Researchers from Stanford, Harvard, and the University of California recently proclaimed that the American Dream is “fading” because millennial incomes are not as high as their parents’ incomes were when they were their children’s age. The American Dream may have taken a beating recently, blogger and Jeopardy champ James Pethokoukis concedes, but mobility is not the deciding indicator of whether the dream is alive.
Why not? Guess it comes down to definitions. The Equality of Opportunity Project defines the “American Dream” as “absolute income mobility,” meaning that kids are doing better than their parents. The project found that just 51 percent of American 30 year olds earn more than their parents did at their age, a decline from 92 percent of 30 year olds in the early 1970s who earned more than their parents did at their age.
Several factors are at play when it comes to a slowdown in absolute mobility: automation, trade, slower economic growth overall in the U.S., and greater disparities in income. But the forlorn conclusions are not as severe as suggested when looked at with regard to the overall picture.
Pethokoukis points to Scott Winship for a deeper explanation. Winship who used to manage research for the Pew Economic Mobility Project, says the project’s data are probably accurate. Absolute mobility is slower now than in the 1950s, ’60s, ’70s, and ’80s. But this has been true for decades so should not come as some tragic surprise, especially since the research is concentrating on the trend and not the actual level of absolute mobility, as reported in breathless newscasts.
What is surprising, however, is the number of variables that the research paper does not include in its analysis when it comes to measuring that level. Among selected measurements excluded, Winship notes, the adjustments for cost of living, which if counted would suggest that the absolute mobility rate would rise 3-4 percentage points. Additionally, government transfers and taxes are not accounted for and baseline incomes are probably higher than what is reported in the research.
If we assume that the incomes of everyone not experiencing absolute mobility in the baseline numbers actually are higher by $5,000 than the baseline figures indicate, that would push up the share of the 1984 cohort achieving upward mobility by about 5 percentage points. Why might that be a reasonable assumption? Health benefits and other nonwage compensation are one factor. Nothing in the Chetty paper includes such benefits as income. Cohabitation is another. Two cohabiters will be two ‘families’ in the Census Bureau data used in the paper (and will be two ‘tax units’ in the paper’s tax data). In reality, cohabiters pool their incomes, just like married couples.
Undercounting of income is a third reason to think that the reported incomes in the Chetty paper are too low. Undercounting is a pretty bad problem in the bottom third, especially in the CPS and census data, but also potentially in the tax data, where people don’t report under-the-table earnings. (I reviewed this evidence in Appendix 3 of my recent paper on poverty trends). A caveat here is that parents also have understated incomes because of these issues, but nonwage compensation, government health benefits, cohabitation, and undercounting of income have all increased over time, so their impact is greater on children.
Put all this together and it looks to me like size-adjusting pushes the absolute mobility rate up 10 points, using the PCE deflator another 3 to 4 points, taxes and transfers another 2, and the rest (plausibly) another 5 points. That’s 20–24 percentage points, which would put the absolute mobility rate at 70–74 percent. Two-thirds seems like a safe conservative estimate.
For adults who were poor children, absolute mobility rates almost certainly remain above 90 percent. This is hardly evidence that the American Dream is ‘fading,’ as the paper’s title claims. The period from 1939 to 1969 was one of exceptionally strong income growth. That growth translated into very high absolute mobility rates. Income growth has slowed since then, though it has not reversed. Thus, absolute mobility rates have fallen, though most people still do better than their parents did at the same age.
What does it all mean? Pethokoukis notes that a 2014 study concluded that the probability of mobility — the chance of moving up or down the income ladder — is about the same as when the parents of today’s millennials were in their shoes.
He optimistically adds that policies that promote work and opportunity, policies that may be coming back into vogue, are a likelier method to faster and more inclusive economic growth than any redistribution methods, an outlook shared by the study’s “superstar” author.
So, as Pethokoukis concludes,
The American Dream still exists, although it’s a bit dinged up. And the United States remains the Land of Opportunity, although it could definitely be better. All of which should pass for good news in a year with precious little of it.
