Severe Inequality Is Incompatible With the American Dream

Why extreme wealth makes it hard for people to do better than their parents did

Tony Gutierrez / AP

The numbers are sobering: People born in the 1940s had a 92 percent chance of earning more than their parents did at age 30. For people born in the 1980s, by contrast, the chances were just 50-50.

The finding comes from a new paper out of The Equality of Opportunity Project, a joint research effort of Harvard and Stanford led by the economist Raj Chetty. The paper puts numbers on what many have seen firsthand for years: The American dream—the ability to climb the economic ladder and achieve more than one’s parents did—is less and less a reality with every decade that goes by.

There are two main reasons why today’s 30-somethings have a harder time than their parents did, according to the authors. First, the expansion of the gross domestic product has slowed since the 1950s, when growth was frequently above 5 percent a quarter. That means the economic pie is growing at a slower rate than it once did, so there’s less to go around. Second, the distribution of that growth is more unequal, and more benefits are accruing to those at the top. Those at the bottom, on the other hand, are not able to achieve as big a share as they once did. Their wages are not growing, so they are stuck at the same level as, or below, their parents. “Because incomes have been stagnant for a relatively large proportion of society, it’s harder for people who stay within that chunk to beat their parents in absolute terms,” Robert Manduca, one of the paper’s co-authors, told me.

These numbers are coming out around the same time as another important economics paper is re-emphasizing the idea that those at the bottom are having a tough time economically. The paper, by three French economists—Thomas Piketty, Gabriel Zucman, and Emmanuel Saez—showed that incomes at the top are booming as those at the bottom stagnate. On average, national income per adult has increased 60 percent in the U.S. since 1980, but most of those gains have accrued to those at the top. People at the bottom half of the income distribution are making, on average, $16,000, while the average pre-tax income of the top 1 percent of adults is about $1.3 million, the researchers found. In the 1980s, the top 1 percent of adults earned 27 times more than the bottom 50 percent. Now, they earn 81 times more.

The two papers are more proof that America is becoming a more unequal society. But does it matter that the rich are making more money than they once did? After all, Americans pride themselves on being a society in which anybody can start from anywhere and become successful. Wealth, in itself, is not problematic: Most Americans likely wish they were the ones at the top.

The problem is less with the existence of such wealth than with how it is created and preserved. For one thing, people at the top are able to use their ample resources to help their children get ahead and stay in their parents’ income bracket. People on the lower rungs of the economic ladder can’t access the same resources. “The relatively rich will skew the chances that their children will do better,” said Miles Corak, a Canadian economist who has studied how inequality informs intergenerational mobility. As children make their way through the education system, their parents’ financial situation tends to inform how successful they are: A child with a nanny, access to pre-school, a tutor, and paid-for college tuition will likely have more professional success in life than a poor child.

But it’s not just access to resources that’s important, Corak argues. Perhaps more important is the power the wealthy have in shaping societies. Because they have access to private schools, elite colleges, and homes in good neighborhoods, for example, wealthy parents have little incentive to back spending on public education, affordable housing, and other services they don’t use. Without support, these services fall by the wayside in poorer neighborhoods, yet it is those services that often do the most to increase social mobility: Access to early childhood education and good schools in safe neighborhoods have been shown, time and again, to improve children’s life prospects. “In a higher inequality society,” Corak said, “there is more of a chance that public policy will be skewed to reflect the preferences of those who have more voice.”

Corak says that in his native Canada, the wealthy and poor alike are invested in the same system and ensure that it benefits everyone, whether rich or poor. “If everyone buys into the system, you have advocates for that system to ensure it stays that way,” Corak said.

The idea that an unequal society allows the wealthy to dictate policies that help themselves has very troubling implications in a country that just elected a president who seems focused on putting the wealthy in charge. The wealthy have benefited from the system that has helped create their wealth: the private schools, the elite colleges, and the growing salaries for those at the top. And they have little incentive to change it.