Judy Loy: Is the American Dream Dead or Just Taking a Nap?
In my line of work, I read a lot. Having a finger on the pulse of the economy, markets and the latest trends can help one see where the next great investment might be. In my research, I discovered a disturbing theme developing in articles in the New York Times, The Economist and CNN, to name a few.
It's the question of whether the American Dream is no longer a reality.
First, let's define what the American Dream is. The American Dream is "the dream of economic opportunity and upward mobility" as defined by The Economist in a 2006 article, "Inequality and the American Dream." As described by the Los Angeles Times in an October 2010 article entitled, "United States threatened by fading belief in the American Dream," it is defined as "if you work hard, you'll get ahead."
It is the ongoing belief that the next generation will be better off than the one before it. In the same Los Angeles Times article, an ABC News/Yahoo! News poll revealed that only half of Americans believe the American Dream still holds true.
The latest data from the Census Bureau are discouraging. Over the past decade, the median household income has fallen seven percent. Median household income is the central point: The same number of households make more than the median as make less. In addition, the poverty rate rose to 15.1% in 2010, its highest level since 1993. One in five children now lives in poverty, which is defined by income of less than $22,314 for a family of four.
The main issue affecting the mindset of pundits is the inequality of income in the United States. This is measured by the Gini Coefficient that was invented in 1912 by an Italian, Corrado Gini. It measures the disparity of income distribution. A Gini Coefficient ranges from zero to one. Zero would illustrate minimum inequality where everyone would have the same income, and a one Gini coefficient designates a population where one member has all and the rest get nothing.
This statistic shows a troubling trend in the United States. In 1970, the Gini was .394; then, in 1990, .428; and, finally, in 2008, the Gini for the U.S. reached .466. Thus, income inequality has grown significantly in the States.
A few trends have led to the disparity. Unions are weaker and manufacturing jobs in the United States are disappearing. It is now acceptable to pay a CEO 343 times the median wage at S&P 500 companies. To put that in perspective, JP Morgan would not pay himself more than 25 times his lowest paid worker. The Gini Coefficient illustrates a vanishing staple in America, the middle class. The poor are getting poorer, the rich are getting richer, and the middle class is getting squeezed.
According to the article "Is Capitalism Working for You?" published in the New York Times on Sept. 20, 2011, Proctor & Gamble has studied the Gini Coefficient and is focusing its marketing on the poor and wealthy as their middle-class customer base is dissipating. Citigroup is advising clients to base their portfolios on the phenomenon, calling it the "Consumer Hourglass Portfolio." The concept is to concentrate assets in companies that serve the rich or the poor but not the in-between. When marketing and investing gear toward a trend, you know a change has occurred.
In a 2011 study done by The Pew Charitable Trusts, "Downward Mobility from the Middle Class: Waking Up from the American Dream" by Gregory Acs, it's revealed that one-third of Americans who are raised in the middle class -- defined by income -- fall out of the middle as adults. The strongest correlations to such downward mobility are marital status, education, test score and drug use.
Those who were divorced, separated, widowed or single were more likely to lose economic ground. In particular, women who are divorced, widowed or separated were 31 to 36 percentage points more likely to be downwardly mobile than married women.
Men or women who do not obtain education beyond high school are more likely to fall out of middle class. The test scores used in the study are from the Armed Forces Qualification Test (AFQT), which measures reading and math skills. Low scores on the AFQT correlated with downward mobility.
Not surprisingly, one of the worst choices a middle-class male youth can make for future mobility is to use hard drugs. In short, if we want the next generation to succeed and at least stay middle class, the study leads to several conclusions. We need to set our children up for positive relationships and good marriages. Most certainly the jury is still out on how to do that.
From there, teaching children the dangers of hard drugs is a must. Most importantly, providing the next generation a good educational foundation and the opportunity for higher education seems the best route to save the American Dream.
Washington is discussing tax increases for the wealthy and more benefits for the poor. What about the important American middle class? The middle class was hit the worst in the economic downturn because much of its wealth resides in home values. A Washington Research organization, Third Way, released a study showing that middle-class schools vastly under-delivered (Note in the previous paragraph that education is a key way to retain middle-class status). Wealthier districts and the poorest districts (which get federal and state aid) performed better. Yet it is essential to have a healthy middle class to maintain our economy.
It is my strong belief that in order for the American Dream to be realized, it is imperative that Washington recognize the need to serve the faltering middle class. Until then, the dream is damaged -- and, unfortunately, for some, a nightmare. The need to improve the educational and taxation systems for the middle class is evident in the reports and data.
This group referred to as the middle class and upper middle class are my clients and friends. They are real people with real problems. They work hard to prepare for retirement, put their kids through school and earn a paycheck. Isn't it time that politicians made them a priority?