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Is the American Dream Dying?

by Fred Block
In this election season, politicians of both parties celebrate the American Dream of unlimited opportunity for the poor who are willing to work hard and play by the rules. However, there are signs that indicate the Dream is on the decline.

A Dream on the Decline

In this election season, politicians of both parties celebrate the American Dream of unlimited opportunity for the poor who are willing to work hard and play by the rules. Since launching his political career, Arnold Schwarzenegger has presented his own highly unusual route to fame and fortune as proof that the American Dream remains a vital reality. But the uniqueness of Arnold’s particular immigrant success story raises the obvious question--how many people can realistically aspire to become the world’s greatest bodybuilder or Hollywood’s most successful action hero? In earlier generations, each immigrant millionaire represented thousands of others who had achieved middle class security, but Arnold represents only himself. Perhaps, his ultimate role is to symbolize an American Dream that survives only for the few with extraordinary talents.

There are signs that indicate the Dream is on the decline. For the last few decades, the distribution of income and wealth in the United States has become more unequal so that those living in poverty have even a smaller share of resources as they struggle to achieve mobility. At the same time, higher education and technical skills have become more central for success across a wide range of occupations. A generation ago, a high school dropout could become an auto mechanic, but now success in that trade -- and many others -- requires technological expertise and access to expensive equipment. And yet, the financial barriers to higher education and technical skills have grown more daunting; reports indicate that the children of the poor are less and less likely to get the advanced training that they need.

There are also studies showing that the United States now has lower rates of mobility out of poverty than countries like Germany. Not only are children at much higher risk of growing up in poverty in the United States, but more of them are doomed to remain in poverty. Think of the seriousness of this reversal if it is now better to be born poor in the Old World than in the New. To be sure, it will take much additional research to prove that the American Dream has moved offshore, but in the meantime, there is other evidence that the Dream is in trouble.

The Dream Gap

Take a look at the following graph. What you see is the growing divergence between the cost of the American Dream and the poverty line over the last thirty years. There is now a huge gap between those living at the poverty line and the resources needed to experience the Dream.

By 2003, the income and benefits sufficient to reach the Dream for an average family of four in the U.S. reached $46,500. The American Dream is defined as sufficient income and benefits so that a family of four can afford comprehensive health insurance, a single family home, quality childcare for one pre-schooler, and college savings so that both children can attend a public college or university. To make the case as strongly as possible, the measure proposed here is a no-frills, minimal budget that leaves this family without any luxuries. This is certainly less comfort than most of us associate with the American Dream, but the goal is to create a low end estimate that is not vulnerable to charges that the Dream Line has been padded with extras. In reality, most readers would probably want to add another $5,000 to the Dream Line to assure this family an occasional vacation and a budget for entertainment. Also, since the line is a national average, it fails to capture the squeeze on families living in those metropolitan areas where housing costs are well above the national average. In California, for example, the Dream Line would be higher by $20,000 because the median home in the state costs more than twice the national average.

dreamgraph.gif

(For details about this chart, see sections on Methodology and the Cost of the American Dream )

The line in the middle of the graph is what a family earns if both parents are working full-time at the minimum wage without health benefits. Thirty years ago, a young family where both parents were working at minimum wage jobs could believe that with hard work and some promotions to better paying jobs, they would realize the Dream. But today, such a family earns only 45% of the Dream Line. Even if one parent’s wages were to double, the family’s income would still fall far short of the line.

While this is a huge problem for the poor, it extends well beyond their ranks. Somewhere between 37% and 45% of all families in the United States are falling below the line. In 2003, half of all men who worked full-time and full year earned less than $40,668; the comparable figure for women is $30,724. Even after adjusting for the value of the employer contribution for health insurance, at least half of families that depend on a single earner in a given year will fall below the line.

However, even this graph understates the severity of the problem. First, there is tremendous instability in the labor market; managers are constantly adjusting the size of the workforce to changing circumstances. With increasing dependence of families on two earners and greater instability in the job market, family income has become increasingly unstable with year-to year shifts of 30% in household income becoming increasingly typical. Many families that might move above the Dream Line in one year will fall below in the next year. Second, families where both parents are working close to full-time with relatively inflexible schedules face continuous challenges. While the Dream Line covers quality childcare for one pre-school child, it does not address other problems. Who watches the school age child after school? What happens when a child is sick? Who goes to day-time events at the child’s school? What happens to the quality of family life under this kind of time squeeze?

Finally, the Dream Gap suggests that most single parent families headed by a woman have little chance at achieving any kind of upward mobility. A single mother working full-time would have to earn $16.83 per hour plus health coverage to make the American Dream a reality for her children.

