Will the Next Generation be Better off Than Their Parents’ Generation? Becker

The great majority of parents would like to see their children become better off economically than they are, and that hope would be even more common among the children. Yet, polls for a while have suggested that neither the majority of children nor parents in the United States are confident that this progress will happen. Despite frequent recent commentary on these polls, little systematic analysis has been presented of what determines whether the average child will be better off than the average parent, and why pessimism about such progress has apparently grown in the US.

The relation in particular families between say the earnings of adult children and those of their parents at comparable ages depends on many factors unique to any family. The abilities and health of the children relative to that of their parents, the luck of both children and parents in occupational and other choices, how concerned are the parents about ensuring that their children will become better off than they are, and many other considerations special to that family. I will not deal with individual family idiosyncratic factors, and instead focus my analysis on how well average persons in one generation fare compared to average persons in their parents’ generation.

The rate of growth in per capita income is by far the most important single variable in determining whether children will be better off than their parents. If per capita income is stagnating over time-the lot of the world throughout the vast majority of history- the average person in one generation will tend to be about as well off as the average person in his parent’s generation. Expectation during this long history of time that children will be better off then their parents would have been atypical.

During the past couple of centuries, much of the world has experienced systematic growth in per capita incomes that has radically changed such expectations. For example, if income per capita were growing only at 1 percent per year, the average individual in the next generation would have about a 30% higher income than the average individual in the present generation- I assume that generations differ by about 25 years. From about the middle of the 19^th century to the beginning of the 21^st century, per capita incomes in the US grew on average close to 2% per year. This implies that over this period of more than 150 years, or about 6 generations, the average income in one generation would have been about 60% higher than the average income in the prior generation.

Add to this that health improved rapidly during the 20^th century as mortality of mothers during childbirth and that of children during their first 3 years were virtually eliminated, and that the huge number of immigrants to America did vastly better than their parents did in their home countries. No wonder that optimism abounded in the United States about how children would fare compared to that of their parents. The decline in this optimism is mainly related to declines in expectations about whether the US will continue to grow at similar rates as in the past.

The difference between generations is even more dramatic in rapidly developing nations. Consider, for example, China with a per capita income that has been growing at around 8% per year since about 1980.  In such a growth environment, the average income in the next generation would be more than six times larger than that in the present generation. No wonder most Chinese families are happy with what is happening in their country and with their government’s policies, despite various restrictions on freedom of speech and writing.

Comparisons among the income and health of the average person in different generations are not the only determinant of wellbeing and optimism about the future. Changes over generations in the degree of economic inequality also have important effects. Inequality has increased considerably since 1980 in the United States, and many other countries, developing as well as developed. When inequality is growing between generations, even if per capita income were stagnant, families at the higher end of the income distribution in their generation would be optimistic about their children’s prospects relative to their own, as long as they expect their children to also be at the higher end of the income distribution in the children’s generation. Conversely, under the same conditions, parents at the lower end of the income distribution would be pessimistic about their children’s opportunities if they expect their children also to be at the lower end of their generation’s income distribution.

A third factor determining the relation between childrens’ and parents’ economic position is called the degree of intergenerational income mobility. That is, the degree to which richer parents are likely to have richer children relative to the income of the children’s generation, and the degree to which poorer parents are likely to have poorer children relative to the children’s generation. When the degree of intergenerational mobility is lower, rich parents will tend to be more optimistic about their children’s prospects, and poorer parents will tend to be more pessimistic. Some evidence suggests that intergenerational mobility in the US has fallen some over time, which would lead to greater pessimism among poorer families about their children’s prospects.

Despite the inequality that has grown by a lot since 1980, and intergenerational mobility that has apparently fallen, I believe that fears about economic growth are the main reason for the growing pessimism in the US about the long-term economic future. As I have argued on many occasions in posts on this blog, faster economic growth by the US can compensate for growing government debt, growing inequality, and other factors that create pessimism about the economic future.

