With commencement season upon us once again, there is good news for graduates: America is still the Land of Opportunity. You can – and with some hard work likely will – live better than your parents. And all of us, wealthy, middle class, and poor, are becoming better off as the years go by. As President John F. Kennedy observed, the tide of economic growth is lifting all our boats.
But how can this be? The Clinton administration says that nearly half of American families suffer static incomes, that real income – that is, after inflation is taken into account – for the poorest fifth of households is about the same now as in 1967, while that of the wealthiest fifth has grown 45%.
It seems pretty damning if a worker at the bottom of the economic scale is still scraping to get by 27 years later while the wealthy family of 1967 is getting wealthier by leaps and bounds. Except that's not exactly the way it is. What Washington isn't telling you is that the household in the lowest 20% in 1967 almost certainly isn't there today. It has moved up. In fact, those households may well be in the top fifth of all earners.
Michael Cox, an economist at the Federal Reserve Bank of Dallas, has performed a service to the truth with a new report that reveals America's dynamic economic opportunity and spotlights how rapidly individuals and families can climb the ladder of rising incomes.
The U. S. Treasury Department and the University of Michigan have, in separate studies covering different time periods (Treasury from 1979 to 1988 and Michigan from 1975 to 1991), tracked the economic progress of individuals and households over time.
The Treasury Department looked at income tax returns from more than 14,000 households, and found that 86 of every 100 at the lowest earnings level in 1979 had moved to higher quintiles by 1988. Two-thirds of the families who started at the bottom were in the upper half of all wage earners – and almost 15% had moved all the way to the top fifth. Only 14% of low income households had failed to advance at all.
The Michigan study found even more upward income mobility when it looked at individuals over a longer time period. All but 5% of those in the lowest fifth of income earners in 1975 had moved up by 1991 – 29% of them all the way to the highest fifth.
Nor was it necessarily a long climb out of the bottom fifth; more than half were in the top three quintiles within four years.
What all this careful measuring means is that there is no static lump of poor families forever trapped at the bottom of the pile. Instead, people are starting at the bottom and rapidly working their way up. Their income goes up quickly early in their working career, hits a peak during middle age and then falls as they move toward retirement.
In short, the American dream is alive, well, and being realized by millions of low income families every year.
Even better, Cox notes the size of families, rewards – how high the ladder goes, if you like – is increasing too. In 1951, the peak earning years were ages 35 to 44, with average earnings in that age range 1.6 times those of entry-level 20- to 24-year-olds. Now, as brain power has replaced muscle power in much of the workplace, the peak earning years are ages 45 to 54 and average earnings at the peak are more than three times those of the 20- to-24-year-olds.
"As workers are increasingly rewarded for what they've learned in the workplace, earnings become sharply higher with experience," Cox writes. "The result is that the income gap widens between youth and middle age. It's not that the young are getting worse off; it's that older workers are doing much better."
Finally, the standard of living has risen for the entire economy. Cox notes that for households in the lowest income quintile, spending on food, clothing and shelter was 45% of consumption in 1993, compared to 75% in 1920.
What the statistics really show is that young people today not only have the opportunity to attain a better living standard than their parents, but also have a good chance of seeing their income rise higher faster.
There's still an opportunity to get really rich, too. Among the 400 richest Americans, according to Forbes magazine, 318 made their fortunes themselves. America remains not only the land of the free, but also the home of opportunity.