Checking in on the American Dream: 3 Charts That Show US Living Standards and Upward Mobility are Far From Stagnant

I have to admit, Wikipedia does a pretty good job defining the American Dream:

The American Dream is a national ethos of the United States, the set of ideals (democracy, rights, liberty, opportunity and equality) in which freedom includes the opportunity for prosperity and success, as well as an upward social mobility for the family and children, achieved through hard work in a society with few barriers. In the definition of the American Dream by James Truslow Adams in 1931, “life should be better and richer and fuller for everyone, with opportunity for each according to ability or achievement” regardless of social class or circumstances of birth.

Now, others might put it differently, but most Americans would probably agree that the American Dream has at least some significant economic aspect to it. A February 2019 survey commissioned by AEI found 94 percent of us think a successful career is essential or important to our view of the American Dream, while 84 percent cited having a better quality of life than their parents. Those results can be found in my colleague Michael Strain’s book from earlier this year, The American Dream Is Not Dead (But Populism Could Kill It). This is how Strain defines the economic part of the American Dream: “If you work hard and play by the rules, you can get ahead. Your effort will be rewarded. America is a place where you can build a better life for yourself and, in an economic sense, where your children will be better off than you. And in America, going from rags to riches is still possible.”

Strain’s book is filled with studies, data, and charts supporting the title’s claim. I want to briefly highlight three evidence-driven assertions which counter the negative narrative most people hear.

First, wages have not been stagnant for decades. A chart and then analysis:

And as you can see in figure 8 — which plots the wages of typical workers between 1973 and the present using both the [consumer price index] research series (blue line) and the [personal consumption expenditure] (red line) price deflators — using the CPI shows that wages have grown by 5 percent. This is reasonably described as stagnant growth. But as figure 8 shows, the conclusion of stagnation is largely a story of the poor performance of wage growth in the 1970s and 1980s. (It is also a story illustrating the extent to which the CPI overstates inflation. Wages deflated by the PCE increased by 21 percent between 1973 and 2018. … Over the past three decades, wages for typical workers have grown by 20 percent using the CPI. And using the PCE — the better measure of inflation — finds a one-third increase in wages. … It’s not spectacular growth, to be sure. But it is not reasonable to describe this growth as stagnant. Typical workers have not worked for several decades without a pay increase.

Second, income growth has not been stagnant for decades:

The nonpartisan Congressional Budget Office computes three income series. Market income is defined as labor income, employer-provided health insurance, business income, and capital income, along with retirement income for past services. Income before taxes and transfers is market income plus social insurance benefits, including Social Security payments, Medicare benefits, and payments from unemployment insurance, Social Security Disability Insurance, and workers’ compensation. Finally, income after taxes and transfers is income before taxes and transfers plus means-tested transfers (e.g., Medicaid and Children’s Health Insurance Program benefits, food stamp benefits, and Supplemental Security Income) minus federal taxes. … Median household market income increased by 21 percent between 1990 and 2016, the last year for which data are available. Like median wage growth, this is not spectacular and is less than household income for the top 1 percent. But it is not stagnant. (And if we had data for 2017 through the present, this growth would look even more impressive.) The median household saw market income plus social insurance benefits increase by 28 percent from 1990 to 2016 (figure 10). And the most comprehensive measure of the income actually available to the median household to spend and save — income after taxes and transfers — grew by 44 percent over this period.

Third, most Americans in their 40s are doing better than their parents were doing during their 40s:

Absolute mobility corresponds directly with improving standards of living. … Overall, I find that around 73 percent of Americans in their 40s have higher incomes than did their parents. (figure 20) Among children raised in the bottom 20 percent, 86 percent have gone on to enjoy higher incomes than their parents. That is, 86 percent of today’s 40-somethings who were raised in the bottom 20 percent have higher incomes than their parents did when their parents were in their 40s. This is particularly important since upward mobility from the bottom of the income distribution is what we should care about most. … For adults who were raised in the second quintile, about 76 percent enjoy a higher income than their parents. This is important because this quintile represents many in the working class, a group that has received considerable attention from populists in both political parties. … In the middle quintile (not shown in figure 20), upward absolute income mobility measures around 77 percent. In the fourth quintile, it’s also around 74 percent. And about 53 percent of 40-somethings today in the top 20 percent have a higher income than their parents did when their parents were in their 40s. This analysis suggests that America is clearly an upwardly mobile society. The common experience is for children to have higher incomes than their parents.

Bottom line: Lots of solid growth in living standards, but not spectacular growth. If we want the latter, then we need to boost economic productivity.