The End of the American Dream

What if the United States now offers the worst of both worlds: high inequality with low social mobility?

by Niall Ferguson

“The United States is where great things are possible.” Those are the words of Elon Musk, whose astonishing career illustrates that the American dream can still come true.

Musk was born in South Africa but emigrated to the United States via Canada in the 1990s. After completing degrees in economics and physics at the University of Pennsylvania, he moved to Silicon Valley, intent on addressing three of the most “important problems that would most affect the future of humanity”: the Internet, clean energy, and space. Having founded PayPal, Tesla Motors, and SpaceX, he has pulled off an astonishing trifecta. At the age of 42, he is worth an estimated $2.4 billion. Way to go!

But for every Musk, how many talented young people are out there who never get those crucial lucky breaks? Everyone knows that the United States has become more unequal in recent decades. Indeed, the last presidential election campaign was dominated by what turned out to be an unequal contest between “the 1 percent” and the “47 percent” whose votes Mitt Romney notoriously wrote off.

But the real problem may be more insidious than the figures about income and wealth distribution imply. Even more disturbing is the growing evidence that social mobility is also declining in America.

The distinction is an important one. For many years, surveys have revealed a fundamental difference between Americans and Europeans. Americans have a much higher toleration for inequality. But that toleration is implicitly conditional on there being more social mobility in the United States than in Europe.

But what if that tradeoff no longer exists? What if the United States now offers the worst of both worlds: high inequality with low social mobility? And what if this is one of the hidden structural obstacles to economic recovery? Indeed, what if current monetary policy is making the problem of social immobility even worse?

This ought to be grist for the mill for American conservatives. But Republicans have flunked the challenge. By failing to distinguish between inequality and mobility, they have allowed Democrats, in effect, to equate the two, leaving the GOP looking like the party of the 1 percent—hardly an election-winning strategy.

To their cost, American conservatives have forgotten Winston Churchill’s famous distinction between left and right—that the left favors the line, the right the ladder. Democrats do indeed support policies that encourage voters to line up for entitlements—policies that often have the unintended consequence of trapping recipients in dependency on the state. Republicans need to start reminding people that conservatism is about more than just cutting benefits. It’s supposed to be about getting people to climb the ladder of opportunity.

Inequality and social immobility are, of course, related. But they’re not the same, as liberals often claim.

Let’s start with inequality. It’s now well known that in the mid-2000s the share of income going to the top 1 percent of the population returned to where it was in the days of F. Scott Fitzgerald’s Great Gatsby. The average income of the 1 percent was roughly 30 times higher than the average income of everyone else. The financial crisis reduced the gap, but only slightly—and temporarily. That is because the primary (and avowed) aim of the Federal Reserve’s monetary policy since 2008 has been to push up the price of assets. Guess what? The rich own most of these. To be precise, the top 1 percent owns around 35 percent of the total net worth of the United States—and 42 percent of the financial wealth. (Note that in only one other developed economy does the 1 percent own such a large share of wealth: Switzerland.)

By restoring the stock market to where it was back before the crisis, the Fed has not achieved much of an economic recovery. But it has brilliantly succeeded in making the rich richer. And their kids.

According to Credit Suisse, around a third of the world’s thousand or so billionaires in 2012 were American. But of these, just under 30 percent were not self-made—a significantly higher proportion than for Australia and the United Kingdom. In other words, today an American billionaire is more likely to have inherited his or her wealth than a British one is.

This is just one of many indications of falling social mobility in the U.S. According to research published by the German Institute for the Study of Labor, 42 percent of American men born and raised in the bottom fifth of the income distribution end up staying there as adults, compared with just 30 percent in Britain and 28 percent in Finland. An American’s chance of getting from the bottom fifth to the top fifth is 1 in 13. For a British or Finnish boy, the odds are better: more like 1 in 8.

