Experience suggests that belief in the American Dream is nothing more than ballast to be thrown overboard as soon as the economy weakens. Certainly that is the role it has played in this recession. Two of the most memorable newspaper articles of the past year were proclamations of the Death of the American Dream. One, “American Dream Is Elusive for New Generation,” appeared in the New York Times and told the sad story of a recent college graduate considering leaving America for opportunities in Europe because he has only been able to attract job offers with $40,000 starting salaries. The other, Ed Luce’s “The crisis of middle class America” in the Financial Times, portrayed a middle class facing three major societal pressures: stagnating incomes, decreasing income mobility, and rapidly rising inequality-together, the “slow-burning-crisis of American capitalism.”
The economic downturn has certainly caused widespread hardship, but it would be a serious mistake to attribute the country’s economic woes to a prolonged erosion of middle-class opportunity. Middle-class college graduates are doing fine, as the phenomenon of recent graduates turning down $40,000 starting salaries would attest (the median salary for workers of all ages in the U.S. is just under $40,000. A job right after college that pays more than most people make is nothing to complain about).
Of far greater concern for the future of American society is the plight of those in the younger generation who are not established, who come from the lowest income bracket. After all, these are the people to whom the American Dream relates: the Dream is that someone born into a less fortunate situation can work hard and take advantage of opportunities to become successful and provide for a family.
Sadly, in aggregate, the federal government’s interventions and redistribution on behalf of the middle class, i.e., the voting class, undermine the prospects of the next generation of workers starting from nothing. The political class’s apprehension that the middle class is in danger is driving debt-financed federal government spending that is increasingly becoming too onerous for future generations to repay. The burden of the debt will become especially heavy if kids starting in the lower class aren’t able to move up in economic status and contribute more to the economy as a group. Their ability to do so, on the other hand, is limited by the country’s public schooling system’s ongoing failure to educate disadvantaged children. The educational system’s failure, however, will persist as long as it is used more as a tool for propping up employment numbers and rewarding Democratic constituencies than for education.
THE FACT THAT the American economy still provides opportunity on a vast scale should be evident from what Americans themselves are saying about their prospects. In early 2009, at the depths of the recession, the Economic Mobility Project, an initiative funded by Pew Charitable Trusts, commissioned a survey of Americans’ economic sentiments. The poll showed that 58 percent of people aged 18-29 thought that they would have an easier time moving up the economic ladder than their parents did. Seventy-two percent of those polled thought that their economic circumstances would be much or somewhat better in 10 years. Seventy-nine percent expressed confidence in the possibility that people could improve their economic standing even during the recession, and among youth the number rose to 88 percent. It is possible that those responses could reflect a sort of cluelessness or ignorance of the real problems in our society, but one wonders if the Greatest Generation would have been considered naive if they’d expressed high hopes during their youth in the depths of the Great Depression. Optimism in the face of uncertainty should itself be considered a strength of American society.
This clear expression of optimism among young workers conflicts with the grim trends reported by Luce and echoed endlessly throughout political commentary. Stagnating wages, declining income mobility, and rising inequality should be expected to eradicate workers’ enthusiasm and lead to dissatisfaction that would surely show up in surveys. The reason the polls don’t reflect such sentiments is that those malign developments are overblown, and are to a significant degree artifacts of the way statistics on income and inequality are kept.
For instance, economic mobility-the ease with which young workers move up the economic ladder-is as healthy as the polls would suggest. While it is true that middle- and lower-class wages have not progressed as they did a couple of generations ago, about 65 percent of children go on to out-earn their parents, including 80 percent of those in the lowest income quintile, according to a study by Julia Isaacs of the Brookings Institution.
It is hard to reconcile the fact that young generations are still advancing economically with the general phenomenon of stagnating wages until one factor is taken into account: immigration. Because immigrants earn less on average than others, including them in the sample makes it appear as though mobility is not as prevalent as it really is.
Nathan Grawe, an economist at Carleton College and a researcher for the Economic Mobility Project, wrote TAS that the finding that immigration decreases measured mobility “really is important news.” Grawe explained that “it helps us to reconcile many Americans’ sense that their families have made progress with the average earnings data we hear every year. While the average income may have been unchanged, that average hides the fact that the country is providing for new and better opportunities for those currently here and for those yet to come.”
