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Commentary
Is the American Dream a Dream?
Increasing Wealth Gaps Are Turning the Dream into a Myth
By David Demers
When I recently posted on Facebook a comment about the massive wealth gap between the richest 10 percent and the bottom 50 percent ($3.5 million vs. $13,000), I received some pushback.
“Life is not equitable,” one poster said.
“In other words, the wealthy have more money than the poor,” another sarcastically replied.
“I’m grateful to have the opportunities to shoot for the 10%,” said a third respondent. “There’s so many of them out there.”
I drew two conclusions from these and other comments.
First, the American Dream is alive and well, despite rapidly expanding gaps in wealth that are leaving the working and middle classes behind.[1]
Second, wealth and income gaps are inevitable, so learn to live with them. That’s how capitalism works.
Let me start with the American Dream ideal.
Polls by the Pew Research center show that most Americans still believe in the American Dream. Three of four agree that “it is possible to start out poor in this country, work hard, and become rich.”[2]
Technically, they are right.
If you were born into the bottom 20 percent in terms of income (about $26,000), you have a 7.5 percent chance of making it into the top fifth income group ($130,545).[3] This wouldn’t make you rich overnight. But after 20 years or so you could accumulate a million dollars or more in assets with smart investments. Your odds of making it into the top 5 percent ($290,164)[4], though, are considerably less. Only 1 percent do.[5]
So Americans are right.
It’s possible for a poor person to earn a high salary and accumulate wealth.
But it’s much easier if you are born into a wealthy family.
More than a fifth of the children born into the top 20 percent of wage-earners will join the top 5 percent group, compared to, as I just mentioned, only 1 percent of those in the bottom fifth.[6] And even if these children of the well-off don’t make it into the top 5 in terms of income, they have a very good chance of becoming wealthy after their parents die. That’s because more than half of all wealth in America is inherited.[7]
And, contrary to popular opinion, most wealthy people are not self-made millionaires. Most inherited their money,[8] received significant financial support from parents, or became wealthy in large part because of government policies and tax laws that favor certain investors or businesses.[9] Some good examples of the latter are real estate investors and bankers.
The income that real estate investors generate from the sale of their rental or business properties (called “capital gains” income) is taxed at a maximum of 20 percent, compared to up to 37 percent for people who earn a paycheck. In addition, capital gains income is not subject to Social Security, Medicare and Medicaid taxes, which usually add 15 percent to a tax bill. Landlords also can eliminate capital gains on as much as $250,000 by living on their rental property for two of the last five years.
Private banks have it even better. They borrow money from the Federal Reserve at extremely low rates (often below 2 percent) and then lend that money back to you, the customer, at interest rates that are three to 15 times higher. Bank credit cards, for instance, usually charge consumers 25 percent or more on unpaid monthly balances. Wouldn’t be nice if we all could borrow money directly from the Federal Reserve?
The bottom line is that most so-called self-made millionaires would not be millionaires without financial support from their families or favorable tax and government incentives, at least according to scientific research.[10]
And the American Dream?
It’s a dream mostly.
The United States is ranked a dismal 27th in terms of social mobility, much lower than other industrialized countries.[11] Denmark is first.
And how about just learning to live with the wealth and income gaps?
The gaps are not inevitable. They were much smaller during the 40 years after World War II.
But we may have to live with them, even if we don’t like it.
Historical research by professor Walter Scheidel at Stanford University revealed that there are no cases in which wealth gaps have been reduced substantially through benign political change.[12] In other words, the wealthy do not voluntarily give up their wealth for the common good. Only catastrophes like war, revolution and pandemics are capable of leveling the income and wealth playing fields. Market crashes like the Great Depression can level them a bit, but the gaps return shortly after.
So, not until the American Dream becomes a myth will revolution become a possibility, and there’s no sign of that happening any time soon. But widening gaps are turning the Dream into a myth.
Endnotes
1. See my website for details <https://www.drdaviddemers.com/falling-behind.html>.
2. New York Times Poll (December 4-7, 2014), retrieved April 4, 2022, from <https://s3.amazonaws.com/s3.documentcloud.org/documents/1377502/poll-finds-a-more-bleak-view-of-american-dream.pdf>.
