The American Dream Still Lives Despite Growth Rate of Millennial Incomes

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.

Read James Pethokoukis’ article on the American Dream.

Read Scott Winship’s analysis of the study’s conclusions.

How to Achieve the American Dream: Start By Being Frugal

Are you an extreme coupon clipper? How’s that working out? Maybe pretty good, you’re saving money. Or maybe you’re spending to save. Or maybe it takes way too much time and you abandoned this strategy for living with fewer expenses.

Well, forget about it. If you want to know how to achieve the American dream, follow the lessons of the Fatzinger family. Learn from the “Einstein of economical.”

“These days, frugality is not about clipping coupons. It’s about rethinking your finances, and maybe your life. …

‘Spend money on what makes you truly happy and on what you enjoy.'”

That’s the message from Rob Fatzinger, the patriarch of a family with 13 kids that lives outside of Washington, D.C. What’s remarkable about them isn’t so much that the family focuses on its happiness rather than on its possessions, but that it is living debt-free in one of the most expensive suburbs in the country.

TPOH doesn’t know what spur recently jabbed The Washington Post to begin covering positive new stories, like the recent one about a Republican mayor helping the poor, or the Fatzingers, a model in the pursuit of happiness. But in a world of media errors, it doesn’t matter why. It just matters that the news is good and … useful.

In the case of the Fatizingers, the story is of a devout Catholic family, led by husband and wife, Rob and Sam, who took frugality to a whole new level. The lessons are ones we can all take home to our smaller households.

Back in 2000, they bought a five-bedroom house out of foreclosure and later added three bedrooms. Nine children, including the youngest, who is 4, live there now.

The good news: The home cost $150,000. The Fatzingers paid down $50,000, saving interest on the 15-year mortgage.

The bad news: Sam said their priest, visiting to bless the new home, ‘walked in and said: “Should I do an exorcism on this house?”‘ The place was in serious disrepair.

‘Relatives gutted it and made it livable,’ Sam said. ‘Youth groups were over here, ripping up carpet, taking down walls.’ Someone gave them a wood stove. A relative gifted them a used couch. Later, another couch was left on a curb for anyone to take. Score. …

The family shops at sales or secondhand stores and checks out the Freecycle Network, a site for giving away belongings.

Friends and strangers also chip in. ‘We always have someone dropping off a bike,’ Sam said. ‘We would get things and not even know where they came from.’ …

These days, even the childless can be terrified of college costs, so just imagine having 13 kids. But the Fatzingers have a strategy, and it’s working. The plan: Start in community college, don’t expect a handout from Mom and Dad, and graduate debt-free.

So far, Alexandria, the oldest at 26, graduated at 21 with a master’s degree in social work. Joshua, 25, graduated from the University of Maryland with a degree in kinesiology and became a missionary.

Caleb, 23, is in the last year of a doctoral program in physical therapy at the University of Maryland at Baltimore. And Lizzie, 21, graduated in May from the University of Maryland with a math major, while also cleaning houses and tutoring. All four graduated from college debt-free.”

Now, this family has made sacrifices. It had a failed business. Caleb is now living off a loan to finish his doctorate. The kids work multiple jobs and really long hours. They skip over the latest must-have Nike sneakers.

But so what? As economist Mark Perry points out, being super frugal doesn’t feel like deprivation, and it isn’t so hard in today’s America.

According to data from the Department of Agriculture, aggregate spending on food in the US has been below 10% of disposable personal income in every year since 2000, compared to an average food  share of nearly 19% of personal income in the 1950s and 15% in the 1960s. …

In the first half of 2016, Americans collectively spent only $1 out of every $3 of disposable (after-tax) personal income on ‘life’s basics’ – the lowest share in history. Up until the early 1960s, American spent more than half of disposable income on ‘food, shelter and clothing;’ and that share didn’t fall below 40% until 1991. The increased affordability of manufactured durable goods like home appliances, furniture, electronic goods, and cars, along with increasingly competitive prices for food, clothing and energy have brought the share of spending on life’s basics to the lowest level ever in recent years. …

Spending on ‘energy goods and services’ as a share of total consumer spending fell below 4% of total consumer expenditures during the six months of 2016 for the first time since the BEA started collecting data back in 1929. That means that energy affordability (‘energy frugality’) has been greater in the first half of this year, when measured by energy spending as a share of total consumer spending, than at any time in US history.

Perry includes a chart to make visualizing frugality in America a little easier.

Cost of living and how to live the American dream

So, if you’re willing to “live small,” in other words, use second-hand merchandise, buy at discount stores, save money, and avoid debt, you can live the American dream, even in 2016 in a house of 15 people and a strong commitment to succeed by everyone in the family.

Read The Washington Post article on the Fatzingers.