In other words, even in this “lost decade,” the U.S. affords opportunities not only for its citizens, but also for citizens of less fortunate countries. Grawe pointed out that while other industrialized nations also have high immigration rates, the mass immigration from poorer countries is a “uniquely North American” phenomenon. For example, many European nations have high rates of immigration, but in most cases much of the immigration is from other wealthy European countries-mass immigration from poorer, predominantly Muslim countries does not compare to immigration into the U.S. from countries like Mexico. Only Canada promises newcomers opportunity near the rate America does, on a smaller scale.
GENERALLY, the idea the middle class is in a “slow-burning crisis” is badly overstated, as is, to a lesser extent, the argument that middle- class wages are stagnating. While it is true that a large and growing body of studies indicate that the earnings of the very rich have risen in disproportion to those of the middle class, it is by no means clear that there is a long-term trend, separate from the recession, of the middle class stagnating or losing ground. Minnesota Federal Reserve economist Terry Fitzgerald, in a contrarian 2008 paper, separated some of the frequently repeated misleading facts from the reality that the middle class has made steady gains.
The key paradox is that while households in the middle of the distribution have fallen behind top-earning households since the 1970s (a favorite statistic of pandering politicians), in fact almost all households have enjoyed substantial income gains since then. There are three factors generating this apparent contradiction, according to Fitzgerald. The first is that households have, thanks to more prevalent divorce and single motherhood, become significantly smaller since the ’70s, yielding less earning power per household. (In other words, whereas a mother with no job or a low-paying job might have lived with a husband instead of heading a household in years past, nowadays she would be more likely to show up in the statistics as a separate household head, dragging down the median household income.) The second is that the price index used by the Census Bureau overstates inflation, and thus understates the income gains that have accrued to the middle class. Lastly, measures of household income exclude certain benefits, like health care insurance, that have become more significant in overall compensation. After controlling for these factors, Fitzgerald found that median household income for most household types increased by “roughly 44 percent to 62 percent from 1976 to 2006.”
The methodology of these measures, though, is probably beyond the interests of most people. The subtleties involved in a realistic understanding of what’s happening to the middle class cannot withstand the brute rhetorical force of the claim, for instance, that middle class wages stagnated between George W. Bush’s and Obama’s presidential inaugurations-one of Obama’s favorite stump speech facts. For example, at a recent town hall meeting, Obama answered a question about the strength of the American Dream with the claim that “what we saw happening during 2001 to the time I took office was wages actually declining for middle-class families, people treading water, young people having more trouble getting their foot in the door in terms of businesses.”
(To his credit, Obama’s answer to the question also included a forceful rejection of the idea that the American Dream was dying, a welcome correction from a president often perceived as hesitant to brag about America:
“Absolutely not. Look, we still have the best universities in the world. We’ve got the most dynamic private sector in the world. We’ve got the most productive workers in the world. There is not a country in the world that would not want to change places with us. For all the problems that we’ve got, as tough as things are right now, we are still the country that billions of people around the world look to and aspire to. And I want everybody to always remember that.”)
TRAGICALLY, the laws that Obama and the Democrats have passed to counteract the supposed decline of the middle class, such as the health care bill and parts of the stimulus, are at odds with what future generations need to continue moving up the income ladder as Americans have been doing. In other words, to appeal to the middle class, which is not in trouble, the Democrats in power are waging a war on the young workers of tomorrow, who are.
Specifically, the Democrats are committed to serving the interests of public sector workers, and especially teachers’ unions. And this affiliation is just one of many ways in which Democrats support enormous present and structural federal budget deficits.
The Democrats’ neglect of youth-friendly reforms together with their commitment to deficits amounts to what liberal budget expert Isabel Sawhill called a “double whammy” for the younger generations. “On the one hand, the programs they need are not going to be there, and on the other hand they’re going to be stuck paying the bills for the elderly population and for the deficits that we’re creating.”
Sawhill and social researcher Ron Haskins authored a book, Creating an Opportunity Society (Brookings, 2009), in which they assess what are in reality the extremely low barriers to exploiting opportunity in the U.S. They note that a youth who finishes high school, gets married before having children, and maintains a steady job is almost guaranteed middle-class status, no matter what his background. Those three conditions shouldn’t prove insurmountable for anyone.
