In the US earnings mobility is falling and income inequality is rising

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["...only half of Americans born in the 1980s are financially better off than their parents were at the same age... nearly four in 10 Americans aged between 18 and 34 are living at home with their parents, the highest proportion in 75 years... the so-called old industrial rust belt states where Trump unexpectedly beat Hillary Clinton were among the worst hit by plunging financial mobility." *RON*]

John Kehoe, Australian Financial Review, 6 January 2017

The American Dream is a pipe dream for a growing number of younger Americans. AP
Donald Trump won the US election promising to "Make America Great Again". Yet for many younger people the great American Dream is vanishing.

Shocking new economic research reveals that only half of Americans born in the 1980s are financially better off than their parents were at the same age.

That is a sharp decline. By way of contrast, for those born in 1940, 92 per cent of offspring at age 30 were wealthier than their mums and dads.

The National Bureau of Economic Research paper underlines a huge challenge facing the incoming Trump administration and policymakers more broadly.

While the US has the world's leading elite Ivy League universities, the secondary school education many Americans are receiving is abysmal. AP
It may also be a warning shot to the rest of the world.

Inequality and, perhaps more disturbingly, a lack of social mobility are exposing – as outdated – the impression that in America it is easy to rise from rags to riches.

Increasingly the deck is stacked against those born to less well-heeled parents and heavily in favour of the wealthy.

The chance of a poor American child rising up the societal income ladder, known as intergenerational earnings mobility, is far behind Australia, Canada, Germany, Japan and nearly all advanced economies, according to the Organisation for Economic Co-operation and Development.

Living with parents


Perhaps in a sign of leaner times, nearly four in 10 Americans aged between 18 and 34 are living at home with their parents, the highest proportion in 75 years according to an analysis of census data by real estate tracker Trulia.

Despite the incredible Silicon Valley technology advances that the current generation has at its fingertips, in inflation-adjusted income terms 50 per cent of millennials are financially behind their parents at around age 30.

"It is hard to overstate how dramatic these findings are," Brookings scholars Dimitrios Halikias and Richard Reeves write in a review of the NBER paper.

"If only one in two Americans are better off, in real terms, than their parents, it is not hyperbole to wonder about the death of the American Dream."

Few economists believe the President-elect's current prescriptions can repel the deep structural forces, particularly technology developments, at play in the economy and society. Soup kitchen in Charleston, North Carolina. NYT
The research bombshell was compiled from census data and federal tax statistics by Raj Chetty, David Grusky, Maximilian Hell, Nathaniel Hendren, Robert Manduca and Jimmy Narang for the NBER.

Intriguingly, the so-called old industrial "rust belt" states where Trump unexpectedly beat Hillary Clinton were among the worst hit by plunging financial mobility.

The likes of Michigan and Indiana have seen well-paid manufacturing jobs ripped away in recent decades, due to machines replacing workers and international trade competition.

Trump claims he can reverse these disheartening trends by renegotiating fairer trade deals, threatening to impose tariffs on China and bullying American businesses out of offshoring blue-collar jobs.
Intergenerational earnings mobility by country. OECD
Yet few economists believe the President-elect's current prescriptions can repel the deep structural forces, particularly technology developments, at play in the economy and society.
Economic growth

Part of the solution may lie in faster economic growth, which has struggled to nudge above 2 per cent for the eight-year Barack Obama presidency.

Trump has pledged 4 per cent plus growth, an improbable target over a sustained period, especially in light of the ageing population and weak productivity growth.

Donald Trump embraces the flag at a rally in November. AP
In any event, faster economic growth alone is unlikely to cure the lack of generational progress.

Absolute income mobility – the fraction of children earning or consuming more than their parents – has been on a steady downward trend for decades, even during the economic boom years presided over by Republican Ronald Reagan in the 1980s and Democrat Bill Clinton in the 1990s.

The NBER paper finds that if current income inequality levels persist, annual GDP would need to exceed an implausible 6 per cent to achieve mobility rates above 80 per cent.

Even if everyone's current income was $US10,000 higher than it actually is today, only 61 per cent would be better off than the 1940 cohort, Halikias and Reeves note.

Of course, it is possible some Millennials who haven't yet surpassed their parents may do so in the future as the lingering effects of the 2008 financial crisis recede.

Conversely, Australia has enjoyed 25 years of unbroken economic growth, so any future recession may retard intergenerational mobility Down Under.

But universal access to a decent public education and healthcare will probably keep Australia well ahead of the US.

Regardless, an obvious answer to fixing America's ills appears to be improving its failing education system.

Share of American children earning more than their parents at same age by birth year. National Bureau of Economic Research
While the US has the world's leading elite Ivy League universities, the secondary school education many Americans are receiving is abysmal.

The US continued falling in the latest global education rankings for 15-year-olds in mathematics, reading and science compiled by the Program for International Student Assessment.

Stunningly, the US dropped below the OECD average in maths, even lagging the old Soviet states of Latvia and Lithuania. The US was around average in reading and science across 72 countries.

It is an indictment on the world's richest country that it is not investing adequately in human capital.

Just over half of American students who begin a university degree end up graduating.
Earning power

Jamie Dimon, the outspoken chief executive of Wall Street giant JPMorgan and one of America's most revered business leaders, says the state of education is a "disgrace".

"I look at that and say that is a crime," Dimon said in a recent Bloomberg television interview.

"That's America at its absolute worst. We are allowing that to happen and these kids don't have the opportunities we all had at one point in life."

Unsurprisingly, non-college educated workers are far more likely to work in lower paying service occupations in the modern economy compared to the past, according to the think thank, The Hamilton Project.

US Federal Reserve chair Janet Yellen said December that workers with university degrees earned on average 70 per cent more than those without, compared to 20 per cent extra in 1980.

"Economists are not certain about many things, but we are quite certain that a college diploma or an advanced degree is a key to economic success," she said.

Education policy was not a major focal point for Trump, unlike Democratic candidates Clinton and Bernie Sanders who pledged free college education and to forgive crippling student loans.

The federal government contributes less than 9 per cent of total funding to secondary schools.

Throwing more Washington money at the education problem may help at the margins, but fixing the ingrained structural glitches in schools and the broader education system would also pay dividends.

Unless America educates and trains everyday Americans better, the great American Dream will be simply a pipe dream for many.

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