I will not repeat much of what I have said previously on improving long-term economic growth in the United States and other rich countries (for example, see my most recent post on August 15th for some discussion of how to improve growth). I summarize these discussions by stressing three factors. Of greatest importance are improvements in the American K-12 school system available to students from poorer families, so that many more of these students graduate high school, and those who graduate are better prepared for college-the recent report on the results of scores on the ACT test is depressing reading since it shows that far more than half of all students taking the test are unprepared for college courses.

Second, it is important to have low marginal tax rates on personal and corporate incomes, and on capital gains, in order to stimulate greater investments and innovations. Finally, entitlement need to be brought under greater control by shifting much more of medical costs to patients through greater out of pocket payments, and by converting public and other pension systems to defined contribution systems rather than defined benefit systems.

America has always been optimistic about its future. The decline in such optimism during the past couple of decades is understandable, but highly regrettable. The best way to restore this optimism is to promote faster economic growth. That is feasible with the right policies, but will not happen automatically. Even America has no destiny to be optimistic about the future without important redirection of various public priorities.

Comments

[Gregory]

Fascinating. Thank you!

I would be interested in seeing some numbers. E.g. How fast do you expect growth to be if we keep the current policies, and how fast if we adopt your ideal policies? I have some doubts about there being large changes in gdp growth per year, since it seems to have stubbornly stayed around the same trend (3%) over the last 100 years or so.

Let's say we adopt radical education reform (charter schools, merit pay, vouchers, etc.) Do you think this boosts gdp growth by a .1 percentage point or, say, 1 percentage point? Getting a sense of the order of magnitude involved would be interesting.

[Pandora Bracelet]

It is hard to say .

[Aaron]

Thanks for the very interesting post--as a member of "the children" of boomers, I certainly am interested in this question!

One thing I have read that I thought was relevant to this discussion is a discussion of likely tax rate changes as a particularly large generation moves through the tax system. When the baby boomers were of prime working age, the number of boomers relative to the number of retirees and school-children was (is?) high, so the tax burden could be relatively lower. As the boomers enter retirement, however, the large number of seniors (who disproportionately need government services) relative to working-age taxpayers will rise, which may lead to a rise in tax rates as well.

Although, obviously, tax rates are only one component of the growth rate, and this demographic phenomenon is only one component of tax rates, it is nonetheless interesting to consider as one of a confluence of reasons why, even if I end up better off than my parents, the gap is unlikely to be as large as it was between the boomers and their parents.

Aaron

[Brian Davis, Austin, TX]

"Tis a pity youth is wasted on the young." I'm referring to the popular assumption across our consumption society (ages 19-45) that the "elderly," now including the early wave of Boomers, are a bunch of delirious geezers readier for the glue factory than the workplace. Boomers and elders, be thankful above all for your health and strive to preserve it; don't hesitate to take on new challenges. A seasoned, disciplined thinker is worth a dozen clueless tyros. Further to the point, the question is NOT whether we'll leave our children well-heeled. If we've done our jobs as parents, the kids are ready, or they're already making it in American life without depending upon a surname. The one favor most of us, who never expect to be "rich," CAN do for the youngsters is to go out debt-free, not hanging our economic mistakes, our millstones around their necks. It's worth more than trying to leave them money-pits of stuff and even businesses or investments they don't understand or care little about.

[Ignacio]

Very interesting, as usual!

[Mortgages]

I appreciated reading your thoughts in a couple of these posts, because I, too, thought some of Posner's reasoned arguments on his blog were flawed. Although I've got great respect for him, I notice some logical leaps and assumptions without evidence (e.g., his idea that the clunkers program would yield only minimal or no environmental gains, because people would suddenly be driving 50% more. Since the largest exchanges have been Ford Explorers for Toyota Corollas, supposedly, it doesn't follow that *suddenly* out of nowhere those people will suddenly start driving 50% more. People who have real "clunkers" are in no position to take on a large carpayment and higher insurance, even if they get a rebate for their clunker. Yes, those people could reasonably be expected to drive a lot more, but that's not what's happening on the ground.)

