American dream (1): you will earn more than your parents, but will you be richer?

According to our theories of the Kondratieff wave it is important that you will see better times for the middleclass to get prosperity, to get a rising tide of the long wave. Because of the ICT Revolution, especially the Communication revolution with its big networks, you saw a part of the population, individuals (or cosmopolitans) doing very well, not only in the West but especially also in emerging Markets. The world becomes flat (Friedman), but is that causing a richer middleclass in Emerging Markets and a poorer middleclass in the West?


Until now it was one of the axioms of economic theory that high growth in a part of the world is good for growth elsewhere (the rising tide lift all boats). But maybe the middleclass in Europe and US is now not profiting from the rise of China, or profiting much less than the US did from the high growth in Europe after WWII.
Are trends in that direction already visible? The view on that is blurred by the credit crisis. Let us first think about the trend in the last years. In this first article I will concentrate on the US.

In the New York Times were a few articles as a kind of update for the American dream: how do the current children it compared to their parents in income and wealth. ( http://economix.blogs.nytimes.com/2012/07/11/only-half-of-americans-exceed-parents-wealth/ Only Half of Americans Exceed Parents’ Wealth by Catharine Rampell).
Her main conclusion based on the elaborate interviews by PEW Center since 1968 mainly based for parents on the 1984 wealth polls and for the children on three reports after 2000. Everything was corrected for age, in real terms etc. :

1. In almost all households in the US (84%) the children earned more money (in real terms) than their parents did at the same age.
2. About half of the households are now after inflation not richer than their parents were
3. When your parents didn’t earn much, the probability is quite low you will earn a lot (in the highest quintile) and the other way around: when your parents earned a lot the probability you will earn almost nothing (lowest quintile) is low.
4. The re is a lot of income mobility in the quintiles: the probability as a child to get a better income than your parents was considerable.

The last interviews, reports from 2010 don’t say anything if children now will earn more than their parents now. But the numbers are reassuring. From other statistics you got the impression that the median wage, income is not rising at all in real terms already for decades. Based on that you could expect the American Dream tob e something of the past. So at the moment it is not that bad: the household income per individual family has risen in the past decades. That is for a part caused by more incomes per household.

All quintiles earned more. The highest incomes rose the most, but the lower incomes also went up considerably (they could also dream).
The chart above shows the mobility. You don’t see 20% as you should postulate for a perfect American dream. You do see higher probabilities that poorer parents/ poorer children and richer parents/ richer children tends to continue. The differences are not very big. So based on this you could say not much is wrong with the American dream, income distribution is not that unfair. This is partly caused because the richest 1% is not scrutinised (not enough observations I presume).



For wealth it is different this time. Since 1984 the real weath of the median family in the US did not improve after inflation. The distribution also deteriorated: the poor got poorer and the rich richer.

The mobility was comparable with the incomes.

The numbers show that net real wealth did not rise with the rising incomes. Woody Brock thinks net wealth/ income needs to be constant on the long run, I think that even a small rise is possible (when you can make more debts, capital markets become faster, more liquid; the last years that went in the opposite direction since the credit crisis, but when the cpaital markets knows again what the risks are then deleveraging can stop and liquidity will return (especially for credits)).



Anyway, a slower growth of wealth than income suggests that wealth is undervalued (or incomes will go down), so the prices of houses and equities should rise when incomes rise. This ought to happen in the next decade.