3. These statistics are derived from two sources: “It’s becoming harder to get rich if you’re born poor,” The Economist (November 25, 2021), retrieved 3/12/24 from https://www.economist.com/films/2021/11/25/its-becoming-harder-to-get-rich-if-youre-born-poor>, and Anja Solum, “This Is How Much Money the Richest Americans Have,” YahooFinance.com (November 21, 2023) retrieved March 12, 2024 from <https://finance.yahoo.com/news/much-money-top-earner-americas-160000931.html>.
4. Lyle Daly, “What’s the Income of the Top 10%, 5%, and 1%?” The Ascent (August 27, 2023), retrieved 3/13/24 from https://www.fool.com/the-ascent/personal-finance/ articles/whats-the-income-of-the-top-10-5-and-1>.
5. Tom Hertz, “Understanding Mobility in America,” Center for American Progress (April 26, 2006), p. i, retrieved May 12, 2022, from <https://cdn.americanprogress.org/ wp-content/uploads/issues/2006/04/Hertz_MobilityAnalysis.pdf?_ga= 2.45881060.1753389493.1652373007-534591163.1652373007>.
6. Ibid.
7. Facundoal Varedo, Bertrand Garbinti and Thomas Piketty, “On the Share of Inheritance in Aggregate Wealth: Europe and the USA, 1900–2010,” Economica , 84: 239–260 (2017), retrieved March 3, 2021, from <http://www.piketty.pse.ens.fr/files/AlvaredoGarbinti Piketty2017.pdf>.
8. Rupert Neate, “Next Generation of Billionaires Collect More Wealth from Inheritance than Work, Says UBS,” The Guardian (November 30, 2023), retrieved 3/13/24 from <https://www.theguardian.com/news/2023/nov/30/next-generation-billionaires-collect-more-wealth-from-inheritance-than-work-ubs>.
9. Brian Miller and Mike Lapham, The Self-Made Myth: And the Truth about How Government Helps Individuals and Businesses Succeed (San Francisco: Berrett-Koehler Publishers, 2012).
10. Ibid.
11. The Global Social Mobility Report 2020: Equality, Opportunity and a New Economic
Imperative, World Economic Forum (January 2020), retrieved 8/16/24 from <https://www3.weforum.org/docs/Global_Social_Mobility_Report.pdf>.
12. Walter Scheidel, The Great Leveler: Violence and the History of Inequality from the Stone Age to the Twenty-first Century (Princeton University Press, 2017).
Commentary
Is the American Dream a Dream?
Increasing Wealth Gaps Are Turning the Dream into a Myth
By David Demers
When I recently posted on Facebook a comment about the massive wealth gap between the richest 10 percent and the bottom 50 percent ($3.5 million vs. $13,000), I received some pushback.
“Life is not equitable,” one poster said.
“In other words, the wealthy have more money than the poor,” another sarcastically replied.
“I’m grateful to have the opportunities to shoot for the 10%,” said a third respondent. “There’s so many of them out there.”
I drew two conclusions from these and other comments.
First, the American Dream is alive and well, despite rapidly expanding gaps in wealth that are leaving the working and middle classes behind.[1]
Second, wealth and income gaps are inevitable, so learn to live with them. That’s how capitalism works.
Let me start with the American Dream ideal.
Polls by the Pew Research center show that most Americans still believe in the American Dream. Three of four agree that “it is possible to start out poor in this country, work hard, and become rich.”[2]
Technically, they are right.
If you were born into the bottom 20 percent in terms of income (about $26,000), you have a 7.5 percent chance of making it into the top fifth income group ($130,545).[3] This wouldn’t make you rich overnight. But after 20 years or so you could accumulate a million dollars or more in assets with smart investments. Your odds of making it into the top 5 percent ($290,164)[4], though, are considerably less. Only 1 percent do.[5]
So Americans are right.
It’s possible for a poor person to earn a high salary and accumulate wealth.
But it’s much easier if you are born into a wealthy family.
More than a fifth of the children born into the top 20 percent of wage-earners will join the top 5 percent group, compared to, as I just mentioned, only 1 percent of those in the bottom fifth.[6] And even if these children of the well-off don’t make it into the top 5 in terms of income, they have a very good chance of becoming wealthy after their parents die. That’s because more than half of all wealth in America is inherited.[7]
And, contrary to popular opinion, most wealthy people are not self-made millionaires. Most inherited their money,[8] received significant financial support from parents, or became wealthy in large part because of government policies and tax laws that favor certain investors or businesses.[9] Some good examples of the latter are real estate investors and bankers.