The numbers indicate that the Dream is turning into a nightmare for a very large segment of the population. In earlier generations, the Dream was not universal; racism blocked upward mobility for certain minority groups. But for others, there was a ladder of mobility that families could move up rung by rung, year by year. Parents would struggle–often with multiple jobs–to reach a certain level of security, and then their children would use education to move even higher, helping their parents to achieve greater comfort in the second half of their lives. And particularly in the decades after World War II, government policies reinforced the rungs of the ladder. But now many of those rungs have been broken and only the most agile and athletic climbers are able to achieve mobility.

Millions of families are now working as hard as they can without making any progress. For some, it means being stuck in bad neighborhoods with lousy schools so their highest aspiration becomes to keep their kids alive, away from drugs, and out of jail. For others, it means having inadequate health insurance so that even a small medical problem becomes a huge financial crisis. And for still others, it means that even when their children do well in high school, there are simply no resources for college or learning technical skills. In all these cases the results are the same; the children have little chance to do better than their parents. Wal-Mart parents end up with Wal-Mart children. We are back to the old European model in which children end up doing the same work as their parents.

Why Has This Happened?

There are two fundamental reasons for the death of the Dream. The first is the stagnation of wage levels at the bottom of the economy. The reasons for this are well known. From the 1940's to the 1960's, the government adjusted the Federal minimum wage to keep up with the rising cost of living, but such upward adjustments have been infrequent over the last three decades. It is now seven years since the Federal minimum wage has been increased. Across the same period, the percentage of the labor force in unions has continued to decline, so fewer workers are able to effectively pressure employers for higher wages.

To be sure, there has been a political response to this problem. President Clinton expanded the Earned Income Tax Credit that gives an actual transfer payment to low wage families to help those who “work hard and play by the rules.” But the maximum transfer that a family can get under the EITC is about $4200 per year–and that goes to a family that earns no more than $15,000. But even the quickest glance at the graph shows how a transfer of that size would leave those families far short of the Dream. The same thing can be said for other government programs such as food stamps and Medicaid.

The second reason is equally serious, but it hasn’t gotten as much attention. It can be called the 4-H problem, since most of the cost increases of the American Dream have occurred with Housing, Health insurance, Higher education, and High quality child care. Between 1973 and 2003, the cost of consumer commodities--everything from green beans to automobiles to t-shirts--rose a little more than 300%. But for each of the 4-H items, the increase has been much greater–515% for Housing, 736% for High quality child care, 679% for Higher education, and 1755% for Health insurance.

PRICE RISES FOR THE 4-H’S

  HOUSING HIGH QUALITY CHILD CARE HIGHER EDUCATION HEALTH INSURANCE
1973 (annual cost) $1,989 $978 $736 $509
2003 (annual cost) $10,245 $7,200 $5,000 $8933
% increase 515% 736% 679% 1755%

In all of the rich countries of the world—including our own—the government plays a critical role in delivering these four key services to the public. Unlike commodities, the 4-H’s are all social forms of consumption--the value of what one individual gets depends on what others get. With housing, for example, people don’t just buy a house; they are moving into a neighborhood whose desirability depends on who else lives there, the quality of services, and access to jobs. The 4-H’s also have the character of public goods; everyone benefits from living in a society where people are well housed, well educated from early childhood to advanced degrees, and are able to access health care. This is why the U.S. government runs a huge mortgage guarantee program and is actively involved in trying to assure that there is enough flu vaccine each year. These services are also too important to just tell consumers to be careful with their choices in the marketplace; there is a public interest in establishing standards so that houses will withstand earthquakes and children are not at risk for sexual abuse at child care centers.

Finally, even when societies rely heavily on private investment to provide some of these services, as most nations do with some components of health care such as prescription drugs, governments must provide private firms with various inducements -- contracts, patent protection, insurance -- to reduce the risk that investments would prove unprofitable.

But while it is inevitable that governments play a central role in providing these 4-H services, there are tremendous variations in who benefits from the governments' policies. In some places, the government’s priority has been to increase the supply of these services and assure that the poor have access to them. This doesn’t require “big government”; it can be done through regulations and other measures to expand the supply of services provided by private actors. In fact, this used to be a high priority in the U.S., but over the last twenty-five years, there has been a radical shift in the government’s priorities. Under the influence of Market Fundamentalism -- the belief that unregulated markets always work best to organize economic activity -- the government’s priority is now to maximize the profits earned by private firms and assure that the market sets the price for these services.

