The dying American dream

President Obama’s former economic adviser delivered two bombshells at an international conference on social mobility this week. Half of Americans are now worse off than their parents. And the gap between rich and poor is the main driver for this fall in absolute income mobility. To put it bluntly, the American dream is dying.

The ‘killer stats’ come from Alan Krueger’s review of a study by fellow US economist Raj Chetty.  Chetty finds that 50% of American children born in the 1980s earn a higher income than their parents. This compares with 90% of children born in 1940. The decline is depicted below (from Chetty’s paper in the journal Science).

Three quarters of this decline is down to widening gaps in income inequality; a quarter down to weaker economic growth.  The implications for Government policy are profound. Simply boosting the national economy would have little impact on absolute social mobility levels even if it could be achieved; reducing income gaps between rich and poor is required to improve the lives of all Americans.

These findings frame the social mobility debate on both sides of the Atlantic for the next decade. We don’t have the same data for Britain. But all the indictors point to a similarly bleak picture. Younger Brits face the prospect of earning less than their parents. And fewer are likely to climb an already steep social ladder (lower absolute mobility means relative mobility is much harder).

Krueger, the Princeton University economist who was Obama’s Chairman of the Council of Economic Advisors, suggested a number of Government actions to boost mobility levels.  These included: universal pre-school, improving teachers, widening access to universities, increasing the minimum wage, more tax credits for low income workers, and more housing vouchers for low-income families with young children. None of these are supported by the current American administration.

It’s a good policy check-list for the British Government to ponder over if it is to deliver on its promises to improve social mobility. The potential rewards are not just higher mobility. The country would enjoy stronger economic growth, and a less divided society.

We must tread carefully with country comparisons. The conference in Jerusalem heard that Israel enjoys high relative income mobility despite high income inequality. Could this be due to compulsory military service, a social equalizer and training ground for essential life skills? Perhaps. But even if so, national service looks a step too far for Britain’s younger generations – for all their bleak prospects.

The meeting was generously supported by the Rashi Foundation and Yad Hanadiv (the Rothschild Foundation).