The fact that so many Americans are failing to meet those criteria reflects more on the current health of the nation’s families than it does on government programs. But insofar as the government can influence those goals, it does so through the school system. Despite loudly touting his reforms such as the Race to the Top program (RTTT), Obama leads the Democratic Party in preventing the changes that the K-12 education system so desperately needs.
While RTTT is on track to bring about some improvements in certain states, it is not a substitute for broad-based reform. The $4 billion in funding for RTTT is a drop in the bucket compared to the $64 billion annual Department of Education budget, and doesn’t even compare to the roughly $90 billion in other stimulus funds dedicated to making sure that teachers across the country kept their jobs, pensions, and salaries intact-without demanding serious reforms. Conservative commentators took notice when RTTT rewarded some union-friendly states, such as Maryland, over many of the most reform-oriented states, such as Louisiana under governor Bobby Jindal. The Democratic Party’s hesitancy to do anything to provoke the teachers’ unions led to the waste of a program that had great potential.
Nowhere was this dynamic more in evidence than in Washington, D.C. First, congressional Democrats cut funding for a wildly successful trial voucher program that allowed students to escape D.C. public schools, which are consistently among the worst in the nation. Then the ruling Democratic Party ousted the famously reformist schools superintendent Michelle Rhee, who had been more aggressive than anyone else in firing bad teachers and whom Obama had singled out for praise in the 2008 election campaign. The message was clear: Democrats, starting with the man at the top, are not capable of doing anything that would increase accountability for the teachers’ unions.
TEACHERS MAKE UP the largest group of public sector workers. As of 2010, the 50 states had an aggregate of $3.2 trillion in unfunded pension liabilities for state and local workers, according to research published by Northwestern’s Kellogg School of Management. In other words, the present generations have made no plans for paying for the promises they have made to themselves-they are simply leaving the check for the next generation to pick up. Inevitably, states like California, Illinois, and New York, too fiscally insecure to retire their own debts, will turn to the federal government for bailouts. Instead of showing foresight and negotiating for pension reform now, the Obama administration has improved the teachers’ unions’ bargaining position.
The unfunded pensions, however, pale in comparison to the federal debt. The debt problem, again, is a political problem that a responsible government could solve easily. But the U.S. government, addicted to giving voters all the spending they want, is far from responsible.
This fiscal year’s deficit will amount to roughly $1.2 trillion, and the CBO has projected that the deficit will be nearly that amount at the end of the decade. In other words, there is no end in sight for the enormous budget shortfalls. Although the CBO also expects the public debt to approach 90 percent of the nation’s gross domestic product by the end of the decade, as of this writing the Obama administration has literally no plan for bringing spending in line with revenues, instead relinquishing that responsibility to a powerless debt commission. And this after signing a health care bill that the Medicare actuaries conclude will not curb government spending on health care-which singlehandedly threatens to overwhelm the federal budget within a generation. With the health care bill the administration has committed itself to ignoring the clear responsibility it has to address the problem of health care costs.
Already, public debt exceeds 60 percent of GDP, and the average American is on the hook for nearly $30,000 of federal debt. If current economic and political trends persist, the increasing federal debt will cause a sovereign default and economic crisis within a generation. If, however, the Obama administration or a subsequent executive manages to stabilize the debt at 90 percent of GDP-the level above which the economists Carmen Reinhart and Kenneth Rogoff believe a debt crisis becomes an imminent risk, and the level the U.S. is expected to reach at the end of the decade-the average person will owe roughly $60,000, about $2,500 of which will be interest payments on the debt for that year alone (my numbers, taken from projections by the Congressional Budget Office and Census Bureau). The vast majority of any repayment would represent a pure redistribution from future workers to present workers.
In the short term, the recession unavoidably entails a terrible job market and large deficits. Confusing the effects of the business cycle with long-term diminished prospects, however, will only encourage intergenerational class warfare. The U.S. can afford to reform the long-term debt, but it can’t afford to allow many more generations of lower-income kids to suffer through failing schools. Somehow, Obama and the Democrats have this backward.