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The American Dream is that the United States is, and should remain, a country of opportunity where individuals could improve their own and their families’ living standards by hard work, competence and thriftiness. It is thus a dream about upward income mobility, based on one’s own efforts. This is certainly what took place in late nineteenth century and early twentieth century when sixteen million immigrants, mostly from Europe, arrived in the United States to escape poverty and oppression. American poet Emma Lazarus composed ringing words for the Lady Liberty that greeted immigrants at New York Harbour with a torch in her hand:
Give me your tired, your poor,
Your huddled masses yearning to breathe free,
The wretched refuse of your teeming shore.
Send these, the homeless, tempest-tossed to me,
I lift my lamp beside the golden door!
In the 1950s, the whole world could also observe, in films and on television, how prosperous the Americans had become compared to others. However, it is often asserted nowadays that the American Dream is dead. It is claimed that some people are stranded in low-income groups whereas others are getting richer and richer. The torch has been extinguished, and the golden door has been closed. In their recent book, The Myth of American Inequality, former Senator (and economics professor) Phil Gramm and his two associates, both respected scholars, show that these claims are false and that the American Dream is alive and well.
On the Escalator
People are usually fascinated by the very rich. Gramm and his associates point out however that the very rich at the end of the nineteenth century, such as Cornelius Vanderbilt and John D. Rockefeller, controlled much more wealth than the very rich today. But almost all of this wealth has been dispersed as a result of challenges from competitors, charitable giving (Vanderbilt University, Rockefeller Foundation), lavish spending by some heirs, and the inevitable dilution by inheritance. When Gloria Vanderbilt died in 2019, she left her son, the CNN reporter Anderson Cooper, 1.5 million dollars, 0.002 per cent of the 200 billion fortune of her great-great-grandfather. No Vanderbilt or Rockefeller is on the Forbes’ list of the 400 richest Americans. Some very rich families came and went so quickly that they are only known to economic historians.
This is at most a small part of the story. What is important is what happens to others. There are two kinds of upward mobility, that of individuals over their lives, and that of income groups or ‘classes’. Here I can only quote a few of the many figures produced in this remarkable book. Usually, the salary of individuals is low in the beginning, and increases as they acquire more skills and experience, accumulate human capital, as it is often called. In 2017, average hourly earnings for young adults (19–25 years) was $18.24, whereas they were $34.88 for mature adults (55–65). This was an increase of more than 90 per cent. In addition to this upward mobility that individuals create by their own efforts, there is the increase in earnings over time from productivity growth. On average, in America individuals’ income rose 24.1 per cent from 1987 to 1996 and 41.0 per cent from 1996 to 2005. The American economy is like an escalator. Even if you do not move, you are brought upwards, but you can also climb the stairs and thus move more quickly upwards.
Upward Mobility based on Ability, Not Class
There is much talk that Americans are stuck in the class into which they were born: Children of the poor will remain poor, whereas children of the rich can expect to be rich also. Gramm and his associates present much interesting data on this issue. The two extreme points would be, first, that your income was wholly determined by the income of your parents and, second, that the income of your parents had no effect on your income. If households are divided into five income groups, or quintiles, the first extreme point would mean that a second generation would all end up in the same quintile as the first one: 100 per cent in each quintile would be from the same quintile as the first generation. In the richest quintile for example there would only be people whose parents were also in the richest quintile, and in the poorest quintile there would only be people whose parents were also in the poorest quintile. The second extreme point, that of no effect, would mean that a second generation would be distributed evenly between the quintilies: 20 per cent in each quintile would be from each of the five quintile of the first generation.
Gramm and his associates refer to three studies of the distribution of the second generation in income groups relative to the first generation. Those three studies produced similar results so they may be regarded as fairly robust. The authors use averages based on those studies. In the richest quintile, 37.9 per cent come from parents who were also in the same quintile, 23.3 per cent from parents in the second-richest quintile, 17.5 per cent from parents in the middle quintile, 12.0 per cent in the second-poorest quintile and 9.3 per cent from parents in the poorest quintile. The comparable numbers for the second-richest quintile are 28.4, 22.6, 21.6, 16.1 and 11.3 per cent. For the middle quintile they are 16.4, 22.5, 23.6, 20.5 and 17.0. For the second-poorest quintile they are 11.3, 20.2, 19.3, 24.4 and 24.9 per cent. In the poorest quintile, 6.1 per cent come from parents in the richest quintile, 11.4 per cent from parents in the second-richest quintile, 17.8 per cent from parents in the middle quintile, 27.3 per cent from parents in the second-poorest quintile and 37.4 per cent from the poorest quintile.
These numbers are remarkable. They show—what had to be expected—that the parents’ class has some effect on in which class their children end up, but not a very significant one. Recall if origin had had no effect, the distribution of the children between income groups would have been random so that 20 per cent of the people in the richest quintile would have had parents from that quintile. Instead these people are 37.9 per cent of all the people in the richest quintile. So, origin makes a difference, but only a small difference, 17.9 per cent. This means also, more importantly, that 62.1 per cent of people in the richest quintile have parents who were not in the richest quintile. Again, as 37.4 per cent of the people in the poorest quintile have parents who were also in that quintile, this means that 62.6 per cent of people in the poorest quintile have parents who were not in the poorest quintile.
Original Position Not Significant
Left-wing intellectuals usually underestimate the dynamic character of competitive capitalism: a fool and his money are soon parted. It is an endless challenge. The original position does not matter much. The numbers which Gramm and his associates quote show that parents cannot buy many advantages for their children. Indeed, initial advantages are wiped out in a few generations. Incidentally, this was also the conclusion in a seminal 1986 paper by Gary S. Becker and Nigel Tomas: ‘Almost all earnings advantages and disadvantages of ancestors are wiped out in three generations.’ Adam Smith shared this fundamental insight in the Theory of Moral Sentiments (Pt. 4, Ch. I):
The produce of the soil maintains at all times nearly that number of inhabitants which it is capable of maintaining. The rich only select from the heap what is most precious and agreeable. They consume little more than the poor; and in spite of their natural selfishness and rapacity, though they mean only their own conveniency, though the sole end which they propose from the labours of all the thousands whom they employ be the gratification of their own vain and insatiable desires, they divide with the poor the produce of all their improvements. They are led by an invisible hand to make nearly the same distribution of the necessaries of life which would have been made had the earth been divided into equal portions among all its inhabitants; and thus, without intending it, without knowing it, advance the interest of the society, and afford means to the multiplication of the species. When providence divided the earth among a few lordly masters, it neither forgot nor abandoned those who seemed to have been left out in the partition.
We should not be too concerned about any original position, but rather about the opportunity to move forwards and upwards. While the American Dream is alive and well, it is worrying that able-bodied but non-working individuals in the poorest quintile receive almost the same or even more income after transfer and tax payments as working people in the next three quintiles above theirs. Gramm and his co-authors observe (p. 81) that ‘the most vocal critics of our economic system for its growth in earned-income inequality in postwar America are also often the most committed advocates of expanding the very transfer payments to low-income Americans that have been the largest cause of the growth in earned-income inequality. They also have been the biggest promoters of the public education system that has left so many behind and the greatest critics of education reforms, such as school choice, that enable more children to raise their future earnings.’ At the end of their book, the authors mention some necessary reforms in America. 1) Getting our facts straight. 2) Remove government disincentives to work. 3) Reform elementary and secondary education for success. 4) Remove government restrictions on opportunity.
These proposals are certainly also relevant to Europe.