Magazine May 3, 2010, Issue

Economic Opportunity in America

There is less than commonly supposed, but it is parents, not redistributors, who hold the solution

With the exception of individual freedom, no public value is held in higher esteem by Americans than economic opportunity. A major theme of the American creed is that with discipline, hard work, and thrift, anyone can get ahead. That take on the American Dream is reflected in pieces of Americana ranging from the Horatio Alger stories to “They’re Coming to America” to Go West, Young Man, all of which speak to one of the most fundamental beliefs Americans have about our country: that it offers people a better chance to thrive than any other nation on earth.

But is it true? Does America deserve its reputation for providing greater opportunity to the huddled masses than other nations? Has opportunity been growing for middle America and for poor and low-income Americans?

An investigation into opportunity begins with the nation’s economy. If the economy is not growing, then economic advancement becomes a zero-sum game, and getting ahead means pushing someone else down. From the perspective of the Great Recession, the performance of the American economy over the past quarter century looks pretty good. Between the recessions of 1991 and 2007, the economy created 28.4 million jobs, and the gross domestic product rose almost continuously, from $8.5 trillion to $14.1 trillion in inflation-adjusted dollars. Between the recessions of 1981 and 2007, the number of households with income less than $15,000 a year shrank by 18 percent, while the number with income more than $75,000 increased by 60 percent. Economic growth enabled an explosion of personal-consumption expenditure, from $5.6 trillion to $9.8 trillion, an increase of 75 percent. So, looking at the economy in aggregate, there was much opportunity for Americans to move up the economic ladder.

Perhaps the most straightforward measure of opportunity, called “absolute mobility” by economists, reflects whether adults have been able to surpass the income of their parents. We can answer questions about mobility with some precision, thanks to data from an extraordinary study of nearly 5,000 families that researchers at the University of Michigan have been following since 1968. Because the children of the adults in the original sample have themselves been followed into adulthood, we can make direct comparisons of income across the two generations. Taking a look at income around age 40 (the parents in the late 1960s to early 1970s, and their children in the late 1990s to early 2000s), we find that 67 percent of the children had surpassed their parents’ earnings. Interestingly, high-income families had a harder time surpassing their parents than did children of parents with more modest incomes: Children of families in the top 20 percent had only a 43 percent chance of out-earning their parents, while those in the bottom 20 percent had a chance of better than 80 percent.

Another measure of mobility, and perhaps a more important one, is “relative mobility,” movement up or down the income distribution relative to others. Using the University of Michigan data, we can divide the parents and their children into five groups of equal size, from lowest to highest income, and then compare the income group that adult children wound up in with the income group of their parents. If incomes in the second generation were distributed randomly, we would expect adult children of parents from every income group to have a 20 percent chance of winding up in each of the five income groups in their own generation. But the Michigan data show that adult children whose parents were in the bottom fifth had a 42 percent chance of winding up in the bottom fifth. On the other hand, 36 percent from the bottom fifth made it to the top three fifths, and 6 percent made it all the way to the top fifth, which shows that there was upward movement despite the headwind of family background. Opportunity may not be boundless in America, but there’s a lot of it nonetheless.

#page#Another way to examine economic opportunity is to compare the United States with other nations. Polls show that Americans believe that the United States has more income mobility than other nations; but income correlations between fathers and sons suggest that the United States has less economic mobility than the Western European and Scandinavian countries for which information is available. In many cases, the father/son income correlations of the United States are twice as high as those of the other countries. Similarly, a research team from Finland headed by Markus Jäntti found that in the six countries it studied, both the bottom and the top of the income distribution tended to be “sticky,” meaning that the correlations of income between fathers and sons were especially pronounced at the extremes of the distribution. The situation was stickier in the United States than in the other nations studied. Among American men with fathers in the lowest fifth, 42 percent also wound up in the bottom group, compared with 25 to 30 percent in the other nations studied. The apple falls closer to the tree in America than in many other countries with advanced economies.

A troubling aspect of intergenerational income mobility in the United States is that black parents are much less able than white parents to pass their income advantages on to their children. White children born to parents in the middle fifth of earners went on to make about 32 percent more than their parents, while black children from the middle earned on average 16 percent less than their parents. And while nearly 70 percent of white children with parents in the middle fifth of income went on to earn more than their parents, only about 30 percent of black children from the middle did so.

There is evidence that some Hispanic parents have the same difficulty helping their children succeed that black parents do. Recent research by Edward Telles and Vilma Ortiz shows that among many immigrant groups, especially those from Latin America and South America, the children lag significantly behind native-born children in school performance. There is evidence from some cities in the Southwest that Mexicans in the third generation (the grandchildren of immigrants) obtain less education and earn less money than do those in the second generation. This downward intergenerational mobility is worrisome not only on its own terms, but because Mexicans constitute about one-third of America’s large and growing immigrant population and will play an increasingly large role in supporting Social Security and Medicare.