Btw, you have every right to anonymously post respectfully argued disagreements. Some of our Founding Fathers wrote the Federalist Papers under pseudonyms, so their identities didn't get in the way of people taking their reasoned arguments neutrally. Judge Posner and Becker choose not to write anonymously, presumably, partly because they hope their names and status will lend weight to their arguments. That's fine, but it's also fine to blog anonymously, especially as an ordinary person responding to a famous person in an abusive internet culture and hateful political environment. Keep up the good work; ignore the bullies.

Mortgages
*******
oliver

[LVTfan]

Per capita growth may sound very egalitarian, but the bulk of the benefit generally accrues to those who own that which the classical economists would recognize as Land -- including forms of it the classical economists didn't see in their lifetimes.

When we talk about the "average child," is that a reference to the child in the middle of the, say, income spectrum, or the wealth spectrum, or the IQ spectrum, or the child of parents whose income or wealth is somewhere around the per capita average?

The reality is Lake Wobegon in reverse. About 80% of us are below average. Not you or I perhaps. But then again, I read somewhere that 19% of us consider ourselves to be in the top 1%, and many more think we have a real shot at being there. And so we toe the line, and tow it, I suppose.

Low marginal rates on wage income are a fine idea. But we ought to be collecting for public purposes the lion's share of the economic rent on natural resources and land value, not permitting that value to accrue to our corporations and their shareholders, our entrepreneurs and their heirs.

[st]

jobs, jobs, jobs. read Andrew Groove's businessweek publication. Unless the job situation resolved, the kids would not work hard. The optimistic view would not come back. Until the job comes back, hard working, good earning MFG jobs for high tech, auto, or others, there is no future for the middle class, including their kids.

[st]

http://www.bloomberg.com/news/2010-07-01/how-to-make-an-american-job-before-it-s-too-late-andy-grove.html

[Helen T.]

In the business world, which is ultimately where wealth is produced, the major source of pessimism comes from:

The foregone conclusion that incentives to produce for both rich and poor Americans will not go anywhere but DOWN from here.

Productive people will be taxed further, while perhaps at the same time, less productive people will be further subsidized. With decreased incentives to produce, future economic performance cannot but decline. After all, a country’s prosperity is almost by definition equal to the total value of goods and services it produces. There is no escaping that reality. Even the extra 5% that the rest of the world lends the US (lent against future growth) so that Americans can live a mere 5% beyond their means is essentially a pittance. And even that extra 5% will become increasingly hard to obtain from foreigners as the US stagnates to the low growth levels associated with decreased incentives to produce.

The bottom line is:

A nation’s prosperity = the total value of goods and services it produces.

With decreased incentives to production, prosperity cannot but follow the downward trend.

Its just as simple as that. There is no need to resort to complex theories.

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[Dave P]

Talk of per capita GDP and taxation is surely beside the point, otherwise people would have been far more pessimistic in the 1960s. The menace of downward mobility has more to do with it, but the real issue is the combination of inequality & insecurity. Ever more precarious work arrangements and the concentration of wealth in fewer hands means that the danger of your children falling through society's holes is far greater, as is the drop. Add to that the growth of newly-industrialising economies, population aging in the older developed regions and global ecological & resource constraints on growth, and the outlook for the next generations of North Americans and western Europeans isn't at all rosy. It could be if we shift consumption and earnings away from the provision of ever more of the increasingly tacky "things" with which we insist on cluttering our lives, and instead place a higher value on intangible exchanges geared toward cultural & intellectual fulfilment. But we're too fond of the material trappings of affluence, and there just aren't the resources to keep us all supplied with - or engaged in producing & selling - the ten-ton SUV's and 20ft plasma TV's "stuff"-fixated consumers will want in the $500 trillion world economy we'll need in a few generations if we're all to be happy bunnies. So it's vaster accumulations of unsustainable material trash, or rewarding social & cultural interactions: the choice is yours. And the signs aren't promising: the very exchanges that we should be prioritising are the spheres of activity we've downgraded in recent decades from a cornerstone of our civilisation to just more humdrum industrialised "product". Pessimistic? Oh yes. But that's because I believe we're capable of far better than griping about a few per cent on the tax rate and assuming we can just carry on ad nauseam with "business as usual".