A generation ago, we had public-private partnerships in the provision of these services; government reduced the risk for private firms, and the benefits were shared between the public and the private firms. Today, we still have a public-private partnership that reduces risk for corporations, but now almost all of the benefits go to the private firms. In this revised arrangement, the government has basically abandoned any role in regulating price increases. For example, we used to keep tuition and fees at public colleges and universities as low as possible to assure access for the children of the poor; now those charges rise even faster than tuition at private schools. Those below the Dream line are the biggest losers in this transformation; the shift to market pricing and private benefits has priced these vital services beyond their reach.

Identifying the Villain

Market Fundamentalism -- the extreme belief in unregulated markets -- is killing the American Dream. This is what lies behind both the resistance to higher wage levels for the working poor and the runaway prices of the 4-H’s. Market Fundamentalists believe that when wages are set by the labor market, they will be fair and appropriate and minimum wage laws are bound to create more problems than they solve. They also insist that the market alone should set the price for such indispensable services as Housing, Higher Education, Health care, and High quality child care.

But all of these claims are false. The labor market does not produce fair outcomes because of the huge power differential between those selling labor and those buying labor. Individual employees, struggling to put food on the table, have to “negotiate” wages with giant multinational corporations that can wait for someone desperate enough to take work at the minimum wage. At the same time, reliance on market pricing alone assures that millions will be priced out of the market for these vital services.

The alternative to Market Fundamentalism is to create a Moral Economy in which markets are regulated to make the promise of opportunity real. We need to return to the idea of sharing the benefits of public-private partnerships. We need to restructure the arrangements for producing the 4-H’s to increase both the supply and quality of these services for those below the Dream Line. We also need to reject Market Fundamentalism’s false claim that government efforts to regulate prices are illegitimate and wrongheaded. On the contrary, government price regulations, when implemented with caution and skill, have played a critical role in the successes of market economies over many centuries and across many continents. The weight of historical evidence actually shows that it is the Market Fundamentalists who are dangerous radicals, basing their economic and social policies on untested and unsound prejudices. They must be defeated so that we can revive the Dream.

Appendix: The Cost of the American Dream

The American Dream means different things to different people, but its core has always centered on the idea that through hard work, people can achieve some degree of comfort and greater opportunities for their children. As a result, we have estimated the cost of the Dream for a family of four to include: a single family home (with a mortgage), comprehensive health insurance, child care for one child under five, and enough savings to send the children to a four year public college or university. Our estimates assume that in all other matters, the family lives very frugally. No allowances have been made for vacations, entertainment, or other luxuries. We have included the cost of quality child care for two reasons. First, this family would not be able to afford a stay-at-home parent. Second, there is strong evidence that quality child care facilitates cognitive development that is valuable for later school success.

Figuring out the percentage of all families that are currently below the Dream Line is difficult because actual families vary by number of children, the share of health insurance costs that they pay, and the actual costs in their region of the country. In 2003, if one assumes that all families had an employer who covered 73% of the cost of health insurance, then 37% of families fell below the Dream Line in that year. This could overstate the case because some of those families had fewer than two children. On the other side, however, 20% of households earning between $25,000 and $50,000 were without any health insurance coverage in that same year. (Data are from http://www.bls.census.gov/cps/relsurv.htm ) Finally, if one takes account of the increasing variability in family income from year-to-year, probably half of all families are at risk of falling below the line in any given year.

Appendix: Methodology in Calculating the Dream Line

The Dream Line in the graph is not strictly a wage figure, since it includes the full cost of comprehensive health insurance that is often partially paid for by the employer as a benefit. However, many employers either do not offer any medical benefits or the plans they offer impose huge out of pocket costs on the employees. Factoring the full cost of comprehensive health insurance into the Dream Line is a simple way to standardize across these variations in benefits and the huge variations in family medical expenses. Despite the staggering annual cost for this coverage, this calculation still provides a very conservative estimate of the impact of rising health costs on family budgets. On average, employees pay 27% of the cost of these family policies. Furthermore, most insurance plans have dramatically increased co-pays and deductibles. Finally, many plans provide little protection from skyrocketing costs for prescription drugs.

At every step, conservative assumptions have been used to calculate the Dream Line to make sure that it represents a no frills standard. The Federal poverty line has frequently been criticized for understating poverty in the U.S. because it is has been set at an unrealistically low level. While we are sympathetic to these criticisms, we nevertheless start with the Federal poverty line for a family of four to establish a baseline of meager consumer spending for our Dream family. To avoid double counting, we adjust the poverty line downward by subtracting the actual cost that households report spending on housing and health insurance in the government’s Consumer Expenditure Surveys. Then we add the annual cost of the 4-H’s -- Health Insurance, Housing, High quality child care, and Higher Education. For higher education, the cost is the amount of savings that a family should be putting aside each year if it wants to accumulate the funds to cover tuition, fees, room and board at a public college or university.

