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No, the American dream isn’t being hoarded

LiveMint logoLiveMint 04-10-2017 Noah Smith

Many Americans are worried that the US is becoming a class society. The country’s founding mythology holds that it began as an egalitarian alternative to the hidebound, class cultures of Europe—a place where even the lowliest of birth rise through hard work and ingenuity. Of course, that rosy image was never quite accurate, but in the mid-20th century the US did manage to build a middle-class society with a decent amount of social mobility.

Now that mobility is fading, and that middle class has bifurcated, it’s causing much consternation. Many writers have bemoaned the plight of the working class, which has been losing ground. To this growing list we must now add Richard Reeves, a senior fellow at the Brookings Institution, whose new book Dream Hoarders claims that the upper-middle class is hogging most of the country’s economic opportunities. Though Reeves’s book correctly identifies a major problem in American society, it ultimately falls short of offering a comprehensive solution.

Reeves’s critics like Mike Konczal at the Roosevelt Institute argue that instead of the upper-middle class we should be focusing only on the very wealthy. But as Reeves points out, this exalted group isn’t always the same set of people. Many wealthy people have highly variable incomes—hedge fund managers who make money when their funds do well, or entrepreneurs who reap a bonanza when they sell their companies. Also, incomes tend to rise as people age, especially for the wealthy—most chief executive officers started out in much less lucrative positions.

Reeves is also right that money doesn’t capture the full importance of class divergence. Educated Americans live longer, get married more and stay married more, and indulge in fewer self-destructive behaviours like smoking. Research has also found that when a person’s income rises past about $75,000 a year—right about the 80th percentile as of 2016—the link between money and happiness becomes weaker.

And Reeves is right to focus on college education as a determinant of class status. The college wage premium has risen substantially in the US since 1980. This earnings premium has happened despite a steady rise in the percent of Americans with higher education. In 1980, 24% of Americans held bachelor’s degrees—by 2015, it was 33%.

A simple economic model would suggest that as the supply of college-educated American workers increased, the wage premium should have been competed away. And if college were merely a way to signal high natural ability, the return on college should have vanished as lower-ability people entered the ranks of degree-holders. That the college premium has held steady or even climbed as more people have gotten degrees implies that not enough Americans are going to college. So while the concentration of wealth in the hands of the super-rich is certainly cause for worry, the divergence of the middle class into upper and lower ranks, partly divided by education, is also an important issue. Addressing the former shouldn’t mean ignoring the latter.

But when it comes to offering solutions to the middle-class divergence, Reeves falters. He focuses mainly on ways that upper-middle-class Americans give their children a leg up. Three methods of “hoarding” get singled out—legacy admissions to elite colleges, exclusionary zoning laws, and unpaid internships.

Legacy admissions are an odious practice that ought to be eliminated. But legacies are overwhelmingly an issue at small, elite universities like Harvard University. Chetty’s research shows that mid-tier public universities are a much more important source of middle-class mobility than the Harvards of the world.

Exclusionary zoning is certainly a big problem and increasing urban density would boost incomes for poor and working-class Americans by allowing more of them to move to places where wages are higher. But educated knowledge workers would gain even more. One of the main benefits of density is that it allows knowledge workers to cluster together and exchange ideas, boosting their productivity. Permitting greater density would make it possible for more of these workers to live in these areas. As for unpaid internships, they certainly seem unfair, since only rich kids can afford to work for free—but the phenomenon is a recent one, while the middle class has been diverging for decades.

Reeves’s error lies in focusing on the zero-sum elements of the economy: Legacy admissions and internships for rich kids are morally offensive, but ultimately a sideshow to the real issues holding back so many Americans.

The problem isn’t that people are hoarding their spots in the upper-middle class; it’s that there aren’t enough spots to begin with. Instead of focusing on who gets into Harvard, the US should make it easier for poor and working-class children to go to the big public universities that are the real drivers of upward mobility. Instead of moving heaven and earth to ensure that the competition for plum jobs is fairer, the US should focus on increasing the number of plum jobs.

The American Dream may be out of reach for many, but not because it’s being hoarded. The dream doesn’t come in a fixed lump to be parcelled out among winners and losers. The goal should be to rebuild the middle class by moving more people into the ranks of the well-off, not to knock down the few who have managed to get there early. Bloomberg View

Noah Smith is a Bloomberg View columnist.

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