[Peter]

Great article. I would be interested in your thoughts about this article.

http://futuremoneytrends.com/The_Water_Crisis.html

Our future generations have so much to come up against.

[Phil in Chicago, MBA '06]

Given the topic, the following charts might be interesting to some of you:

http://www.businessinsider.com/us-wealth-inequality-2010-7#despite-the-myth-of-social-mobility-poor-americans-have-a-slim-chance-of-rising-to-the-upper-middle-class-8

According to these data, income inequality is increasing, and social mobility is virtually non-existent. Just food for thought....

[Joshua Norman]

@Gregory:

I agree with the idea of school choice wholeheartedly! Government run schools are terrible!

@Phil:

There used to be Horatio Algeresque social mobility in America. Unfortunately Human Resources made him fill out an electronic application, then waterboarded him because other people more closely reflectly the open position requirements. But seriously, with the rapid offshoring of American jobs to Turd World countries and the massive influx of immigrants to America, the middle & working classes are facing an onslaught of cheap, desparate labor in this country.

[impact crusher]

thanks for sharing

[Bayoul]

Dave P, America’s relative position in the world in the 60’s was very different than today. In the 60’s, despite being a period of rapidly growing collectivism in American politics, America still remained, by far, a much more free and individualistic nation compared to the rest of the world. This is due to the enormous endowment of individualism bestowed upon this nation upon its very unique creation. But decades of advancing collectivism in America and, at the same time, economic liberalizations in the rest of the world, have significantly narrowed the individualism advantage (and hence economic efficiency) that America once enjoyed.

In other words, the endowment of individualism is been used up while other nations are catching up to us in economic freedom. So, while the erosion of American individualism is accelerating in the US, other nations seem to be discovering and implementing economic freedom and individualism. Hence the inevitable convergence and loss of American exceptionalism in the prosperity arena.

[Old Broken Down Carpenter]

Geez, that young Joshua Norman fella above who thinks "Horatio Algeresque social mobility in America" is dead really ought to come down off his high horse and get a job, even if it means getting his hands dirty. I sure wouldn't hire him, based on the stuff he says on this blog. He don't seem to be the sort of fellow who is interested in hard work. Probably a lot of them folks in "Turd World countries" outwork Mr. Norman in their sleep.

[Joshua Norman]

@Old Broken Down Carpenter:

Are you that Jake guy from other posts posting under a pseudonym?

As for getting a job, unfortunately your Christian neoconservative Republicans and their globalist Democrat lackeys sent the majority of new created jobs to Turd World countries & imported coolies from Latin America and Asia to fill the remaining jobs.

The reason why Turd World coolies are in demand for the global labor force is because they're willing to work for $1 a day & no bathroom breaks. I've worked with those people & I'm unimpressed with their so called work ethic.