The income that real estate investors generate from the sale of their rental or business properties (called “capital gains” income) is taxed at a maximum of 20 percent, compared to up to 37 percent for people who earn a paycheck. In addition, capital gains income is not subject to Social Security, Medicare and Medicaid taxes, which usually add 15 percent to a tax bill. Landlords also can eliminate capital gains on as much as $250,000 by living on their rental property for two of the last five years.
Private banks have it even better. They borrow money from the Federal Reserve at extremely low rates (often below 2 percent) and then lend that money back to you, the customer, at interest rates that are three to 15 times higher. Bank credit cards, for instance, usually charge consumers 25 percent or more on unpaid monthly balances. Wouldn’t be nice if we all could borrow money directly from the Federal Reserve?
The bottom line is that most so-called self-made millionaires would not be millionaires without financial support from their families or favorable tax and government incentives, at least according to scientific research.[10]
And the American Dream?
It’s a dream mostly.
The United States is ranked a dismal 27th in terms of social mobility, much lower than other industrialized countries.[11] Denmark is first.
And how about just learning to live with the wealth and income gaps?
The gaps are not inevitable. They were much smaller during the 40 years after World War II.
But we may have to live with them, even if we don’t like it.
Historical research by professor Walter Scheidel at Stanford University revealed that there are no cases in which wealth gaps have been reduced substantially through benign political change.[12] In other words, the wealthy do not voluntarily give up their wealth for the common good. Only catastrophes like war, revolution and pandemics are capable of leveling the income and wealth playing fields. Market crashes like the Great Depression can level them a bit, but the gaps return shortly after.
So, not until the American Dream becomes a myth will revolution become a possibility, and there’s no sign of that happening any time soon. But widening gaps are turning the Dream into a myth.
Endnotes
1. See my website for details <https://www.drdaviddemers.com/falling-behind.html>.
2. New York Times Poll (December 4-7, 2014), retrieved April 4, 2022, from <https://s3.amazonaws.com/s3.documentcloud.org/documents/1377502/poll-finds-a-more-bleak-view-of-american-dream.pdf>.
3. These statistics are derived from two sources: “It’s becoming harder to get rich if you’re born poor,” The Economist (November 25, 2021), retrieved 3/12/24 from https://www.economist.com/films/2021/11/25/its-becoming-harder-to-get-rich-if-youre-born-poor>, and Anja Solum, “This Is How Much Money the Richest Americans Have,” YahooFinance.com (November 21, 2023) retrieved March 12, 2024 from <https://finance.yahoo.com/news/much-money-top-earner-americas-160000931.html>.
4. Lyle Daly, “What’s the Income of the Top 10%, 5%, and 1%?” The Ascent (August 27, 2023), retrieved 3/13/24 from https://www.fool.com/the-ascent/personal-finance/ articles/whats-the-income-of-the-top-10-5-and-1>.
5. Tom Hertz, “Understanding Mobility in America,” Center for American Progress (April 26, 2006), p. i, retrieved May 12, 2022, from <https://cdn.americanprogress.org/ wp-content/uploads/issues/2006/04/Hertz_MobilityAnalysis.pdf?_ga= 2.45881060.1753389493.1652373007-534591163.1652373007>.
6. Ibid.
7. Facundoal Varedo, Bertrand Garbinti and Thomas Piketty, “On the Share of Inheritance in Aggregate Wealth: Europe and the USA, 1900–2010,” Economica , 84: 239–260 (2017), retrieved March 3, 2021, from <http://www.piketty.pse.ens.fr/files/AlvaredoGarbinti Piketty2017.pdf>.
8. Rupert Neate, “Next Generation of Billionaires Collect More Wealth from Inheritance than Work, Says UBS,” The Guardian (November 30, 2023), retrieved 3/13/24 from <https://www.theguardian.com/news/2023/nov/30/next-generation-billionaires-collect-more-wealth-from-inheritance-than-work-ubs>.
9. Brian Miller and Mike Lapham, The Self-Made Myth: And the Truth about How Government Helps Individuals and Businesses Succeed (San Francisco: Berrett-Koehler Publishers, 2012).
10. Ibid.
11. The Global Social Mobility Report 2020: Equality, Opportunity and a New Economic
Imperative, World Economic Forum (January 2020), retrieved 8/16/24 from <https://www3.weforum.org/docs/Global_Social_Mobility_Report.pdf>.
12. Walter Scheidel, The Great Leveler: Violence and the History of Inequality from the Stone Age to the Twenty-first Century (Princeton University Press, 2017).