Editor’s Note: Several times a week in his e-letter Liberty Through Wealth, Chief Investment Strategist Alexander Green offers sharp insights into building wealth, finding financial independence, and living a richer, freer life.
Below, Alex gives us an important and inspiring reminder that the American Dream is still within reach.
For more of this type of content from Alex, check out the Liberty Through Wealth website here.
– James Ogletree, Managing Editor
I recently debated with author and economist Dr. Gregory Clark, who argues that there is no social mobility in this country.
In his view, you are statistically unlikely to rise above the economic quintile that you were born into.
There is a problem with his argument, however. It is demonstrably untrue.
Most readers have experienced economic mobility themselves.
Part of growing older is moving from earning no income, to earning minimum wage, to performing low-skill jobs, to landing better jobs – thanks to education and training – to earning your peak income (due to greater experience), to retiring and earning less.
This is a fundamental part of most workers’ experience. And it results in increasing income mobility right up until retirement.
Workers who, in addition, live within their means, save, and invest generate substantial assets as well.
And higher income and greater wealth make it far easier to live the American Dream.
I can now look back a half-century to my high school days and recognize dozens of men and women who followed this path. And I’ve met many hundreds more along the way.
This is merely anecdotal evidence, of course. (Although I’ll bet your experience is similar.)
A scholar like Dr. Clark would insist on reliable and convincing statistical evidence instead.
And there is plenty of it.
A few years ago, Senator Phil Gramm, Dr. Robert Ekelund, and Dr. John Early – three men with different political views – co-authored an excellent book entitled, “The Myth of American Inequality: How Government Biases Policy Debate.”
The authors note that there are essentially two ways to assess income mobility.
The first one measures changes in income over an individual’s lifetime (as I described above).
The other – Dr. Clark’s particular interest – measures the change in children’s income compared to the parents. (Intergenerational social mobility, in other words.)
Combining data from the Census Bureau, the Treasury Department, and the Pew Charitable Trusts, the authors demonstrate the following…
- The vast majority of Americans have experienced rising real incomes over all extended periods in the nation’s history.
- No matter what step of the economic escalator individuals begin on, rising productivity tends to increase inflation-adjusted earnings over time.
- Those who exert more effort – through education or persistence – earn even more.
- Multiple studies reveal a high level of mobility no matter what income level a child was born into.
- Almost 90% of adult children’s economic success comes from factors not related to the income ranks of parents.
- For children reared by parents in the bottom income quintile, 93% grew up to have more income than their parents.
- They conclude by saying, “Economic mobility is alive, powerful, and widespread in America today.”
Ours is a story of extraordinary upward mobility driven by the efforts of American workers and the most prosperous economy in the history of the world.
They also point out that most American fortunes – even the very largest – disappear within a few generations, thanks to charitable gifts and spendthrift heirs.
In the book, the authors cite Dr. Clark for doing a bang-up job of depicting wage stagnation from 1200 until 1800.
How he could remain impervious to the evidence that things are dramatically different today is a mystery.
It’s true that some countries have higher levels of social mobility than others.
What accounts for this difference?
- Family structure: Communities with a higher proportion of two-parent households tend to have ever greater upward mobility, even for children of single parents.
- Early childhood environment: Parent interaction and quality-of-life experiences give kids a head’s start. (Many inner-city toddlers grow up in a culture of silence. They come to kindergarten lacking basic knowledge, such as the fact that peas are “small, round, and green.”)
- Education: Lower drop-out rates mean more kids have the skills they need to hold higher-paying jobs.
- Social capital: Neighborhoods with strong social networks and community involvement have higher rates of mobility.
- Migration: People who find it easy to move from rural areas to the city – or from one city to another – are better able to pursue better job opportunities.
Many U.S. communities do a good job of nurturing these values. Others, less so.
As a parent, I would try to foster these conditions to make it as easy as possible for my children to rise.
Looking at the list, I’m reminded of a story about Nobel Prize-winning economist Milton Friedman.
A Swedish economist once told him, “In Scandinavia, we have no poverty.” Friedman replied, “In America, among Scandinavians, we have no poverty either.”
Other nations do not struggle with the same racial history that we have here.
However, if Sweden’s robust welfare state is superior to the American system, it’s also worth pondering why Swedes here earn far more than Swedes over there.
Perhaps what individuals who believe the dream is dead really need is a change of perspective.
They may still have a long way to go to achieve their most important financial goals. But opportunities exist.
All they need is a plan to get there, the desire to get started, and a determination to carry through.
The American Dream is an aspiration and, ultimately, an achievement. Those who see it as an entitlement are bound to be disappointed.
The first step in achieving it is realizing that it exists – and then moving toward it in a systematic way.