Much talk in recent years has focused on America losing its way. Americans have pined for the nostalgic, longing for the days when you could pull yourself up by your bootstraps and overcome seemingly insurmountable obstacles. While much of this sentiment leans toward the overly romantic side of history, the idea that the United States is a place where anyone - whether you were born here or abroad - can make it, is becoming a question more than a statement. Many Americans don't know if they will be better off than their parents.
Better off than Our Parents?
Are they right to feel gloomy? Real median family income increased in near lockstep with productivity in the three decades following World War II, but since the mid-1970s, it has remained relatively flat despite continued improvements to productivity. Between 1988 and 2008, the richest 10% of Americans pocketed all the income growth, while the rest of the country - 90% of Americans - saw their incomes decline.
Recognizing that incomes for the majority of Americans have shown anemic growth is one thing, but what does income have to do with social mobility?
Income inequality could increase, but as long as a segment of American families saw their fortunes shift from poverty to Park Avenue the possibility of upward mobility still exists, right?
While economists, statisticians and policymakers look at income in a variety of ways, the average worker may simply ask, "Am I better off than my parents?" To measure how much a generation's income is influenced by previous generations, economists have developed the intergenerational elasticity of income (IGE), a correlation between the economic status of parents and their children. High IGEs mean that upward mobility is more difficult. Countries that have lower levels of elasticity tend to focus on the sort of financial strains that affect social mobility, such as the cost and quality of education or ease of access to healthcare. In the U.S., income seems to matter more than in many other developed countries.
From Bootlegger to High Society
In a January 2012 speech, Alan Krueger, the Chairman of the Council of Economic Advisers, called the pressure on upward mobility an issue of inequality of opportunity.
The top 1% of families have seen real after-tax income grow by 278% since 1979, while the middle 60% of families saw a growth rate below 40%. Statistics point to the shrinking of the middle class, long considered the heart of the economy. Countries with high income inequality, demonstrated by the Gini coefficient, tend to have lower mobility across generations, as measured by the IGE. There is a positive correlation between the wealth of one's parents and how concentrated wealth is in a country. Krueger called this phenomenon the "Great Gatsby Curve," and estimated that the benefits of well-off parents (and the negatives of growing up in poverty) will increase over time.
When compared to other developed nations, America continues to fall behind. The human development index (HDI), a composite index compiled by the United Nations, ranked the U.S. fourth in 2011, but when the ranking was adjusted for income inequality (IHDI), the U.S. fell to number 23. The IHDI ranking looks at how access to factors important in social mobility, especially schooling, are distributed between the rich and poor.
Babies born with a silver spoon are more likely to pass that on to their children, especially when the stepping stones most likely to provide higher income - better healthcare and better schooling - are often out of reach for the poor.
Women Have Become Upwardly Mobile
Social mobility studies try to account for factors that a child is born into, such as gender, race, birthplace and parents' social status. A 2009 study used Social Security information to examine shifts in income since 1937, and found that while mobility for all workers has improved since the 1950s it has declined for men. In other words, if overall mobility for all earners has been stable while mobility for men has fallen, mobility for women has to have increased in order to make up the difference. The decline in the gender gap has helped improved mobility.
The Bottom Line
The effects of social mobility and income inequality can be broad, but are not for certain. Some economists and analysts have argued that demand for goods and services has been kept lower than it could otherwise have been because wealth is concentrated at the top, and those with high levels of income tend to consume smaller portions of their incomes than those at the bottom.
Through the eyes of macroeconomic study, the rich thus have a lower marginal propensity to consume and a higher marginal propensity to save, and investing does not have the same effect as consuming a good. Additionally, with real incomes stagnant or falling, many in lower-income brackets outlived their means by borrowing in order to try to maintain the same lifestyle in the face of a decline in income.
Barack Obama and Mitt Romney's campaigns spent more than $1.6 billion on the 2012 election. This astronomical figure, while not the most spent on an election in real terms, highlights the role of money in determining the course of the American government. With the cost of running for office so high today, one must wonder whether Abraham Lincoln could have afforded to keep up.