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A Rising Economic Tide Lifts (Almost) All Boats

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By Jeremy Horpedahl, guest columnist

Do you think the future of the next generation of Americans will be better, worse, or about the same as life today? When Americans were asked this question in April 2012 in a CBS/New York Times poll, the most common answer (47%) was "worse."  Another 47% were split between "better" and "about the same." We'll have to wait another 25 years to see who was right, although pessimism about the future is nothing new. But if past trends are any indication of future performance, the future looks bright for the vast majority of Americans, especially those at the bottom of the income scale.

A recent study of income mobility by the Pew Charitable Trusts reveals plenty of good news about the economic performance of the current generation. Analyzing data from the Panel Survey of Income Dynamics, a longitudinal survey of households started in 1968, the study shows that the vast majority of households (84%) exceeded their parents' household income. The data are all adjusted for inflation and family size, and compare 5-year averages of household income in the late 1960s and early 1970s for parents with the 2000s for their children. This "motion picture" approach of the Pew study (following particular families over time) is much better than "snapshot" approaches of other data, such as Census data on median family income (for all families at a point in time).

Those 84% of households that exceeded their parents' income didn't just do so by a few bucks; the median family came close to doubling their parents' income in most income quintiles. Not surprisingly, the top quintile (the rich) did the best, with median income increasing by 126% over their parents. The bottom quintile (the poor) did the worst, but still quite well with a 74% increase (see Figure 4 in the Pew Study). And the poorest households actually did better than the other quintiles on a different measure: about 93% of them exceeded their parents' income. For the top quintile, a smaller but still respectable 70% beat their parents. The other three quintiles were in the 80% range (see Figure 1).

(For more on income inequality, check out Nobel laureate Joseph Stiglitz's recent appearance on The Daily Ticker, below.)

Social Mobility Still Exists

The study also examines mobility between quintiles, and here the brightness or gloominess of the results depends on your outlook. The bad news is that 43% of those poor as children were stuck in the bottom quintile as adults (but remember, 93% still beat their parents). The good news is that 57% of the poor reached a higher income quintile, with more (30%) jumping at least two quintiles than those only jumping one (27%). On the flip side, 40% of those in the top quintile as children were still in the top quintile as adults. This means that 60% were not at the top anymore, again with more dropping at least two quintiles (37%) than just dropping one (23%). (See Figure 3)

Is this a lot of mobility? As I said, it depends on your outlook. But having a better than 50/50 shot for both the rich and poor of moving seems like a lot of mobility. Looked at in another way, we have about 9% of the population stuck at the bottom and another 8% that is (happily, for them) stuck at the top. Overall, about 31% of the population was in the same quintile as their parents, but everyone else (69%) moved either up or down.

It's True, Incomes Are Rising

While many Americans are pessimistic about income gains in general, they perceive their own situation differently: about 70% say they are better off than their parents (compared with the 84% that actually are). Of course, there is no guarantee that the next generation will do better than their parents — there are many worrying political and economic trends which need to be addressed, especially the general decline in economic freedom. But the strong pessimistic bias of the average American does not square with evidence: over the past generation, we have seen significant increases in income for individuals compared with their parents.

There is plenty of gloomy news about the economy, and in the past I have written about the problem of long-term unemployment. There will be plenty more gloomy news to report, especially in the short run. But when we take a long-run view of our economic performance things look a lot better, and it's important to recognize positive trends as well.

Jeremy Horpedahl is an Assistant Professor of Economics in the Harold Walter Siebens School of Business, Buena Vista University. He received his Ph.D. from George Mason University. Prior to entering academia, he was a Senior Economic Analyst for the South Dakota Department of Labor.