Could increasing equality revive the American Dream?

Only half of children born in the 1980s are making more money than their parents did, a Stanford study finds. But researchers say improving equality may be the answer.

First Look

The American Dream is struggling, a group of Stanford researchers says – but there may be a way to revive it.

Researchers at the Stanford Institute for Economic Policy Research in Palo Alto, Calif., released a new study comparing adult children’s wealth to their parents’ when both were age 30. They adjusted the data – which came from the census and anonymized IRS records – for inflation, taxes, and changes in household size. What they found was that, while 90 percent of children born in the 1940s made more than their parents, only half of those born in the 1980s exceeded their parents’ income by age 30.

These findings cut against the expectations of many parents, who may hope that their children will embody the American Dream and enjoy greater success than their parents did. But distributing growth more equally across society may be one way to improve living standards for this generation, too.

“One of the defining features of the American Dream is the ideal that children have a higher standard of living than their parents,” economist Raj Chetty, a senior fellow at SIEPR and one of the authors of the study, said in the press release. “We assessed whether the U.S. is living up to this ideal, and found a steep decline in absolute mobility.”

Millennials and their families may already have been aware of the decline, Professor Chetty indicated, saying the election reflected “the anxiety and frustration many people are feeling.” One possible source of frustration for Millennials: though they dream of buying homes, just as previous generations did, many may be unable to afford them, thanks to rising house prices and the financial burdens imposed by student debt and high rent costs.

The largest declines in “absolute mobility” were concentrated in the eastern Midwest, in states like Michigan and Illinois. And across the board, the declines were more pronounced for men. 

But the researchers made an observation that may be surprising. Children’s struggles to exceed their parents’ living standards haven’t been driven primarily by falling economic growth rates, as measured by gross domestic product (GDP). 

That’s not to say high growth rates – like those during the post-war years – wouldn’t help. In a model that raised the economic growth rate to post-war levels, the estimated rate of absolute mobility rose from 50 percent to 62 percent.

But distributing that wealth was far more influential. Even at current low levels of growth (2-3 percent), a model that distributed wealth more evenly – as it was in the middle of the century – allowed 4 in 5 children to do better than their parents.

If realized, such an even distribution could reverse two-thirds of the decline between 1940 and 1980, researchers say. That finding may come as no surprise for economic equality advocates like Richard G. Wilkinson and Kate Pickett, who co-authored “The Spirit Level: Why Greater Equality Makes Societies Stronger,” about the financial and social benefits of equal societies.

The study’s authors noted, however, that achieving such equality is likely to be a challenge. Issues like segregation, housing, and education all present obstacles, they said. 

But making changes may be the American Dream's best hope.

“The finding of this study implies that if we want to revive the American Dream of increasing living standards across generations, then we’ll need policies that foster more broadly shared growth,” Chetty said in the release.