American Dream? Odds plunge that children will earn more than their parents

Rising income inequality has eroded the ability for American children to grow up to earn more than their parents, according to groundbreaking new research from a superstar team of economists that carries deep implications for President-elect Donald Trump’s policy agenda.

The research from a team of economists led by Stanford’s Raj Chetty, and also including researchers from Harvard and the University of California at Berkeley, estimates that only half the children born in the 1980s grew up to earn more than their parents did, after adjusting for inflation. That’s a drop from 92 percent of children born in 1940.

The fall-off is particularly steep among children born in the middle class.

“If we simply care about absolute mobility,” Chetty said in an interview, “these results show, you have to care about inequality.”

Previously, Chetty’s team has studied a different measure of mobility: the ability of children to move up or down America’s income ladder as they grow up, when compared to other Americans. The new research attempts, for the first time, to quantify so-called “absolute mobility,” which people often associate with the American Dream: the odds of a child earning more as an adult than his or her parents earned at the same age.

The economists say rising concentration of income among the richest Americans explains 70 percent of what has been a steady decline in absolute mobility from the baby boom generation to millennials, while a slowdown in economic growth explains just 30 percent.

Absolute mobility “is something that was a feature of the American economy for kids born around 1940, that baby boomer generation,” said Nathaniel Hendren, a Harvard economist who is one of the authors of the study. “As we look forward, there’s just been a dramatic decline in that measure” – which, he said, runs parallel to a decades-long stagnation in earnings for typical American workers, even as earnings for the very rich have soared.

“If you don’t have that kind of widespread economic growth across the income distribution, it’s tough to grow up and earn more than your parents,” Hendren said. For policymakers, “This is a distinct reason to focus on inequality.”

That finding suggests Trump’s tax-cut plans would do little to improve economic mobility for struggling blue-collar families, even if they help accelerate growth, because analysts predict the cuts would benefit high earners disproportionately. Put another way: Trump has promised his cuts would help workers by supercharging growth, but the new research suggests past growth has done little to boost the absolute mobility of middle-class Americans.

Trump did not make inequality a focus of his presidential campaign, but he appealed directly to the anxieties of workers who feel the economy is not delivering for them in the same way it did for their parents. The paper highlights several sources of those anxieties in the Trump coalition.

It finds barely 2 in 5 men born in the mid-80s grew up to earn as much, at age 30, as their fathers did at the same age. It shows average rates of mobility falling particularly fast in Rust Belt states, most notably Michigan and Indiana. And it finds a much steeper drop in absolute mobility for the middle class than for the poor.

The calculations come from a novel approach by the authors to marry data from anonymous tax records and detailed statistics on the distribution of income in the United States from the census. Using those sources, the authors estimate the chances that a particular child will grow up to earn more than her or his parents. The large decline in the past half-century remains steady even if they change how they calculate inflation over time, or take into account demographic shifts such as the changing size of U.S. households over time.

The surge in inequality over the past half-century is well documented. New research this week, from economists Thomas Piketty, Emmanuel Saez and Gabriel Zucman, shows the bottom 50 percent of U.S. income earners only gained 1 percent in earnings from 1962 to 2014, after adjusting for inflation. From 1980 to 2014, they found, nearly 70 percent of income gains went to the top 10 percent.

Even knowing the data on rising inequality, Chetty said, the mobility researchers were surprised by their new findings.

“We thought mobility would be lower,” he said. “We didn’t realize how much lower it would be. And we didn’t realize that the distribution of growth would matter more than the level of GDP growth.”