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BK Blog Post
Posted by Jared Bernstein.
From 2009 to 2011, Bernstein was the Chief Economist and Economic Adviser to Vice President Joe Biden, executive director of the White House Task Force on the Middle Class, and a member of President Obama’s economic team.
Back in the early 1990s, I got into a cab in DC and began chatting with the driver, who was complaining about the tax policies of the new president, Bill Clinton.
“He’s going to raise my taxes!” he complained.
I knew that the first Clinton budget actually raised taxes solely on the wealthy and increased the Earned Income Tax Credit—a wage subsidy for low-wage workers. I told this to the driver pointing out that unless he was wealthy, these changes were more likely to lower rather than raise his taxes.
“I know that,” he said. “But what if I win the lottery!”
Now, I’m not saying that lots of people decide their political leanings based on the infinitesimal probability that they’re going to win the lottery, but that conversation came back to me this morning as I read this piece in the Times about the extent to which many Americans overestimate their chances of upward mobility.
The piece tied this phenomenon to the “American dream,” which might be described as the belief that class and opportunity are a lot more fluid here than elsewhere, such that hard work and perseverance are likely to enable you to climb the upward ladder of mobility. While there’s surely something salutary, or at least optimistic, about such beliefs, the cold, hard statistics do not much support them. There’s actually less mobility here than in many other advanced economies, and significant shares of children end up as adults in the same income quintiles in which they start out, especially at the top and bottom of the income scale.
Mobility scholars Richard Reeves and Belle Sawhill call this “stickiness in the tails.” Their data show that of those who start out in the bottom fifth of the income scale, by the time they’re age 40, 60% are still in the bottom 40% (36% remain in the bottom fifth); only 10% end up in the top fifth. For those who start out in the top fifth, 56% end up in the top 40%, including 30% of whom start off and end up in the top fifth; only 11% are downwardly mobile such that they end up in the bottom fifth.
This much is well studied and nicely covered in the Times piece. What we hear less about, and why that old conversation came back to me today, is this: there is a case to be made that the political economy of American dream as described above is not so benign. Is it instead a tool of conservative politics, exploited to extract “rents” from the majority on the wrong side of the inequality divide on behalf of the wealthiest few percent (“rents” here mean undeserved profits beyond their value-added)? To garner support for supply-side tax cuts on the wealthy, deregulation, anti-unionism, attacks on the safety net, anti-Keynesianism, and so forth?
I grant that this is sensitive territory. No one wants to crush the aspirations of those who strive to climb the income/class ladder. And there are many inspiring examples of people who have, through hard work and self-sacrifice, lived the dream. But I’ve been deeply ensconced in these debates for decades, and it’s clear to me that my cab driver’s probability error is not an isolated mistake but a serious problem with far-reaching consequences.
Here are some of its symptoms:
–The dream framework supports the notion that “rents” in the form of tax breaks and regulatory carve outs for the rich are job creating and opportunity enhancing for everyone else. Meanwhile, benefits for the poor stifle their incentives to pursue the dream. This is the politics that in recent weeks has attempted to cut both the estate tax for a tiny sliver of the wealthiest inheritors and food stamps and Medicaid the poor.
–Financial markets must be bailed out when they blow up the system; to bail out housing markets is to invoke “moral hazard,” i.e. to lose the price discipline that’s a critical hydraulic of the dream.
–The dream favors YOYO over WITT: “you’re on your own” over “we’re in this together.” The political implications are less support for collective action (e.g. unions, collective bargaining, safety nets, direct job creation programs) and more for tax cuts and other supply-side (versus demand-side) solutions.
–The dream supports a politics wherein inequality of outcomes are OK; inequality of opportunities are not. Inequality of incomes, wages, wealth, all at historical highs, are seen in this framework as the result of individual efforts, prowess, etc. as if we live in a true meritocracy, a sentiment that is at the kernel of the dream. There’s some consciousness creeping into the broader debate that barriers to opportunities, like education, are higher than they should be, and that’s a positive development. But there’s still a steep resistance to the critical linkages—certainly correlational and probably causal—between these two forces: that of inequality of outcomes and inequality of opportunities (Ben Spielberg and I have a paper on this out soon). It may be discomforting to those who want to believe in the dream of pure meritocracy, but we cannot attack the inequality of opportunity without attacking the inequality of outcomes.
–The dream points to deficit reduction over fiscal stimulus: Listen to the language of those who inveigh against investment in public goods—it’s framed as burdening our grandchildren with debts, making it that much harder for them to climb the ladder as the dream would have them do. But the idea of investing public resources in children and their parents’ well-being today through job creation, infrastructure investment, and educational opportunities is cast in opposition to their ability to make it on their own (this is a variant of YOYO over WITT). As a side point, it’s also worth noting that the deficit scolds will also tap dream mythology noted above to argue that tax increases in the interest of deficit reduction are unacceptable.
Again, I’m deeply aware of the sensitivities here, and here’s how I think they should be squared. Every individual, every parent, every kid, every teacher, pastor, mentor, coach, and so on should operate from the perspective that individual success is a function of perseverance, effort, dedication, and the belief that hard work will pay off.
But every policy maker, economist, social scientist, budget analyst, journalist, social worker, cop—everyone who’s work exists at the intersection of people and the actual institutions in which we live—should be mindful of the cautions and questions raised above. They (we) should operate with the aspiration of meritocracy but the realization that we’re far from it, and even moving in the wrong direction. Our understanding as social scientists must be that the American dream is decidedly not a reality for too many Americans. Our goal should be to change that reality.
Along the way, it wouldn’t hurt to help people learn a bit more about the probability of winning the lottery.