You’ve heard the saying — that apples don’t fall far from the tree. But when it comes to earning potential, that saying may not be so true anymore.
A new study out of Stanford, Harvard, and U.C. Berkeley finds that children today are far less likely to earn as much money as their parents, compared to past generations. It says that likelihood has fallen from 92% for kids born in the 1940s to just 51% for those born in the 1980s — our current millennials.
The study combines census and earnings data to measure the rate of “absolute income mobility” — or the percentage of children who earned more than their parents.
It did that by comparing household incomes of children and parents at age 30 for each group and also at every income level. Researchers adjusted for inflation, taxes, any financial benefits outside of income, and household size.
The Stanford News says the results show a strong decline among people of all income levels with the largest declines among the middle class. The decline is also found in all 50 states although the amount of decline varies demographically.
The states where mobility fell the most were Michigan, Nevada, and Washington state. Vermont, Florida, Ohio, Indiana, Illinois, Idaho, Oregon, and Alaska were in second highest tier. California was right about in the middle. The states where mobility fell the least were New York, Louisiana, South Dakota, North Dakota, Montana, and Hawaii.
It also shows that the decline for men was much steeper than for women. Almost all men born in 1940 earned more than their parents. But for those born in 1984, that earning potential drops to 41%.
Due to the earnings gender gap, the decline wasn’t so steep for women because they don’t generally earn as much. Their rate dropped from an already low 42% for those born in 1940, to just 26% for daughters born in 1984.
The study authors say there are two reasons for this change in earning potential. One is an increasing inequality in how our economic growth is distributed. The other is a slowdown in GDP growth. But they blame the former for most of this decline.
Stanford economics Professor Raj Chetty, who’s one of the study authors, says: “One of the defining features of the American Dream is the ideal that children have a higher standard of living than their parents.”
He says: “We assessed whether the U.S. is living up to this ideal, and found a steep decline in absolute mobility.” He says: “(It) likely has a lot to do with the anxiety and frustration many people are feeling, as reflected in the election.”
The take-away is that any efforts to reverse this trend would need to foster more widely shared economic growth. But the researchers say it’s not that easy to accomplish because of complex issues that include education, housing, and situations that create segregated opportunities.
The nation is now faced with an incoming president who’s promising big changes. Donald Trump’s mantra has been “jobs, jobs, jobs”. But there’s a lot of controversy over his potential to improve the economic situation for everyone. And if the disenfranchised people who voted for him don’t get the results they were promised, there’s sure to be backlash down the road…
Investors seem to think Trump will fulfill his promises, which is why the stock market has been on a tear since he was elected. But this optimism seems to be based more on hope than reality.
Trump’s plan calls for $100 billion in infrastructure spending per year for 10 years. The “hope” is that this would create many jobs and boost the economy. On the surface, it does sound hopeful. In reality, we already spent $416 bullion on infrastructure in 2014 with meager results. Total transportation infrastructure was $279 billion, of which highways saw $165 billion in spending. Water infrastructure was over $100 billion alone.
Trump’s plan may not make a dent in the overall picture. Instead, it could just create more debt, to which Republicans are usually opposed. Additionally, there already isn’t enough skilled labor in the U.S. to work on these projects. There are already 200,000 construction job openings, and no takers.
According to John del Vecchio, editor of the Forensic Investor, Deere & Co. is a perfect example as to why Trump’s plan may not create the jobs needed.
John Deere’s stock has been soaring from excited investors anticipating massive expenditures on infrastructure. But Deere’s revenues were down 27% when infrastructure spending was $416 billion in 2014. Why would there be a sudden dramatic increase just because a new President is in office?
Del Vecchio says Trump’s plan is incremental at best, and that “the notion that all these companies are going to see huge revenue increases is way overblown as their business has been in decline despite massive infrastructure spending in recent years.”
The Wall Street Journal writes that if the economy steams ahead with a 3.8% growth rate, as Mr. Trump promised, we’d only see a slight bump in earning potential — from 51% to 61%. That’s still a far cry from two generations ago.
And many economists are not convinced the GDP will get anywhere near 3.8%. The study authors say we’d need to see a 6% growth rate per year to return to the earning potential of kids born in the 1940s.
The study’s authors are urging the U.S. to do more to reduce income inequality and to increase the benefits of economic growth for the middle class and the poor. Improving educational opportunities would help. Providing relocation assistance for families living in high-poverty areas would also help.
This study cites previous research on the effects of impoverished environments on children and their earning potential as adults. That research looked at randomly selected families living in high-poverty housing projects that used vouchers to move to better neighborhoods.
It found the sooner that children were moved to better neighborhoods, the greater the chance they had of financial success as adults. Children under 10 years of age who moved to a better neighborhood had a 60% gain in earning potential. That potential dropped to about zero if children waited until they were adults, in their 20s, to move away.
One student who assisted with the research told the Stanford News: “It’s sobering to see how sharp the decline has been over time, particularly since the odds were so much better for my parents.” He said: “I can see what my parents have been able to do for me, and it’s a bit scary to think that it’s a coin flip whether or not I’ll be able to provide the same things for my kids in the future.”
It seems that Making America Great Again got a lot of attention from disgruntled voters in this last election. Maybe what they are really looking for is a way to “Make the American Dream… Great Again”… for everybody.
I was speaking with my daughter on a road trip last week, and she asked me about income inequality, and wondered why the rich have so much and the poor have so little. She thought redistribution would be the right thing to do.
I replied that it’s been tried before but simply doesn’t work. It suggested that you could even out the playing field and give everybody the same amount of money, only to find that down the road, we’d be right back to where we were.
“Why?” she asked.
I told her that it all has to do with knowledge and experience. Once people know how to make money, they go do it. Most millionaires have gone bankrupt or lost everything, only to figure out how to build it back again rather quickly.
I told her that the most important thing people need is wealth consciousness. And that’s why I love what I do. The Real Wealth Show helped me raise my wealth consciousness, and hopefully has helped many others as well.
If you’d like to further developer your wealth consciousness, consider joining our Real Wealth Investor Academy. It’s just $10/month for cutting-edge investor information broken down into easily-digestible bite sized pieces.
And check out Retire Rich with Rentals for an overview on how to build wealth through cash flow homes.
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