I OFFERED to pay back all unemployment benefits received if the following took place, whether I could find work or not.
1. The U.S. removes all the illegal immigrants in the country and either deport them back to their home countries or create conditions that compel the illegals to return home on their own accord.
2. The U.S. enforces the immigration laws already on the books and removes the anchor baby loophole.
3. The U.S. reduces the number of legal immigrants permitted to enter the country as well as implements formal policies that focus immigration efforts on immigrants with the desired education, skills & capital.
4. The U.S. implements tariffs on imports, particularly on imports from the Turd World.
5. The U.S. dedicated the revenue raised by tariffs to cut taxes for individuals, businesses and U.S. corporate entities.
6. The U.S. cuts $1 trillion from government spending programs that are not authorized by the enumerated powers of the United States Constitution. I was unaware that America was obligated to provide for the common defense of wealthy foreign countries such as Germany, Japan, Kuwait & Korea nor was I aware that they had to promote the general welfare of Afghanistan, Pakistan & Iraq. I just proposed spending cuts of $250 billion. Anyone else want to suggest spending cuts or do I personally have to make all the suggestions?

If anyone is opposed to what I stand for than debate me on the issues, don't resort to childish insults and sneers like the Old Broken Down Carpenter.

[eurail pass]

I think this dream can only materlize in our day and age with the increase in etrrepreneurship among today's youth. Working 9-5 jobs just isn't going to cut it anymore. Some work second or even third jobs to to stay afloat. How times have changed.

[Martha D]

…“It could be if we shift consumption and earnings away from the provision of ever more of the increasingly tacky "things" with which we insist on cluttering our lives, and instead place a higher value on intangible exchanges geared toward cultural & intellectual fulfilment.”

People who measure their standard of living primarily through “intangible exchanges geared toward cultural & intellectual fulfillment” have a quality of life that is largely immune to economic decline since their standard of living seems to be largely un-correlated to per capita income. Therefore, such people have little reason to preoccupy themselves with eventual economic decline. They can be happy regardless of economic prosperity, since they derive their happiness from intangible things that money cannot buy. For these people, the whole issue of economic decline presented in this post would seem largely a mute point.

[www.google.com/accounts/o8/id?id=AItOawn7abRk5nRN3j1zRHi5eZf1DsGOCJMeIPU]

Examples of childish insults include 'Turd World,' 'Democrat' used as an adjective, and 'anchor baby.'

On the issues, what Joshua Norman appears to stand for is the perennially widespread mixture of populism and nationalism sometimes referred to (perhaps childishly and insultingly) as 'America Firstism.' While it addresses genuine and legitimate concerns about the corrosive effect of hypercompetition on society, its policy prescriptions seem to me to be more about singling out scapegoats than about dealing with the root causes of diminishing economic security expectations. I don't think America has much potential as a gated community among nations. We will stand or fall along with humanity as a whole. An injustice anywhere will inevitably become injustice everywhere. With that understanding, I think the quality of life prospects for Americans will be bleak until the global south (as far as I know a less insulting formulation for 'third world' or 'developing world') adopts human rights and labor rights norms at least as ambitious as those of the United States and western Europe. I'm also very skeptical of the 'globalist' position that these human rights norms must wait in line behind economic growth, let alone will reliably result from economic growth. China and Singapore both stand as proof that capitalism can exist quite independently of democracy.

[Joshua Norman]

Google blog link says "Examples of childish insults include 'Turd World,' 'Democrat' used as an adjective, and 'anchor baby.'" I also used neoconservative as an adjective too, did you miss that? Isn't that the pot calling the kettle black. You're leveling opprobriums at me.

It also says "On the issues, what Joshua Norman appears to stand for is the perennially widespread mixture of populism and nationalism sometimes referred to (perhaps childishly and insultingly) as 'America Firstism.' While it addresses genuine and legitimate concerns about the corrosive effect of hypercompetition on society, its policy prescriptions seem to me to be more about singling out scapegoats than about dealing with the root causes of diminishing economic security expectations. I don't think America has much potential as a gated community among nations. We will stand or fall along with humanity as a whole."
I'm proud that I belive in American concerns over other concerns. The policies I advocate are merely a reversal of the governing policies the US has pursued over the last 80 years. If you or anyone think they are bad, then address them instead of saying I'm "scapegoating".
You say this means that America has no potential as a gated community, I say America has no potential if it serves as a place of lebensraum for the world's citizens.