Understanding the American Dream does not grow from our president’s pessimism about income inequality (Our Prozac Presidency, WSJ 12/19/2013). He could avoid the Prozac if he understood his starting point about income inequality is not supported by comprehensive income research. And he appears to have no grasp at all of the relationship between an annual income and the growth of wealth over many years.
Two outstanding reports by Pew tell a very different story. One compared generational wealth by household age during the 25-year period from 1984 to 2009, an approximation of Obama’s adult years to the start of his presidency (see From Poverty to Wealth). The second is a 40-year follow-up study entitled Pursuing the American Dream: Economic Mobility Across Generations (see Income, Wealth, and Debt). This study covered most of Obama’s life from childhood, 1968 through 2009. It compared the income of parents and their genetic offspring at the same ages 40 years later. These comparisons were adjusted for family size and inflation.
The meat in these research studies, among other things, shows that 85% of the offspring from the poorest of families make better incomes than their parents, and many become top income earners in a single generation. What is not often reported is that the offspring of the highest earning families also fall to the lowest level of income earners. This data clearly pops the bubble that income in America is somehow stacked against the offspring of poorer families.
Pew’s study on generational wealth by household age group should cause Obama to reach for the Prozac. On its face, one may read that growing wealth in the old days was somehow easier than it is today. This reading is corrupted by a lesson that younger households, and our governments, have not yet learned: Growing wealth through debt is a slippery slope. All households, young and old alike, must learn to manage debt prudently. Without doing so, generating wealth is a pipe dream.
Most all young families start out poor. It is the prudent management of income and steady investment throughout 40-50 years that any wealth is generated. Virtually all high income families in America started with nothing. Generating wealth through income is not a project for the faint of heart, but an incredible number of regular Americans succeed in this process.
President Obama’s income inequality compares apples and oranges separated by 40 years of hard work. It makes no sense to compare the incomes of folks who are entering the job market for the first time with those who have been working and investing for several decades. Excluding most professional athletes, super high incomes are the byproduct of successful investments, from wealth, throughout a working life. Our president prefers over-night wealth through a hand full of magic beans.