Are private equity buyout activities contributing to income inequality and the death of the American Dream?
In this episode you’ll learn:
- What is the probability someone will make more than their parents.
- Do private equity buyout firms help the economy.
- What have been the returns for private equity buyout funds.
- How much has income inequality increased?
- What contributes to upward mobility.
Correction
In the episode, the statistics shared for the number of U.S. manufacturing jobs should have been in millions not thousands. There were 17,230 million manufacturing jobs in September 2000 and 12,269 million in September 2016.
Show Notes
How the Twinkie Made the Super Rich Even Richer – New York Times
Private Equity, Jobs and Productivity – National Bureau of Economic Research
The Equality of Opportunity Project
The American Dream Quantified At Last – David Leonhardt
Universal Basic Incomes – The Economist
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Summary Article
Is the American Dream Dying?
Is the American Dream dying?
The term “American dream” comes from a popular 1931 book by the historian James Truslow Adams. He defined it as “that dream of a land in which life should be better and richer and fuller for everyone.”
Upward Mobility
Fulfilling the American Dream is often measured by upward mobility, such as does someone earn more than their parents.
By that metric, the probability of achieving the American Dream is greatly diminished today.
Raj Chetty and his team of economists recently launched the Equality of Opportunity Project (now Opportunity Insights) to measure the upward mobility of U.S. citizens.
They found that someone born in 1940 had a 92% probability of making more than his or her parents. That probability fell to 61% for someone born in 1970 and for someone born in 1980, who would be in their mid-thirties today, the probability he or she will make more than his or her parents is only 50%.
Income Inequality
Income data compiled by Thomas Piketty, Emmanuel Saez and Gabriel Zucman for their paper, “Distributional National Accounts: Methods and Estimates for the United States” show that from 1980 through 2014, pre-tax income for the bottom 50% of the U.S. population, comprising 117 million individuals, grew by only one percent.
That is not one percent annually, but one percent in total over a thirty-four year period. In 2014, average pre-tax income for the bottom 50% was $16,200. They collected 12.5% of total national income.
Meanwhile, over the same period the average pre-tax income for the top 10% of the population, which is comprised of 23 million individuals, grew by 121%. In 2014, the average pre-tax income for the top 10% was $304,000, comprising 47% of total national income.
Redistribution through taxes, credits, and transfers has resulted in an average post-tax income of $25,000 for the bottom 50%, with much of the adjustment coming from the value of health insurance benefits such as Medicaid and health insurance subsidies.
The average post-tax income has increased by 21% for the bottom 50% since 1980.
Post-tax income for the top 10% averaged $252,000 in 2014, 113% higher since 1980.
Solutions
What would it take for more Americans to benefit from upward mobility and make more than their parents?
The Equality of Opportunity Project found that the economy would need to grow faster and the economic spoils distributed more evenly.
They write, “Most of the decline [in upward mobility] is due to the more unequal distribution of economic growth in recent decades rather than the slowdown in GDP growth. Increasing economic growth rates to the higher levels experienced in mid-century America would increase the fraction of children earning more than their parents to 62%. Spreading the existing growth more broadly across the income distribution would raise the level to 80%.”
The Equality of Opportunity Project also found differences in upward mobility are caused by differences in childhood environment. Specifically, “cities with a high level of upward mobility tend to have five characteristics: lower levels of residential segregation, a larger middle class, stronger families, greater social capital and higher quality public schools.”
Education
Education is key. David Leonhardt of the New York Times wrote regarding how to improve upward mobility that, “Given today’s high-tech, globalized economy, the single best step would be to help more middle- and low-income children acquire the skills that lead to good-paying jobs. Notably, most college graduates still earn more than their parents did, other data show — yes, even after taking into account student debt.”
“But education is not the only answer. Incomes have also stagnated because of the rise of corporate power and the weakening of labor unions, leading profits to rise at the expense of wages. The decline of two-parent families plays a role, too. And tax policy has not done enough to push back against these forces: The middle class, not the affluent, deserves a tax cut.”
Given the complexity of the global economy, there is not one simple solution that will renew the American Dream. Income inequality is a multifaceted problem.
Only the combined efforts of national and local leaders, businesses, communities, and individuals and families will give those born today a greater than 50% chance of achieving the American Dream.
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