True, the relatively flat income distribution of Scandinavian countries makes it easier to get from the bottom to the top—there’s less financial distance to travel. But the same cannot really be said of Britain. Indeed, the amazing thing about the most recent research on social mobility is that the United Kingdom—which used to have the most rigid class structure in the developed world—now risks losing that title to the United States. No wonderDownton Abbey is so popular here.

The American Dream has become a nightmare of social stasis. According to research by Pew, just under 60 percent of Americans raised in the top fifth of incomes end up staying in the top two fifths; a fractionally higher proportion of those born in the bottom fifth—60.4 percent—end up staying in the bottom two fifths.

Alvaro Leiva/Panos

Perhaps not surprisingly, the child poverty rate is more than double the poverty rate for seniors.

This is the America so vividly described by Charles Murray in his bestselling bookComing Apart. At one end of the social scale, living in places with names like “Belmont,” is Murray’s “cognitive elite” of around 1.5 million people. They and their children dominate admissions to the country’s top colleges. They marry one another and cluster together in fewer than a thousand exclusive neighborhoods—the enclaves of wealth that Murray calls the SuperZips.

At the other end, there are places like “Fishtown,” where nobody has more than a high school diploma; a rising share of children live with a single parent, often a young and poorly educated “never-married mother.” Not only has illegitimacy risen in such towns, so has the share of men saying they are unable to work because of illness or disability or who are unemployed or who work fewer than 40 hours a week. Crime is rampant; so is the rate of incarceration. In other words, problems that used to be disproportionately associated with African-American communities are now endemic in the trailer parks and subprime slums inhabited by poor whites. You get born there, you stay there—unless you get sent to jail.

What has gone wrong? American liberals argue that widening inequality inevitably causes falling social mobility. This was what Alan Krueger, chairman of the Council of Economic Advisers, had in mind back in January, when he came up with the “Great Gatsby Curve,” showing that more unequal countries have less social mobility. (Hang on, wasn’t Gatsby a self-made bootlegger?) But to European eyes, this is also a familiar story of poverty traps created by well-intentioned welfare programs. Consider the case highlighted by Gary Alexander, Pennsylvania’s former secretary of public welfare. A single mom with two young kids is better off doing a part-time job for just $29,000—on top of which she receives $28,327 in various benefits—than if she accepts a job that pays $69,000, on which she would pay $11,955 in taxes.

Another good example is the growth in the number of Americans claiming Social Security disability benefits. Back in the mid 1980s, little more than 1.5 percent of the population received such benefits; today it’s nearly 3.5 percent. Nor (as used to be the case) are the recipients mainly elderly. Around 6 percent of the population aged between 45 and 54—my age group—are SSDI beneficiaries. Payments to disabled workers average $1,130 a month, which works out as $13,560 a year—just $2,000 less than a full-time wage at the federal minimum of $7.25 an hour.

Maybe we really are unhealthier than we were 30 years ago, though the data on life expectancy tell a different story. Maybe work really has got more physically demanding, though the shift from manufacturing to services also suggests otherwise. The more credible possibility is that it has become easier for the mildly unwell or unfit to get classified as disabled and to opt for idle poverty over working poverty, which pays only slightly better and means working with that niggling backache or mild depression.

Significantly, after two years on disability benefit, you qualify for Medicare, swelling the ever-growing number of beneficiaries of the federal government’s most expensive welfare program. Right now, federal spending on health care, according to the Congressional Budget Office, is around 5 percent of GDP, but it is forecast to double by the 2040s. Needless to say, this reflects the great demographic shift that is inexorably driving up the share of seniors in the population. But consider how the combination of an aging population and welfare programs is working to reduce the resources available to young people.

According to the Urban Institute, the current share of federal spending on the young is around 10 percent, compared with the 41 percent that goes on the non-child portions of Social Security, Medicare, and Medicaid. Per capita government spending—including state and local budgets—is roughly double for the elderly what it is for children. Perhaps not surprisingly, the child poverty rate is more than double the poverty rate for seniors. Ask yourself: how can social mobility possibly increase in a society that cares twice as much for Grandma as for Junior?

