The American Dream is Dead

A recent poll revealed that 52% of Americans believe the American Dream is dead, up from 43% in 2010. The optimism about how the economy works and our living standards is important. For most, how they feel about the economy dramatically influences their vote. Since we are less than three months away from the election, people's feelings about the economy are front and center.

The problem is that people's feelings have drifted from the actual numbers. This divergence has been coined the “Vibecession” by

kyla scanlon

. I have discussed it in videos and in this post on

Monday Morning Economist

with

Jadrian Wooten

and

Chris Clarke

.

Today, we discuss the actual living standards in the United States based on reliable economic data. Finally, I will also cover reasons we might be experiencing the divergence between feelings and facts.

The Data

America's Real Gross Domestic Product (GDP) reached $22.9 trillion in quarter 2 (Q2) of 2024. We have fully recovered from the pandemic and continue to grow positively. A common rebuttal online is that the GDP growth we are experiencing is influenced by high inflation. That is true in nominal terms, but not in this case because we are using Real GDP, a measure of GDP that excludes inflation. Real GDP allows us to compare GDP across time and measures real production levels while accounting for inflation. Real GDP is the measure you want to use to measure the REAL production levels across time.

Growth Rates

Another measure we would like to use is the rate of change in real GDP. Real GDP growth rates have been positive. On an annualized basis, Real GDP grew by 2.84% in the second quarter of 2024. (Update: Revised data released on Wednesday of this week adjusted the growth rate to 3.0%)

Average Living Standards

The latest figures from Q2 2024 indicate that Real GDP per capita was $68,700. If we took all of our production in the U.S. and divided it equally, we would each generate $68,700. That figure is up from $63,257 in Q4 2019, before the pandemic.

You are not alone if you wonder how anyone could think the economy is not doing well. By these measures, we should all be happy and excited about the economy's future, but that is not the case.

Bad Vibes

While Real GDP per capita is an excellent measure of average living standards, there are better income and wealth distribution measures. Real GDP tells us how big the pie is but not how it is sliced. The size of the slice is what individuals care about. Pie size becomes more contentious when the relative size of slices becomes easier to compare and people can see what they don't have. My hypothesis is that relative income and comparison are the reasons Americans have a negative outlook on the economy.

Relative Income

We measure income inequality using the Gini Index. The Gini index (ratio) measures how income or consumption expenditure distribution among individuals or households within an economy deviates from a perfectly equal distribution. A Gini index of 0 represents perfect equality, while an index of 100 implies perfect inequality.

According to the Current Population Survey data, the Household Income Gini Ratio has increased since the late 1960s and reached 48.8 in 2022. This increase in income inequality might be creating some economic tensions.

It is usually assumed that income inequality is a signal that the "Rich are getting richer, and the poor are getting poorer," but is that the case?

Are the rich getting richer and the poor getting poorer?

No, the poor are getting richer, and the rich are getting richer …by more.

The above graph shows the average income for each quintile since 1967 in real (2022) dollars. This data was collected from the Tax Policy Center. The lowest quintile in 1967 had an average income of $1,600. In 2022, the average income in the lowest quintile was $16,120. Income levels for the lowest quintile increased by 9.1 fold! Remember, this is in real terms. The highest quintile experienced a growth of 14.6 fold during that time frame.

As measured by income levels, life has improved across the income distribution. However, the growth experienced by the top earners outpaced the growth of the lowest earners. When we examine the growth of the top 5% of earners, their income grew by 16.8 times.

Are we living a better life than our Parents?

Opportunity Insight has examined the concept of intergenerational mobility. We find that more than 90% of children born in the 1940s grew up to earn more than their parents. But, over the past fifty years, this measure of the American Dream has declined. Today, only half of children grow up to earn more than their parents.

Every parent dreams of their children having a better life than they did. When younger generations do not earn more than their parents, it might lead to a feeling that the American Dream is failing.

Takeaway

As we reflect on the state of the American economy and the perception of the American Dream, there are several key points I want you to keep in mind:

1. Economic Growth: The U.S. economy has shown resilience and growth, with Real GDP and GDP per capita increasing steadily. By traditional measures, the economy is performing well.

2. Income Inequality: While all income groups have seen growth since 1967, the gap between the highest and lowest earners has widened significantly. This increasing inequality may be fueling discontent despite overall economic growth.

3. Intergenerational Mobility: The likelihood of children out-earning their parents has decreased dramatically over the past 50 years, challenging a core tenet of the American Dream.

4. Perception vs. Reality: There's a notable disconnect between economic data and public sentiment, dubbed the "Vibecession." This gap highlights the importance of considering both objective measures and subjective experiences when evaluating economic well-being.

5. Complexity of Progress: While the data shows that all income groups are better off in absolute terms compared to previous generations, relative differences and the pace of improvement vary greatly across the income spectrum.

Stay informed and make better decisions,

Dr. A

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Videos to Watch

I created these videos to help explain the topics I cover in class. I hope you find them helpful resources to support your understanding of the macroeconomy.