Raj Chetty, the head of Stanford’s “Equality of Opportunity” project, recently released a paper called “The Fading American Dream” co-authored with another economist, a sociologist, and three grad students. It claims that “rates of absolute mobility have fallen from approximately 90% for children born in 1940 to 50% for children born in the 1980s.” [Though the study ends with 2014, when most of those “born in the 1980s” were not yet 30.]
The title alone was sure to attract media excitement, particularly because the new study thanks New York Times columnist David Leonhardt “for posing the question that led to this research.”
Leonhardt, in turn, gushed that Chetty’s research “is among the most eye-opening economics work in recent years.” He explained that he asked Chetty to “create an index of the American dream” which “shows the percentage of children who earn more money… than their parent earned at the same age.” The result, he concludes, is “very alarming. It’s a portrait of an economy that disappoints a huge number of people who have heard that they live in a country where life gets better, only to experience something quite different.”
“Another Chetty-bomb just exploded in the mobility debate,” declared a Brookings Institution memo: “Only half of Americans born in 1980 are economically better off than their parents. This compares to 90 percent of those born in 1940.”
At Vox.com, Jim Tankersley proclaimed “The American Dream [is] collapsing for young adults.”
“Sons born in 1984 are only 41 percent likely to earn more than their fathers, compared to 95 percent of sons born in 1940,” wrote USA Today reporter Nathan Bomey. “If the American dream is defined as earning more money than your parents,” said Bomey, “today’s young adults are just as likely to have a nightmare as they are to achieve the dream.”
The Chetty study proved to be a politically irresistible story, since it appears to confirm a popular nostalgia for the good old days and belief that it has become more and more difficult to get ahead. But that is not what the study really shows. What it really shows is:
First: Incomes were extremely low in 1940, so it was quite easy to do better 30 years later.
Second: Doing better than your parents is not defined by your income at age 30, but by income and wealth accumulated over a lifetime (including retirement).
Third: A rising percentage of young people remain in grad school at age 30, so their current income is lower than that of their parents at that age but their future income is likely to be much higher.