical of such analyses, even ones that are Big-Data thorough, because the grist for all of them are facts that by definition describe some part of the past. That's why forecasting is hazardous: even the most sophisticated relies to a large degree on extrapolation. Extrapolation is the standard way to be blindsided ;)
To be fair to futurists, they're caught in a bind. The only choices in the field are some form of extrapolation, imaginative forecasting, or good ol' guesswork. :)
I agree - I suppose some information is better than none but their are always reasons to be wary!
Yeah, there is: that's what makes for all those surprises :)
If you have the time and inclination, try gazing through this period piece: The People's Almanac Presents The Book of Predictions It's one of those books that you can buy for less than a buck + shipping at Amazon.
I did so myself, and had my eyes opened by the confluence of genuine experts making predictions that in retrospect were wildly wrong. Case in point: with one exception none of those experts forecast the fall of the Soviet Union. The only one to do so was a Catholic priest! (He had been stationed in Eastern Europe). And even he forecast that the U.S.S.R would turn into a social democracy like 1970s-era Sweden.
It was sobering.
Thanks will add it to my list of reads:)
Glad to! Might as well save it for your free time...
....if you have any ;)
Lol yes:)
The short answer to the question is yes (as long as the definition of the American dream is limited to this one sense, which IS an important component).
The more important question is the followup question:
Can this dream be resurrected?
You have to define what killed the American Dream (as defined) before you can repair the damage.
We debate the causes of these two factors depending on our politics, but one thing is clear. The policies driving the economy as a whole have been largely leftist and/or globalist over the last 40 years (or longer). Government has grown at astronomical rates and the debt has grown larger in turn.
Can this dream be resurrected?
Let's see how much a new administration strips away the leftist/globalist influence, and see what happens.
...and of course, even this approach doesn't take into account cultural trends that impact the economy. How many children are growing up with the goal of becoming a musician instead of an entrepreneur? How many children have been brainwashed into hatred of capitalism and/or hard work? How many children are being trained to be lifetime welfare clients?
Some of these factors may never be qualified or even recognized as having an impact on the economy
Thanks for another well researched article.
Thank you - great answers! You might enjoy the podcast as it looks at issues like this:)
I'll check it out!
Cool!