The Myth of Disappearing Prosperity

It’s harder to get ahead. That’s no reason to stop trying.

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The American Dream is in rehab. Unemployment is way too high, the poverty rate is going up, and family income has fallen over the past few years. The bottom line for many families is that it feels awfully hard to get ahead.

[See 12 Ways to Stop America's Decline.]

But America has not become some capitalistic wasteland where ambitious strivers lay spent and broken. It remains one of the most vibrant places in the world. Opportunity exists and prosperity is still attainable. It's harder to find, but gloomy headlines and fear-mongering politicians are exaggerating the death of the American Dream—and creating some misimpressions about how we attain the good life. Here are four bogus assumptions contributing to the national malaise:

If the rich have more money, the poor have less. Income inequality is one factor economists look at to gauge fairness in the economy, and it's been trending in an uncomfortable direction. Here's what the latest Census data shows:

Percentage of all income earned by the top one-fifth of earners: 50.3 percent.

By the middle fifth: 15 percent.

By the lowest fifth: 3.4 percent.

In terms of proportion, the top fifth earn 3.4 times as much as the middle fifth, and 15 times as much as the lowest fifth. That gap has been growing since the mid 1970s. In 1976, for instance, the top quintile earned only 2.9 times as much as the middle fifth and about 10 times as much as the bottom fifth.

But wealth is not a zero-sum game, and bigger incomes for top earners doesn't mean they're taking money from everybody else, which is how the enrichment of the upper class is often portrayed. What it means is the wealthy are benefiting the most from the modern U.S. economy. The reason is mostly education, which has become vital as the economy has shifted from an industrial one based on manual and skilled labor to a service economy based on knowledge. We're still in the midst of that transition, which is a big reason that earnings for most income groups have fallen over the last 10 years: Too many American workers, including many in the middle class, have outdated skills that are in lower and lower demand. The inevitable result is falling pay for their services.

[See how to tell when the recession's really over.]

An unmistakable lesson from these income trends is that more than ever, education is the pathway to prosperity. Top earners aren't earning proportionately more because they're taking it from lower earners. They're earning more because in a global economy, they have the right skills to compete effectively with workers the world over. "Blaming the rich for earning more is like getting a C and blaming the people who get an A," says Southern Methodist University professor Michael Cox, former chief economist for the Dallas Federal Reserve Bank. "As the rewards for education go up, people who don't get educated don't share in the gains the way more educated people do."

Most people don't measure their well-being against the wealthy, anyway. They measure it against their own well-being in the past. If they feel better off, they tend to be satisfied. If they feel worse off, they join the Tea Party or march with Glenn Beck. Ordinarily, a healthy, growing economy creates wealth and everybody's living standards improve, so lower earners don't care that much if the wealthy have proportionately more. But we've got two problems right now: the economy is barely growing, and far too many people lack the skills to climb up the socioeconomic ladder. "I'd be a lot less worried about income inequality if we had better income mobility," says economist Heidi Shierholz of the Economic Policy Institute. "But we don't have equality of opportunity."

There's sharp disagreement about how to level the playing field throughout the whole economy and make it easier for people to improve their own living standards. The ideal solution would be better skills for everybody, which would raise incomes and living standards for every income group. But even without that, any given individual still has the ability to get educated, work like mad, bound upward, and join that top one-fifth of earners. It might be harder than it was 10 or 20 years ago, but ambitious Americans still enjoy vastly better opportunities than people in most other parts of the world. If you're determined, prosperity is in your future.

[See why the rich need the poor.]

America is in its worst shape ever. Not really. There's plenty of distress and we should all be appalled that 44 million Americans are living in poverty. But we've faced deeper problems in the past and have come up with solutions. Today's poverty rate, for instance, is 14.3 percent. That's awful. But it's still far below the levels of the 1950s and early 1960s, when it was over 20 percent. Social programs passed in the 1960s helped reduce poverty, but recessions have always caused a temporary uptick.

Incomes also fluctuate during recessions. The latest figures show that median real income is down about 5 percent from the peak it hit in 2000. After the 1991 recession—which was much milder than the one we just endured—income fell by about the same amount. Income in 1983—following a double-dip recession and a long bout of double-digit inflation—was 6 percent lower than it was 10 years earlier. Then it rose sharply. The biggest difference between now and then may not be the economy, but the lack of political resolve in Washington to mend it or simply get out of the way. If dickering politicians weren't holding the economy hostage to partisan gamesmanship, optimism would be much higher, perhaps even self-fulfilling.

[See 7 new skills every worker needs.]

Nobody gets ahead in a weak economy. Wrong! For everybody falling behind, many other Americans are learning new survival skills and taking risks they never would have taken in a more stable economy. Research by the Kauffman Foundation has shown that half of the nation's largest and fastest-growing small firms were started in a recession or bear market—often because of "accidental" entrepreneurs who got laid off from conventional jobs. The same pattern seems to be holding true today. The latest numbers from Kauffman show that the pace of new-business creation in 2009 was the highest in the 14 years the foundation has been tracking such activity. That comes despite a brutal small-business lending crunch. Many of those firms will fail, but the proprietors will have learned lessons that aren't taught in school or corporate training programs and will benefit them down the road. And almost assuredly, the next Microsoft or Google or Netflix will emerge from the ashes of the Great Recession.

The irony is that the same forces causing hardships for many—new technology, outsourcing, falling labor costs—are creating opportunities for others able to take advantage of them. "The paradox of progress is we grow through creative destruction," says Cox. "There are opportunities everywhere if you use technology to your advantage."

[See how to survive a 'zombie economy.']

Prosperity should be automatic. For a lucky group of Americans, it was. People who entered the work force in the 30 or 40 years following World War II joined an economy in which incomes mostly went up and American companies were largely immune from the forces of global competition. That began to change in the 1980s, and globalism clearly accelerated over the last decade. The bar for success got raised, and today, a finite set of skills no longer guarantees a comfortable life or predictable retirement. Still, prosperity remains the reward for driven workers who continually improve their skills and take nothing for granted. Working harder for it might even make it more satisfying.