Oh, sweet America, ye land of opportunity, home to the time-tested formula in which hard work + perseverance = success, in spite of family background.
Or not. The new reality, as described in a Dec. 16, 2013, discussion on MSNBC’s Morning Joe, is it’s harder than ever for Americans born into low-income families to advance up the economic ladder.
Middle-class economic growth is stunted compared to other parts of the developed world, and it’s hard for people to work their way out of poverty, said Steven Rattner, a Morning Joe economic analyst and former Treasury Department official who oversaw the restructuring of the auto industry under President Barack Obama.
"We have fallen way back," Rattner said. "We're behind many countries in Europe in terms of the ability of every kid in America to get ahead. It's a real problem."
Why is that? host Joe Scarborough asked. They talked about the globalization of the job market and increased poverty.
Rattner’s statement betrays our classic view of the American Dream. Is his point accurate?
Rattner researcher Sundas Hashmi directed us to reports that bolster Rattner’s statement. The takeaway: The American rags-to-riches story is more out of reach than ever, possibly responsible for restricting economic growth.
The Great Gatsby Curve
We last heard a version of this talking point from the president himself, who spoke at length recently about the dangerous consequences for America if income inequality continues to rise and income mobility decreases.
"In fact, statistics show not only that our levels of income inequality rank near countries like Jamaica and Argentina, but that it is harder today for a child born here in America to improve her station in life than it is for children in most of our wealthy allies, countries like Canada or Germany or France," Obama said. "They have greater mobility than we do, not less."
Alan Krueger, former chairman of the president’s Council of Economic Advisers, explained the connection between economic mobility and income as the "Great Gatsby Curve," named after the novel about Prohibition-era upper-class excess by F. Scott Fitzgerald.
Families at all earning levels were growing together after World War II but have been growing apart since in the decades since, Krueger wrote. The country’s top earners have pulled a lot further ahead than the middle and lower class, he said, and the trend line suggests the future earnings of today’s children will be tied more and more to the income level of their parents.
"Not since the Roaring 20s has the share of income going to the very top reached such high levels," Krueger said, according to prepared remarks.
Krueger compared income inequality of 10 developed countries with the correlation between a parent’s income and their children’s (it’s more complicated than we described, check out the details in Krueger’s presentation or this Bloomberg infographic). The "Gatsby Curve" showed economic possibilities for children in European countries such as Finland, Norway, Denmark, Sweden, Germany and France were much less connected to their parents’ income than in the United States and United Kingdom.
Evidence from Pew and others
A 2011 short report by the Pew Charitable Trusts’ Economic Mobility Project described a joint study by researchers from 10 countries who looked at how children’s mobility is connected to their family’s socioeconomic background. They used parents’ education as a measure because it has strong ties to income and offered cross-country comparisons.
Of the 10 countries studied, the United States had the strongest link between parents’ education and a child’s economic, educational and socio-emotional outcomes, the study found, more pronounced than in the United Kingdom, France, Germany and Nordic countries, as well as Canada and Australia.
"Americans absolutely confirm they believe America is the land of opportunity and that people should have equal opportunity if they have the skills," said Diana Elliott, research officer for the Pew Charitable Trusts’ Economic Mobility Project, in an interview. "The data fly in the face of what Americans have believed and what they say they believe in our polling work."
Pew researchers use data from a long-term survey that started tracking 5,000 families in 1968 and follows those parent-child pairs as they form their own households (known as Panel Study of Income Dynamics). Since economic mobility is best measured when people are in their prime working years around age 40, we won’t have a third generation comparison for another decade or two, Elliott said.
The United States has a greater degree of "stickiness," in which people at both extremes of the income distribution are likely to stay in the quintile into which they were born, than neighbor Canada, she said, referencing this report.
The Brookings Institution and Pew Charitable Trusts teamed up on a 2008 report that analyzed several studies on economic mobility and concluded the following:
Cross-country comparisons of relative mobility aren’t always based on perfect data. But the United States is distinct from other countries, research shows, in having "less, not more, intergenerational mobility than do Canada and several European countries."
Upward mobility is particularly uncommon for children who are born into families at the lowest income bracket.
A previous examination of this issue by PolitiFact Ohio mentioned a 2010 study by the Organisation for Economic Co-Operation and Development, a Paris-based think tank with 34 member countries, including the United States. The study found Denmark, Australia, Norway, Finland, Canada, Sweden, Germany, Spain and France out-ranked the U.S. in terms of a child’s ability to earn more than his or her parents. Only Italy and Great Britain had stronger links between a person’s earnings and his or her parents than the U.S. of the 12 countries evaluated.
Why is this happening?
A 2012 New York Times article that examined five studies about the United States' lagging economic mobility identified the depth of American poverty as one culprit, as the country has a "thinner safety net" than other wealthy nations.
Other potential reasons the Times reported include the increased likelihood of poor Americans to be raised by single mothers, decreased unionization, high incarceration rates and the country’s historical racial divide.
A college education is one way for children born into the lowest income distribution to move up despite their family background, noted a report by the Federal Reserve Bank of San Francisco. But for many born into the poorest bracket, college is out of reach. Just 7 percent of adults whose parents were in the bottom income quintile obtained a college degree.
Disagreement, caution and another measure
It is not wise to compare U.S. data with considerably smaller, more homogenous populations in European countries, such as Denmark.
The evidence is scant that income inequality is hurting or driving our country’s economic woes.
Looking at absolute mobility, or comparing a person’s income to their parents’, reveals a different story than isolating the measure that most of these studies used (that’s relative mobility, or looking at where an adult landed in the income distribution compared to his or her parents).
For children born into the lowest quartile, 83 percent made higher family incomes than their parents, according to the Federal Reserve Bank of San Francisco, which examined the same long-term family survey that Pew uses. As a whole, 67 percent of U.S. adults out-earned their parents.
Thing is, we don’t have solid comparisons for absolute mobility for other countries, said Donald Schneider, a Heritage researcher who addressed his concerns about international comparisons of economic mobility in a whopping 6,700-word piece.
We won’t visit each point here (this is getting long enough -- eat a cookie, you deserve it). Basically, he cautioned the data used for some of these studies is not collected in the same way, and cultural differences could account for some of the income gaps.
Plus, he wrote, Americans have to make more money to move from the bottom to the top than in countries such as Denmark.
But many see that as the problem, said Julia Isaacs, a senior fellow at the Urban Institute who studied international comparisons of generational income mobility in 2007. More distance means more inequality.
"We have more distance from the top to bottom," she said, "and whether that’s a good or bad thing may depend on your point of view."
Steven Rattner said, the United States is "behind many countries in Europe in terms of the ability of every kid in America to get ahead."
Some conservative economists say the comparisons between countries are imperfect, that we need better data, and Americans are doing just fine if you look at their ability to simply out-earn their parents. We don’t know how that compares to European countries.
But many studies back up Rattner’s point. Studies show that we are behind "many countries in Europe in terms of the ability of every kid in America to get ahead." Nordic countries have particularly higher rates of income mobility than the United States.
We rate the statement Mostly True.