In addition to income, wealth (defined here as assets minus debt) is an important measure of opportunity and mobility. Wealth enables families to invest, to obtain credit, to make major purchases such as cars and homes, to be financially secure in retirement, and to make bequests to children or others. There are two major modes of wealth transmission from parents to children. The first is a complex constellation of factors, including genes, investments in education, direct teaching by parents, and the habits of saving and investing that parents inculcate in their children. The second method of transmission is direct transfers.

#page#Although the correlation between the wealth of parents and that of their children is less pronounced than the income correlation reviewed above, it is still considerable. University of Chicago researchers Kerwin Charles and Erik Hurst found that children’s deviation from the mean wealth will typically be about 35 percent of their parents’ deviation: Rich parents have rich children, though not quite as rich; poor parents have poor children, though not quite as poor. As with income, the persistence of wealth from generation to generation is much stronger at the extremes of the distribution. The probability that a child whose parents were in the middle fifth of the wealth distribution will himself wind up in the middle fifth is 25 percent. By contrast, the probability that a child born to parents in the top or bottom fifth will end up in his parents’ income group is 36 percent.

A little less than a quarter of all Americans receive wealth transfers from their parents, but the vast majority of wealth is not inherited. Even among those whose net worth exceeds $1 million, only about half received wealth transfers from their parents, and only 17 percent of their total wealth was inherited.

In sum, the data we have on income and wealth force us to conclude that there is less opportunity in the United States than conventional wisdom would suggest, and less than in most other Western countries with modern economies.

One of the annoying features of many media stories and political speeches about the evidence reviewed here is that the popular accounts make it seem that impersonal social forces, especially the American economy and government policy, entirely determine the opportunities new generations will find as they grow up. Leaving aside the fact that, as we have seen, the American economy has been exceptionally productive, and the fact that the federal government alone spends $750 billion (5.7 percent of GDP) on mobility-enhancing programs, the critics hardly mention the vital role of parental and personal responsibility.

The fact that personal responsibility plays a major role in mobility and economic well-being can be easily demonstrated. The three basic rules of success in America are that young people should finish their educations (at least high school), get jobs, and get married before having children. Computations based on Census data that my Brookings Institution colleague Isabel Sawhill performed for our recent book, Creating an Opportunity Society, show that kids who follow these rules have a 74 percent chance of winding up in the middle class (defined as income of $50,000 or more) and a mere 2 percent chance of winding up in poverty ($17,200 for a family of three in 2008). By contrast, young people who violate all three of these rules have only a 7 percent chance of winding up in the middle class and a 76 percent chance of winding up in poverty.

As with so much else, opportunity-enhancing decisions begin at home. For example, low-income parents talk less to their children and use physical discipline more than middle-class parents. More talk and less physical punishment have been linked to children’s positive development by a host of studies. Similarly, low-income and minority children typically experience numerous stressful changes in their living arrangements. Nonmarital births, divorce, and cohabitation occur with much more frequency among the poor than among other groups, thereby imposing more harm on the development of poor children and more severely reducing their prospects for economic success.

#page#In addition to family structure, parental decisions about education are a key factor in promoting opportunity. Not only are there substantial differences in average family income at each level of educational achievement, from high-school dropout to college (the median income of college graduates is nearly three times that of high-school dropouts), but only those with at least a college degree have improved their income over the past three decades. A child from a family with income in the bottom fifth (below about $34,000 in the early 1970s) can quadruple his chances of making it all the way to the top fifth (above around $117,000 in the early 2000s) by earning a college degree.

Even parents with limited resources can greatly increase the odds that their child will get a good education. Each year, federal and state governments spend around $27 billion paying for preschool education and child care, which can provide a solid foundation for achievement during the K–12 years. Most of this money is focused on disadvantaged children. The federal government pays for the Head Start program, which enrolls nearly 1 million children, and 40 states operate their own preschool programs, which again are free to most low-income families. Parents can take advantage of these and similar preschool programs and make sure their children are ready for the public schools.

Although many K–12 schools located in poor neighborhoods are of low quality, most school systems offer parents some choice about where they send their children. In addition, parents can choose where to live based on the quality of nearby schools. Now that federal housing programs are based primarily on vouchers, even low-income parents have options in the selection of neighborhoods and schools. The charter-school movement offers parents yet another avenue of choice.

Similar if not greater opportunity exists for parents to help their children obtain a good postsecondary education. Last year, $180 billion was available from governmental and private sources in the form of grants, loans, and tax breaks to help students pay for postsecondary education. The federal Pell Grant program alone provided more than $18 billion, almost exclusively to students from poor and low-income families. Colleges and universities, along with employers, offered another $40 billion for grants and scholarships, a significant portion of which was awarded to students from poor, low-income, and minority families. Low-income students who are accepted at an accredited postsecondary institution are also eligible for federal loans at reduced interest rates and on generous repayment terms.

So while family background continues to exert major influence on where children land along the income distribution, it is hard to avoid the impression that the most serious limit on opportunities for new generations consists in the decisions of their parents and themselves. In this sense, opportunity in America fully lives up to the American self-conception, which holds that you must earn it through your own effort.

Mr. Haskins is co-director of the Brookings Center on Children and Families.

Ron HaskinsMr. Haskins is a senior fellow in economic studies at the Brookings Institution and a co-director of the Center on Children and Families.

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