I am trying to resolve two well-documented but apparently contradictory recent trends in the U.S. economy:
- First of all, the American middle class is thriving (see here and here) where it is shown by the AEI’s Mark Perry that the middle class is only shrinking overall in the sense that the upper-income class is growing rapidly. Furthermore the lower-income class is really shrinking because so many lower-income households are moving into the middle class.
- Secondly, the American dream is fading in the sense that “absolute income mobility,” the fraction of children who earn more than their parents, has fallen from 90% for children born in the 1940s to only 50% for children born in the 1980s. The authors of these studies, Raj Chetty et al, point out that a more equal distribution of GDP growth across all income groups would reverse more than 70% of the decline in mobility.
- Blue states like California, New York and Illinois, whose economies turn on finance, trade and knowledge, are richer than red states. Red state economies based on energy extraction, agriculture and suburban sprawl, may have lower wages, higher poverty rates and lower levels of education than those of blue states but their residents benefit from a much lower cost of living, especially for housing.
- For the large number of blue state urbanites who work in low-paying retail, food preparation and service jobs, and also for tradespeople, teachers and civil servants, the American dream of home ownership, or even an affordable rental apartment, is increasingly out of reach.
Conclusion. The traditional American middle class is thriving overall but hurting quite badly in some of the most attractive large urban areas where the cost of housing is increasingly out-of-sight. This obviously hurts their upward social mobility.