The American "Rags To Riches" Dream Is Now History For Most

Tyler Durden's picture

It would appear that the Horatio Alger myth - that hard work and pluck will lift a person from dire circumstances to enviable success - is not living up to expectations for Americans. As WSJ's Lauren Weber notes, 40% of Americans think it’s fairly common for someone to start off poor, work hard and eventually rise to the top of the economic heap but a new Pew study shows that in reality, only 4% of Americans travel the rags-to-riches path. Unfortunately, they discovered considerable “stickiness” at both ends of the income spectrum and that Americans attached to the rags-to-riches myth might be disappointed to know that other countries show greater mobility among have-nots - "this is what we call the 'parental penalty,' and it's really high in the U.S. - If you’re born in the bottom here, your likelihood of sticking in the bottom is much higher."

 

Via WSJ,

...only 4% of Americans travel the rags-to-riches path, according to new research from the Economic Mobility Project of the Pew Charitable Trusts.

 

...a great many  who are born into the poorest segments of the population are stuck there for life, a finding that suggests the U.S. has much to do to improve social mobility.

 

Forty-three percent of Americans raised in the bottom quintile of household income remain there a generation later (with income of less than $28,900 in 2009 dollars, adjusted for family size). Twenty-seven percent rise up slightly into the second quintile, 17% land in the middle of the distribution, and 9% end up in the 4th quintile.

 

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Fed researchers looked at mobility for all Americans. They discovered considerable “stickiness” at both ends of the income spectrum. In other words, poor or wealthy children are most likely to stay in their respective wealth brackets as adults.

 

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In a birthright economy – think India’s old caste system – 100% of individuals would remain in the economic category they’re born into. In an ‘equal chance’ economy, socioeconomic status would change in a random but predictable way, with 20% of people staying where they are and 20% moving into each of the other categories (imagine a lottery machine where 100 balls pop around a tank and 20 are randomly funneled into each of five different baskets).

 

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But Americans attached to the rags-to-riches myth might be disappointed to know that other countries show greater mobility among have-nots.

 

In Sweden, Finland, Norway, Denmark and the United Kingdom, between 25% and 30% of people stay in the bottom quintile, according to Daly, compared to the 44% in the U.S.

 

This is what we call the ‘parental penalty,’ and it’s really high in the U.S.,” she said. “If you’re born in the bottom here, your likelihood of sticking in the bottom is much higher.”

 

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and while there is plenty to worry about there, the last paragraph of Weber's note is perhaps the most worrisome in terms of the Fed's current policies...

Americans who moved up from the bottom had at least nine times more wealth than those who were stuck — $8,892 for people with no upward mobility versus $78,005 for people who moved one rung up and $94,586 for those who made it at least to the middle.

 

Especially in a nation where work is increasingly punished...

As quantitied, and explained by Alexander, "the single mom is better off earnings gross income of $29,000 with $57,327 in net income & benefits than to earn gross income of $69,000 with net income and benefits of $57,045."

 

 

We realize that this is a painful topic in a country in which the issue of welfare benefits, and cutting (or not) the spending side of the fiscal cliff, have become the two most sensitive social topics. Alas, none of that changes the matrix of incentives for most Americans who find themselves in a comparable situation: either being on the left side of minimum US wage, and relying on benefits, or move to the right side at far greater personal investment of work, and energy, and... have the same disposable income at the end of the day.