American Dream Alive and Well

Commentary by Pete du Pont

One of the most over-used rhetorical devices in politics is the class warfare argument that tax cuts only benefit the rich. Fortunately, this tired, socialist rhetoric is losing its charm because most Americans aren't inclined to believe that socking it to the rich will solve all their problems. One of the main reasons for this, is the firm belief among most people that one day, they themselves might become rich. The beauty of America is that they might just be right.

What class warfare warriors fail to realize is that the poor are not always going to be poor, nor will the rich always be rich. And most important when you are talking about the long-range implications of any specific public policy, the rich won't always be the same people.

The truth, according to a study by my colleagues at the National Center for Policy Analysis, which was published by the Financial Services Roundtable, is that despite an increasing disparity in incomes between the highest and lowest paid workers, there is a great deal of economic mobility. Throughout worker's careers, most will move up and down the economic ladder - some more than once. More importantly, this movement continues from generation to generation.

One way of looking at economic mobility is to divide workers into five equal groups (quintiles) by income, from highest to lowest, and identify movement between the groups over time. Comparing the status of workers from year to year, about one-third of workers in the bottom income group moved to a higher group after one year, and about one-quarter who were in the top group moved to a lower one. Among those who were in one of the intermediate three groups at the beginning of one year, about half move to another group by the end of the next year.

More importantly, mobility increases even more over a 10-year period. After 10 years, 60 percent of workers of the same age who began in the bottom group move to a higher-earning quintile. More than half of the workers in the top group move to a lower group. Some 8 percent of workers who began in the bottom group move all the way to the top, and 6 percent of those who began in the top group move all the way to the bottom.

The rising inequality of wage income is primarily due to the high value the labor market pays to workers with certain skills. This is good news for those concerned about equality of opportunity, for one of the most important factors allowing people to escape the lowest income quintile is the acquisition of education and job skills.

Income differences between high and low income earners also tend to be eliminated by the third generation, on the average. Comparing data on men's earnings a generation ago with the earnings of their sons, the authors found almost two-thirds of the sons of the fathers in the highest income group were in lower income group. Nearly 60 percent of the sons of the fathers in the bottom income quintile moved to a higher group.

Similarly, the most important factor in wealth accumulation is not inherited wealth, but differences in the degree to which people save what they earn and differences in the receipt of capital gains. Looking at the annual Forbes 400 list of wealthiest Americans, almost two-thirds of those named to the list in 1994 were not on the list 10 years earlier. Also, 80 percent of those on the list were self-made, as opposed to individuals who inherited fortunes.

Looking at the list over a nine-year period, we can see that significantly more than 400 people occupied a place on the list. According to research by Congress' Joint Economic Committee, 2,218 taxpayers were on the list at some point during the period. Amazingly, three-fourths were among the top 400 for just one year and 87 percent were on the list for two years or less. Less than 1 percent made the cut every year.

This high churn rate is due mostly to the dynamism of America, which rewards hard work, education and flexibility. If this were not the case, the country would settle into a permanent aristocracy of wealth; it hasn't, for climbing the economic ladder is more the norm than the exception.