Most Americans continue to believe that hard work and ambition determine success. But in a speech last week, Federal Reserve Chair Janet Yellen highlighted some disturbing tends in wealth and income inequality:
“It is no secret that the past few decades of widening inequality can be summed up as significant income and wealth gains for those at the very top and stagnant living standards for the majority. I think it is appropriate to ask whether this trend is compatible with values rooted in our nation’s history, among them the high value Americans have traditionally placed on equality of opportunity.”
She noted that other developed countries offer a better chance at economic mobility. This is true—to a point. Consider Sweden. Like the other Nordic countries, it offers the best shot at income mobility, according to severalstudies (PDF). (America ranks near the bottom.) But while it is relatively easy to move into the Swedish middle class, research by Swedish economists Anders Björklund, Jesper Roine, and Daniel Waldenström (PDF) suggests that climbing any higher is nearly impossible. They looked at the income of more than 100,000 father-son pairs in Sweden from 1974 to 2005: The lowest income tier was eight times more porous than the top income tier. Another way to put this is that hardly any sons born outside the top income tier end up there. The authors suspect that Sweden’s emphasis on high income taxes keep the self-made from accumulating lots of wealth, while very low taxes on capital keep wealth in rich families.
America, on the other hand, is lousy at moving many people out of poverty but great at making a very few very rich. The 2014 global wealth report (PDF) from Credit Suisse claimed that the U.S. created more new millionaires than any other country last year. Bill Gates recently noted that about half of the country’s wealthiest are, like him, entrepreneurs—not heirs. Columbia economist Wojciech Kopczuk and Berkeley’s Emmanuel Saez studied estate tax returns from 1916 to 2000 and argued that the recent rise in income inequality stems from the massive salaries of high-income earners, rather than heirs living off their inheritances. That’s consistent with a study by Lena Edlund and Kopczuk, based on Forbes‘s list of the 400 richest Americans, that claimed the super-wealthy are increasingly people who earned, rather than inherited, their wealth. Saez and Wopczuk speculated that the U.S. progressive tax structure and estate taxes have reduced the number of heirs in America’s super-rich club.
No question that it’s very difficult to get super-rich in the U.S. The difference is that it’s possible. In Sweden, the families in the top income tier are the same from one generation to the next. In the U.S., the children of the rich get bumped out of the uppermost echelon because the Larry Pages and Elon Musks overtake them. Americans’ outsize optimism may be informed by an intuitive understanding of these findings. Other countries may offer higher rates of mobility and better safety nets, but if what you want is the chance to become astronomically wealthy, the U.S. offers an almost unparalleled opportunity—even if it’s a very long shot.