While costs vary considerably by region, the graph provides an average figure for people in the U.S. living in metropolitan areas—where most people live. Costs in rural areas are generally lower, but families in these areas face more limited employment opportunities. Our procedures assure that we have a very frugal estimate of the cost of the American Dream -- one without luxuries -- but designed primarily to assure expenditures that will make it possible for the family’s children to do better.

Health Insurance

The cost included in the graph is the full cost of comprehensive health insurance for a family. The data for 1993 and 2003 are from the Kaiser Family Fund that carries out a large-scale survey of employers to provide estimates of their costs for insuring their employees. The annual figures are an average of the cost of different types of health care plans—both Health Maintenance Organizations and fee-for-service plans. Data for 1973 and 1983 are from the Bureau of National Affairs Personnel Policy Forum that draws on a smaller employer survey.

Housing

The cost included is the annual mortgage payment for the median priced existing single family home in the U.S. for the given year, assuming a mortgage rate that is the average of the current and two preceding years. The data are calculated from the Housing Affordability Index provided by the National Association of Realtors. Using the current year housing cost is appropriate because most families have to accumulate savings over a number of years in order to be able to move up to the house that they want. The median price is appropriate because the intention is to estimate costs in metropolitan areas; not rural areas where housing is considerably less expensive.

Higher Education

The cost here is an annual amount of savings that the family put asides each year to cover the cost of tuition, fees, room and board at a public college or university for two children. For 2003, the estimate is that a family should put aside $2500 per year to provide sufficient funds to cover public college costs in 2020. For earlier years, this annual figure is adjusted downward to match the changing cost of public four year colleges between 1983-2003 as reported by the College Board. Data for 1973 is in Arthur Podolsky, Basic Student Charges 1972-73 and 193-74, U.S. Department of Health, Education, and Welfare.

There are programs to provide scholarship assistance to some low income students who want to go to college. The problem, however, is that low income families face two problems in sending their children to college—covering all of the costs and coping without the earnings that the child would otherwise contribute to the family budget. To deal with the second problem requires that the family have some income cushion. The $2500 per child annual savings provides a fairly conservative estimate of that income cushion on an annual basis.

High Quality Child Care

Costs of center-based child care vary significantly, and consistent data are very hard to find. Figures for 1973 and 1983 are averages taken from national surveys done in 1975 and 1985 as reported by Sandra Hofferth in Congressional testimony [1] . The figures for 1993 and 2002 are figures from market rate surveys in the Sacramento area prepared for the California state government. Since the Sacramento costs were somewhat higher than the national average, these were adjusted downward by 10%. Adjusting between Sacramento rates and national rates was done by using the Children’s Defense Fund’s 2000 study of child care costs and the Public Policy Institute of California’s study, Child Care Price Dynamics in California .

Other Factors

In constructing the Dream Line, we did not account for expenses associated with transportation, saving for retirement, or taxes. The retirement issue is serious because over the past thirty years, the percentage of jobs that offer decent pension benefits has fallen sharply. In the case of taxes, the Consumer Expenditure Survey indicates that taxation as a percentage of total income has actually fallen for families near the Dream Line—even before the recent rounds of federal tax cutting.

The Dream Line is quite distinct from the admirable effort by Diana Pearce and others to construct a Self-Sufficiency Standard (SSS) as a way to estimate a Living Wage in particular localities. First, the Dream Line is an estimate of a national average whereas the SSS is calculated for local conditions. Second, the Dream Line makes use of the government’s poverty line, while the SSS looks at the specific costs of food, rental housing, transportation, and miscellaneous expenditures in a given areas. In terms of health insurance, the Self-Sufficiency Standard includes estimates of employee cost for health insurance coverage and other out of pocket health costs. On child care, the measures are similar, but the SSS includes the cost of after-school care for school age children. The SSS makes no adjustment for the costs of Higher Education. Unfortunately, the calculation of Self-Sufficiency Standards goes back only about ten years, and it would be very difficult to use the same methodology to calculate a Self-Sufficiency Standard for 1973. However, if this were done, the result would most certainly parallel the sharp upward trend of the Dream Line in this graph. For more on the SSS, see the National Economic Development and Law Center, The Self-Sufficiency Standard for California 2003.

Zach Schiller’s research support was indispensable in preparing this report as were dozens of conversations with other members of the Rockridge Institute.

[1]American Families in Tomorrow’s Economy, Hearings before the Select Committee on Children, Youth, and Families, House of Representatives, 100th Congress, July 1, 1987

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