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

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[Shiva]

Don't you have to inflation adjust per capita growth figures ? 8% in China or India is the same as moving slightly backwards ?

[P.T]

Nope. Growth is measured as an inflation adjusted figure.

[Jack]

Perhpas missing from this "income" evaluation is standard of living. Those who say the standard of living help the rich the most are clearly missing it. The life expectancy has increased the most for the poor and the gap between the rich and poor, in the US and in the world, has decreased, since the beginning of the 20th Century. The "average poor" in the US have a higher "standard of living" based upon how they live, square footage of house, car, phones, technology, food availability, etc, than the middle class of the rest of the world, including Europe. Even if wages remain stagnant for most of the population, in 20 years they will live better than their parents thanks to cheaper, more available technology. Those who think their kids won't be better off are simply ignorant of how the world has changed around them, or they are expecting a war or disease catastrophe on a Biblical scale.

[Private Label Rights Products]

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[Richard Spencer]

I just wish, that when writing about he future financial problems of the country, that one would start, or at least make mention of the enormous amount of unfunded liabilities from Medicare and SS alone by actually using the present dollar value of it. The Dallas Federal Reserve recently estimated it to be in excess of a $100 Trillion. I do not think that anything makes sense by any author about the future unless that is addressed straight on. It is mostly chatter unless one faces up to the realities of our financial hole when fantasizing about a solution that actually allows the future we want.

[can dogs eat bread]

Next US generation is my doggy's generation, hehe... :)) Yes, my doggy love american laws and read it also!... And i say, answer me please (for my mental health), can dogs eat human bread or not? Fruits and nuuts is good for daily dog feeding? Ahywhere, thanks for all, friends. I be happy with my doggy day after day, permanently in our future. Learn & read more about american dog feeding, it is very healthy!

[can dogs eat bread]

Next US generation is my doggy's generation, hehe... :)) Yes, my doggy love american laws and read it also!... And i say, answer me please (for my mental health), can dogs eat human bread or not? Fruits and nuuts is good for daily dog feeding? Ahywhere, thanks for all, friends. I be happy with my doggy day after day, permanently in our future. Learn & read more about american dog feeding, it is very healthy!

[sweet]

good

[Business Energy Australia]

Great read and informative, thanks. You’re right we don’t hear very much at all about the Greens Policies. I had no idea they didn’t receive big biz political donations – good on them. This will be something I’ll be keeping strongly in mind when I head to the ballot box.

[MRWED]

Your ideas are really great. I think to be assured that children will be much economically stable compared to their parents is to make sure they will have competent education. And to train them to be independent at early age.

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[wow account]

Americans believe their children will do as well or better than they have done, and this belief hasn’t weakened over time. Now let’s get back to arguing about objective living standards rather than subjective fears about them.

[student aid]

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.

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[den]

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[high interest savings account]

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[john]

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.“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.”