The only mystery that remains is why this generational conflict has not yet become a serious issue in American politics. Bafflingly, young voters still tend to line up with the very organizations that seem most intent on ratcheting up the future liabilities of government (not to mention the teenage unemployment rate)—notably the public-sector unions.

Writing in 1960, the economist Friedrich Hayek made a remarkable prediction about the ultimate consequences of the welfare state. “Most of those who will retire at the end of the century,” he wrote, “will be dependent on the charity of the younger generation. And ultimately not morals but the fact that the young supply the police and the army will decide the issue: concentration camps for the aged unable to maintain themselves are likely to be the fate of an old generation whose income is entirely dependent on coercing the young.”

Hayek was right that by 2000 the baby boomers would expect the young to bear the rising costs of their protracted and generously funded retirements. Almost alone among postwar economists, he saw the generational conflict implied by the welfare state. But he was wrong about how the younger generation would react. Far from rounding up the old and putting them in camps, it is the young who are the docile victims.

One possible explanation for this docility lies in the other main reason for declining social mobility: the disastrous failure of American high schools in the places like Murray’s imaginary Fishtown.

Despite a tripling of per-pupil expenditure in real terms, American secondary education is failing. According to the Council on Foreign Relations, three quarters of U.S. citizens between the ages of 17 and 24 are not qualified to join the military because they are physically unfit, have criminal records, or have inadequate levels of education. A third of high school graduates fail the mandatory Armed Services Vocational Aptitude Battery. Two fifths of students at four-year colleges need to take remedial courses to relearn what they failed to master in high school.

In international comparison, the United States is now somewhere in the middle of the league table for mathematical aptitude at age 15. The Organization for Economic Cooperation and Development’s most recent Program for International Student Assessment (PISA) study was damning: in math, the gap between the teenagers in the Shanghai district of China and the United States is as large as the gap between American teenagers and Albanians.

But the real shocker is the differential between rich and poor kids. At the ages of 4 to 5, children from the poorest fifth of homes are already 21.6 months behind children from the richest homes in the U.S., compared with 10.6 months in Canada. The proportion of 15-year-olds who are functionally illiterate (below level 2 in PISA tests) is 10.3 percent in Canada. In the U.S. it is 17.6 percent. And students from the highest social-class groups are twice as likely to go to college than those from the lowest classes.

Meanwhile, there are disturbing signs that America’s elite educational institutions are reverting to their old role as finishing schools for the children of a hereditary elite—the role they played back when F. Scott Fitzgerald was partying at Princeton.

At the ages of 4 to 5, children from the poorest fifth of homes in the U.S. are already 21.6 months mathematically behind children from the richest homes.

In a disturbing critique of Ivy League admissions policies, the editor of the American Conservative, Ron Unz, recently pointed out a number of puzzling anomalies. For example, since the mid-1990s Asians have consistently accounted for around 16 percent of Harvard enrollments. At Columbia, according to Unz, the Asian share has actually fallen from 23 percent in 1993 to below 16 percent in 2011. Yet, according to the U.S. census, the number of Asians aged between 18 and 21 has more than doubled in that period. Moreover, Asians now account for 28 percent of National Merit Scholarship semifinalists and 39 percent of students at CalTech, where admissions are based purely on academic merit.

Perhaps those in charge of Ivy League admissions have good reasons for their decisions. Perhaps it is right that they should do more than simply pick the most academically talented and industrious students who apply. But the possibility cannot be rejected out of hand that, whatever their intentions, the net effect of their pursuit of “diversity” is in fact to reduce yet further this country’s once unique social mobility. Nor can we dismiss the hypothesis that the “legacy” system may be the key here, as the cognitive elite discreetly rig the game in favor of their offspring with well-timed benefactions.

As a professor at Harvard, I am disquieted by such thoughts. Unlike Elon Musk, I did not come to the United States intent on making a fortune. Wealth was not my American dream. But I did come here because I believed in American meritocracy, and I was pretty sure that I would be teaching fewer beneficiaries of inherited privilege than I had encountered at Oxford.

Now I am not so sure.