Goodbye, Horatio Alger

The Democratic pragmatists in Congress are so wedded to their middle-of-the-road attitudes about government social programs, which some of them insist won them victory in November, that they seem incapable of seeing the economic state of the nation for what it has sadly become. To put it simply, the Democratic majority that took control of Congress in January is inheriting a class society. Today in America, one's birth largely determines one's future.

We may quibble about the exact threshold over which a nation must pass to be described as a class society, but the latest research on income mobility is startling. As economists Isabel Sawhill and Sara McLanahan state in the fall volume of the journal they edit, The Future of Children, the American ideal of a classless society "is one in which all children have a roughly equal chance of success regardless of the economic status of the family into which they were born." In sum, they write, "the association between one's parents' income and one's own should be small."

But that is not the case in America. Only a couple of decades ago, economists thought that in the land of Horatio Alger only 20 percent of one's future income was determined by one's father's income, a conclusion that University of Chicago economic Nobelist Gary Becker, among others, hailed as proof of the fairness and health of the American economic model. More sophisticated research in the 1990s, however, suggested that the relationship between incomes of fathers and their sons was closer to 40 percent--disheartening if true. Some relationship between intergenerational incomes is to be expected through biological inheritance, cultural privilege and the passing on of social norms, but at 40 percent, the Chicago school argument took a serious blow.

Now, based on new data gathered in the past few years, some economists, led by Bhashkar Mazumder of the Federal Reserve Bank of Chicago, argue that 60 percent of a son's income is determined by the level of income of the father. For women, it is roughly the same. Sixty percent is a shocking number, and some economists want to await further research, but Mazumder's methodology is persuasive. At the least, the estimate of a 40 percent correlation is likely too low.

Still, has mobility declined in recent decades? Mazumder and others think it has. Their research finds that the correlation of income between generations rose markedly in the 1980s and '90s. Again, not all economists agree, but most of those doing research in the area do concede that income mobility today is greater in many European countries than it is in America. My guess is that few in Congress, or in the media for that matter, believe that yet. Reality dawns slowly on unwilling eyes.

The findings would not be as disturbing, of course, if incomes had been growing about equally for all levels of Americans over the past quarter-century. But income inequality has risen since the 1970s to the levels of the Roaring Twenties. For example, the income of the top fifth of American households after inflation has risen by 50 percent since the late 1970s, the next fifth by only about 20 percent and the middle fifth by only 10 percent or so. A gain of 10 or even 20 percent over roughly a quarter-century is close to trivial, and the income of those in the bottom fifth did not increase at all over this period. By contrast, throughout American industrial history, incomes grew 30 to 50 percent or more every quarter-century, and in the quarter-century after World War II, gains reached more than 100 percent for all income categories. Since the late 1970s, only the top 1 percent of households increased their income by 100 percent.

Thus, an American worker in the 1950s and '60s could improve his or her standard of living significantly even without rising in the hierarchy, because incomes increased handsomely for all levels of earners. To do well now, you've got to climb the pyramid, as conservatives until recently could insist Americans did. It is now clear that many, probably most, cannot.

What's going on? First, the nature of the economy changed beginning in the 1970s, and median wages, for a variety of reasons, largely stagnated. For men alone, they declined.

Second, to make it to the middle class--or stay there--a college degree increasingly became a requirement. College was a new and expensive cost for those climbing into the middle class.

And third, as the economy changed and society evolved, government essentially sat it out. The influence of a neoliberal ideology of minimal government was effectively promulgated by Ronald Reagan and economists led by Milton Friedman. Generally slow economic growth since the early 1970s also meant lower federal tax revenues, which the Reagan and Bush tax cuts reduced even further. The Republicans did not succeed in cutting the absolute size of government, largely because entitlement programs like Medicare and Medicaid grew, but both Republicans and Democrats were party to what amounted to a sharp reversal of the progressive history in America, in which government since 1900 had been an active, constructive force to help people adapt to changing and difficult economic circumstances.

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