Saturday, December 10, 2016

Falling Behind Your Parents

If you are a young person, you have every right to hope that by the time you are 30 you will be making more money than your parents did at age 30. If that's your hope, then a recent piece in The New York Times, "The American Dream, Quantified at Last" by David Leonhardt, is very bad news for you.

The American dream has always been that the next generation will do better than the previous. It hasn't always come true — witness the Great Depression of the 1930s — but in general it has.

But recent research now shows that the likelihood of the dream coming true has been going down in every decade-of-new-births since 1940:

(Click to enlarge.)

So if you were born in 1980 and are now 36, you had at age 30 just a 50 percent of exceeding your parents' income when they were 30. If yours was a 1950 birth (mine was in 1947) the probability was 79 percent — down from 92 percent for those born in 1940. The figures for 1960 and 1970 were intermediate values. The decline in generation-to-generation expectations has been steady and ongoing.

This next graph shows that in each of these five decade years, the higher the parents' age-30 income was, the less likely the children would surpass it:

(Click to enlarge.)

That is not surprising for those whose parents were exceptionally wealthy (i.e., those income percentiles at the right side of the graph). It's also not surprising that those born to quite poor parents (percentiles at the left end of the graph) would have fewer problems "moving on up" as decade followed decade, simply because in the later decades there were more federal and state income-support programs — and the research being cited takes those into account.

Look, though, at the vast stretch of the graph between the very poor and the very rich and you see the graph getting ever (downwardly) steeper as the decades roll on. In 1940, the whole graph is approximately level until about the 85th percentile of income. By 1980, there is no part of the graph that is even close to being level. That means that even if your parents were relatively comfortable at the 70th income percentile, your likelihood of surpassing them, if you were born in 1980, came to only about 4 chances in 10.

As the article cited above makes clear, the economy has grown quite over recent decades, and the graphs do not show this. The article says:

... the American economy is far larger and more productive than in 1980, even if it isn’t growing as rapidly. Per-capita G.D.P. is almost twice as high now. By itself, that increase should allow most children to live better than their parents.

"G.D.P." is "gross domestic product" — the total value of all goods and services the economy produces in a given year. It is a measure of the size of the economy. "Per-capita G.D.P." is that figure divided by the number of people in the population. If G.D.P. were divided equally among all the people in the population, per-capita G.D.P. would reflect each person's income in dollars.

During the Great Recession of 2008, our G.D.P. actually declined briefly. Since then, G.D.P. growth has been slower than it otherwise would have been. This failure of G.D.P. to grow at its accustomed pace has contributed to a worsening of the prospects of young people vis-à-vis their parents.

The article makes clear that we need to boost G.D.P. growth, if we want to resuscitate the American Dream. But even more needed is to reverse the rise of income inequality that has occurred in our society since 1970:

The researchers ran a clever simulation recreating the last several decades with the same G.D.P. growth but without the post-1970 rise in inequality. When they did, the share of 1980 babies who grew up to out-earn their parents jumped to 80 percent, from 50 percent. 

The main recommendation the article makes is accordingly to give tax cuts to the middle class ... not to the affluent! They would help level the income playing field, and they would leave more money in average folks' pockets that could be spent on goods and services, thereby boosting the total size of the American economy.









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